-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FBmgAVcllrb/OiX9h0OkX6mD8L8Ge26yosP9JPU7WwgDMI+K3iVbZuFbiS89by8y kRm8rxPVo18hy89AKGsjWA== 0000950131-99-004527.txt : 19990730 0000950131-99-004527.hdr.sgml : 19990730 ACCESSION NUMBER: 0000950131-99-004527 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990729 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAC-WEST TELECOMM INC CENTRAL INDEX KEY: 0001071598 STANDARD INDUSTRIAL CLASSIFICATION: RADIO BROADCASTING STATIONS [4832] FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-76779 FILM NUMBER: 99672865 BUSINESS ADDRESS: STREET 1: 4210 CORONADO AVE CITY: STOCKTON STATE: CA ZIP: 95204 BUSINESS PHONE: 2099263324 MAIL ADDRESS: STREET 1: 4210 CORONADO AVE CITY: STOCKTON STATE: CA ZIP: 95204 S-4/A 1 AMENDMENT NO. 2 TO FORM S-4 As filed with the Securities and Exchange Commission on July 29, 1999 Registration No. 333-76779 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- AMENDMENT NO. 2 TO FORM S-4 REGISTRATION STATEMENT Under The Securities Act of 1933 ---------------- PAC-WEST TELECOMM, INC. (Exact name of Registrant as specified in its charter) California 4832 68-0383568 (State or other (Primary Standard (I.R.S. Employer jurisdiction Industrial Identification No.) ofincorporation or Classification Code organization) Number) 4210 Coronado Avenue, Stockton, CA 95204 Telephone: (209) 926-3300 (Address, including zip code, and telephone number, including area code, of Registrant's principal offices) ---------------- Richard E. Bryson Chief Financial Officer Pac-West Telecomm, Inc. 4210 Coronado Avenue, Stockton, CA 95204 Telephone: (209) 926-3300 (Address, including zip code, and telephone number, including area code, of Registrant's principal offices) Copy to: Jeffrey S. O'Connor, Esq. Kirkland & Ellis 200 East Randolph Drive, Chicago, IL 60601 Telephone: (312) 861-2000 ---------------- Approximate date of commencement of proposed sale to the public: The exchange will occur as soon as practicable after the effective date of this Registration Statement. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, please check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] ---------------- We hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until we file a further amendment which specifically states that this Registration Statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement becomes effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this Prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the SEC + +is effective. This Prospectus is not an offer to sell these securities and is + +not a solicitation for an offer to buy these securities in any state where + +the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JULY 29, 1999 PROSPECTUS Pac-West Telecomm, Inc. Exchange Offer for $150,000,000 13 1/2% Senior Notes Due 2009 Expires 5:00 p.m., New York City time, , 1999, unless extended. No public market exists for the outstanding notes or the new notes. We do not intend to list the new notes on any securities exchange or seek approval for quotation through any automated trading system. For a discussion of risk factors that you should consider before participating in this exchange offer, see "Risk Factors" beginning on page 11 of this prospectus. Neither the SEC nor any state securities commission has approved the notes to be distributed in this exchange offer, nor have any of these organizations determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. , 1999 TABLE OF CONTENTS
Page ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 11 The Exchange Offer........................................................ 19 Use of Proceeds........................................................... 28 Capitalization............................................................ 29 Unaudited Pro Forma Financial Data........................................ 30 Selected Financial Data................................................... 32 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 34 Business.................................................................. 46 Management................................................................ 64 Certain Relationships and Related Transactions............................ 71 Principal Shareholders.................................................... 76 Description of Capital Stock.............................................. 78 Description of Indebtedness............................................... 79 Description of Notes...................................................... 80 Certain United States Federal Tax Considerations.......................... 113 Plan of Distribution...................................................... 117 Legal Matters............................................................. 117 Experts................................................................... 118 Where You Can Find More Information....................................... 118 Index to Financial Statements............................................. F-1
PROSPECTUS SUMMARY The following summary highlights selected information from this prospectus and may not contain all of the information that is important to you. This prospectus includes specific terms of the notes we are offering, as well as information regarding our business and detailed financial data. Except as otherwise stated, all share data gives effect to the ten for one stock split which became effective as of March 19, 1999. We encourage you to read this prospectus in its entirety. The Exchange Offer On January 29, 1999, Pac-West Telecomm, Inc. completed the private offering of its $150,000,000 13 1/2% Series A senior notes due 2009. In this exchange offer, you are entitled to exchange those notes for registered new notes with substantially identical terms. The interest rate on the old notes may be increased if certain conditions are not met. You should read the discussion under the heading "--Summary of Terms of the New Notes" and "Description of Notes" for further information regarding the new notes. We believe that the new notes issued in this exchange offer may be resold by you without compliance with the registration and prospectus delivery provisions of the Securities Act of 1933. You should read the discussion under the headings "--Summary of the Exchange Offer" and "The Exchange Offer" for further information regarding the exchange offer and resale of notes. Our Company Pac-West is a rapidly growing competitive local exchange carrier providing switched local and long distance telecommunications services and one-stop integrated telecommunications services to Internet service providers, paging companies and other companies handling large volumes of incoming calls as well as medium and small businesses. We built our network to capitalize on the significant growth in national Internet usage and in the related demand for local telephone service by regional and national Internet service providers, as well as the increasing demand of medium and small businesses for customized and integrated telecommunications services. We believe the structure of our network and our presence in each California local calling area provide us with significant competitive advantages over incumbent local exchange carriers and other competitive local exchange carriers, particularly for our target customers. Our network enables these companies to provide their business and residential customers with access to the Internet, paging and other services from almost any point in California through a local call. The fact that we own our switches and lease our fiber transport lines and our focus on telecommunications intensive customers allows us to quickly enter new markets and generate high network utilization, substantial revenues, strong profit margins and positive cash flows. For the year ended December 31, 1998 and for the three month period ended March 31, 1999, we had net revenues of approximately $42.2 million and $14.4 million, respectively. Our Strategy Our objective is to become a leading provider of telecommunications services to Internet service providers, paging companies and other companies handling large volumes of incoming calls as well as medium and small businesses in each of our target markets. We plan to do this by: . Capitalizing on growing Internet service provider demand for local services; . Focusing on the medium and small business market; . Expanding our direct sales force; . Targeting California and the western United States; . Leasing our transmission lines; . Installing advanced, uniform equipment; and . Expanding our customer base through potential acquisitions. 3 For more information relating to our strategy, see "Business--Strategy." Risk Factors We have a substantial amount of indebtedness. Further, our success will be particularly dependent on our ability to expand our business and manage our growth, provide competitive services, comply with applicable governmental regulations and negotiate favorable agreements. Before tendering your old notes in this exchange offer, you should carefully consider the information provided under the caption "Risk Factors." How to Contact Us Our executive offices are located at 4210 Coronado Avenue, Stockton, California 95204 and our telephone number is (209) 926-3300. Summary of the Exchange Offer The Initial Offering of Old Notes Old Notes................. We sold the old notes on January 29, 1999 to NationsBanc Montgomery Securities LLC, CIBC Oppenheimer Corp. and First Union Capital Markets, a division of Wheat First Securities, Inc. in accordance with a purchase agreement dated January 27, 1999. These initial purchasers of the notes subsequently resold the notes to: (1) qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933; and (2) qualified buyers outside the United States in reliance upon Regulation S under the Securities Act of 1933. Registration Rights Agreement................ You are entitled to exchange your old notes for new notes with substantially identical terms. This exchange offer is intended to satisfy these rights. The Exchange Offer The Exchange Offer........ We are offering to exchange $1,000 principal amount of 13 1/2% Series B senior notes due 2009 of Pac- West Telecomm, Inc. which have been registered under the Securities Act of 1933 for each $1,000 principal amount of our outstanding 13 1/2% Series A senior notes due 2009 which were issued in January 1999 in a private offering. In order to be exchanged, an old note must be properly tendered and accepted prior to the expiration date. All old notes that are validly tendered and not validly withdrawn will be exchanged. As of the date of this prospectus the aggregate principal amount of old notes outstanding is $150 million. We will issue new notes on or promptly after the expiration of this exchange offer. General................... The form and terms of the new notes are the same as the form and terms of the old notes which they replace, except that: . the new notes bear a Series B designation and a different CUSIP number from the old notes; 4 . the new notes have been registered under the Securities Act of 1933 and, therefore, will not bear legends restricting their transfer; and . the holders of new notes will not be entitled to certain rights under the registration rights agreement, including the provisions providing for an increase in the interest rate on the old notes in certain circumstances relating to the timing of this exchange offer, which rights will terminate when this exchange offer is consummated. See "The Exchange Offer--Purpose and Effect of the Exchange Offer." The new notes will evidence the same debt as the old notes and will be entitled to the benefits of the indentures. See "Description of Notes." Resales................... We believe that the new notes issued in this exchange offer may be offered for resale, resold and otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act of 1933 provided that: . the new notes are being acquired in the ordinary course of your business; . you are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate in the distribution of the new notes issued to you in this exchange offer; and . you are not an affiliate of ours. If our belief is inaccurate and you transfer any new notes issued to you in this exchange offer without delivering a prospectus meeting the requirements of the Securities Act of 1933 or without an exemption from registration of your new notes from such requirements, you may incur liability under the Securities Act of 1933. We do not assume or indemnify you against any such liability. Each broker-dealer that is issued new notes in this exchange offer for its own account in exchange for old notes which were acquired by such broker-dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act of 1933 in connection with any resale of the new notes. A broker-dealer may use this prospectus for an offer to resell, resale or other retransfer of the new notes issued to it in this exchange offer. Record Date............... We mailed this prospectus and the related exchange offer documents to registered holders of old notes on , 1999. Expiration Date........... The exchange offer will expire at 5:00 p.m., New York City time, , 1999, unless we decide to extend the expiration date. 5 Conditions to the This exchange offer is not subject to any condition Exchange Offer........... other than that this exchange offer not violate applicable law or any applicable interpretation of the staff of the SEC. Untendered Old Notes...... If you are eligible to participate in this exchange offer and you do not tender your old notes, you will not have any further registration or exchange rights and your old notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such old notes could be adversely affected. Special Procedures for Beneficial Owners........ If you are the beneficial owner of book-entry notes and your name does not appear on a security position listing of DTC as the holder of such book- entry notes or if you are a beneficial owner of notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your notes, you should contact such person in whose name your notes are registered promptly and instruct that person to tender on your behalf. Guaranteed Delivery If you wish to tender your old notes and time will Procedures............... not permit your required documents to reach the exchange agent by the expiration date of this exchange offer, or the procedure for book-entry transfer cannot be completed on time or certificates for the old notes cannot be delivered on time, you may tender your old notes in accordance with the procedures described in this prospectus under the heading "The Exchange Offer-- Guaranteed Delivery Procedures." Withdrawal Rights......... You may withdraw the tender of your old notes at any time prior to 5:00 p.m., New York City time on , 1999. Certain U.S. Federal Tax Considerations........... The exchange of old notes for new notes will not be a taxable event for United States federal income tax purposes. Use of Proceeds........... We will not receive any proceeds from the issuance of new notes in accordance with this exchange offer. We will pay all of our expenses incident to this exchange offer. Exchange Agent............ Norwest Bank Minnesota, N.A., is serving as the exchange agent in connection with this exchange offer. 6 Summary of Terms of the New Notes The form and terms of the new notes are the same as the form and terms of the old notes except that the new notes will be registered under the Securities Act of 1933 and, therefore, will not bear legends restricting their transfer and will not be entitled to registration under the Securities Act of 1933. The new notes will evidence the same debt as the old notes, and the same indenture will govern both the new notes and the old notes. New Notes................. Series B 13 1/2% senior notes due 2009 of Pac-West Telecomm, Inc. Maturity.................. February 1, 2009 Interest.................. Semi-annually in cash in arrears on February 1 and August 1, beginning on February 1, 2000. Interest Reserve Account.. We have purchased and pledged to the trustee, as security for the benefit of the holders of the notes, a portfolio of U.S. government securities in an amount sufficient to provide for payment in full of the first two scheduled interest payments due under the notes. We used approximately $19.7 million of the net proceeds of the private offering of the old notes to acquire the pledged securities. Optional Redemption....... On or after February 1, 2004, we may redeem some or all of the notes at any time at the redemption prices described in the section "Description of Notes" under the heading "Optional Redemption." Prior to February 1, 2002, we may redeem up to 35% of the notes with the proceeds of certain public offerings of equity in Pac-West at the price listed in the section "Description of Notes" under the heading "Optional Redemption." Ranking................... The notes: . are our general unsecured obligations; . rank equal in right of payment with all our existing and future unsecured senior indebtedness; . rank senior in right of payment to all our future subordinated indebtedness; . effectively rank junior to all of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and . are effectively subordinated to all indebtedness, liabilities and other obligations of our future subsidiaries. Currently, we have no subsidiaries. As of March 31, 1999, the notes were subordinated to approximately $209,000 of our secured indebtedness. 7 Certain Covenants......... We will issue the new notes under an indenture with Norwest Bank Minnesota, N.A., as trustee. The indenture will, among other things, restrict our ability to: . borrow money; . pay dividends on stock or repurchase stock; . make investments; . use assets as security in other transactions; and . sell certain assets or merge with or into other companies. See "Description of Notes--Certain Covenants." Mandatory Offer to If we sell certain assets or experience a change of Repurchase............... control, we must offer to repurchase the notes at the prices listed in the section "Description of Notes." Form of New Notes......... The new notes will be represented by one or more permanent global securities in bearer form deposited with Norwest Bank Minnesota, N.A., as book-entry depositary, for the benefit of DTC. You will not receive new notes in registered form unless one of the events set forth under the heading "Description of Notes--Book-Entry; Delivery and Form" occurs. Instead, beneficial interests in the new notes will be shown on, and transfers of these will be effected only through, records maintained in book-entry form by DTC with respect to its participants. 8 Summary Financial Data This information was derived from both our audited and unaudited financial statements and related notes contained elsewhere in this prospectus. The unaudited financial data at March 31, 1999 and for the three month periods ended March 31, 1998 and March 31, 1999 include certain adjustments, all of which are normal recurring adjustments which we consider necessary for a fair presentation of our results for these periods. The unaudited balance sheet data as of March 31, 1999 includes the effect of our recapitalization as described in Note 1 to the audited financial statements included elsewhere in this prospectus and the private offering of the old notes. The results of our operations for the three month period ended March 31, 1999 are not necessarily indicative of the results of operations which we expect for the full 1999 calendar year. Please read this summary along with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our audited and unaudited financial statements with related notes and our unaudited pro forma financial data with related notes contained elsewhere in this prospectus. On October 1, 1996, we began operations when our predecessor company transferred its telephone and answering service divisions to us. As a result, you have limited comparable historical financial information upon which to base your evaluation of our past performance and the value of investing in the new notes. We recognize reciprocal compensation as revenue only to the extent received in cash. Pacific Bell and GTE, the two incumbent local exchange carriers with which we have interconnection agreements, have each refused to pay the portion of reciprocal compensation which they estimate is the result of inbound calls terminating to Internet service providers. Pacific Bell and GTE argue that such calls are not local within the meaning of their interconnection agreements and therefore assert no reciprocal compensation is due. See note 5 to the audited financial statements and "Risk Factors--Our right to receive reciprocal compensation for calls to Internet service providers is currently being challenged." Adjusted EBITDA as used in this prospectus represents earnings before interest, net; income taxes; depreciation and amortization; further adjusted for the costs of merger and recapitalization; transaction bonuses and consultant's costs; and extraordinary item. Included in other income (expense), net, is interest income of $5,000, $90,000, $327,000, $48,000 and $527,000 for the period from commencement on October 1, 1996 to December 31, 1996, for the years ended December 31, 1997 and 1998, and for the three month periods ended March 31, 1998 and 1999, respectively. Although EBITDA is not a measure of financial performance under generally accepted accounting principles, we believe it is a common measure used by analysts and investors in evaluating the capacity of a company to service its obligations, as well as to compare a company's results with those of similar companies. In addition, EBITDA is a measure included in the restrictive covenants under our new senior credit facility. The terms of the notes do not restrict our discretionary use of funds depicted by adjusted EBITDA. In addition, we have no intention to pay dividends to our stockholders. However, we do need to reserve funds to service our existing and future debt obligations, and, to the extent available, to fund anticipated capital expenditures of $30 million to $50 million in 1999. Also see the Statements of Cash Flows in the audited and unaudited financial statements. 9
Period from Commencement on Year Ended Three Month Period Ended October 1, 1996 December 31, March 31, to December 31, ---------------- -------------------------- 1996 1997 1998 1998 1999 --------------- ------- ------- ----------- -------------- (unaudited) (unaudited) (dollars in thousands) Statements of Operations Data: Revenues................ $4,232 $29,551 $42,211 $10,252 $ 14,416 Costs and expenses: Operating costs........ 2,064 12,060 15,344 3,731 4,062 Selling, general and administrative: Selling, general and administrative...... 1,519 7,367 10,779 2,002 4,303 Transaction bonuses and consultant's costs (1)........... -- -- 3,798 -- -- Depreciation and amortization.......... 299 2,204 4,106 845 1,449 ------ ------- ------- ------- -------- Income from operations.......... 350 7,920 8,184 3,674 4,602 Interest expense........ (105) (932) (4,199) (377) (4,050) Gain on disposal of answering service division............... -- 385 -- -- -- Costs of merger and recapitalization (1)... -- -- (3,004) -- -- Other income (expense), net.................... (11) 119 330 25 527 ------ ------- ------- ------- -------- Income before provision for income taxes and extraordinary item.. 234 7,492 1,311 3,322 1,079 Provision for income taxes.................. 94 2,997 1,561 1,329 432 ------ ------- ------- ------- -------- Income (loss) before extraordinary item.. 140 4,495 (250) 1,993 647 Extraordinary item--loss on early extinguishment of debt, net of income tax benefit of $278 (1).................... -- -- (417) -- -- ------ ------- ------- ------- -------- Net income (loss).... $140 $4,495 $(667) $1,993 $647 ====== ======= ======= ======= ======== Other Financial Data: Reciprocal compensation withheld............... -- $3,793 $32,591 $5,032 $13,401 Adjusted EBITDA......... 633 10,538 16,091 4,496 6,051 Adjusted EBITDA margin %...................... 15.0% 35.7% 38.1% 43.9% 42.0% Capital expenditures.... $3,899 $11,884 $42,466 $1,275 $3,633 Cash provided by (used in): Operating activities... 75 5,876 12,033 5,558 4,544 Investing activities... (1,682) (6,619) (42,031) (1,185) (23,329) Financing activities... 1,549 3,658 41,631 (255) 44,921 Ratio of earnings to fixed charges (2)...... 2.1x 5.8x 1.2x 6.6x 1.1x Pro forma ratio of earnings to fixed charges (2)............ -- 1.1x March 31, 1999 -------------- (unaudited) (in thousands) Balance Sheet Data: Cash and cash equivalents........................................... $ 41,372 Restricted cash (3)................................................. 19,844 Working capital..................................................... 60,053 Property, plant and equipment, net.................................. 59,528 Total assets........................................................ 134,311 Total debt.......................................................... 150,209 Convertible Redeemable Preferred Stock, including accrued cumulative dividends of $2,466................................................ 47,466 Stockholders' equity (deficit)...................................... (74,608)
- -------- (1) Transaction bonuses and consultant's costs, costs of merger and recapitalization and the extraordinary item all relate to our recapitalization. (2) For purposes of this computation, earnings are defined as income before provision for income taxes, extraordinary item and fixed charges, excluding capitalized interest. Fixed charges are the sum of: (A) interest costs, including amounts capitalized, (B) amortization of deferred financing costs, and (C) the portion of operating lease rental expense that is representative of the interest factor. On a proforma basis, earnings were insufficient to cover fixed charges by $394,000 for the year ended December 31, 1998. (3) Restricted cash represents cash deposited in an interest reserve trust account to fund the initial interest payments due under the notes. 10 RISK FACTORS Ownership of the old notes or the new notes involves a high degree of risk. Holders of the old notes should consider carefully the risk factors below, as well as the other information in this prospectus, before tendering their old notes in this exchange offer. Our substantial indebtedness could adversely affect our business and prevent us from fulfilling our obligations under the notes. We have a substantial amount of indebtedness and are highly leveraged. On an unaudited basis, as of March 31, 1999, our borrowings and other long-term obligations totaled $150,209,000, and we had a stockholders' deficit of $(74,608,000). We may also incur additional indebtedness in the future to expand and develop our current business and services and enter new markets. Our substantial indebtedness could: . make it more difficult for us to satisfy our obligations with respect to the notes; . increase our vulnerability to general adverse economic and industry conditions; . limit our ability to fund future working capital, capital expenditures, marketing costs and other general corporate requirements; . require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures, marketing efforts and other general corporate purposes; . limit our flexibility in planning for or reacting to changes in our business and the industry in which we operate; . place us at a competitive disadvantage compared to our less leveraged competitors; and . limit our ability to borrow additional funds. We may not be able to generate sufficient cash to service our indebtedness, including the notes. Failure to generate cash in the future either from operations or from additional financing will adversely affect our ability to make payments on and to refinance our indebtedness, including the notes, and to fund capital expenditures and marketing efforts. Our ability to generate cash from operations will be particularly dependent on our ability to expand our business and manage our growth, provide competitive services, comply with applicable governmental regulations and negotiate favorable agreements. In addition, we may need to refinance all or a portion of our indebtedness, including the notes, on or before maturity. We may not be able to refinance this indebtedness on commercially reasonable terms or at all. We may not have sufficient funds available to expand our business. We will need to make significant capital expenditures in order to expand and develop our current business and to enter new markets. We expect to fund these expenditures through existing resources, through internally generated funds, and through equity and debt financings. If we are unable to raise sufficient funds, we may have to delay or abandon some of our expenditures or plans for future expansion. This would result in underutilization of our established infrastructure and reduced profitability and may negatively affect our ability to compete for and satisfy the demands resulting from the growth and expansion of our customers. Failure to continue our expansion may adversely affect our financial condition. Our failure to expand our business in order to satisfy the growing needs of our customers, to achieve economies of scale and to benefit from the infrastructure we have established would adversely affect our business prospects, our financial condition and ability to meet our obligations under the notes. This could result from our inability to: .assess potential markets; .obtain required governmental authorizations, franchises, and permits; 11 .implement interconnection and collocation arrangements with incumbent local exchange carriers; .lease adequate transmission capacity from inter-exchange carriers, incumbent local exchange carriers and competitive local exchange carriers; .purchase and install switches in additional markets; and .develop a sufficient customer base. We may not be able to manage our growth, which could adversely affect our business. Future expansion will place significant additional strains on our personnel, financial and other resources. The failure to efficiently manage our growth could adversely affect the quality of our services, our business and our financial condition. Our ability to manage our growth will be particularly dependent on our ability to develop and retain an effective sales force and qualified technical personnel. The competition for qualified managers and technical personnel in the telecommunications industry is intense, and we may not be able to hire and retain sufficient qualified personnel. In addition, we may not be able to maintain the quality of our operations, to control our costs, to maintain compliance with all applicable regulations, and to expand our internal management, technical, information and accounting systems in order to support our desired growth. We may not be able to comply in a cost-effective manner with current or future regulations. Our provision of telecommunications services is heavily regulated at the federal, state, and local levels. Compliance with these regulations impose substantial costs on us and restricts our ability to conduct our business. For example, in each state in which we desire to offer our services, we must obtain prior authorization from the appropriate state authorities. If we experience delays in obtaining required approvals or fail to comply with regulatory requirements, our business and our financial condition could be adversely affected. In addition, regulatory requirements may change with little notice, which would adversely affect our business. A failure to establish interconnection agreements on favorable terms would adversely affect our business. We must interconnect with incumbent local exchange carriers in order to service our customers. The Telecommunications Act of 1996 mandates that incumbent local exchange carriers interconnect with companies like ours to provide us with individual network services components, such as origination, termination and other services. However, it does not assure the time frame in which those services will be offered to us or assure that we will be able to purchase those services at rates and on terms and conditions that allow us to remain competitive and profitable. If we have difficulties obtaining high quality, reliable and reasonably priced services from the incumbent local exchange carriers, our services will be less attractive to customers and our business will be adversely affected. Our primary interconnection agreements are with Pacific Bell and GTE. Our interconnection agreement with GTE has expired, but will remain in force until a replacement agreement is finalized. In addition, we will need new interconnection agreements in each new market we enter. We cannot be certain that we will be able to enter into replacement or new interconnection agreements on favorable terms. See "Business--Regulatory Proceedings--Interconnection Agreements." We may not be entitled to receive reciprocal compensation for calls to Internet service providers. Two incumbent local exchange carriers with which we have interconnection agreements, Pacific Bell and GTE, have refused to pay that portion of compensation under the agreement that they estimate is the result of inbound calls terminating to Internet service providers, and the obligation to pay this reciprocal compensation is currently under review by both state and federal regulators. If it is ultimately determined that we are not entitled to receive reciprocal compensation for calls to Internet service providers, our business and financial condition could be adversely affected. The total reciprocal compensation withheld by these incumbent local exchange carriers and not included in revenues was $3.8 million, $32.6 million and $13.4 million for the years 12 ended December 31, 1997 and 1998 and for the three month period ended March 31, 1999, respectively. On June 24, 1999, the California Public Utilities Commission determined that reciprocal compensation would be payable for Internet service provider calls under our new interconnection agreement with Pacific Bell, but did not determine whether Pacific Bell owes reciprocal compensation withheld under the prior agreement. Pacific Bell has requested a rehearing of this matter. See "Business--Regulatory Proceedings--Jurisdiction over and Compensation for Internet Service Provider Traffic." We may not be able to compete effectively against the incumbent local exchange carrier, which has a vested interest in making it difficult for us to service customers. In each of our target markets, we will be competing principally with the incumbent local exchange carrier serving that area. The incumbent local exchange carriers are well-established providers of local telephone services with most of the telephone subscribers within their respective service areas. In addition, incumbent local exchange carriers also have long-standing relationships with regulatory authorities at the federal and state levels. Incumbent local exchange carriers also have increased pricing flexibility for their private line and special access and switched access services. The FCC also has proposed a rule that would give these carriers additional pricing flexibility and deregulate competitive access services, as opposed to local exchange services, either automatically or after certain competitive levels are reached. Such a rule could allow them to offer discounts to large customers through contract tariffs, engage in aggressive volume and term discount pricing practices for their customers, and/or charge competitors excessive fees for interconnection to their networks. We may not be able to overcome these advantages and compete successfully with the incumbent local exchange carriers. We may not be able to compete effectively in providing local exchange service. We face competition from long distance carriers, such as AT&T, MCI WorldCom and Sprint, seeking to enter, reenter or expand entry into the local exchange marketplace. In addition, we face competition from other competitive local exchange carriers, resellers, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and private networks built by large end users. This places downward pressure on prices, which may make it difficult for us to provide these services profitably, and we may not be able to compete effectively with these companies. We may not be able to compete effectively in providing long distance service. We face intense competition from long distance carriers in the provision of long distance services, which places downward pressure on prices for long distance service and may make it difficult for us to provide these services profitably. Although the long distance market is dominated by three major competitors, AT&T, MCI WorldCom and Sprint, hundreds of other companies also compete in the long distance marketplace. We may not be able to effectively compete with these industry participants. We may not be able to compete effectively with the Bell operating companies if they are permitted to enter the long distance service market. Federal law currently prohibits regional Bell operating companies, including Pacific Bell and Nevada Bell, from engaging in local calling areas long distance telephone service. However, this restriction may be removed by the FCC if the regional Bell operating companies meet certain specified conditions and the FCC determines that it is in the public interest. If the regional Bell operating companies obtain permission to provide these services, or if they are able to enter into teaming agreements with others to circumvent these restrictions, our business could be adversely affected. It would remove the major incentive regional Bell operating companies 13 have to cooperate with companies like ours to foster competition within their service areas, and it would permit them to offer both long distance and local exchange services, a competitive advantage which only companies such as Pac- West currently are able to offer. See "Business--Regulation." Our competition may have superior resources, placing us at a cost and price disadvantage. Many of our current and potential competitors have financial, personnel and other resources, including brand name recognition, substantially greater than those of Pac-West. As a result, some of our competitors can raise capital at a lower cost than we can. Also, our competitors' greater name recognition may provide them with a competitive advantage in marketing their services. Finally, our competitors' cost advantages give them the ability to reduce their prices for an extended period of time if they so choose. We may not be able to compete effectively with these companies. We may not be able to obtain or retain our key Internet service provider customers, which account for a significant portion of our revenues. For the three months ended March 31, 1999, nine of our fifteen largest customers in terms of revenues are Internet service providers. As a result, a significant reduction in usage by one or more of our key Internet service providers or a general decrease in Internet service provider traffic could result in a material decrease in our revenues for a given period. We believe that our success in the foreseeable future will depend in large part on our ability to develop and maintain a large Internet service provider customer base. The competition for Internet service provider customers in the telecommunications industry, however, is intense, and we expect it will continue to increase. We may not be able to increase or maintain our Internet service provider customer base. The technologies that we use may become obsolete, which would limit our ability to compete effectively. The telecommunications industry is subject to rapid and significant changes in technology. If we do not replace or upgrade our technology and equipment that becomes obsolete, we will not be able to compete effectively because we will not be able to meet customer expectations. The development of competing technologies, such as integrated services digital network lines, cable modems, T-1 circuits and digital subscriber lines, which provide significantly faster data transfer rates than the fastest current dial-up modems, may give companies that provide these services a competitive advantage. Further, if we attempt to incorporate new technologies or products into our systems, those new technologies and products may not be compatible with our existing technologies and services. We may not be able to obtain timely access to new technology on satisfactory terms or incorporate new technology into our systems in a cost effective manner or at all. The loss of key executive officers could negatively impact our business prospects. We believe that a critical component of our success will be the retention of our key executive officers. Mr. Wallace W. Griffin, our Chief Executive Officer, has particular expertise in the telecommunications industry and has been instrumental in establishing and executing our business plan and strategy. Mr. John K. La Rue, our Executive Vice President--Technology and Network Operations, and Mr. Jason R. Mills, our Vice President--Network Operations, have a unique understanding of our network and have been instrumental in its development. The loss of the services of one or more of these individuals or our other executive officers, including Mr. Richard E. Bryson, Mr. Brian K. Johnson and Mr. Dennis V. Meyer, could adversely affect our ability to manage our business and our business prospects. Our inability to predict our need for resold long distance services could subject us to various charges or penalties. We offer long distance services to our customers as part of our strategy to provide one-stop integrated services. We rely on long distance carriers to provide transmission and termination services for some of our 14 long distance traffic through resale arrangements. Such arrangements typically provide for the resale of long distance services on a per-minute basis and may contain minimum volume commitments. These agreements are based on estimates of future supply and demand for transmission capacity based on calling patterns and traffic levels of our future customers. If we do not accurately predict our long distance service needs, we may have to pay underutilization charges or seek additional capacity through more expensive alternative means. Our inability to obtain sufficient leased transport capacity could seriously limit our operations. We currently lease transport capacity from various third-party carriers to connect our switches to the incumbent local exchange carriers. If we cannot lease sufficient transport capacity, our operations could be limited or we could be forced to make additional unexpected up-front capital expenditures to install our own transport capacity. This could adversely affect our business and our financial condition. See "Business--Network." A system failure could delay or interrupt our services. Our operations are dependant upon our ability to support our highly complex network infrastructure. Many of our customers are particularly dependent on an uninterrupted supply of services. Any damage or failure that causes interruptions in our operations could result in the loss of these customers and could have a material adverse effect on our business and our financial condition. Because of the nature of the services we supply and the complexity of our network, it is not feasible to maintain backup systems, and the occurrence of a natural disaster, operational disruption or other unanticipated problem could cause interruptions in the services we provide. Additionally, the failure of a major supplier to provide the communications capacity we require, or of a major customer to continue buying our goods and services, as a result of a natural disaster, operational disruption or any other reason, could cause interruptions in the service we provide. We may face additional costs or a system failure due to Year 2000 issues. The Year 2000 computer problem refers to the potential for system and processing failures of date-related data as a result of computer-controlled systems using two digits rather than four to define the applicable year. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with Year 2000 requirements. We believe that all of our systems other than our long distance billing system and one of our accounting systems are Year 2000 compliant. We have not yet completed our review of our noncomputer systems for Year 2000 issues relating to embedded microprocessors. To the extent that any Year 2000 issues exist, a system failure may result and we may incur significant additional costs to replace or upgrade noncompliant systems. We have not developed a formal disaster recovery plan to recover data that may be affected by Year 2000 issues. Many of our customers and suppliers, particularly the incumbent local exchange carriers and long distance carriers, could be impacted by the Year 2000 issue, which in turn could affect us. We utilize third-party equipment and software and interact with incumbent local exchange carriers, major suppliers and major customers that each have equipment and software that may not be Year 2000 compliant. Failure of such third-party or incumbent local exchange carrier equipment or software to operate properly with regard to the year 2000 and thereafter could require us to incur unanticipated expenses to remedy any problems which could have a material adverse effect on our business and our ability to meet our obligations under the notes. Furthermore, the purchasing patterns of our major customers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds available for our services, which could have a material adverse effect on our business and our ability to meet our obligations under the notes. We are assessing the compliance efforts of our major customers and suppliers. If the systems of certain of our customers and suppliers, particularly the incumbent local exchange carriers, long distance carriers and others on whose services we depend or with 15 whom our systems interface, are not Year 2000 compliant, it would have a material adverse effect on us. We have not developed, nor is it feasible to develop, a contingency plan to address the above scenario. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Issues." Delays in implementing a new billing and operations support system could adversely affect our business. Our existing billing system is not adequate to meet our expected future needs and is not Year 2000 compliant. Further, to improve our operating processes and to meet expected growth, we will need to install an operations support system. We are currently in the process of implementing both of these systems. The failure to implement these systems on a timely basis could result in erroneous billings as a result of Year 2000 issues or the inability to correctly process data, such as changes in taxes. Our expansion into new states could be delayed or limited as a result of capacity limitations and new product or service introductions may be delayed. Any of these events could have a material adverse affect on our business and on our financial condition. Because the notes are unsecured, you may not be fully repaid if we become insolvent. The new notes will not be secured by any of our assets. Therefore, you may not be fully repaid if we become insolvent. Moreover, the indenture relating to the notes permits us to incur secured debt. If we were to incur secured debt and we become insolvent, the holders of the secured debt would receive payments from the assets used as security before you receive payments. The covenants in our new senior credit facility could adversely affect the operation of our business. Our new senior credit facility contains provisions which limit our management's discretion by restricting our ability to: . incur additional debt; . pay dividends and make other distributions; . prepay subordinated debt; . make investments and other restricted payments; . enter into sale and leaseback transactions; . create liens; . sell assets; and . enter into certain transactions with affiliates. In addition, the new senior credit facility requires us to meet certain financial ratios. If we fail to comply with the restrictions of the new senior credit facility or any other subsequent financing agreements, a default may occur. This default may allow the creditors to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies. In addition, the lenders may be able to terminate any commitments they had made to supply us with further funds. See "Description of Indebtedness." We are majority owned by equity investors and their interests may conflict with your interests. As of March 31, 1999, Safeguard 98 Capital, L.P., SCP Private Equity Partners, L.P., TL Ventures III L.P., EnerTech Capital Partners, L.P. and William Blair Capital Partners, L.L.C. collectively own approximately 63.5% of our common stock. Some of our directors are affiliated with these investors. Jerry L. Johnson is an officer of Safeguard Scientific, the parent of Safeguard Delaware, Inc., the general partner of Safeguard 98 Capital, L.P.; David G. Chandler is a managing director of William Blair Capital Partners; Mark 16 J. DeNino is managing director of TL Ventures III; and Samual A. Plum is a general partner of SCP Private Equity Partners. In addition, Bruce A. Westphal, one of our directors, is the Chairman of Bay Alarm Company, the owner of approximately 21.6% of our common stock. These investors may significantly influence and ultimately make decisions that are adverse to your interests. For example, these investors may want to pursue acquisitions, divestitures, or other transactions which they believe could increase the value of their equity investment in Pac-West, which may increase the financial risk to note holders. In addition to their Pac-West investment, some of these investors have invested significantly in other telecommunications companies, Internet service providers, and related businesses, and they or their affiliates may make further similar investments in the future. Through these investments, these investors may develop relationships with businesses which are competitive with us. These relationships may lead to conflicts involving arrangements between Pac-West and the investors' other holdings. These investors are under no obligation to bring any investment or business opportunities of which they are aware to Pac-West, even if the opportunity is directly within the scope of our business operations. See "Certain Relationships and Related Transactions" and "Principal Shareholders." Our rapid growth and limited comparable historical financial information regarding our current operations may make it difficult for you to completely evaluate us. On September 30, 1996, our predecessor transferred its telephone and answering service divisions to us. Before that time, we did not conduct any operations and, since that time, we have disposed of the answering service division and have focused our business strategy on operating as a competitive local exchange carrier. Due to significant changes in our operations since September 30, 1996, we believe that the financial information of the predecessor telephone and answering service divisions is not directly comparable to our results of operations. In addition, since September 30, 1996, we have had rapid growth and our industry has undergone substantial change. As a result you have limited comparable historical financial information on which to base your evaluation of us and this information may not be indicative of future results. Variability of quarterly operating results could result in fluctuations in the trading price of the notes. Our quarterly operating results have fluctuated, and will continue to fluctuate, significantly from period to period depending upon such factors as the success of our efforts to expand our customer base, changes in and the timing of expenditures relating to the continued expansion of our network, the level of reciprocal compensation received, the development of new services, the success of our sales and marketing efforts, changes in pricing policies by us and by our competitors, factors relating to our acquisition strategy and certain other factors. As a result, it is likely that in some future quarters our operating results will be below the expectations of investors and securities analysts. If this happens, the trading price of the notes could decline. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Quarterly Results." A decrease in a significant stockholder's holdings could result in a loss of revenue generated by business from that stockholder. Prior to our recapitalization, Bay Alarm Company held approximately 78.0% of our common stock. As a result of our recapitalization, Bay Alarm reduced its interest in Pac-West to 21.7% of our common stock and 22.8% of our outstanding convertible redeemable preferred stock. Our sales to Bay Alarm Company and its subsidiary, InReach Internet LLC, collectively accounted for approximately 7.1%, 6.4% and 4.5% of our revenues for the years ended December 31, 1997 and 1998 and for the three month period ended March 31, 1999, respectively. The reduction in Bay Alarm's holdings in Pac-West may make it and its affiliates less likely to purchase goods and services from Pac-West in the future, which could have an adverse affect on our results of operations. See "Certain Relationships and Related Transactions" and "Principal Shareholders." 17 If we have a change of control, we may be unable to purchase all of the notes you hold, even if they are validly tendered. If a change of control occurs, we must offer to buy back all of the outstanding notes for a price equal to 101% of the notes' principal amount, plus any interest which has accrued and remains unpaid as of the repurchase date. In that event, we may not have sufficient funds available to pay the purchase price for all of the notes tendered by holders seeking to accept our offer to purchase. In addition, our new senior credit facility prohibits us from repurchasing the notes after a change of control until we first repay our debt under the new senior credit facility in full. If we fail to repurchase the notes in that circumstance, there will be defaults under both the notes and the new senior credit facility. See "Description of Notes--Repurchase of the Option of Holders--Change of Control" and "Description of Indebtedness." A court may determine that our recapitalization and the issuance of the notes resulted in a fraudulent conveyance, permitting cancellation or subordination of the notes or requiring the return of payments on the notes. If a bankruptcy case or lawsuit is initiated by unpaid creditors of Pac-West, the debt represented by the notes may be reviewed under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws. If a court determines that our recapitalization and the issuance of the notes resulted in a fraudulent conveyance, the notes could be canceled or made subordinate to all of our other debt, and any payments made by us on the notes could be required to be returned. The circumstances under which a court could determine that a fraudulent conveyance had occurred are limited, and we do not believe they existed when the notes were issued. See "Description of Notes-- Fraudulent Conveyance Matters" for additional information regarding fraudulent conveyances. Forward-looking statements may prove to be inaccurate. Some of the statements contained in this prospectus are forward-looking. The words "believe," "expect," "anticipate," "estimate," "plan," "future," and other similar expressions generally identify forward-looking statements. They include statements concerning: . debt levels and ability to obtain financing and service debt; . liquidity and capital expenditures; . growth strategy; . acquisition activities; . regulatory matters affecting the telecommunications industry; . reciprocal compensation for Internet access services; . competitive conditions in the telecommunications industry; . projected growth of the telecommunications industry; . general economic conditions; and . year 2000 issues. Actual results may differ materially from those suggested by the forward- looking statements for various reasons, including those discussed in this section. 18 THE EXCHANGE OFFER Purpose and Effect of the Exchange Offer We originally sold the old notes on January 29, 1999 to the initial purchasers of the notes in accordance with the purchase agreement. The initial purchasers of the notes subsequently placed the old notes with: (1) qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933; and (2) qualified buyers outside the United States in reliance upon Registration S under the Securities Act of 1933. As a condition of the purchase agreements, we entered into the registration rights agreement. The registration rights agreement provides that: (1) we will file an exchange offer registration statement with the SEC on or prior to 90 days after the closing date; (2) we will use our best efforts to have this exchange offer registration statement declared effective by the SEC on or prior to 180 days after the closing date; (3) unless this exchange offer would not be permitted by applicable law or SEC policy, we will commence this exchange offer and use our best efforts to issue on or prior to 30 business days after the date on which this exchange offer registration statement was declared effective by the SEC, new notes in exchange for all notes tendered prior to the expiration of this exchange offer; and (4) if obligated to file a shelf registration statement to register the old notes, we will use our reasonable best efforts to file the shelf registration statement with the SEC on or prior to 30 days after such filing obligation arises and to cause the shelf registration statement to be declared effective by the SEC on or prior to 120 days after the obligation arises. For each old note surrendered to us in accordance with this exchange offer, the holder of the old note will receive a new note having a principal amount equal to that of the surrendered note. Interest on each old note will accrue from the last interest payment date on which interest was paid on the old note surrendered or, if no interest has been paid on such old note, from the date of its original issue. Interest on each new note will accrue from the date of its original issue. Under existing interpretations of the staff of the SEC contained in several no-action letters to third parties, the new notes will in general be freely tradeable after this exchange offer without further registration under the Securities Act of 1933. However, any purchaser of old notes who is our affiliate or who intends to participate in this exchange offer for the purpose of distributing the new notes: (1) will not be able to rely on the interpretation of the staff of the SEC; (2) will not be able to tender its old notes in this exchange offer; and (3) must comply with the registration and prospectus delivery requirements of the Securities Act of 1933 in connection with any sale or transfer of the new notes, unless such sale or transfer is made in accordance with an exemption from those requirements. As contemplated by these no-action letters and the registration rights agreement, each holder accepting this exchange offer is required to represent to us in the letter of transmittal or agent's message that: (1) the new notes are to be acquired by the holder or the person receiving the new notes, whether or not that person is the holder, in the ordinary course of business; (2) the holder or the other person, other than a broker-dealer, is not engaging and does not intend to engage, in a distribution of the new notes; (3) the holder or the other person has no arrangement or understanding with any person to participate in the distribution of the new notes; (4) neither the holder nor the other person is our affiliate within the meaning of Rule 405 under the Securities Act of 1933; and 19 (5) the holder or the other person acknowledges that if the holder or the other person participates in this exchange offer for the purpose of distributing the new notes it must comply with the registration and prospectus delivery requirements of the Securities Act of 1933 in connection with any resale of the new notes and cannot rely on those no-action letters. An agent's message is a message, transmitted by a book-entry transfer facility to, and received by, the exchange agent forming a part of a confirmation of a book-entry, which states that such book-entry transfer facility has received an express acknowledgment from the participant in the book-entry transfer facility tendering the old notes that such participant has received and agrees: (1) to participate in the automated tender option program; (2) to be bound by the terms of the letter of transmittal; and (3) that we may enforce such agreement against such participant. As indicated above, each participating broker-dealer that receives a new note for its own account in exchange for old notes must acknowledge that it: (A) acquired the old notes for its own account as a result of market-making activities or other trading activities; (B) has not entered into any arrangement or understanding with us or any of our affiliates, within the meaning of Rule 405 under the Securities Act of 1933, to distribute the new notes to be received in this exchange offer; and (C) will deliver a prospectus meeting the requirements of the Securities Act of 1933 in connection with any resale of such new notes. For a description of the procedures for resales by Participant Broker- Dealers, see "Plan of Distribution." In the event that changes in the law or the applicable interpretations of the staff of the SEC do not permit us to effect an exchange offer, or if for any other reason we do not meet the time periods set forth in the second paragraph of this section, we will: (1) file the shelf registration statement covering resales of the old notes; (2) use our reasonable best efforts to cause the shelf registration statement to be declared effective under the Securities Act of 1933; and (3) use our reasonable best efforts to keep effective the shelf registration statement until January 29, 2001. We will, in the event of the filing of the shelf registration statement, provide to each applicable holder of the old notes copies of the prospectus which is a part of the shelf registration statement, notify each holder when the shelf registration statement has become effective and take certain other actions as are required to permit unrestricted resale of the old notes. A holder of the old notes that sells old notes in accordance with the shelf registration statements generally will be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers. The holder will also be subject to certain of the civil liability provisions under the Securities Act of 1933 in connection with sales and will be bound by the provisions of the registration rights agreement which are applicable to a holder, including certain indemnification obligations. In addition, each holder of the old notes will be required to deliver information to be used in connection with the shelf registration statement and to provide comments on the shelf registration statement within the time periods set forth in the registration rights agreement in order to have its old notes included in the shelf registration statement and to benefit from the provisions set forth in the following paragraph. If there is a registration default because: (a) we fail to file any of the registration statements required by the registration rights agreement on or before the date specified for such filing; 20 (b) any of such registration statements is not declared effective by the SEC on or prior to the target date specified for such effectiveness; or (c) we fail to consummate this exchange offer within 30 business days of the effectiveness target date with respect to this exchange offer registration statement; or (d) the shelf registration statement or this exchange offer registration statement is declared effective but thereafter ceases to be effective or usable for its intended purpose during the periods specified in the registration rights agreement, then we will pay additional interest, to each holder of notes, with respect to the first 90-day period immediately following the occurrence of the first registration default in an amount equal to $.05 per week per $1,000 principal amount of notes held by such holder. The amount of the additional interest will increase by an additional $.05 per week per $1,000 principal amount of notes with respect to each subsequent 90-day period until all registration defaults have been cured, up to a maximum amount of additional interest, if any, for all registration defaults of $.50 per week per $1,000 principal amount of notes. We will pay all accrued additional interest on each interest payment date to the global note holder by wire transfer of immediately available funds or by federal funds check and to holders of certificated securities by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all registration defaults, the accrual of additional interest will cease. Following the consummation of this exchange offer, holders of the old notes who were eligible to participate in this exchange offer but who did not tender its old notes will not have any further registration rights and such old notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such old notes could be adversely affected. Terms of the Exchange Offer Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept any and all old notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the expiration date. We will issue $1,000 principal amount of new notes in exchange for each $1,000 principal amount of outstanding old notes accepted in this exchange offer. Holders may tender some or all of their old notes in accordance with this exchange offer. However, old notes may be tendered only in integral multiples of $1,000. The form and terms of the new notes are the same as the form and terms of the old notes except that: (1) the new notes bear a Series B designation and a different CUSIP number from the old notes; (2) the new notes have been registered under the Securities Act of 1933 and hence will not bear legends restricting the transfer thereof; and (3) the holders of the new notes will not be entitled to certain rights under the registration rights agreement, including the provisions providing for an increase in the interest rate on the old notes in certain circumstances relating to the timing of this exchange offer, all of which rights will terminate when this exchange offer is terminated. The new notes will evidence the same debt as the old notes and will be entitled to the benefits of the indenture. As of the date of this prospectus, $150,000,000 aggregate principal amount of the old notes were outstanding. We have fixed the close of business on , 1999 as the record date for this exchange offer for purposes of determining the persons to whom this prospectus and the letter of transmittal will be mailed initially. Holders of old notes do not have any appraisal or dissenters' rights under the General Corporation Law of California, or the indenture in connection with this exchange offer. We intend to conduct this exchange offer in 21 accordance with the applicable requirements of the Securities Exchange Act of 1934 and the related rules and regulations of the SEC. We will be deemed to have accepted validly tendered old notes when, as and if we have given oral or written notice thereof to the exchange agent. The exchange agent will act as agent for the tendering holders for the purpose of receiving the new notes from us. If any tendered old notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth in this prospectus or otherwise, the certificates for any such unaccepted old notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the expiration date of this exchange offer. Holders who tender old notes in this exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of old notes in accordance with this exchange offer. We will pay all charges and expenses, other than transfer taxes in certain circumstances, in connection with this exchange offer. See "--Fees and Expenses." Expiration Date; Extensions; Amendments The expiration date is 5:00 p.m., New York City time, on , 1999, unless we extend this exchange offer, in which case the expiration date will be the latest date and time to which this exchange offer is extended. In order to extend this exchange offer, we will notify the exchange agent of any extension by oral or written notice and will mail to the registered holders an announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. We reserve the right to: (1) delay accepting any old notes, to extend this exchange offer or to terminate this exchange offer if any of the conditions set forth below under "--Conditions" will not have been satisfied, by giving oral or written notice of such delay, extension or termination to the exchange agent, or (2) amend the terms of this exchange offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered holders. Interest on the New Notes The new notes will bear interest from their date of issuance. Holders of old notes that are accepted for exchange will receive, in cash, accrued interest thereon to, but not including, the date of issuance of the new notes. Such interest will be paid with the first interest payment on the new notes on February 1, 2000. Interest on the old notes accepted for exchange will cease to accrue upon issuance of the new notes. Interest on the new notes is payable semi-annually in arrears on each February 1 and August 1, beginning on February 1, 2000. Procedures for Tendering Only a holder of old notes may tender such old notes in this exchange offer. To tender in this exchange offer, a holder must complete, sign and date the letter of transmittal, or a facsimile thereof, have the signatures on the letter of transmittal guaranteed if required by the letter of transmittal or transmit an agent's message in connection with a book-entry transfer, and mail or otherwise deliver the letter of transmittal or the facsimile, together with the old notes and any other required documents, to the exchange agent prior to 5:00 p.m., New York City time, on the expiration date. To be tendered effectively, the old notes, letter of transmittal or an 22 agent's message and other required documents must be completed and received by the exchange agent at the address set forth below under "Exchange Agent" prior to 5:00 p.m., New York City time, on the expiration date. Delivery of the old notes may be made by book-entry transfer in accordance with the procedures described below. Confirmation of the book-entry transfer must be received by the exchange agent prior to the expiration date. By executing the letter of transmittal, each holder will make to us the representations set forth above in the fifth paragraph under the heading "-- Purpose and Effect of the Exchange Offer." The tender by a holder and our acceptance thereof will constitute agreement between the holder and us in accordance with the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal or agent's message. The method of delivery of old notes and the letter of transmittal or agent's message and all other required documents to the exchange agent is at the election and sole risk of the holder. As an alternative to delivery by mail, holders may wish to consider overnight or hand delivery service. In all cases, sufficient time should be allowed to assure delivery to the exchange agent before the expiration date. No letter of transmittal or old notes should be sent to us. Holders may request their respective brokers, dealers, commercial banks, trust companies or nominees to effect the above transactions for such holders. Any beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. See "Instructions to Registered Holder and/or Book-Entry Transfer Facility Participant from Beneficial Owner" included with the letter of transmittal. Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an eligible institution unless the old notes tendered pursuant thereto are tendered: (1) by a registered holder who has not completed the box entitled "Special Registration Instructions" or "Special Delivery Instructions" on the letter of transmittal; or (2) for the account of an eligible institution. In the event that signatures on a letter of transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by an eligible institution. In order for an institution to be eligible, it must be a member firm of the Medallion System. If the letter of transmittal is signed by a person other than the registered holder of any old notes listed in this prospectus, such old notes must be endorsed or accompanied by a properly completed bond power, signed by such registered holder as such registered holder's name appears on such old notes with the signature thereon guaranteed by an eligible institution. If the letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, offices of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and evidence satisfactory to us of its authority to so act must be submitted with the letter of transmittal. We understand that the exchange agent will make a request promptly after the date of this prospectus to establish accounts with respect to the old notes at the book-entry transfer facility, DTC, for the purpose of facilitating this exchange offer, and subject to the establishment thereof, any financial institution that is a participant in DTC's system may make book-entry delivery of old notes by causing DTC to transfer such old notes into the exchange agent's account with respect to the old notes in accordance with DTC's procedures for such transfer. Although delivery of the old notes may be effected through book-entry transfer into the exchange agent's account at DTC, unless an agent's message is received by the exchange agent in compliance 23 with the automated tender option program, an appropriate letter of transmittal properly completed and duly executed with any required signature guarantee and all other required documents must in each case be transmitted to and received or confirmed by the exchange agent at its address set forth below on or prior to the expiration date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under the guaranteed delivery procedures. Delivery of documents to DTC does not constitute delivery to the exchange agent. All questions as to the validity, form, eligibility, time of receipt, acceptance of tendered old notes and withdrawal of tendered old notes will be determined by us in our reasonable discretion, which determination will be final and binding. We reserve the absolute right to reject any and all old notes not properly tendered or any old notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the absolute right to waive any defects, irregularities or conditions of tender as to particular old notes. Our interpretation of the terms and conditions of this exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within such time as we determine. Although we intend to notify holders of defects or irregularities with respect to tenders of old notes, neither we, the exchange agent nor any other person will incur any liability for failure to give such notification. Tenders of old notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any old notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent to the tendering holders, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date of this exchange offer. Guaranteed Delivery Procedures Holders who wish to tender their old notes and: (1) whose old notes are not immediately available; (2) who cannot deliver their old notes, the letter of transmittal or any other required documents to the exchange agent; or (3) who cannot complete the procedures for book-entry transfer, prior to the expiration date of this exchange offer, may effect a tender if: (A) the tender is made through an eligible institution; (B) prior to the expiration date, the exchange agent receives from the eligible institution a properly completed and duly executed notice of guaranteed delivery, by facsimile transmission, mail or hand delivery. A form of such notice accompanies this prospectus. The notice must set forth the name and address of the holder, the certificate number(s) of the old notes and the principal amount of old notes tendered. The notice must state that the tender is being made thereby and must guarantee that, within three New York Stock Exchange trading days after the expiration date, the letter of transmittal or facsimile thereof together with the certificate(s) representing the old notes, or a confirmation of book-entry transfer of such old notes into the exchange agent's account at DTC, and any other documents required by the letter of transmittal will be deposited by the eligible institution with the exchange agent; and (C) such properly completed and executed letter of transmittal, or facsimile thereof, as well as the certificate(s) representing all tendered old notes in proper form for transfer, or a confirmation of book-entry transfer of the old notes into the exchange agent's account at DTC, and all other documents required by the letter of transmittal are received by the exchange agent upon five New York Stock Exchange trading days after the expiration date. Upon request to the exchange agent, a notice of guaranteed delivery will be sent to holders who wish to tender their old notes according to the guaranteed delivery procedures set forth above. 24 Withdrawal of Tenders Except as otherwise provided in this prospectus, tenders of old notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration date. To withdraw a tender of old notes in this exchange offer, a telegram, telex, letter or facsimile transmission notice of withdrawal must be received by the exchange agent at its address set forth in this prospectus prior to 5:00 p.m., New York City time, on the expiration date. Any such notice of withdrawal must: (1) specify the name of the person or entity having deposited the old notes to be withdrawn; (2) identify the old notes to be withdrawn, including the certificate number(s) and principal amount of the old notes, or, in the case of old notes transferred by book-entry transfer, the name and number of the account at DTC to be credited; (3) be signed by the holder in the same manner as the original signature on the letter of transmittal by which the old notes were tendered, including any required signature guarantees, or be accompanied by documents of transfer sufficient to have the trustee with respect to the old notes register the transfer of the old notes into the name of the person withdrawing the tender; and (4) specify the name in which any the old notes are to be registered, if different from that of the depositor. We will determine all questions as to the validity, form, eligibility and time of receipt of withdrawal notices and our determination will be final and binding on all parties. Any old notes so withdrawn will be deemed not to have been validly tendered for purposes of this exchange offer and no new notes will be issued with respect thereto unless the old notes withdrawn are validly retendered. Any old notes which have been tendered but which are not accepted for exchange will be returned to the holder thereof without cost to the holder as soon as practicable after withdrawal, rejection of tender or termination of this exchange offer. Properly withdrawn old notes may be retendered by following one of the procedures described above under "--Procedures for Tendering" at any time prior to the expiration date. Conditions Notwithstanding any other term of this exchange offer, we will not be required to accept for exchange, or issue new notes for, any old notes, and may terminate or amend this exchange offer as provided in this prospectus prior to the expiration date of the exchange offer if: (1) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to this exchange offer which we believe might materially impair our ability to proceed with this exchange offer or any material adverse development has occurred in any existing action or proceeding with respect to us or any of our subsidiaries; or (2) any law, statute, rule, regulation or interpretation by the staff of the SEC is proposed, adopted or enacted, which we believe might materially impair our ability to proceed with this exchange offer or materially impair the contemplated benefits of this exchange offer to us; or (3) any governmental approval has not been obtained, which approval we believe is necessary for the consummation of this exchange offer. If we determine in our reasonable discretion that any of the conditions are not satisfied prior to the expiration date, we may: (1) refuse to accept any old notes and return all tendered old notes to the tendering holders; (2) extend this exchange offer and retain all old notes tendered prior to the expiration of this exchange offer, subject, however, to the rights of holders to withdraw such old notes (see "--Withdrawal of Tenders"); or (3) waive such unsatisfied conditions with respect to this exchange offer and accept all properly tendered old notes which have not been withdrawn. 25 Exchange Agent Norwest Bank Minnesota, N.A., has been appointed as exchange agent for this exchange offer. Questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for notice of guaranteed delivery should be directed to the exchange agent addressed as follows: By Mail: By Hand Delivery or Overnight Courier: Norwest Bank Minnesota Norwest Bank Minnesota, National Association National Association Corporate Trust Operations Corporate Trust Operations P.O. Box 1517 Norwest Center Minneapolis, MN 55480-1517 Sixth and Marquette Minneapolis, MN 55479-0113 In Person: Facsimile Transmission: (612) 667-4927 Norwest Bank Minnesota, National Association For Information Telephone (call Northstar East Bldg. collect): (612) 667-9764 608 2nd Ave. S. 12th Floor Corporate Trust Services Minneapolis, MN 55479-0113 Delivery to an address other than set forth above will not constitute a valid delivery. Fees and Expenses We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telecopy, telephone or in person by our and our affiliates' officers and regular employees. We have not retained any dealer-manager in connection with this exchange offer and will not make any payments to brokers, dealers, or others soliciting acceptances of this exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection with this exchange offer. We will pay the cash expenses to be incurred in connection with this exchange offer. Such expenses include fees and expenses of the exchange agent and trustee, accounting and legal fees and printing costs, among others. Accounting Treatment The new notes will be recorded at the same carrying value as the old notes, which is face value, as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes as a result of this exchange offer. The expenses of this exchange offer will be deferred and charged to expense over the term of the new notes. Consequences of Failure to Exchange Upon consummation of the exchange offer, we will have no further obligation to register your old notes. The old notes that are not exchanged for new notes in accordance with this exchange offer will remain restricted securities. Accordingly, such old notes may be resold only: (1) to us, upon redemption thereof or otherwise; (2) so long as the old notes are eligible for resale in accordance with Rule 144A, to a person inside the United States whom the seller reasonably believes is a qualified institutional buyer within the meaning of Rule 144A under the Securities Act of 1933 in a transaction meeting the requirements of 26 Rule 144A, in accordance with Rule 144 under the Securities Act of 1933, or in accordance with another exemption from the registration requirements of the Securities Act of 1933, and based upon an opinion of counsel reasonably acceptable to us; (3) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Securities Act of 1933; or (4) in accordance with an effective registration statement under the Securities Act of 1933, in each case in accordance with any applicable securities laws of any state of the United States. These trading restrictions could adversely affect the trading market and price for the old notes. Resale of the New Notes With respect to resales of new notes, based on interpretations by the staff of the SEC set forth in no-action letters issued to third parties, we believe that a holder or other person who receives new notes, other than a person that is our affiliate within the meaning of Rule 405 under the Securities Act of 1933, in exchange for old notes in the ordinary course of business and who is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate, in the distribution of the new notes, will be allowed to resell the new notes to the public without further registration under the Securities Act of 1933 and without delivering to the purchasers of the new notes a prospectus that satisfies the requirements of Section 10 of the Securities Act of 1933. However, if any holder acquires new notes in this exchange offer for the purpose of distributing or participating in a distribution of the new notes, such holder cannot rely on the position of the staff of the SEC expressed in such no-action letters or any similar interpretive letters, and must comply with the registration and prospectus delivery requirements of the Securities Act of 1933 in connection with any resale transaction, unless an exemption from registration is otherwise available. Further, each participating broker-dealer that receives new notes for its own account in exchange for old notes, where such old notes were acquired by such participating broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the new notes. Prior to this exchange offer, there has been no existing trading market for any of the old notes and we expect that a trading market will not develop for the new notes. We do not intend to apply for listing of the new notes on any securities exchange or on the Nasdaq National Market. The new notes may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar securities, our performance and other factors. An active market for the new notes may not develop. Consequently, the new notes may be relatively illiquid, and you may be unable to sell your new notes. 27 USE OF PROCEEDS This exchange offer is intended to satisfy certain of our obligations under the registration rights agreement executed in connection with the issuance of the old notes. We will not receive any cash proceeds from the issuance of the new notes. In consideration for issuing the new notes contemplated in this prospectus, we will receive old notes in the same principal amount with substantially the same terms. We received $145.2 million from the sale of the old notes after deducting the fees and expenses of the private offering of the old notes and this exchange offer, but excluding $1.2 million in expenses incurred prior to the closing of the private offering of the old notes. We used $100.0 million of the net proceeds to repay an existing senior credit facility which matured on January 29, 1999 and bore an annual interest rate of approximately 8%. We used approximately $19.7 million to fund the interest reserve account for the notes. We have and will continue to use the remaining net proceeds of the private offering of the old notes, together with cash generated from operations, to fund the costs of the initial phase of our planned expansion through the end of 1999 and for working capital and other general corporate purposes. Our principal capital expenditure requirements for such expansion will include the purchase and installation of switches, transmission equipment collocated in incumbent local exchange carrier central offices and customer premise equipment. We made capital expenditures of approximately $22.0 million during the fourth quarter of 1998 and expect to make additional capital expenditures of between $30.0 and $50.0 million during 1999, of which $3.6 million of capital expenditures was incurred in the first quarter of 1999. The actual cost and timing of our planned expansion will depend on a variety of factors, including the cost of the development of our network in each of our new markets, the extent of competition and pricing of the telecommunications services in such markets and the acceptance of our services. Accordingly, our actual capital requirements may exceed the amounts described above. As part of our strategy, we may make strategic acquisitions, and a portion of the proceeds from the private offering of the old notes may be used for such purpose. We have no definitive agreement with respect to any acquisition, although from time to time we have discussions with other companies and assess opportunities on an ongoing basis. 28 CAPITALIZATION The following table sets forth our capitalization as of March 31, 1999, which includes the effect of our recapitalization and the private offering of the old notes. The old notes surrendered in exchange for the new notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the new notes will not result in any increase or decrease in our indebtedness or any additional net proceeds to us. Therefore, no effect has been given to the exchange offer in this capitalization table and no pro forma balance sheet data has been presented. This table should be read in conjunction with the "Selected Financial Data" and the related notes thereto, and our financial statements, including related notes thereto, included elsewhere in this prospectus. See "Use of Proceeds."
March 31, 1999 -------------- (unaudited) (in thousands) Cash and cash equivalents............................. $ 41,372 Restricted cash (1)................................... 19,844 ======== Total debt (including current maturities): 13 1/2% senior notes due 2009....................... 150,000 Notes payable....................................... 209 New senior credit facility (2)...................... -- -------- Total debt........................................ 150,209 -------- Convertible redeemable preferred stock, including accrued cumulative dividends of $2,466 (3)........... 47,466 Stockholders' equity (deficit): Common stock........................................ 13 Additional paid-in capital.......................... 7,768 Notes receivable from stockholders.................. (233) Retained earnings (deficit)......................... (82,156) -------- Total stockholders' equity (deficit).............. (74,608) -------- Total capitalization.............................. $123,067 ========
- -------- (1) Restricted cash represents cash deposited in an interest reserve trust account to fund the initial interest payments due under the notes. (2) Our new senior credit facility provides for initial maximum borrowings of $20.0 million and future borrowings of up to an additional $20.0 million for working capital and general corporate purposes. See "Description of Indebtedness." (3) See "Description of Capital Stock." 29 UNAUDITED PRO FORMA FINANCIAL DATA The unaudited pro forma condensed statements of operations data for the year ended December 31, 1998 and for the three month period ended March 31, 1999 give pro forma effect to the private offering of the old notes and this exchange offer as if they had occurred on January 1, 1998. The unaudited pro forma condensed statements of operations data do not purport to represent what our results of operations would have been if the private offering of the old notes and this exchange offer had occurred as of the date indicated or what such results will be for any future periods. The unaudited pro forma financial data is based upon assumptions that we believe are reasonable and should be read in conjunction with the audited and unaudited financial statements and accompanying notes thereto included in this prospectus. PAC-WEST TELECOMM, INC. UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS DATA Year Ended December 31, 1998 (in thousands)
Historical Pro Forma ---------- --------- Revenues.................................................. $42,211 $42,211 Operating costs........................................... 15,344 15,344 Selling, general and administrative expenses (1).......... 14,577 14,577 Depreciation and amortization expense..................... 4,106 4,106 ------- ------- Income from operations.................................... 8,184 8,184 Interest expense (2)...................................... (4,199) (5,601) Other expense, net (3).................................... (2,674) (2,674) ------- ------- Income (loss) before provision for income taxes and extraordinary item....................................... 1,311 (91) Provision for income taxes (4)............................ 1,561 1,000 ------- ------- Loss before extraordinary item............................ $ (250) $(1,091) ======= =======
Three Month Period Ended March 31, 1999 (in thousands)
Historical Pro Forma ---------- --------- Revenues................................................... $14,416 $14,416 Operating costs............................................ 4,062 4,062 Selling, general and administrative expenses............... 4,303 4,303 Depreciation and amortization expense...................... 1,449 1,449 ------- ------- Income from operations..................................... 4,602 4,602 Interest expense (2)....................................... (4,050) (3,963) Other income............................................... 527 527 ------- ------- Income before provision for income taxes .................. 1,079 1,166 Provision for income taxes (4)............................. 432 466 ------- ------- Net income................................................. $ 647 $ 700 ======= =======
30 PAC-WEST TELECOMM, INC. NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS DATA Year Ended December 31, 1998 and for the Three Month Period Ended March 31, 1999 (in thousands) (1) Selling, general and administrative expenses for 1998 include transaction bonuses and consultant's costs of $3,798. (2) The pro forma interest expense as a result of the private offering of the old notes is summarized as follows:
Year Ended Three Month Period December 31, Ended 1998 March 31, 1999 ------------ ------------------ (unaudited) Historical interest expense.............. $4,199 $4,050 Historical interest and amortization of deferred financing costs associated with historical borrowings repaid by the private offering of the old notes....... (4,181) (4,047) Interest related to the portion of the notes assumed to replace Pac-West's historical borrowings (at 13.5%)........ 4,983 3,810 Amortization of expected debt issuance costs ($6.0 million over a 10 year period)................................. 600 150 ------ ------ Pro forma interest expense............... $5,601 $3,963 ====== ======
(3) Other expense, net for 1998 includes other costs of the merger and recapitalization of approximately $3,004. (4) An income tax benefit has been recorded in the pro forma adjustments for the incremental increase in interest expense and for the amortization of deferred financing costs associated with the private offering of the old notes and this exchange offer using our effective income tax rate of 40%. Note: The unaudited pro forma condensed statements of operations data is based on: (A) The notes replace substantially all historical borrowings outstanding during the period presented, including the senior secured borrowings and other long-term obligations being repaid by the proceeds of the private offering of the old notes; and (B) Interest expense related to the notes reflects the incremental interest resulting from the portion of the notes being used to refinance Pac- West's lower rate historical borrowings, see "Use of Proceeds." 31 SELECTED FINANCIAL DATA The following table sets forth selected financial data of: . our predecessor's telephone and answering service divisions for the years ended December 31, 1994 and 1995 and for the nine month period ended September 30, 1996, and . Pac-West for the period from our commencement on October 1, 1996 to December 31, 1996, the years ended December 31, 1997 and 1998 and for the three month periods ended March 31, 1998 and 1999. Our selected financial data as of the dates and for the periods indicated were derived from audited and unaudited financial statements contained elsewhere in this prospectus and the unaudited financial statements of our predecessor's telephone and answering service divisions for the years ended December 31, 1994 and December 31, 1995. The unaudited financial data at March 31, 1998 and 1999 and for the three month periods ended March 31, 1998 and March 31, 1999 include all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of results for these unaudited periods. The unaudited balance sheet data as of March 31, 1999 includes the effect of our recapitalization and the private offering of the old notes. The results of operations for the three month period ended March 31, 1999 are not necessarily indicative of the results of operations that we expect for the full 1999 calendar year. The following selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes thereto appearing elsewhere in this prospectus. On October 1, 1996, we began operations when our predecessor company transferred its telephone and answering service divisions to Pac-West. As a result, this prospectus includes our audited financial statements for the period from our commencement on October 1, 1996 to December 31, 1996, and the 1997 and 1998 calendar years only. Due to the significant changes in our operations since September 30, 1996, we believe that the financial information of our predecessor's telephone and answering service divisions is not directly comparable to our current results of operations. Accordingly, you have limited comparable historical financial information upon which to base your evaluation of our past performance and the value of investing in the new notes. We recognize reciprocal compensation as revenue only to the extent received in cash. Pacific Bell and GTE, the two incumbent local exchange carriers with which we have interconnection agreements, have each refused to pay the portion of reciprocal compensation which they estimate is the result of inbound traffic terminating to Internet service providers. Pacific Bell and GTE argue that such calls are not local within the meaning of their interconnection agreements and therefore assert no reciprocal compensation is due. See Note 5 to the audited financial statements and "Risk Factors--Our right to receive reciprocal compensation for calls to Internet service providers is currently being challenged." Adjusted EBITDA represents earnings before interest, net; income taxes; depreciation and amortization; further adjusted for the costs of merger and recapitalization; transaction bonuses and consultant's costs and extraordinary item. Included in other income (expense), net, is interest income of $11,000, $20,000, $15,000, $5,000, $90,000, $327,000, $48,000 and $527,000 for the predecessor telephone and answering service divisions for the years ended December 31, 1994 and 1995, and for the nine month period ended September 30, 1996, and Pac-West for the period from commencement on October 1, 1996 to December 31, 1996, for the years ended December 31, 1997 and 1998, and for the three month periods ended March 31, 1998 and 1999, respectively. Although EBITDA is not a measure of financial performance under generally accepted accounting principles, we believe it is a common measure used by analysts and investors in evaluating the capacity of a company to service its obligations, as well as to compare a company's results with those of similar companies. In addition, EBITDA is a measure included in the restrictive covenants under our new senior credit facility. See the statements of cash flows in the audited and unaudited financial statements. The terms of the notes do not restrict our discretionary use of funds depicted by adjusted EBITDA. In addition, we have no intention to pay dividends to our stockholders. However, we do need to reserve funds to service our existing and future debt obligations, and, to the extent available, to fund anticipated capital expenditures of $30 million to $50 million in 1999. 32
Predecessor Telephone and Answering Service Divisions Pac-West Telecomm, Inc. --------------------------------------- ------------------------------------------------------- Period from Commencement on Nine Month October 1, Year Ended Three Month Period Year Ended Year Ended Period Ended 1996 to December 31, Ended March 31, December 31, December 31, September 30, December 31, ----------------- ----------------------- 1994 1995 1996 1996 1997 1998 1998 1999 ------------ ------------ ------------- ------------ ------- -------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) (dollars in thousands) (dollars in thousands) Statements of Operations Data: Revenues............... $ 6,775 $ 8,900 $ 8,737 $ 4,232 $29,551 $ 42,211 $10,252 $14,416 Costs and expenses: Operating costs....... 2,959 3,498 4,202 2,064 12,060 15,344 3,731 4,062 Selling, general and administrative: Selling, general and administrative....... 2,687 3,011 3,123 1,519 7,367 10,779 2,002 4,303 Transaction bonuses and consultant's costs (1)............ -- -- -- -- -- 3,798 -- -- Depreciation and amortization......... 495 512 549 299 2,204 4,106 845 1,449 ------- ------- ------- ------- ------- -------- ------- ------- Income from operations........... 634 1,879 863 350 7,920 8,184 3,674 4,602 Interest expense....... (19) (93) (33) (105) (932) (4,199) (377) (4,050) Gain on disposal of answering service division.............. -- -- -- -- 385 -- -- -- Costs of merger and recapitalization (1).. -- -- -- -- -- (3,004) -- -- Other income (expense), net................... 11 17 34 (11) 119 330 25 527 ------- ------- ------- ------- ------- -------- ------- ------- Income before provision for income taxes and extraordinary item... 626 1,803 864 234 7,492 1,311 3,322 1,079 Provision for income taxes................. 250 722 345 94 2,997 1,561 1,329 432 ------- ------- ------- ------- ------- -------- ------- ------- Income (loss) before extraordinary item... 376 1,081 519 140 4,495 (250) 1,993 647 Extraordinary item-- loss on early extinguishment of debt, net of income tax benefit of $278 (1)................... -- -- -- -- -- (417) -- -- ------- ------- ------- ------- ------- -------- ------- ------- Net income (loss)..... $ 376 $ 1,081 $ 519 $ 140 $ 4,495 $ (667) $ 1,993 $ 647 ======= ======= ======= ======= ======= ======== ======= ======= Other Financial Data: Reciprocal compensation withheld.............. $ -- $ -- $ -- $ -- $ 3,793 $ 32,591 $ 5,032 $13,401 Adjusted EBITDA........ 1,129 2,388 1,431 633 10,538 16,091 4,496 6,051 Adjusted EBITDA margin %..................... 16.7% 26.8% 16.4% 15.0% 35.7% 38.1% 43.9% 42.0% Cash provided by (used in): Operating activities.. $ 1,018 $ 1,758 $ 1,092 $ 75 $ 5,876 $ 12,033 $ 5,558 $ 4,544 Investing activities.. (1,155) (1,266) (2,523) (1,682) (6,619) (42,031) (1,185) (23,329) Financing activities.. 196 (350) 1,778 1,549 3,658 41,631 (255) 44,921 Ratio of earnings to fixed charges (2)..... -- -- -- 2.1x 5.8x 1.2x 6.6x 1.1x Pro forma ratio of earnings of fixed charges (2)........... -- 1.1x Balance Sheet Data (as of end of period): Cash and cash equivalents........... $ 257 $ 399 $ 746 $ 688 $ 3,603 $ 15,236 $ 7,721 $41,372 Restricted cash (3).... -- -- -- -- -- -- -- 19,844 Working capital (deficit)............. (321) (219) 626 398 2,598 15,532 4,046 60,053 Property, plant and equipment, net........ 2,311 3,065 5,883 9,483 19,079 57,294 19,419 59,528 Total assets........... 3,945 5,141 8,641 12,966 27,528 82,493 31,080 134,311 Total debt............. 1,106 591 3,256 7,022 15,672 100,248 15,417 150,209 Convertible redeemable preferred stock, including accrued cumulative dividends of $1,324 at December 31, 1998 and $2,466 at March 31, 1999........ -- -- -- -- -- 46,324 -- 47,466 Stockholders' equity (deficit)............. 1,445 2,526 4,037 4,177 8,672 (74,113) 10,665 (74,608)
- ------- (1) Transaction bonuses and consultant's costs, costs of merger and recapitalization and the extraordinary item all relate to our recapitalization. (2) For purposes of this computation, earnings are defined as income before provision for income taxes, extraordinary item and fixed charges, excluding capitalized interest. Fixed charges are the sum of: (A) interest costs, including amounts capitalized, (B) amortization of deferred financing costs, and (C)the portion of operating lease rental expense that is representative of the interest factor. On a proforma basis, earnings were insufficient to cover fixed charges by $394,000 for the year ended December 31, 1998. Due to the significant changes in our operations since September 30, 1996, we believe that the ratios of earnings to fixed charges of our predecessor's telephone and answering service divisions are not meaningful and therefore are not included in the table. (3) Restricted cash represents cash deposited in an interest reserve trust account to fund the initial interest payments under the notes. 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a rapidly growing competitive local exchange carrier that provides switched local and long distance telecommunications services and one-stop integrated telecommunications services to Internet service providers, paging companies and other companies handling large volumes of incoming calls as well as medium and small businesses. Our predecessor, also known as Pac-West Telecomm, Inc., began selling office phone systems in 1980 and reselling long distance service to small and medium size businesses and residential customers in 1982. Beginning in 1986, our predecessor began offering paging and telephone answering services to its customers. Effective September 30, 1996, our predecessor transferred its telephone and answering service divisions to us. Prior to September 30, 1996, we did not conduct any operations and, since that time, we have disposed of the answering service division and have focused our business strategy on operating as a competitive local exchange carrier. For the year ended December 31, 1998 and for the three month period ended March 31, 1999, recognizing compensation from other telecommunications companies for completing their customers' calls only to the extent such compensation was actually received in cash, we had net revenues of approximately $42.2 million and $14.4 million and adjusted EBITDA of approximately $16.1 million and $6.1 million, respectively. Factors Affecting Operations Revenues. We derive our revenues from monthly recurring charges, usage charges and initial non-recurring charges and telephone equipment sales and service. Monthly recurring charges include the fees paid by customers for lines in service and additional features on those lines, as well as equipment collocation services. Usage charges consist of fees paid by end users for each call made, fees paid by incumbent local exchange carriers as reciprocal compensation for completion of their customers' calls through another carrier, and access charges paid by carriers for long distance traffic originated or terminated by Pac-West. Initial non-recurring charges are paid by end users, if applicable, for the initiation of our service. We derive a substantial portion of our revenues from reciprocal compensation paid by incumbent local exchange carriers with which we have interconnection agreements. Reciprocal compensation revenues increased significantly in recent fiscal quarters as a result of increasing inbound call volume from our Internet service provider and other customers. For the years ended December 31, 1997 and 1998 and for the three month periods ended March 31, 1998 and 1999, recorded reciprocal compensation accounted for approximately 37.4%, 37.1%, 41.8% and 42.1%, respectively, of our revenues. Two incumbent local exchange carriers with which we have interconnection agreements, Pacific Bell and GTE, have refused to pay that portion of reciprocal compensation that they estimate is the result of inbound calls terminating to Internet service providers. These incumbent local exchange carriers contend that such Internet service provider calls are not local calls within the meaning of their respective interconnection agreements and claim that no reciprocal compensation is therefore payable. The total reciprocal compensation withheld by these incumbent local exchange carriers and not included in revenues was $3.8 million for the year ended December 31, 1997, $32.6 million for the year ended December 31, 1998 and $13.4 million for the three month period ended March 31, 1999. On June 24, 1999, the California Public Utilities Commission adopted a decision in an arbitration proceeding between us and Pacific Bell which held that reciprocal compensation would be payable for Internet service provider calls under our new interconnection agreement with Pacific Bell which became effective on June 29, 1999. Pacific Bell has requested rehearing of this decision. This decision does not address reciprocal compensation withheld under the prior agreement. We do not know at this time what action Pacific Bell will take with respect to this decision. In the event that all or a portion of the withheld reciprocal compensation is paid, the terms of our recapitalization require us to pay additional distributions to certain owners of up to $20.0 million. In 1999, the maximum cash distribution under the terms of the recapitalization could be up to approximately $15 million net of the after tax proceeds from the withheld reciprocal compensation. See "Certain Relationships and Related Transactions." 34 We expect that reciprocal compensation will continue to represent a significant portion of our revenues in the future. We are currently negotiating and implementing new interconnection agreements and the terms of the related reciprocal compensation. The per minute reciprocal compensation rate we receive from Pacific Bell under our new agreement is significantly lower than it was under our previous agreement. We also expect that the per minute reciprocal compensation rate may decline significantly under any new interconnection agreements. See "Risk Factors--A failure to establish interconnection agreements on favorable terms would adversely affect our business" and "--Our right to receive reciprocal compensation for calls to Internet service providers is currently being challenged." Operating Costs. Operating costs are comprised primarily of leased transport charges, usage charges for long distance and intrastate calls and, to a lesser extent, reciprocal compensation related to calls that originate with a Pac-West customer and terminate on the network of an incumbent local exchange carrier or other competitive local exchange carrier. Our leased transport charges are the lease payments we incurred for the transmission facilities used to connect our customers to our switch and to connect to the incumbent local exchange carrier and other competitive local exchange carrier networks. Our strategy of leasing rather than building our own transport facilities results in our cost of services being a significant component of total costs. Selling, General and Administrative Expenses. Our recurring selling, general and administrative expenses include network development, administration and maintenance costs, selling and marketing, customer service, information technology, billing, corporate administration and personnel. We expect to incur significant selling and marketing costs as we continue to expand our operations, a significant amount of which will be incurred in a particular market before the switch becomes operational and begins to generate revenue. Consequently, selling and marketing expenses are expected to increase until implementation of our expansion plan is substantially complete. We will incur other costs and expenses, including the costs associated with the development and maintenance of our networks, administrative overhead, premises leases and bad debts. We expect that these costs will grow significantly as we expand our operations and that sales and marketing and administrative overhead will be a large portion of these expenses during the start-up phase in each of our new markets. Results of Operations The following table summarizes the results of operations as a percentage of revenues for: (1) Our predecessor's telephone and answering service divisions for the nine month period ended September 30, 1996 and Pac-West for the period from our commencement on October 1, 1996 to December 31, 1996 on a combined basis; and (2) Pac-West for the years ended December 31, 1997 and 1998 and for the three month periods ended March 31, 1998 and 1999. The "Combined" column in the following table combines the results of operations of our predecessor's telephone and answering service divisions for the nine month period ended September 30, 1996 with those of Pac-West for the period from our commencement on October 1, 1996 to December 31, 1996. Due to the significant changes in our operations since September 30, 1996, we believe that the financial information of our predecessor telephone and answering service divisions is not directly comparable to our results of operations. As a result, prospective investors are cautioned not to place undue reliance on such financial information. The following data should be read in conjunction with the financial statements and notes thereto included elsewhere in this prospectus. Selling, general and administrative expenses and income from operations for the year ended December 31, 1998 include $3.8 million of one-time transaction bonuses and consultant's costs. Excluding these transaction bonuses and consultant's costs, selling, general and administrative expenses were 25.5% of revenues and income from operations was 28.4% of revenues for that period. The net loss for 1998 includes the costs of the 35 recapitalization of $3.0 million, transaction bonuses and consultant's costs of $3.8 million and the extraordinary loss on early extinguishment of debt of $0.7 million before income tax benefit.
Combined Pac-West Telecomm, Inc. ----------- -------------------------- Three Month Period Ended March Year Ended December 31, 31, ------------------------ ------------ 1996 1997 1998 1998 1999 ----------- ----- ----- ----- ----- (Unaudited) (Unaudited) Statements of Operations Data: Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0% Operating costs.................. 48.3 40.8 36.4 36.4 28.2 Selling, general and administrative expenses......... 35.8 24.9 34.5 19.5 29.8 Depreciation and amortization expense......................... 6.5 7.5 9.7 8.3 10.1 Income from operations........... 9.4 26.8 19.4 35.8 31.9 Net income (loss)................ 5.1 15.2 (1.6) 19.4 4.5
Three Month Period Ended March 31, 1999 Compared to Three Month Period Ended March 31, 1998 Revenues for the three month period ended March 31, 1999 increased $4.1 million to $14.4 million from $10.3 million for the corresponding period in 1998. The increase in revenues was primarily attributed to an increase of $1.9 million in paid local interconnection revenues, an increase of $2.0 million in recurring charges and installation charges billed directly to Internet service providers, and an increase of $0.2 million in dedicated transport, i.e. private line, revenues. In the third quarter of 1998, we installed new higher capacity switches at our Stockton and Los Angeles switching sites. During the fourth quarter of 1998, we expanded switch capacity to existing and new customers. Our revenues for the first quarter of 1999 significantly increased compared to the first quarter of 1998 as a result of the increased utilization of this newly installed switch capacity, primarily attributable to Internet service provider customers. In addition, new service orders from medium and small businesses have accelerated in the first quarter of 1999 as we have built our sales force. The number of access lines sold increased 147% to 74,026 as of March 31, 1999 from 29,930 as of March 31, 1998. Billable minutes of use were 3.1 million in the first quarter of 1999, up 107% from 1.5 million for the first quarter of 1998. Inbound local calls and minutes subject to reciprocal compensation revenues in accordance with interconnection agreements increased 69% and 100%, respectively, for the first quarter of 1999 over the first quarter of 1998. However, for reasons discussed elsewhere in this prospectus, the incumbent local exchange carriers paid only 31% of the reciprocal compensation billings for the first quarter of 1999 as compared to paying 46% in 1998. The net effect of those significant increases in inbound local calls and minutes, offset by the lower payment percentage, resulted in the $1.9 million or 46% increase in paid interconnection revenues. The $2.0 million increase in the first quarter of 1999 over the first quarter of 1998 in direct billings to Internet service providers represented a 96% year to year increase. Lines used by our Internet service providers significantly increased from 1998 to 1999, from 24,519 lines in service by Internet service providers at March 1, 1998 to 56,320 lines in service at March 1, 1999. The $0.2 million or 24% increase in dedicated transport revenues primarily related to increased data networking services for private corporate networks. Our operating costs for the three month period ended March 31, 1999 increased $0.4 million to $4.1 million from $3.7 million for the corresponding period in 1998. Our operating costs as a percentage of revenues 36 decreased to 28.2% for the three month period ended March 31, 1999 from 36.4% for the corresponding period in 1998. The increase in operating costs was primarily due to an increase in network operations associated with a higher level of telecommunications activity. We made significant investments in our telephone infrastructure during the second half of 1998 to accommodate future growth of competitive local exchange carrier services. As a result of increased utilization of our newly installed switching equipment and the use of higher capacity transmission facilities, our operating costs decreased as a percentage of revenues. Our selling, general and administrative expenses for the three month period ended March 31, 1999 increased $2.3 million to $4.3 million from $2.0 million for the corresponding period in 1998. As a percentage of revenues, our selling, general and administrative expenses increased to 29.8% for the three month period ended March 31, 1999 from 19.5% in the corresponding period in 1998. The increase in selling, general and administrative expenses was primarily due to the addition of 46 employees in sales and marketing; an increase in network operational, development and administration costs including 19 additional network employees; and 18 additional employees in other administration, customer service and information technology functions. Total employees doubled from 84 at March 31, 1998 to 167 at March 31, 1999. Our depreciation and amortization expense for the three month period ended March 31, 1999 increased $0.6 million to $1.4 million from $0.8 million for the corresponding period in 1998. Depreciation and amortization as a percentage of revenues increased to 10.1% for the three month period ended March 31, 1999 from 8.3% in the corresponding period in 1998. The increase in depreciation and amortization expense was primarily due to the additional depreciation on the portion of the $42.5 million of equipment acquired during 1998 which has been placed in service. As the balance of equipment acquired in 1998 and 1999 is placed in service, depreciation expense as a percentage of revenues is expected to increase in subsequent quarters in 1999. Our interest expense for the three month period ended March 31, 1999 increased $3.7 million to $4.1 million from $0.4 million in the corresponding period in 1998. The increase in interest expense was primarily due to the financing of a significant portion of the $42.5 million of equipment acquired during 1998 and interest on the $150 million private offering of the old notes consummated January 29, 1999 including amortization over 10 years of the related deferred financing costs associated with that offering. In addition, the interest rate on the old notes since January 29, 1999 is a higher interest rate than the rates paid on the equipment financings outstanding in the first quarter 1998. Our combined effective federal and state tax rate was 40% for the first quarter of both 1999 and 1998. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Our revenues for the year ended December 31, 1998 increased $12.6 million to $42.2 million from $29.6 million for 1997. The increase in revenues was primarily attributed to an increase of $4.6 million in paid interconnection revenues, an increase of $5.1 million in recurring charges and installation charges billed directly to Internet service providers, an increase of $1.2 million in local and long distance usage revenues, and an increase of $0.8 million in dedicated transport revenues. Inbound local calls and minutes subject to reciprocal compensation revenues in accordance with interconnection agreements increased 128% and 232%, respectively, 1998 over 1997. However, for reasons discussed elsewhere in this prospectus, the incumbent local exchange carriers paid only 32% of the reciprocal compensation billings in 1998 as compared to paying 74% in 1997. The net effect of these significant increases in inbound local calls and minutes, partially offset by the significantly lower payment percentage, resulted in the $4.6 million or 42% increase in paid interconnection revenues. The $5.1 million increase in 1998 over 1997 in direct billings to Internet service providers represented a 106% year over year increase. Lines used by our Internet service providers significantly increased from 1997 to 1998, from 18,430 lines in service by Internet service providers at December 1, 1997 to 34,799 lines in service at December 1, 1998. 37 The $1.2 million increase in outbound local and long distance revenues, including 800 number and travel card calls, represented a 23% increase 1998 over 1997. This increase is directly related to our focus on providing services to high-volume, telecommunication intensive users and to medium and small businesses. The $0.8 million or 25% increase in dedicated transport revenues primarily related to increased data networking services for private corporate networks. Our operating costs for the year ended December 31, 1998 increased $3.2 million to $15.3 million from $12.1 million for 1997. Our operating costs as a percentage of revenues decreased to 36.4% for the year ended December 31, 1998 from 40.8% for 1997. The increase in operating costs was primarily due to an increase in network operations associated with the higher level of revenues. We made significant investments in our telephone infrastructure beginning in the second half of 1996 through 1998 to accommodate future growth of competitive local exchange carrier services. As a result of increased utilization of our newly installed switching equipment and the use of higher capacity transmission facilities, our operating costs decreased as a percentage of revenues. Excluding $3.8 million of bonuses paid to certain key executives in connection with their assistance with our recapitalization and consulting payments made to our current President in connection with services provided by him prior to his joining Pac-West, our selling, general and administrative expenses for the year ended December 31, 1998 increased $3.4 million to $10.8 million from $7.4 million for 1997. Excluding the $3.8 million of transaction bonuses and consultant's costs, our selling, general and administrative expenses as a percentage of revenues increased to 25.5% for the year ended December 31, 1998 from 24.9% in 1997. Selling, general and administrative expense in 1998 reflects a 79% increase in the number of employees, a $0.6 million increase in facility costs and a $1.6 million increase in payroll costs related to the increased hiring of technology, sales, administrative and support personnel. Our depreciation and amortization expense for the year ended December 31, 1998 increased $1.9 million to $4.1 million from $2.2 million for 1997. Depreciation and amortization as a percentage of revenues increased to 9.7% for the year ended December 31, 1998 from 7.5% in 1997. The increase in depreciation and amortization expense was primarily due to the additional depreciation on the $7.7 million of equipment acquired during the second half of 1997 and the $20.1 million of equipment acquired during the first nine months of 1998. Depreciation and amortization expense will increase during 1999 as a result of capital expenditures made during 1998 and additional capital expenditures expected to be made in 1999. Our interest expense for the year ended December 31, 1998 increased $3.3 million to $4.2 million from $0.9 million in 1997. The increase in interest expense was primarily due to an increase in long-term debt during 1998. Interest expense will increase in 1999 as a result of the private offering of the old notes. The increase in long-term debt in 1998 was primarily due to $10.5 million of new borrowings during the year to finance the purchase of network equipment, and due to incremental borrowings of approximately $53.0 million in connection with the merger and recapitalization. Our tax provision for 1998 reflects the impact of the nondeductibility of a substantial portion of the costs associated with the recapitalization. Excluding the impact of these one-time costs, our combined effective federal and state tax rate for 1998 was 40%, consistent with 1997's effective tax rate. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Our revenues for 1997 increased $16.6 million to $29.6 million from $13.0 million in 1996. The increase in revenues was primarily attributed to an increase of $10.4 million in local interconnection revenues, an increase of $3.7 million in recurring charges and installation charges billed directly to Internet service providers, an increase of $0.7 million in local and long distance usage revenues and an increase of $1.0 million in dedicated transport revenues. 38 Both local interconnection revenues and billings to Internet service providers were new types of revenues in mid 1996 with less than $1.0 million of each type of revenue being recorded in 1996. Local and long distance usage revenues increased 15% in 1997 over 1996, which increase was due to our focus on business customers. Dedicated transport revenues increased 42% 1997 over 1996 primarily due to increased data networking services for private corporate networks. Our operating costs for 1997 increased $5.8 million to $12.1 million from $6.3 million in 1996. Our operating costs as a percentage of revenues decreased to 40.8% in 1997 from 48.3% in 1996. The decrease in operating costs as a percentage of revenues was primarily due to an increase in revenues from higher-margin, competitive local exchange carrier related services. Our selling, general and administrative expenses increased $2.8 million to $7.4 million from $4.6 million in 1996. Our selling, general and administrative expenses as a percentage of revenues decreased to 24.9% for the year ended December 31, 1997 from 35.8% for 1996. The increase in selling, general and administrative expenses was primarily due to an increase in hiring of additional sales, marketing and administrative personnel and a $0.5 million increase in facility costs. The decrease in selling, general and administrative expenses, as a percentage of revenues, was primarily due to the lower selling and marketing expenses associated with the addition of Internet service provider customers and a rapid increase in revenues from Internet service provider customers. Our depreciation and amortization expense in 1997 increased $1.4 million to $2.2 million from $0.8 million in 1996. Depreciation and amortization as a percentage of revenues increased to 7.5% for the year ended December 31, 1997 from 6.5% in 1996. The increase in depreciation and amortization expense was primarily due to the additional depreciation on the $3.9 million of equipment acquired during the fourth quarter of 1996 and the $11.9 million of capital equipment acquired during 1997. Our interest expense in 1997 increased $0.8 million to $0.9 million from $0.1 million in 1996. The increase in interest expense was primarily due to the additional interest expense on the $4.7 million of equipment financings entered into during the fourth quarter of 1996 and $10.7 million of equipment financings entered into during 1997. Total debt increased from $7.0 million at December 31, 1996 to $15.7 million at December 31, 1997. Our combined effective federal and state tax rate was 40% for both 1997 and 1996. Quarterly Results The following tables set forth certain unaudited quarterly financial data for the nine quarters ended March 31, 1999. In our opinion, the unaudited financial information set forth below has been prepared on the same basis as the audited financial information included elsewhere in this prospectus and includes all normal recurring adjustments necessary to present fairly the information set forth. The operating results for any quarter are not necessarily indicative of the results for any future period. We recognize reciprocal compensation only to the extent it is received in cash. Pacific Bell and GTE, the two incumbent local exchange carriers with which we have interconnection agreements, have each refused to pay the portion of reciprocal compensation which they estimate is the result of inbound calls terminating to Internet service providers. Pacific Bell and GTE argue that such calls are not local within the meaning of their interconnection agreements and therefore assert no reciprocal compensation is due. Other income (expense), net includes costs of the recapitalization of $2.9 million and $0.1 million, respectively, for the quarters ended September 30, 1998 and December 31, 1998. In addition, other income (expense), net, includes interest income of $8,000, $6,000, $23,000, $53,000, $48,000, $80,000, $78,000 and $121,000 and $527,000 for the quarters ended March 31, June 30, September 30 and December 31, 1997 and March 31, June 30, September 30 and December 31, 1998 and March 31, 1999, respectively. 39
Quarter Ended --------------------------------------------------------------------------------- 1997 1998 1999 ---------------------------------- ----------------------------------- -------- Mar. 31 June 30 Sep. 30 Dec. 31 Mar. 31 June 30 Sep. 30 Dec. 31 Mar. 31 ------- ------- ------- ------- ------- ------- ------- -------- -------- (unaudited, in thousands) Statements of Operations Data: Revenues................ $4,992 $6,421 $7,998 $10,140 $10,252 $9,680 $ 9,500 $ 12,779 $ 14,416 Costs and expenses: Operating costs........ 2,549 3,032 3,160 3,319 3,731 4,060 3,867 3,686 4,062 Selling, general and administrative: Selling, general and administrative...... 1,663 1,609 1,839 2,256 2,002 2,217 2,715 3,845 4,303 Transaction bonuses and consultant's costs............... -- -- -- -- -- -- 3,798 -- -- Depreciation and amortization.......... 480 514 549 661 845 856 1,063 1,342 1,449 ------ ------ ------ ------- ------- ------ ------- -------- -------- Income (loss) from operations.......... 300 1,266 2,450 3,904 3,674 2,547 (1,943) 3,906 4,602 Interest expense........ (203) (200) (213) (316) (377) (409) (882) (2,531) (4,050) Gain (loss) on disposal of answering service division............... 403 -- -- (18) -- -- -- -- -- Other income (expense), net.................... 10 10 27 72 25 22 (2,776) 55 527 ------ ------ ------ ------- ------- ------ ------- -------- -------- Income (loss) before provision for income taxes and extraordinary item.. 510 1,076 2,264 3,642 3,322 2,160 (5,601) 1,430 1,079 Provision (benefit) for income taxes........... 204 430 906 1,457 1,329 864 (1,205) 573 432 ------ ------ ------ ------- ------- ------ ------- -------- -------- Income (loss) before extraordinary item.. 306 646 1,358 2,185 1,993 1,296 (4,396) 857 647 Extraordinary item--loss on early extinguishment of debt, net of income tax benefit............ -- -- -- -- -- -- (417) -- -- ------ ------ ------ ------- ------- ------ ------- -------- -------- Net income (loss).... $ 306 $ 646 $1,358 2,185 $ 1,993 $1,296 $(4,813) $ 857 $ 647 ====== ====== ====== ======= ======= ====== ======= ======== ======== Other Financial Data: Reciprocal compensation withheld .............. $ -- $ -- $1,304 $ 2,489 $ 5,032 $7,823 $ 9,531 $ 10,205 $ 13,401 Adjusted EBITDA......... 1,185 1,784 3,003 4,566 4,519 3,403 2,921 5,248 6,051 Capital expenditures.... 1,424 764 1,948 7,748 1,275 6,588 13,031 21,572 3,633 Cash provided by (used in): Operating activities... 382 1,358 2,526 1,610 5,558 1,829 (1,172) 5,818 4,544 Investing activities... (590) (410) (557) (5,062) (1,185) (6,248) (12,984) (21,614) (23,329) Financing activities... 155 (472) (63) 4,038 (255) 3,273 14,004 24,609 44,921
Our quarterly operating results have fluctuated and will continue to fluctuate from period to period depending upon such factors as the success of our efforts to expand our customer base, changes in and the timing of expenditures relating to the continued expansion of our network, the level of reciprocal compensation withheld by incumbent local exchange carriers, the development of new services, the success of sales and marketing efforts, changes in pricing policies by us or our competitors, and certain factors relating to our acquisition strategy as further described under "--Liquidity and Capital Resources." Our revenues, income from operations, excluding transaction bonuses and consultant's costs, and adjusted EBITDA declined in each of the second and third quarters of 1998. The decline in revenues was due primarily to lower reciprocal compensation received resulting from a reduction in the percentage of reciprocal compensation paid under interconnection agreements. The reciprocal compensation paid declined from 64% of total reciprocal compensation billed in the fourth quarter of 1997 to 46% in the first quarter of 1998, 28% in the second quarter and 25% in the third quarter. We expect that the per minute reciprocal compensation rate may decline significantly under the new interconnection agreements. In addition to lower reciprocal compensation payments, our revenue growth was constrained throughout the first three quarters of 1998 40 because our three switching facilities were operating at close to full capacity and we could not provision switch capacity for new customers or existing customers seeking additional capacity. Income from operations and adjusted EBITDA were negatively impacted by quarterly increases in selling, general and administrative expenses excluding transaction bonuses and consultant's costs, resulting from our decision to build our direct sales force, executive management team and administrative staff to support future growth. In the third quarter of 1998, we installed new higher capacity switches at our Stockton and Los Angeles Pac-West switching sites. During the fourth quarter of 1998, we expanded switch capacity to existing and new customers. Our revenues, income from operations and adjusted EBITDA for the fourth quarter of 1998 and the first quarter of 1999 significantly increased compared to the third quarter of 1998 as a result of the increased utilization of the newly installed switch capacity, primarily attributable to Internet service provider customers. In addition, new service orders from medium and small businesses have accelerated in the fourth quarter of 1998 and the first quarter of 1999 as we have built our sales force. In view of the significant historical growth of our operations, we believe that period-to-period comparisons of our financial results should not be relied upon as an indication of future performance and that we may experience significant period-to-period fluctuations in operating results in the future. We expect to focus in the near term on building and increasing our customer base and increasing our network utilization both through internal growth and through acquisitions which may require us from time to time to increase our expenditures for personnel, marketing, network infrastructure and the development of new services. Liquidity and Capital Resources Net cash provided by operating activities was $4.5 million for the three month period ended March 31, 1999 compared to $5.6 million for the three month period ended March 31, 1998. This decrease primarily reflects lower net income as well as a decrease in accounts payable due to a $2.6 million payment in January 1999 for new switching equipment accrued for at December 31, 1998. Net cash provided by operating activities was $12.0 million for the year ended December 31, 1998 compared to $5.9 million for the year ended December 31, 1997. This increase primarily reflects increased accounts payable and accrued liabilities of $5.9 million. Net cash provided by operating activities for the period from our commencement on October 1, 1996 to December 31, 1996 and for our predecessor's telephone and answering service divisions for the nine months ended September 30, 1996 were $75,000 and $1,092,000, respectively. Net cash used in investing activities was $23.3 million for the three month period ended March 31, 1999 compared to $1.2 million for the three month period ended March 31, 1998. During the three month period ended March 31, 1999, we invested $3.6 million in new switching and related equipment as compared to $1.3 million during the comparable 1998 quarter. Further, in the first quarter of 1999, $19.7 million of the proceeds from the private offering of the old notes was used to purchase short-term investments to fund the interest reserve trust account for the notes. Net cash used in investing activities was $42.0 million for the year ended December 31, 1998 compared to $6.6 million for the year ended December 31, 1997. During 1998, we invested approximately $41.0 million in new switching and related equipment and leasehold improvements to expand switching capacity in Los Angeles, Oakland and Stockton, California. During 1997, our investment of approximately $6.7 million in new switching and related equipment and leasehold improvements was partially offset by $0.5 million of proceeds from the disposition of assets. Net cash used in investing activities for the period from our commencement on October 1, 1996 to December 31, 1996 and for our predecessor's telephone and answering service divisions for the nine month period ended September 30, 1996 were $1.7 million and $2.5 million, respectively. Net cash provided by financing activities was $44.9 million for the three month period ended March 31, 1999 compared to a net use of $0.3 million for the three month period ended March 31, 1998. The net cash provided in the three month period ended March 31, 1999 was primarily attributable to proceeds from the $150 million private offering of the old notes reduced by the payoff of $100 million of senior secured borrowings. Net cash provided by financing activities was $41.6 million for the year ended December 31, 1998 compared to $3.7 million for 1997. The net cash provided in 1998 was primarily attributable to $37.8 million of proceeds 41 from the sale of our common and preferred stock, $75.4 million of proceeds from senior secured borrowings in connection with the recapitalization, less $74.0 million of payments to existing stockholders. See "Certain Relationships and Related Transactions--Recapitalization." Net cash provided by financing activities for the period from our commencement on October 1, 1996 to December 31, 1996 and for our predecessor's telephone and answering service divisions for the nine months ended September 30, 1996 was $1.5 million and $1.8 million, respectively. The local telecommunications services business is capital intensive. Our operations have required and will continue to require substantial capital investment for the design, acquisition, construction and implementation of our network. Capital expenditures, including amounts financed under capital leases, were $3.6 million for the first quarter of 1999, $42.5 million for the year ended December 31, 1998, $11.9 million for the year ended December 31, 1997 and $3.9 million for the period from our commencement on October 1, 1996 to December 31, 1996. Of the $42.5 million of capital expenditures during 1998, $25.6 million was included in construction in progress at December 31, 1998 and therefore are not being depreciated until placed in service in 1999. We expect to make additional capital expenditures between $30.0 and $50.0 million during 1999. The actual cost of our planned expansion will depend on a variety of factors, including the cost of the development of our network in each of our new markets, the extent of competition and pricing of the telecommunications services in such markets and the acceptance of our services. Accordingly, our actual capital requirements may not exceed the amounts described above. Planned capital expenditure projects during 1999 include: completion of an upgraded and expanded switch at the existing Oakland, California facility; construction of switching facilities in Las Vegas, Nevada and Seattle, Washington; expansion of existing switch in Los Angeles, California; and implementation of a new billing and operation system support system. We have entered into a new senior credit facility. This facility provides for initial maximum borrowings of $20.0 million and future borrowings of up to an additional $20.0 million for working capital and other general corporate purposes, and bears interest, at our option, at: (1) the base rate, as defined in the new senior credit facility; or (2) the Eurodollar rate, as defined in the new senior credit facility, plus between 2.25 and 3.5%. As of May 31, 1999, there were no amounts outstanding under this facility and the borrowing rate would have been 7.69%. Our borrowings under the new senior credit facility will be secured by all of our assets. The new senior credit facility has a three year term. See "Description of Indebtedness." Our principal sources of funds following this exchange offer are anticipated to be current unrestricted cash balances, cash flows from operating activities and borrowings under the new senior credit facility. In addition, we have purchased and pledged to the trustee for the benefit of the holders of the notes approximately $19.7 million of U.S. government securities to provide for the payment of the first two scheduled interest payments under the notes. See "Description of Notes--Interest Reserve Account." These U.S. government securities are classified as restricted cash. We believe that these funds will provide us with sufficient liquidity and capital resources for us to meet our financial obligations for the next year, including the payment of principal and interest under the notes, as well as to provide funds for our working capital, capital expenditures and other needs. No assurance can be given, however, that this will be the case. Depending upon our rate of growth and profitability, we may require additional equity or debt financing to meet our working capital requirements or capital equipment needs. There can be no assurance that additional financing will be available when required or, if available, will be on terms satisfactory to us. Instruments governing our indebtedness, including the new senior credit facility and the indenture, contain financial and other covenants that restrict, among other things, our ability to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of substantially all of our assets. Such limitations, together with our highly 42 leveraged nature, could limit corporate and operating activities, including our ability to respond to market conditions to provide for unanticipated capital investments or to take advantage of business opportunities. Quantitative and Qualitative Disclosures About Market Risks The SEC's rule related to market risk disclosure requires that we describe and quantify our potential losses from market risk sensitive instruments attributable to reasonably possible market changes. Market risk sensitive instruments include all financial or commodity instruments and other financial instruments that are sensitive to future changes in interest rates, currency exchange rates, commodity prices or other market factors. We are not exposed to market risks from changes in foreign currency exchange rates or commodity prices. We do not hold derivative financial instruments nor do we hold securities for trading or speculative purposes. At December 31, 1998, we had $100 million of long-term debt and other long-term obligations subject to variable interest rates. However, all of this $100 million was replaced by the issuance of $150 million of fixed rate notes in January 1999, and consequently we currently have no risk exposure associated with changing interest rates on debt. We are exposed to changes in interest rates on our investments in cash equivalents. All of our investments in cash equivalents are in money market funds that hold short-term investment grade commercial paper, treasury bills or other U.S. government obligations. Therefore this investment policy reduces our exposure to long-term interest rate changes. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes. A hypothetical 100 basis point decline in short-term interest rates would reduce the annualized earnings on our $15.2 million of cash equivalent investments at December 31, 1998 by approximately $152,000. We do, however, have market risk exposure associated with the market price on the $150 million of notes outstanding. These notes are recorded at book value which could vary from current market prices in the future, especially if interest rates decline. As of March 31, 1999, the market value of the notes approximated their book value. Inflation We do not believe that inflation has had any material effect on our business over the past three years. Year 2000 Issues Year 2000 Compliance Issues. The information in this section is a "Year 2000 Readiness Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act of 1998 and contains forward-looking statements. These statements include, but are not limited to, anticipated costs and the date by which we expect to complete actions and are based on management's current estimates, which are in turn based on assumptions about future events, including, but not limited to, the availability of resources, representations received from third parties and other factors. There can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause material differences include, but are not limited to, our ability to identify and remediate all relevant systems, results of Year 2000 testing, adequate resolution of Year 2000 issues by business and other third parties that are service providers, suppliers and customers of ours, unanticipated system costs, the adequacy of and ability to implement contingency plans and similar uncertainties. The forward-looking statements made in this Year 2000 discussion speak only as of the date on which these statements are made. Impact of the Year 2000 computer problem. The Year 2000 computer problem refers to the potential for system and processing failures of date-related data as a result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time- sensitive software may recognize a date represented as "00" as the year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. To date, we have not experienced any Year 2000 issues with any of our internal systems or our products, and we do not expect to experience any of them. 43 Assessment. The Year 2000 problem affects the computers, software and other equipment that we use, operate or maintain for our operations. Accordingly, we have organized a program team responsible for monitoring the assessment and remediation status of our Year 2000 issues and reporting to our management. This project team is currently assessing the potential effect and costs of remediating Year 2000 issues for our internal systems. To date, we have not obtained independent verification or validation to assure the reliability of our risk and cost estimates because we do not feel that the scope of our program warrants this time and expense. Internal infrastructure. We believe that we have identified all major computers, software applications and related equipment used in connection with our internal operations that will need to be evaluated to determine if they must be modified, upgraded or replaced to minimize the possibility of a material disruption to our business. We are currently assessing the potential impact of Year 2000 issues on these computers, equipment and applications. We expect to complete this evaluation by August 1999 and will then begin modifying, upgrading and replacing major systems that we believe have Year 2000 issues. Our long distance billing system and our accounting system are not yet Year 2000 compliant. We are in process of replacing our long distance billing program to accommodate future anticipated growth with a new Year 2000 compliant system. The manufacturer of the noncompliant accounting system has provided software that is represented to be Year 2000 compliant. Systems other than information technology systems. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, security systems and other common devices may have Year 2000 issues. We are currently assessing the potential effect on and the costs of remediating these issues, if any, for our office equipment and our facilities in Stockton, Los Angeles, and Oakland, California and Las Vegas, Nevada. Products. We have designed our products to be Year 2000 compliant and believe that using our products as documented should not cause any Year 2000- related issues. We have tested and intend to continue to test all of our products for Year 2000 issues. While we believe our products are Year 2000 compliant, it is impractical for us to test our products in every telecommunications systems environment or with all available combinations of our products with components supplied by our customers or other third party suppliers. As a result, there may be situations where the combination of our products working with components supplied by other third parties could result in Year 2000 issues. Costs of remediation. We currently anticipate that our total cost of addressing our Year 2000 issues will be $150,000, of which approximately $102,000 has been incurred and expensed through May 31, 1999. We do not have a separate information technology or similar budget. The cost of addressing Year 2000 issues will be reported as a general and administrative expense. We have not deferred any material information technology projects due to our Year 2000 efforts. Since we have been working on a Year 2000 resolution for over one year, all major decisions regarding replacement of equipment and software was done with Year 2000 compliance as a major purchase criteria. Costs of software upgrades and additions, as well as hardware upgrades which were required for compatibility, enhancement, capability/capacity, or efficiency were not considered as a Year 2000 cost. Suppliers. We are contacting with third-party suppliers of components and our key subcontractors used in the manufacturing of our products to identify, and to the extent possible, resolve issues relating to the Year 2000 issue. While we expect that we will be able to resolve any significant Year 2000 issue identified with these third parties, because we have no control over the actions of these parties, these third parties may not remediate any or all of the Year 2000 issues identified. Any failure of any of these third parties to timely resolve Year 2000 issues with either their products sold to us, or their systems could have a material adverse effect on our business, operating results and financial condition. We believe that many incumbent local exchange carriers and long distance carriers are also impacted by the Year 2000 issue, which in turn could affect us. 44 Most reasonably likely worst case consequence of Year 2000 issues. We expect to identify and resolve all Year 2000 issues that could materially adversely affect our business operations. However, for the reasons discussed above, we believe that it is not possible to determine with complete certainty that all Year 2000 issues affecting us have been identified or corrected. As a result, we believe that the following consequences are possible: . operational inconveniences and inefficiencies for us, our contract manufacturers and our customers that will divert our management's time and attention and our financial and human resources from ordinary business activities; . business disputes and claims for pricing adjustments or penalties by our customers due to Year 2000 issues, which we believe will be resolved in the ordinary course of business; and . business disputes alleging that we failed to comply with the terms and conditions of contracts or industry standards of performance that result in litigation on contract termination. Contingency plans. We are currently developing contingency plans to be implemented if our efforts to identify and correct Year 2000 issues affecting our internal systems are not effective. We expect to complete our contingency plans by the end of October 1999. Depending on the systems affected, these plans could include: . accelerated replacement of affected equipment or software; . short to medium-term use of backup equipment and software; . increased work hours for our personnel; and . use of contract personnel to correct on an accelerated schedule any Year 2000 issues that arise or to provide manual workarounds for information systems. Our implementation of any of these contingency plans could have a material adverse effect on our business, operating results and financial conditions. New Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards Statement No. 133, Accounting for Derivative Instruments and for Hedging Activities. Statement No. 133 is effective for years beginning after June 15, 1999. Statement No. 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. We do not anticipate that the adoption of Statement No. 133 will have a material impact on our financial position or the results of our operations. 45 BUSINESS Our Company We are a rapidly growing competitive local exchange carrier providing switched local and long distance telecommunications services and one-stop integrated telecommunications services to Internet service providers, paging companies and other inbound call service providers as well as medium and small businesses. We built our network to capitalize on the significant growth in national Internet usage and in the related demand for local telephone service by regional and national Internet service providers, as well as the increasing demand of medium and small businesses for customized and integrated telecommunications services. We believe the structure of our network and, in California, our presence in each local calling area provides us with significant competitive advantages over incumbent local exchange carriers and other competitive local exchange carriers, particularly for Internet service providers, paging companies and other inbound call service providers. In California, our network enables these companies to provide their business and residential customers with access to Internet service provider, paging and other services from almost any point in the state through a local call. Our network development strategy of owning our switches and leasing our fiber transport lines and our focus on telecommunications intensive customers allow us to quickly enter new markets and generate high network utilization, substantial revenues, strong profit margins and positive cash flows. Markets According to data published by the FCC, total local exchange service revenues including business and residential services was approximately $103.0 billion in 1997. We believe that the rapid opening of local markets to competition, accelerated growth in local traffic related to increases in Internet access, and the desire for one-stop integrated services by small and medium businesses present a significant opportunity for new entrants to achieve significant penetration in this large, established market. Management believes that the primary determinants of success will be the construction of a network that meets the needs of target customers, rapid deployment of network assets, building of a direct local sales force to market to small and medium businesses and the ability to provide competitively priced services. Our primary market is California. We own and operate switches in Los Angeles, Oakland and Stockton, have local points of presence in all 11 California local calling areas, and have over 500 assigned local prefixes and 5.0 million telephone numbers available for use. Pac-West's local prefixes cover 246 California rate areas and allow virtually all California callers to access our network through a local call. Industry sources indicate that the California market generated approximately $26.0 billion in local exchange and long distance revenues in 1996 and has over 660 Internet service providers, over 600,000 medium and small businesses and about 7.5 million total business lines. Over the next two years, we intend to duplicate our proven network and marketing strategy in other western states, including Nevada, Arizona, Washington, Colorado, Texas, Utah, Idaho, New Mexico and Oregon. We believe that the use of telecommunications services is rapidly expanding in each of these areas and that we will be able to effectively use our experience in California and our customer relationships to enter these markets. 46 The following table sets forth certain information regarding the markets in which Pac-West currently operates and our anticipated geographic network buildouts. Since Internet service providers are often present in more than one state, for purposes of presenting the total number of Internet service providers, each Internet service provider is counted only once. Medium and small businesses are defined as businesses with fewer than 100 employees.
1997 Target Customer Base 1996 Revenues (in millions) ------------------------------------- -------------------------------------- Number of Number of Internet Medium & Total Local Local Launch Service Small Business Exchange Exchange Long Total Period Providers Business Lines Intrastate Interstate Distance Market ------ --------- --------- ---------- ---------- ---------- -------- ------- Current Markets: California............. 1996 664 600,173 7,473,945 $ 8,423 $2,396 $15,142 $25,961 Planned Markets: Arizona................ 1999 213 78,546 766,290 949 408 2,023 3,380 Colorado............... 2000 239 97,222 837,557 1,203 466 2,014 3,683 Idaho.................. 2000 111 27,562 173,788 254 132 546 932 Nevada................. 1999 166 29,854 398,604 322 154 894 1,370 New Mexico............. 2000 151 32,730 234,439 422 160 737 1,319 Oregon................. 1999 239 77,020 569,452 758 333 1,497 2,588 Texas.................. 2000 431 340,208 3,472,214 5,060 1,589 8,468 15,117 Utah................... 2000 170 36,888 340,687 404 182 739 1,325 Washington............. 1999 302 125,182 915,398 1,424 555 2,700 4,679 ----- --------- ---------- ------- ------ ------- ------- Total Planned Markets............. -- 845,212 7,708,429 10,796 3,979 19,618 34,393 --------- ---------- ------- ------ ------- ------- Total Pac-West Markets............. 1,388 1,445,385 15,182,374 $19,219 $6,375 $34,760 $60,354 ========= ========== ======= ====== ======= =======
We focus on providing services to high-volume, telecommunications intensive users and to medium and small businesses. Pac-West's customers include 76 regional and national Internet service providers, all of which have operations in California. We believe that our greatest opportunity for rapid growth is to continue to grow with and provide high quality services to our Internet service provider customers. By building our network to meet demand from existing Internet service provider customers that are increasing their capacity in existing markets and expanding into new geographic markets, we believe we can: (1) quickly achieve predictable, high utilization rates on newly deployed network assets from high volume users; (2) generate a high return on invested capital in a short period of time; and (3) enter new markets with a stable and growing revenue and cash flows base upon which we can aggressively market to build a more diversified base of revenue and customers. Internet access service is one of the fastest growing segments of the global telecommunications services market. International Data Corporation, a market research firm, estimates that the number of Internet users worldwide reached 69 million in 1997 and will grow to over 320 million by the year 2002. The rapid growth and development of the Internet has resulted in the creation of approximately 5,000 national and local Internet service providers in the United States. We believe that we are strategically positioned to become one of the leading providers of telecommunications services to Internet service providers in our target markets. Pac-West believes many medium and small businesses have significant and increasing needs for advanced telecommunication services that are not adequately served by incumbent local exchange carriers or other competitive local exchange carriers. Our target state markets have approximately 1.4 million medium and small businesses and approximately 15.2 million total business lines in service. Many of our target customers want technologically advanced telecommunications systems and low cost bundled services but do not have the expertise to design, purchase and maintain these kinds of systems themselves. We believe our complete product 47 offering of system design, equipment selection and installation, and bundled local and long distance services positions us to become a leading provider of integrated telecommunications services to medium and small businesses, allowing us to quickly penetrate our target markets and build customer loyalty. Network Our network strategy is to own our switches and lease our fiber transport lines. We believe that this strategy provides us with significant cost and time-to-market advantages over competitors that own both their switches and fiber lines. By owning our switches, we can configure our network to provide high performance, high reliability and cost-effective solutions for our customers' needs. By leasing our transport lines, we can reduce up-front capital expenditures, rapidly enter new markets, and provide low-cost redundancy. In addition, we seek to maximize our operating profits by carrying a high percentage of our customer-originated traffic on our network. Our network development strategy of owning our switches and leasing our fiber transport lines and our high percentage of on-network customer traffic enable us to rapidly generate revenues and positive cash flows while avoiding the risk of stranding our capital in underutilized fiber transport equipment. To meet demand for telecommunications services in California, we have established three California switching sites, one in each of Los Angeles, Oakland, and Stockton, and digital connections in each of California's 11 local calling areas. We believe the structure of our network and, in California, our presence in each California local calling area provides us with significant competitive advantages over incumbent local exchange carriers and other competitive local exchange carriers, particularly for Internet service providers, paging companies and other companies handling large volumes of incoming calls. In California, our network enables our customers to provide their business and residential customers with access to Internet, paging and other services from almost any point in the state through a local call. In this way, our customers can achieve statewide coverage with significantly lower capital and operating expenses. Our switching sites offer Internet service providers highly reliable, low cost tandem switching and the ability to build lower cost networks by collocating equipment at our three switching sites rather than in all 11 local calling areas. In addition, our interconnection arrangements and statewide leased transport network allow Internet service providers to obtain statewide coverage at local calling rates, which reduces switching and transmission costs. Our switching sites use Alcatel USA's tandem switches to switch calls between originating locations and final destinations. Each port on a switch is a data access point for entry or exit of information to and from the network. As of March 1, 1999, we had an installed capacity of 187,000 ports and total expandable capacity of 260,000 ports, all in California. By the end of the second quarter of 1999, we expect to increase our California switching sites' total expandable capacity to 345,000 ports. We plan to duplicate our network strategy of owning our switches, leasing our fiber transport lines and providing statewide local coverage in each of our target markets. We intend to install new Pac-West switching sites in Nevada and Washington in 1999 and in Arizona or Colorado in early 2000. Leased Transmission Capacity. We lease our transmission facilities from inter-exchange carriers, incumbent local exchange carriers and other competitive local exchange carriers. We generally seek to lease fiber optic transmission facilities from multiple sources in each of our current and target markets. Management believes that our broad market coverage results in: (1) an increased number of buildings that can be directly connected to our switching network, which should maximize the number of customers to which we can offer our services; (2) a higher volume of telecommunications traffic both originating and terminating on our network, which should result in improved operating margins; (3) enhanced reliability at competitive prices; (4) the ability to leverage our investment in high capacity switching equipment and electronics; and 48 (5) the opportunity for our network to provide backhaul carriage for other telecommunications service providers, such as long distance and wireless carriers. Interconnection. Our primary interconnection agreements are with Pacific Bell and GTE. Our interconnection agreement with GTE has expired and is currently being renegotiated. In accordance with its terms, however, this agreement will remain in force during renegotiation. We believe that interconnection arrangements between the incumbent local exchange carriers and other competitive local exchange carriers will be in place at appropriate times in other markets that we may enter. Interconnection agreements between us and incumbent local exchange carriers are subject to approval of the relevant state commission, and under the terms of the Telecommunications Act of 1996, each incumbent local exchange carrier which is subject to the Telecommunications Act of 1996 is required to negotiate an interconnection agreement with us. Where an interconnection agreement cannot be reached on terms and conditions satisfactory to us, we may pursue arbitration of any disputes before the state utility commissions as provided under the Telecommunications Act of 1996. Pac- West currently is in arbitration with Citizens Telecommunications Company of California, Inc. in California and Nevada Bell in Nevada. See "--Regulation." Strategy Our objective is to become a leading provider of telecommunications services to Internet service providers, paging companies and other companies handling significant amounts of incoming calls as well as medium and small businesses in each of our target markets. We plan to do this by: Capitalizing on Growing Internet Service Provider Demand for Local Services. Significant increases in dial-up access to the Internet have resulted in the creation of approximately 5,000 national and local Internet service providers in the U.S., which, in turn, has created strong demand for local access lines nationwide. Pac-West currently has 76 regional and national Internet service provider customers, all of which have operations in California. Many of these Internet service providers already operate in several states and are continuing to expand into additional markets. Also, many Internet service providers based outside of our target markets are establishing a presence in California and other western states. We intend to duplicate our proven network strategy in new markets in order to serve the needs of our existing customers and attract new customers entering those markets from other regions. The structure of our network offers Internet service providers three primary benefits: . switching systems which support high calling volumes and long holding times for Internet service provider calls; . statewide local calling capabilities through established physical locations in each local calling area within a state, which reduces Internet service providers' transmission costs; and . the ability to collocate Internet modems and servers in fewer locations, which enables Internet service providers to achieve broad geographic coverage while minimizing capital expenditures. We believe that by entering new markets with our existing customers, we can reduce our risk, achieve predictable, high usage rates on our network assets, and generate a high return on invested capital in a short period of time. Focusing on Medium and Small Business Market. We believe that medium and small businesses have significant and increasing needs for advanced telecommunication services. Many of our target customers want technologically advanced telecommunications systems along with low cost bundled local, long distance, data and other enhanced services but do not have the expertise to design, purchase and maintain these kinds of systems and services themselves. We believe that these target customers are not adequately served by incumbent local exchange carriers and other competitive local exchange carriers. We intend to become a leading provider of integrated telecommunications services by offering a complete product offering of system design, equipment selection and installation along with bundled local and long distance services. We believe that this product mix will enable us to quickly penetrate target markets and build customer loyalty. 49 Expanding Our Direct Sales Force. To achieve significant revenue growth in the medium and small business services market, we have and will continue to expand our direct sales force and use independent sales agents in selected markets. From September 1998 to December 1998, our direct, internal sales force increased from 25 to 46 professionals, and to 58 professionals as of March 1, 1999. We believe that employing a direct sales force and independent sales agents with extensive local market and telecommunications sales experience enhances the likelihood of success in new markets. Salespeople with experience in a particular market provide us with extensive knowledge of our target customer base through existing relationships with target customers. As a result, our salespeople are able to pre-sell our products and services before we initiate network operations in a particular market. Targeting California and Western United States. Our primary market is currently California. After completing our planned expansion, we expect to offer coverage throughout the Western United States, one of the fastest growing regional markets for business telecommunications services in the country. We select our target markets based on a number of considerations, including the number of potential customers and other competitors in those markets and the presence of multiple transmission facility suppliers. Our target markets had approximately 1,400 Internet service providers, 1.4 million medium and small businesses and 15.2 million business lines in 1997, and generated approximately $60.4 billion of local exchange and long distance revenues in 1996. We believe that our geographically clustered network will enable us to take advantage of regional calling patterns to transmit a large percentage of customer traffic on our network. We also believe that by originating and terminating calls on our network, we can continue to achieve significant cost savings and may develop some pricing advantages over our competition. Leasing Our Fiber Transport Lines. Virtually all of our planned capital expenditures are intended to accommodate our growing customer base and the increasing needs of our existing customers. We believe this strategy reduces capital deployment risks and will provide an attractive return on invested capital. In addition, we believe that our strategy of leasing our fiber transport lines provides us with significant cost and time-to-market advantages over competitors who own rather than lease their transport. Installing Advanced, Uniform Equipment. We have chosen Alcatel USA's digital tandem switches to switch calls between originating locations and final destinations. Due to their high call carrying capacity, multiple path call routing capabilities and ability to switch multiple digital, voice and data applications of varying bandwidths, tandem switches are ideally suited for handling the high volumes and long holding times involved in serving Internet service provider customers. Tandem switches, software and customer collocation facilities, provide the scale, switching capacity and standardization needed to efficiently and reliably serve our target customers. Our uniform and advanced switching platform combined with the structure of our computer network enable us to: . deploy features and functions quickly throughout our entire network; . expand switch and transport capacity in a cost-effective, demand-based manner; . lower maintenance costs through reduced training and spare parts requirements; and . achieve direct connectivity to wireless and other personal communication system applications in the future. Expanding Our Customer Base Through Potential Acquisitions. We may acquire other competitive local exchange carriers or other telecommunications providers to grow our business. We believe that strategic acquisitions may enable us to accelerate our market penetration, cross-sell additional services, diversify our customer base and improve operating profitability. Products and Services Our products and services are designed to appeal to the sophisticated telecommunications needs of our target customers. 50 Local Services. We provide local dial-tone services to customers, allowing them to complete calls in a local calling area and to access long distance carriers. Local services and long distance services can be bundled together using the same transport facility. Our network is designed to allow a customer to easily increase or decrease capacity and alter enhanced services as the telecommunications requirements of the business change. In addition to our core local services, we also provide access to third party directory assistance and operator services. Long Distance Services. We provide domestic and international long distance services. Long distance calls which do not terminate on our network are passed to long distance carriers which route the remaining portion of the call. Our ability to integrate local and long distance services allows us to aggregate customers' monthly recurring, local usage and long distance charges on a single, consolidated invoice. Specialized Application Services. We tailor products and services for target industries with special telecommunications needs. These services typically include rated local calling, expanded local calling area, discounted long distance rates and tailored trunking configurations. Internet Service Provider Services. We provide Internet service providers collocation services at each of our three California switch locations. Collocation enables an Internet service provider to install its equipment in any or all of our switch facilities and interconnect directly to our tandem switches to switch calls from their originating locations to their final destinations. Collocated equipment is protected by the same cooling, power back-up and security systems protecting our switches. In California, an Internet service provider's ability to collocate equipment at only three sites, rather than in all 11 local calling areas, reduces its capital expenditures and maintenance requirements. We receive monthly rental revenue from the Internet service provider for the space used. Pac-West is also in the process of introducing a managed modem service where we provide modem pools and dedicated circuits into the worldwide web for our Internet service provider customers. Enhanced Services. In addition to providing typical enhanced services such as voicemail, call transfer and conference calling, we offer additional value- added enhanced services to complement our core local and long distance services. These enhanced service offerings include: Internet Access Services--Enables customers to use their available capacity for access to Internet service providers. Data Networking Services--We provide high-speed, broadband services to use for data communications, such as private corporate networks. Digital Subscriber Line Services--We expect to offer high-speed digital subscriber line service to our Internet service provider and business customers through a reseller relationship with a major digital subscriber line supplier. Equipment Sales. System design and equipment sales and installation are essential components of our strategy of marketing to medium and small businesses. We offer our business customers technologically advanced systems bundled together with local and long distance services. Sales and Marketing Sales. We are building an experienced direct sales force. We recruit salespeople with strong sales backgrounds in our existing and target markets, including salespeople from long distance companies, telecommunications equipment manufacturers, network systems integrators and incumbent local exchange carriers. We plan to continue to attract and retain highly qualified salespeople by offering them an opportunity to work with an experienced management team in an entrepreneurial environment and to participate in the potential economic rewards made available through a results-oriented compensation program that emphasizes sales commissions. During the months prior to initiating service in a new market, our salespeople will begin pre-selling our services to target customers. This pre- selling effort is designed to shorten the period between the availability of service and the receipt of customer orders and to generate customers in each market who may enter into service agreements before the local Pac-West network becomes operational. 51 Marketing. In its existing markets, Pac-West seeks to position itself as a high quality alternative to incumbent local exchange carriers for local telecommunication services by offering network reliability and superior customer support at competitive prices. We intend to build our reputation and brand identity by working closely with our customers to develop services tailored to their particular needs and by implementing targeted advertising and promotional efforts, which will be gradually expanding to mass media. Customer and Technical Service. Management believes that our ability to provide superior customer and technical service is a key factor in acquiring new customers and reducing churn of existing customers. We have developed a customer service strategy designed to effectively meet the service requirements of our target customers. The principal salesperson for each customer will provide the first line of customer service by identifying and resolving any customer concerns. Customer service representatives will provide real time problem identification and resolution and superior customer service. All of these services will be supported by our experienced engineering and technical staff. Customers We focus on providing services to high volume telecommunications users, including Internet service providers, paging companies, call centers and medium and small businesses. Nine of our top fifteen customers are Internet service providers. For the year ended December 31, 1997 and 1998 and for the three month period ended March 31, 1999, Internet service providers accounted for approximately 16.2%, 23.3% and 28.4%, respectively, of our revenues, not including reciprocal compensation related to terminating calls to Internet service providers. The following is a list of some of our Internet service provider and paging customers:
Internet Service Providers Paging Companies -------------------------- ---------------- Concentric Network Corp. Metrocall, Inc EarthLink, Inc. PageMart Wireless, Inc. Frontier Global Center, Incorporated California Wireless, Inc. The Grid Inc. InReach Internet LLC JPS.Net Corp. Mindspring Enterprises, Inc. Slip.Net, Inc.
Our business customers include regional banks, alarm companies, universities, healthcare providers, real estate agencies, law firms and others. Sales to Bay Alarm Company and InReach Internet LLC collectively accounted for approximately 7.1%, 6.4% and 4.5%, respectively, of our revenues for the year ended December 31, 1997 and 1998 and for the three month period ended March 31, 1999. Mr. Bruce A. Westphal, who serves on our board of directors, is the principal stockholder and serves as Chairman of the Board of both Bay Alarm Company and InReach Internet LLC. Competition The telecommunications industry is highly competitive. We believe that the principal competitive factors affecting our business will be pricing levels and pricing policies, customer service, accurate billing and, to a lesser extent, variety of services. Our ability to compete effectively will depend upon our continued ability to maintain high quality, market-driven services at prices generally equal to or below those charged by our competitors. To maintain our competitive posture, we believe that we must be in a position to reduce our prices in order to meet reductions in rates, if any, by others. Any such reductions could adversely affect us. Many of our current and potential competitors have financial, personnel and other resources, including brand name recognition, substantially greater than ours as well as other competitive advantages over us. 52 Incumbent Local Exchange Carriers. In each of the markets we target, we will compete principally with the incumbent local exchange carrier serving that area, such as Pacific Bell and GTE in California. Some incumbent local exchange carriers, including GTE, are offering long distance services to their local telephone customers. The regional Bell operating companies, including Pacific Bell, are actively seeking removal of federal regulatory restrictions that prevent them from entering the long distance market. Many experts expect the regional Bell operating companies to be successful in entering the long distance market in a few states within the next two years and in most states within a year or two thereafter. We believe the regional Bell operating companies expect to offset market share losses in their local markets by capturing a significant percentage of the long distance market between local calling areas, especially in the residential segment where the regional Bell operating companies' strong regional brand names and extensive advertising campaigns may be very successful. See "--Regulation." As a relatively recent entrant in the integrated telecommunications services industry, we have not achieved and do not expect to achieve a significant market share for any of our services. In particular, the regional Bell operating companies and other local telephone companies have long-standing relationships with their customers, have financial, technical and marketing resources substantially greater than ours, have the potential to subsidize competitive services with revenues from a variety of businesses, have long- standing relationships with regulatory authorities at the federal and state levels, and currently benefit from certain existing regulations that favor the incumbent local exchange carriers over us in certain respects. While recent regulatory initiatives, which allow competitive local exchange carriers such as ourselves to interconnect with incumbent local exchange carrier facilities, provide us with increased business opportunities, such interconnection opportunities have been, and likely will continue to be, accompanied by increased pricing flexibility for and relaxation of regulatory oversight of the incumbent local exchange carriers. With respect to competitive access services, the FCC recently proposed a rule that would provide for increased incumbent local exchange carrier pricing flexibility and deregulation for such access services either automatically or after certain competitive levels are reached. If the incumbent local exchange carriers are allowed by regulators to offer discounts to large customers through contract tariffs, engage in aggressive volume and term discount pricing practices for their customers, and/or seek to charge competitors excessive fees for interconnection to their networks, the income of competitors to the incumbent local exchange carriers, including us, could be materially adversely affected. If future regulatory decisions afford the incumbent local exchange carriers increased access service pricing flexibility or other regulatory relief, such decisions could also have a material adverse effect on competitors to the incumbent local exchange carrier, including ourselves. Competitive Access Carriers/Competitive Local Exchange Carriers/Other Market Entrants. We also face, and expect to continue to face, competition from other current and potential market entrants, including long distance carriers seeking to enter, reenter or expand entry into the local exchange market such as AT&T, MCI Worldcom, and Sprint, and from other competitive local exchange carriers, out-of-region incumbent local exchange carriers, resellers of local exchange services, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and private networks built by large end users. In addition, a continuing trend toward mergers, acquisitions and strategic alliances in the telecommunications industry could also increase the level of competition we face. Consolidation is also occurring in the incumbent local exchange carrier industry, such as the proposed plans for mergers between SBC and Ameritech, and between Bell Atlantic and GTE. These types of consolidations and alliances could put us at a competitive disadvantage. The Telecommunications Act of 1996 imposes certain regulatory requirements on all local exchange carriers, including competitors such as ourselves, while granting the FCC expanded authority to reduce the level of regulation applicable to any or all telecommunications carriers, including incumbent local exchange carriers. The manner in which these provisions of the Telecommunications Act of 1996 are implemented and enforced could have a material adverse effect on our ability to successfully compete against incumbent local exchange carriers and other telecommunications service providers. 53 The changes in the Telecommunications Act of 1996 radically altered the market opportunity for traditional competitive local exchange carriers. Because many existing competitive local exchange carriers initially entered the market providing dedicated access in the pre-1996 era, they had to build a fiber infrastructure before offering services. Switches were added by most competitive local exchange carriers since 1996 to take advantage of the opening of the local market. With the Telecommunications Act of 1996 requiring unbundling of the incumbent local exchange carrier networks, competitive local exchange carriers are now able to enter the market more rapidly by installing switches and leasing fiber transport capacity until traffic volume justifies building facilities. New competitive local exchange carriers will not have to replicate existing facilities and can be more opportunistic in designing and implementing networks. Competition for Provision of Long Distance Services. The long distance telecommunications industry has numerous entities competing for the same customers and a high average churn rate, as customers frequently change long distance providers in response to the offering of lower rates or promotional incentives by competitors. Prices in the long distance market have declined significantly in recent years and are expected to continue to decline. Internet Service Providers. The competition for Internet service provider customers in the telecommunications industry is high and we expect that competition will intensify. In addition, alternative competing technologies regarding this service may emerge. Our competitors in this market include other telecommunications companies, including integrated online services providers with their own communications networks. Many of these competitors have greater financial, technological, marketing, personnel and other resources than ours. Competition from International Telecommunications Providers. Under the recent World Trade Organization agreement on basic telecommunications services, the United States and 68 other members of the World Trade Organization committed themselves to opening their respective telecommunications markets and/or foreign ownership and/or to adopting regulatory measures to protect competitors against anticompetitive behavior by dominant telecommunications companies, effective in some cases as early as January 1998. Although we believe that the World Trade Organization agreement could provide us with significant opportunities to compete in markets that were not previously accessible and to provide more reliable services at lower costs than we could have provided prior to implementation of the World Trade Organization agreement, it could also provide similar opportunities to our competitors. There can be no assurance that the pro-competitive effects of the World Trade Organization agreement will not have a material adverse effect on our business, financial condition and results of operations or that members of the World Trade Organization will implement the terms of the World Trade Organization agreement. Regulation Our telecommunications services business is subject to varying degrees of federal, state and local regulation. Federal Regulation The FCC regulates interstate and international telecommunications services. We provide service on a common carrier basis. The FCC imposes certain regulations on common carriers such as the regional Bell operating companies that have some degree of market power. The FCC imposes less regulation on common carriers without market power including, to date, competitive local exchange carriers. Among other obligations, common carriers are generally subject to nondiscrimination and tariff filing requirements, as well as certain service reporting requirements. The FCC also requires common carriers to receive an authorization to construct and operate telecommunications facilities, and to provide or resell telecommunications services, between the United States and international points. 54 In August 1996, the FCC released an interconnection decision establishing rules implementing the Telecommunications Act of 1996 requirements that incumbent local exchange carriers negotiate interconnection agreements and providing guidelines for review of such agreements by state public utilities commissions. On July 18, 1997, the Eighth Circuit vacated certain portions of the interconnection decision, including provisions establishing a pricing methodology and a procedure permitting new entrants to pick and choose among various provisions of existing interconnection agreements between incumbent local exchange carriers and their competitors. On October 14, 1997, the Eighth Circuit issued a decision vacating additional FCC rules affecting the use of combinations of an incumbent local exchange carrier's unbundled network elements. On January 25, 1999, the Supreme Court reversed most aspects of the Eighth Circuit's holdings with respect to FCC jurisdiction and, among other things, declared that the FCC has general authority under the Telecommunications Act of 1996 to promulgate regulations governing local interconnection pricing, including regulations governing reciprocal compensation. The Supreme Court also found that the FCC had the authority to promulgate a pick and choose rule, and upheld most of the FCC's rules governing access to unbundled network elements. The Court, however, remanded to the FCC its designation of unbundled network elements based on the FCC's use of an improper standard to determine whether an unbundled element must be made available. The Eighth Circuit decisions and their recent reversal by the Supreme Court perpetuate continuing uncertainty about the rules governing the pricing, terms and conditions of interconnection agreements. The Supreme Court's action in particular may require or trigger the renegotiation of existing agreements. Although state public utilities commissions have continued to conduct arbitrations, and to implement and enforce interconnection agreements during the pendency of the Eighth Circuit proceedings, the Supreme Court's recent ruling and further proceedings on remand at the Eighth Circuit or the FCC may affect the scope of state commissions' authority to conduct such proceedings or to implement or enforce interconnection agreements. They could also result in new or additional rules being promulgated by the FCC. Given the general uncertainty surrounding the effect of the Eighth Circuit decisions and the recent decision of the Supreme Court reversing them, there can be no assurance that we will be able to continue to obtain or enforce interconnection terms that are acceptable to us or that are consistent with our business plans. The Telecommunications Act of 1996 is intended to increase competition. The act opens the local services market by requiring incumbent local exchange carriers to permit interconnection to their networks and establishing incumbent local exchange carrier obligations with respect to: Reciprocal Compensation. Requires all incumbent local exchange carriers and competitive local exchange carriers to complete calls originated by competing carriers under reciprocal arrangements at prices based on a reasonable approximation of incremental cost or through mutual exchange of traffic without explicit payment. Resale. Requires all incumbent local exchange carriers and competitive local exchange carriers to permit resale of their telecommunications services without unreasonable restrictions or conditions. In addition, incumbent local exchange carriers are required to offer wholesale versions of all retail services to other telecommunications carriers for resale at discounted rates, based on the costs avoided by the incumbent local exchange carrier in the wholesale offering. Interconnection. Requires all incumbent local exchange carriers and competitive local exchange carriers to permit their competitors to interconnect with their facilities. Requires all incumbent local exchange carriers to permit interconnection at any technically feasible point within their networks, on nondiscriminatory terms, at prices based on cost, which may include a reasonable profit. At the option of the carrier seeking interconnection, collocation of the requesting carrier's equipment in the incumbent local exchange carriers' premises must be offered, except where an incumbent local exchange carrier can demonstrate space limitations or other technical impediments to collocation. Unbundled Access. Requires all incumbent local exchange carriers to provide nondiscriminatory access to unbundled network elements, including certain network facilities, equipment, features, functions, 55 and capabilities, at any technically feasible point within their networks. Such access must be on nondiscriminatory terms, at prices based on cost, which may include a reasonable profit. Number Portability. Requires all incumbent local exchange carriers and competitive local exchange carriers to permit users of telecommunications services to retain existing telephone numbers without impairment of quality, reliability or convenience when switching from one telecommunications carrier to another. Dialing Parity. Requires all incumbent local exchange carriers and competitive local exchange carriers to provide "1+" equal access to competing providers of telephone exchange service and toll service, and to provide nondiscriminatory access to telephone numbers, operator services, directory assistance, and directory listing, with no unreasonable dialing delays. Access to Rights-of-Way. Requires all incumbent local exchange carriers and competitive local exchange carriers to permit competing carriers access to poles, ducts, conduits and rights-of-way at regulated prices. Incumbent local exchange carriers are required to negotiate in good faith with carriers requesting any or all of the above arrangements. If the negotiating carriers cannot reach agreement within a prescribed time, either carrier may request arbitration of the disputed issues by the state regulatory commission. Where an agreement has not been reached, incumbent local exchange carriers remain subject to interconnection obligations established by the FCC and state telecommunication regulatory commissions. On May 8, 1997, the FCC released an order establishing a significantly expanded federal universal service subsidy regime. For example, the FCC established new subsidies for telecommunications and information services provided to qualifying schools and libraries with an annual cap of $2.3 billion and for services provided to rural health care providers with an annual cap of $400.0 million. The FCC also expanded the federal subsidies for local exchange telephone service provided to low-income consumers. Providers of interstate telecommunications service, such as ourselves, as well as certain other entities, must pay for these programs. Our share of these federal subsidy funds will be based on our share of certain defined telecommunications end-user revenues. Currently, the FCC is assessing such payments on the basis of a provider's revenue for the previous year. We are paying approximately $16,000 per month in subsidy payments during the first half of 1999. To offset this expense, we currently charge our customers a surcharge on all interstate usage, subject to periodic adjustment. The FCC is currently in the process of revising its rules for subsidizing service provided to consumers in high cost areas, which may result in further substantial increases in the overall cost of the subsidy program. The FCC postponed the projected effective date of this revision to January 1, 2000. Several parties have appealed the May 8th order. Such appeals have been consolidated and transferred to the United States Court of Appeals for the Fifth Circuit where they are currently pending. The FCC and a federal-state joint board also are continuing to examine and revise various aspects of universal service. We cannot predict the effect that further regulatory or judicial revision of the universal service regime will have on our business, financial condition or results of operations. The Telecommunications Act of 1996 codifies the incumbent local exchange carriers' equal access and nondiscrimination obligations and preempts inconsistent state regulation. The Telecommunications Act of 1996 also contains special provisions that eliminate the AT&T Antitrust Consent Decree and similar antitrust restrictions on the regional Bell operating companies restricting the regional Bell operating companies from providing long distance services and engaging in telecommunications equipment manufacturing. The Telecommunications Act of 1996 permitted the regional Bell operating companies to enter the out- of-region long distance market immediately upon its enactment. Further, provisions of the Telecommunications Act of 1996 permit a regional Bell operating company to enter the long distance market in its traditional service area if it satisfies several procedural and substantive requirements in those states in which it seeks long distance relief. These requirements include obtaining FCC approval upon a showing that the regional Bell operating company has entered into interconnection agreements or, under some circumstances, has offered to do so. The interconnection agreements must satisfy a 14-point checklist of competitive requirements and the FCC must be 56 satisfied that the regional Bell operating companies' entry into long distance markets is in the public interest. To date, several petitions by regional Bell operating companies for such entry have been denied by the FCC and none has been granted. Under the Telecommunications Act of 1996, any entity, including cable television companies and electric and gas utilities, may enter any telecommunications market, subject to reasonable state regulation of safety, quality and consumer protection. Because implementation of the Telecommunications Act of 1996 is subject to numerous federal and state policy rulemaking proceedings and judicial review there is still uncertainty as to what impact such legislation will have on us, but it is likely to encourage additional competitive entry in markets we serve. In accordance with authority granted by the FCC, we resell the international telecommunications services of other common carriers between the United States and international points. In connection with such authority, we have filed tariffs with the FCC stating the rates, terms and conditions for our international services. With respect to our domestic service offerings, we have filed tariffs with the FCC stating the rates, terms and conditions for our interstate services. Our tariffs are generally not subject to pre-effective review by the FCC, and can be amended on one day's notice. Our interstate services are provided in competition with interexchange carriers and, with respect to access services, the incumbent local exchange carriers. In October 1996, the FCC adopted an order eliminating the requirement that non-dominant interstate carriers such as ourselves maintain tariffs on file with the FCC for domestic interstate services. This order applies to all non- dominant interstate carriers, including AT&T. The order does not apply to the switched and special access services of the regional Bell operating companies or other local exchange providers. On February 13, 1997, the United States Court of Appeals for the District of Columbia Circuit stayed the implementation of the FCC order pending its review of the order on the merits. Currently, that temporary stay remains in effect. If the stay is lifted and the FCC order becomes effective, telecommunications carriers such as ourselves will no longer be able to rely on the filing of tariffs with the FCC as a means of providing notice to customers of prices, terms and conditions on which they offer their interstate services. In June 1997, the FCC issued another order which allows non-dominant carriers, such as ourselves, to offer interstate access services without the filing of tariffs. The obligation to provide non-discriminatory, just and reasonable prices remains unchanged under the Communications Act of 1934. While tariffs provided a means of providing notice of prices, terms and conditions, we intend to rely primarily on our sales force and direct marketing to provide such information to our customers. With limited exceptions, the current policy of the FCC for most interstate access services dictates that incumbent local exchange carriers charge all customers the same price for the same service. Thus, the incumbent local exchange carriers generally cannot lower prices to those customers likely to contract for their services without also lowering charges for the same service to all customers in the same geographic area, including those whose telecommunications requirements would not justify the use of such lower prices. The FCC may, however, alleviate this constraint on the incumbent local exchange carriers and permit them to offer special rate packages to very large customers, as it has done in a few cases, or permit other forms of rate flexibility. The FCC has adopted some proposals that significantly lessen the regulation of incumbent local exchange carriers that are subject to competition in their service areas and provide such incumbent local exchange carriers with additional flexibility in pricing their interstate switched and special access on a central office specific basis; and, as discussed in the following paragraph, is considering expanding such flexibility. To the extent we provide interexchange telecommunications service, we are required to pay access charges to incumbent local exchange carriers and other competitive local exchange carriers when we use the facilities of those companies to originate or terminate interexchange calls. Also, as a competitive local exchange carrier, we provide access services to other interexchange service providers. The interstate access charges of incumbent local exchange carriers are subject to extensive regulation by the FCC, while those of competitive local exchange carriers are subject to a lesser degree of FCC regulation but remain subject to the requirement that all 57 charges be just, reasonable, and not unreasonably discriminatory. In two orders released on December 24, 1996, and May 16, 1997, the FCC made major changes to the interstate access charge structure. In the December 24th order, the FCC removed restrictions on incumbent local exchange carriers' ability to lower access prices and relaxed the regulation of new switched access services in those markets where there are other providers of access services. If this increased pricing flexibility is not effectively monitored by federal regulators, it could have a material adverse effect on our ability to compete in providing interstate access services. The May 16th order substantially increased the costs that price cap incumbent local exchange carriers subject to the FCC's price cap rules, recover through monthly, non-traffic-sensitive access charges and substantially decreased the costs that price cap incumbent local exchange carriers recover through traffic-sensitive access charges. In the May 16th order, which was upheld on appeal by the United States Court of Appeals for the Eighth Circuit, the FCC also announced its plan to bring interstate access rate levels more in line with costs. The plan will include rules that may grant price cap incumbent local exchange carriers increased pricing flexibility upon demonstrations of increased or potential competition in relevant markets. The manner in which the FCC implements this approach to lowering access charge levels could have a material effect on our ability to compete in providing interstate access services. On February 26, 1999, the FCC issued a declaratory ruling on the issue of inter-carrier compensation for calls bound to Internet service providers. The FCC ruled that the calls are jurisdictionally mixed, but largely interstate calls. The FCC, however, determined that this issue did not resolve the question of whether inter-carrier reciprocal compensation is owed for such calls under existing interconnection agreements. The FCC noted a number of factors that would allow the state public utilities commissions to continue to require the payment of reciprocal compensation. Since the issuance of the FCC decision, thirteen states have issued decisions either initially or on reconsideration of existing decisions. In each case, the commission determined compensation is owed. In Massachusetts, however, the commission vacated its earlier decision because, in its view, its decision was based solely on a ground rejected by the FCC and in Missouri the commission determined that the parties would be subject to a reconciliation once the FCC determines the issue of the amount of compensation owed. Until then, compensation should be tracked but it does not have to be paid. We cannot predict the impact of the FCC's ruling on existing state decisions, the outcome of pending appeals or future litigation on this issue. State Regulation State regulatory agencies have regulatory jurisdiction when Pac-West facilities and services are used to provide intrastate services. A significant portion of our current traffic is classified as intrastate and therefore subject to state regulation. To provide intrastate services, we generally must obtain a certificate of public convenience and necessity from the state regulatory agency and comply with state requirements for telecommunications utilities, including state tariffing requirements. We have obtained such certificates to provide local exchange and intrastate toll service in California, Nevada, Washington and Oregon, an application is pending in Arizona, and we intend to file applications for such authority in the near future for Colorado, Idaho, Montana, Utah, New Mexico, Texas and Wyoming. There can be no assurance that such state authorizations will be granted. Most states in which we operate or propose to operate also requires us to seek approval for any transfers of control. In addition, the implementation of the Telecommunications Act of 1996 is subject to numerous state rulemaking proceedings on these issues, it is currently difficult to predict how quickly full competition for local services, including local dial tone, will be introduced. Furthermore, the Telecommunications Act of 1996 provides that state public utilities commissions have significant roles in determining the content of interconnection agreements, including the responsibility to conduct the mandatory arbitration proceedings called for by the Telecommunications Act of 1996. The actions of the state public utilities commissions are subject to the Telecommunications Act of 1996 and, in several respects, the FCC's interpretations thereof. For example, the FCC has determined that the state public utilities commissions will continue to determine whether reciprocal compensation will be included in arbitrated interconnection agreements. 58 On October 22, 1998, the California Public Utilities Commission issued a decision holding that local telephone calls placed to Internet service providers terminate at the Internet service providers' modem and are thus local calls entitled to reciprocal compensation. On November 30, 1998, Pacific Bell and GTE filed applications for rehearing of the October 22, 1998 decision, which was denied on July 22, 1999. The California Public Utilities Commission may grant or deny rehearing, or may commence a separate generic proceeding to develop its prospective policy regarding reciprocal compensation. We cannot predict the outcome of these California Public Utilities Commission proceedings or of future appeals, of additional pending cases involving related issues, or of the applicability of such proceedings to our interconnection agreement with Pacific Bell or GTE. As a result, no assurance can be given that we will collect the reciprocal compensation previously withheld by Pacific Bell and GTE or whether we will be entitled to reciprocal compensation for these types of calls in the future. Internet service providers currently form a significant part of our customer base in California and adverse decisions in these proceedings could limit our ability to serve this group of customers profitably and have a material adverse effect on us. We expect that reciprocal compensation will continue to represent a significant portion of our revenues in the future although we expect that the per minute reciprocal compensation rate may decline significantly under new interconnection agreements. We are currently in the process of renegotiating our interconnection agreement and the terms of our reciprocal compensation arrangements with GTE, and no assurance can be given concerning the outcome of these negotiations or any arbitration under Section 252 which may occur in the absence of successful negotiations. On November 16, 1998, Pacific Bell filed a Petition for Arbitration of an interconnection agreement in accordance with Section 252(b) of the Telecommunications Act of 1996. This agreement would replace the interconnection agreement which was executed in 1996. This petition proposed that telephone calls to Internet service providers be excluded from calls subject to reciprocal compensation. This petition also proposed that calls made to a number assigned to the calling party's rate center but routed to a second rate center be deemed interexchange toll-free calls for which Pacific Bell would be entitled to compensation for providing switched access. Pacific Bell asserts that, because such calls would allow certain calling parties to complete calls to Internet service providers or other customers in another rate center without toll charges, these calls are essentially toll-free in nature. A previous decision of general application issued by the California Public Utilities Commission in October of 1998 held that calls to Internet service providers are subject to the payment of reciprocal compensation. We have asserted that because calls routed to a second rate center are placed by dialing a number assigned to the calling party's rate center and not using 8XX toll-free processing that these calls should not be considered toll-free. See "Risk Factors--A failure to establish interconnection agreements on favorable terms would adversely affect our business" and "--We may not be entitled to receive reciprocal compensation for calls to Internet service providers." On June 24, 1999, the California Public Utilities Commission adopted a decision (D.99-06-088) which adopted the terms of the interconnection agreement between Pac-West and Pacific Bell resulting from the arbitration process commenced by the petition. The decision provides that until such time as the October 1998 decision regarding reciprocal compensation is modified, reciprocal compensation is payable by Pacific Bell for calls to Internet service provider customers of Pac-West, and that Pacific Bell's position concerning toll free calls was rejected. The decision also adopts per minute rate levels for reciprocal compensation based on Pacific Bell's approved costs, and these rate levels are substantially lower than the rates under the 1996 interconnection agreement. The parties were ordered to sign an interconnection agreement incorporating these and other results of the arbitration process, and the new interconnection agreement became effective on June 29, 1999. Pacific Bell has requested a rehearing of this matter. This decision does not address reciprocal compensation withheld under the prior agreement and we do not know at this time what action Pacific Bell will take with respect to this decision. On July 22, 1998, the California Public Utilities Commission issued a ruling soliciting comments on the rating and routing of telephone calls between rate centers. Specifically, the California Public Utilities 59 Commission inquired whether a carrier should be allowed to provide customers with local telephone numbers for rate centers in which the customers are not located and where a carrier has no physical facilities and, if so, how inter- carrier compensation should be accomplished for calls to such customers. Comments were filed in August and September 1998. We often provide service to our Internet service provider customers using this method. A prohibition on this service would impair our ability to provide service to our customers. The new interconnection agreement described above which results from the arbitration process is subject to the outcome of this proceeding. We presently claim reciprocal compensation based on these calls. A California Public Utilities Commission decision holding that such calls are not entitled to reciprocal compensation could result in a substantial loss of revenue to us. On July 6, 1999, an administrative law judge release a draft decision in this proceeding finding that carriers can provide customers with local telephone numbers for rate centers in which the customer is not located and where a carrier has no physical facilities. The draft decision defers the resolution of intercarrier compensation issues in such circumstances to further evidentiary proceedings. After receiving comments, the California Public Utilities Commission will vote on the draft decision at a meeting after August 6, 1999. While the ultimate results of this proceeding are unknown, we expect that we will not be prohibited from providing service using this method. See "Risk Factors--A failure to establish interconnection agreements on favorable terms would adversely affect our business," "--We may not be entitled to receive reciprocal compensation for calls to Internet service providers" and "--We may not be able to obtain or retain our key Internet service provider customers, which account for a significant portion of our revenues." Local Regulation Our networks are subject to numerous local regulations such as building codes and licensing requirements. Such regulations vary on a city by city and county by county basis. To the extent we decide in the future to install our own fiber optic transmission facilities, we will need to obtain rights-of-way over private and publicly owned land and pole attachment authorizations. There can be no assurance that such rights-of-way or authorizations will be available to us on economically reasonable or advantageous terms. We could also be subject to unexpected franchise requirements and could be required to pay license or franchise fees based on a percentage of gross revenues or some other formula. Regulatory Proceedings Litigation On October 8, 1997, Pacific Bell filed a complaint against us in the San Francisco County Superior Court seeking a declaratory ruling that the interconnection agreement between it and ourselves does not require it to pay reciprocal compensation for calls that its end users make to our Internet service provider customers. Pacific Bell argued that such calls to Internet service providers are not local calls within the meaning of the agreement even though they are dialed and billed as local calls. In addition to the declaratory ruling, Pacific Bell sought an accounting and restitution by Pac- West of all payments Pacific Bell made to us under that agreement for calls which we completed to Internet service providers. We filed a demurrer to the complaint, seeking a stay of any further action by the court on the basis that the California Public Utilities Commission has primary jurisdiction over the complaint. The court granted our demurrer in part on October 23, 1997, staying Pacific Bell's action pending California Public Utilities Commission review of issues in Pacific Bell's complaint. Jurisdiction over and Compensation for Internet Service Provider Traffic We derive a substantial portion of our revenue from incumbent local exchange carriers in the form of reciprocal compensation payments. For the years ended December 31, 1997 and 1998 and the three months ended March 31, 1999, reciprocal compensation payments accounted for approximately 37.4%, 37.1% and 42.1%, respectively, of our revenue. We expect that reciprocal compensation will continue to represent a significant portion of our revenue for the foreseeable future. The two incumbent local exchange carriers with which we have interconnection agreements, Pacific Bell and GTE, have refused to pay that portion of reciprocal compensation that they estimate is the result of terminating calls to Internet service providers. These incumbent local exchange carriers contend that such calls are not local calls within the meaning of their respective interconnection agreements and claim that reciprocal compensation is therefore not payable. The 60 total reciprocal compensation withheld by these incumbent local exchange carriers and not included in revenue was $3.8 million, $32.6 and $13.4 million for the years ended December 31, 1997 and 1998 and for the three month period ended March 31, 1999, respectively. See "Risk Factors--A failure to establish interconnection agreements on favorable terms would adversely affect our business" and "--We may not be entitled to receive reciprocal compensation for calls to Internet service providers." On November 21, 1997, we filed a complaint against Pacific Bell requesting, among other things, that the California Public Utilities Commission order that calls to Internet service providers are local calls and, more specifically, that the agreement with Pacific Bell requires it to compensate us for completing those calls. In March 1998, Pac-West and Pacific Bell filed cross- motions by stipulation for summary judgment on all issues pending in this proceeding. These motions are currently pending. We cannot predict the ultimate outcome of the California Public Utilities Commission proceeding, future appeals or additional pending cases. Therefore, we cannot assure you that we will collect the withheld compensation from GTE or Pacific Bell or that we will have the right to compensation for these types of calls in the future. If the California Public Utilities Commission acts contrary to our position, the ability to serve our customer base could be severely limited since a large part of that base consists of Internet service providers. If the California Public Utilities Commission acts contrary to our position, and it is determined that the compensation associated with past Internet service provider traffic is greater than the amount already withheld, we could be required to reimburse the incumbent local exchange carriers the difference between these two amounts. Thirty-one state commissions have addressed the issue of whether the obligation to pay reciprocal compensation should apply to local calls to Internet service providers. Every state commission to address this issue to date except Massachusetts and Missouri has ruled that compensation is owed for such calls. Several of these cases are being appealed. So far, U.S. District courts in the states of Texas, Washington, Oregon and Illinois have upheld state commission decisions and no court has reversed such a decision. Recently the 7th Circuit Court of Appeals upheld the decision of the Illinois Commerce Commission requiring the payment of reciprocal compensation for Internet service provider-bound calls. On October 22, 1998, the California Public Utilities Commission issued a decision holding that calls placed to Internet service providers are local calls and are subject to reciprocal compensation. On November 30, 1998, Pacific Bell and GTE filed applications for rehearing, which was denied on July 22, 1999. We cannot predict the outcome of the California Public Utilities Commission proceeding, future appeals or additional pending cases. Therefore, we cannot assure you that we will collect the withheld compensation from GTE or Pacific Bell or that we will have the right to compensation for these types of calls in the future. If the California Public Utilities Commission does act contrary to our position, our ability to serve our customer base could be severely limited since a large part of that base consists of Internet service providers. If the California Public Utilities Commission acts contrary to our position and the compensation associated with past Internet service provider traffic is greater than the amount already withheld, we could be required to reimburse the incumbent local exchange carriers for the difference between these two amounts. On February 26, 1999, the FCC issued a declaratory ruling on the issue of inter-carrier compensation for calls bound to Internet service providers. The FCC ruled that the calls are jurisdictionally mostly interstate calls. The FCC, however, determined that this issue did not resolve the question of whether inter-carrier reciprocal compensation is owed for such calls under existing interconnection agreements. The FCC noted a number of factors that would allow the state public utilities commissions to require the payment of reciprocal compensation. Since the issuance of the FCC decision, thirteen states have issued decisions either initially or on reconsideration of existing decisions. In each case, the relevant state commission determined compensation is owed. In Massachusetts, however, the state commission vacated its earlier decision because, in its view, its decision was based solely on a ground rejected by the FCC and in Missouri the state commission determined that the parties would be subject to a reconciliation once the FCC determines the issue of the amount of compensation owed. Until then, compensation should be tracked but it does not have to be paid. We cannot predict the impact of the FCC's ruling on existing state decisions, the outcome of pending appeals or future litigation on this issue. However, our ability to serve our customer base could be severely limited since a large part of that base consists of Internet service providers. If the FCC's decision results in action being taken that is 61 contrary to our position, and it is determined that the compensation associated with past Internet service provider traffic is greater than the amount already withheld, we could be required to reimburse the incumbent local exchange carriers for the difference between these two amounts. Rating and Routing of Calls By California Public Utilities Commission Decision No. 97-12-094 in Case No. 96-10-018, which was brought by Pac-West against two small rural incumbent local exchange carriers, Volcano Telephone Company and Evans Telephone Company, the California Public Utilities Commission found that Pac-West's method of providing foreign exchange service did not violate any existing law or policy and that Volcano and Evans were required to properly deliver calls to Pac-West. However, the California Public Utilities Commission also determined that it should examine our method of service from a general policy standpoint in another proceeding. Although the outcome of the subsequent proceeding could affect our future provision of foreign exchange service, the California Public Utilities Commission held that any order adverse to us would be applied only on a prospective basis and would not affect any contracts for services executed prior to a final decision. On July 22, 1998, the California Public Utilities Commission issued a ruling soliciting comments on the continuing propriety of Pac-West's service methods. Specifically, the California Public Utilities Commission inquired whether a carrier should be allowed to provide customers with local telephone numbers for rate centers in which customers are not located and where a carrier has no physical facilities and, if so, how inter- carrier compensation should be accomplished for calls to such customers. Comments were filed in August and September 1998. We often provide service to our customers using this method. A prohibition on this service would impair our ability to provide service to our customers. We presently claim reciprocal compensation based on these calls. A California Public Utilities Commission holding that such calls are not entitled to reciprocal compensation could result in a significant loss of revenue to us. Interconnection Agreements We are currently in the process of renegotiating our interconnection agreements which govern the terms of our reciprocal compensation arrangements with GTE. We cannot give any assurances concerning the outcome of these negotiations or any arbitration that may follow unsuccessful negotiations. On November 16, 1998, Pacific Bell filed a petition for Arbitration of an interconnection agreement in accordance with Section 252(b) of the Telecommunications Act of 1996. In its petition, Pacific Bell requested arbitration on three issues: (1) the jurisdiction of calls placed to Internet service providers; (2) reciprocal compensation rates; and (3) term of the agreement. On November 18, 1998, Pacific Bell filed a complaint against us at the California Public Utilities Commission seeking unspecified compensation under the interconnection agreement with us. This complaint, which was amended on March 12, 1999, argues that many of the calls to our Internet service provider customers are toll-free interexchange calls for which Pacific Bell is entitled to compensation for providing switched access. Pacific Bell believes that a call placed from a dialing party in one rate center to a number assigned to the same rate center is potentially a toll call if such a call is routed for completion in a second rate center. Because the dialing party is sometimes not charged for this call, Pacific Bell believes these calls to be toll-free calls for which Pacific Bell is entitled to compensation under the agreement. We presently claim reciprocal compensation based on these calls. On June 24, 1999, the California Public Utilities Commission adopted a decision in the arbitration proceeding between us and Pacific Bell which held that reciprocal compensation would be payable for Internet service provider calls under our new interconnection agreement with Pacific Bell which became effective on June 29, 1999. Pacific Bell has requested a rehearing of this matter. This decision does not address reciprocal compensation withheld under the prior agreement. We do not know at this time what other action Pacific Bell will take with respect to this decision. A California Public Utilities Commission holding that such calls are not entitled to reciprocal compensation could result in a significant loss of revenue to us and an obligation to pay significant amounts to Pacific Bell. 62 On October 12, 1998, we filed at the Public Utilities Commission of Nevada a petition for arbitration of an interconnection agreement with Nevada Bell in accordance with Section 252(b) of the Telecommunications Act of 1996. The issues in this arbitration are whether reciprocal compensation is payable for calls placed to Internet service providers and whether reciprocal compensation is payable for a local-rated call placed by a dialing party in one local calling area that is routed to a second local calling area for completion. On April 8, 1999, the Public Utilities Commission of Nevada held that calls placed to Internet service providers are subject to reciprocal compensation in the same manner as other calls, but held that, under current Nevada regulatory policy, calls routed from one local calling area to another local calling area for completion should not be deemed local calls. Due to the geographic centralization of Nevada populations within large local calling areas, we do not believe that Public Utilities Commission of Nevada's ruling on the classification of local calls will have a material effect on our planned operations in Nevada. On February 2, 1999, we filed at the California Public Utilities Commission a petition for arbitration of an interconnection agreement with Citizens Telecommunications Company of California, Inc., in accordance with Section 252(b) of the Telecommunications Act of 1996. The issues in this arbitration are whether reciprocal compensation is payable for calls placed to Internet service providers and what compensation arrangement should apply when calls are exchanged through indirect interconnection over the facilities of a third party carrier. A California Public Utilities Commission holding contrary to our position could materially adversely affect our ability to economically serve customers in Citizens Telecommunications Company of California, Inc.'s service area. We are not party to any other pending legal or regulatory proceedings that we believe would, individually or in the aggregate, have a material adverse effect on our financial condition or results of operations. For additional information regarding regulatory matters, see "Risk Factors-- We may not be entitled to receive reciprocal compensation for calls to Internet service providers." Employees As of March 1, 1999, we had 147 full time employees. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified employees. None of our employees are currently represented by a collective bargaining agreement. We believe that we enjoy good relationships with our employees. Facilities We are headquartered in Stockton, California and lease offices and space in a number of locations primarily for sales offices and network equipment installations. As of March 1, 1999, we had 17 premise leases. The table below lists our material facilities:
Lease Approximate Location Use Expiration Square Footage -------- --- ---------- -------------- Stockton, CA Corporate headquarters and June 2002 33,000 equipment Oakland, CA Equipment November 2003 9,971 Los Angeles, CA Equipment September 2006 8,458
We have also entered into a lease in Las Vegas, Nevada, for 12,065 square feet, to establish a new switching facility which we expect to be operational in 1999. The Las Vegas lease will expire in 2009. Significant construction has been substantially completed at that site. We believe that our leased facilities are adequate to meet our current needs in the markets in which we currently operate. Additional facilities will be required as we expand into new markets. Each of our material leases is extendable at our option. Our Stockton, California lease is extendable for five two-year periods, and each of our Oakland, Los Angeles and Las Vegas leases are extendable for two five-year periods. 63 MANAGEMENT Executive Officers, Key Employees and Directors Our executive officers, key employees and directors and their ages as of March 1, 1999 are set forth below:
Name Age Position(s) ---- --- ----------- Executive Officers: Wallace W. Griffin....... 60 President, Chief Executive Officer and Director John K. La Rue........... 49 Executive Vice President--Technology and Network Operations and Director Richard E. Bryson........ 45 Chief Financial Officer Brian K. Johnson......... 38 Vice President--Sales Joel A. Effron........... 55 Senior Vice President--Sales and Marketing Dennis V. Meyer.......... 60 Vice President--Finance and Treasurer Jason R. Mills........... 27 Vice President--Network Operations Gregory Joksch........... 42 Vice President--Information Technologies Jeff M. Webster.......... 34 Vice President--Business Operations and Regulatory Matters Directors: Jerry L. Johnson......... 51 Chairman of the Board of Directors David G. Chandler........ 41 Director Mark J. DeNino........... 45 Director Samuel A. Plum........... 54 Director Dr. Jagdish N. Sheth..... 61 Director Bruce A. Westphal........ 58 Director
The present principal occupations and recent employment history of each of our executive officers, key employees and directors listed above are set forth below. Wallace W. Griffin has served as the President, Chief Executive Officer and a Director of Pac-West since the recapitalization. From 1994 to 1997, Mr. Griffin served as a Group President for a number of Jones International companies, including Jones Lightwave, Ltd., a competitive local exchange carrier, and Jones Education Company, a leader in using technology to deliver education. Concurrently, he was co-owner of a consulting and business development company, Griffin Enterprises, Inc. From 1987 through 1992, Mr. Griffin served as the President and Chief Executive Officer of U S West Marketing Resources Group, where he managed the $1 billion publishing, media software and advertising services division. Mr. Griffin has over thirty-five years experience in telecommunications, cable television, publishing and advertising. John K. La Rue founded Pac-West's predecessor, also known as Pac-West Telecomm, Inc., in 1980 and served as its President from 1980 until September 30, 1996 and as our President from our incorporation in 1996 until the recapitalization. Since the recapitalization, Mr. La Rue has served as our Executive Vice President of Technology and Network Operations and as a Director. Richard E. Bryson has served as our Chief Financial Officer since November 1998. From 1992 to 1998, Mr. Bryson worked at Bank of America as a Managing Director in the Telecommunications Group providing emerging telecommunications companies with corporate finance and capital markets services. From 1989 to 1992, he was President and founder of MBIC, a fund investing in growth companies. From 1980 to 1989, he worked at Citibank in Mezzanine Investments and Capital Markets. 64 Brian K. Johnson has served as our Vice President of Sales since September 1998. Mr. Johnson will lead the expansion of our local and long distance services. Mr. Johnson has over 15 years of sales and sales management experience. Most recently, Mr. Johnson served for two years as Vice President and General Manager of WinStar Telecommunications, overseeing competitive local exchange carrier operations in the San Francisco Bay Area. Prior to joining WinStar, Mr. Johnson was employed by Metrocall for two years as Vice President and General Manager for the California and Nevada markets. His telecommunications sales management experience includes positions at Comverse Technology, LA Cellular and Harris Corporation. Joel A. Effron has served as our Senior Vice President of Sales and Marketing since April 1997. From 1994 through 1997, Mr. Effron ran his own management consulting company called J. Effron & Associates. Prior to that, Mr. Effron served as President of three corporations, including Compath, a $35 million marketing, installation and service company for business telephone systems, Codart, a communication and entertainment start-up, and Zendex, a computer manufacturer. Mr. Effron has over 25 years of experience in the telecommunications industry with extensive senior management experience in marketing, planning, policies and procedures and manpower development. Dennis V. Meyer served as our and our predecessor's Chief Financial Officer and Treasurer from 1994 until November 1998. In November 1998, Mr. Meyer was appointed Vice President--Finance and Treasurer. Prior to 1994, Mr. Meyer spent 12 years in public accounting at Ernst & Ernst, now Ernst & Young, a national accounting firm. Mr. Meyer is a certified public accountant with over twenty years of experience as a senior financial officer of several manufacturing and regulated transportation companies. Mr. Meyer also served as an officer in the Air Artillery Branch of the U.S. Army. Jason R. Mills has served as Vice President of Network Operations since 1997. Mr. Mills joined our predecessor in 1986 and has been serving as our Director of Network Operations for the past five years. Gregory Joksch has served as our Vice President of Information Technologies since the recapitalization. From 1992 to 1998, he served as Director of Information Technologies and was responsible for our information technology systems. Jeff M. Webster has served as our and our predecessor's Vice President of Operations since 1991. His current areas of responsibility include human resource management and regulatory administration including tariffs, compliance and reporting. Mr. Webster began with Pac-West as an Account Executive in 1987 and was later promoted to general management of business operations, human resources, administration and customer service management. Jerry L. Johnson has served as our Chairman of the board of directors since the recapitalization. Since 1995, Mr. Johnson has been employed by Safeguard Scientifics, where he is responsible for managing the operating portfolio companies and the operations team. From 1985 to 1995, he worked at U S West in various positions, including Vice President, Network and Technology Services, which included managing U S West's largest division, supervising 5,000 management and engineering employees and 16,000 technical and clerical employees. From 1983 to 1985, Mr. Johnson was President and CEO of Northwestern Bell Information Technologies. David G. Chandler has served as one of our Directors since the recapitalization. Mr. Chandler is a Managing Director of William Blair Capital Partners, L.L.C., a Chicago-based private equity firm. In addition, Mr. Chandler is a Principal of William Blair & Company where he has been employed since 1987. Prior to joining William Blair & Company, he was an investment banker with Morgan Stanley & Co. Incorporated from 1984 to 1987. Mr. Chandler serves as a director of the following companies: Electronic Manufacturing Systems, Inc., Encore Paper Company, Gibraltar Packaging Group, Harmonic Systems Incorporated, Morton Grove Pharmaceuticals, Inc., PharmaResearch Corporation and Sweetwater Sound, Inc. 65 Mark J. DeNino has served as one of our Directors since the recapitalization. Mr. DeNino has served as a Managing Director of TL Ventures since 1994. Prior to that time, Mr. DeNino was an investment banker for eight years, starting with Fidelity Bank, now First Union National Bank, where he ran its investment banking group and was president of its venture capital SBIC. Mr. DeNino also co-founded or has been involved in the start-up of three technology ventures. Mr. DeNino also serves as a director of the following companies: Coastal Security Systems, Inc., CRW Financial, Inc., FlowWise Networks, Inc., GMT MicroElectronics Corporation, Argus Networks Inc., Neuron Data, Inc. and Adaptive Media, Inc. Samuel A. Plum has served as one of our Directors since the recapitalization. Mr. Plum has been a Managing General Partner of the general partner of SCP Private Equity Partners, L.P. since its commencement in August 1996 and was a Managing Director of Safeguard from 1993 to 1996. From February 1989 to January 1993, Mr. Plum served as President of Charterhouse, Inc. and Charterhouse North American Securities, Inc., the U.S. investment banking and broker-dealer divisions of Charterhouse PLC, a merchant bank located in the United Kingdom. From 1973 to 1989, Mr. Plum served in various capacities in the investment banking divisions of PaineWebber Inc. and Blyth Eastman Dillon & Co., Inc. Mr. Plum has 22 years of investment banking, mergers and acquisitions and private equity investment experience. Mr. Plum also serves as a director of Index Stock Photography, Inc. and Metallurge Holdings, Inc. Dr. Jagdish N. Sheth has served as one of our Directors since July, 1999. Dr. Sheth has also been the Charles H. Kellstadt Professor of Marketing in the Goizueta Business School since 1991 and is the founder of the Center for Relationship Marketing at Emory University. From 1984 to 1991, Dr. Sheth was the Robert E. Brookner Professor of Marketing at the University of Southern California and is the founder of its Center for Telecommunications Management. Bruce A. Westphal has served as one of our Directors since the recapitalization. Mr. Westphal served as the Chairman of our board of directors from our inception in 1996 until the recapitalization. Mr. Westphal currently serves as the Chairman of the Board of Bay Alarm and InReach Internet as well as President of Balco Properties. Mr. Westphal served as the Chief Executive Officer and Chairman of Bay Alarm from 1984 to 1997 and as its President from 1977 to 1984. Mr. Westphal is currently or has been active in a number of professional organizations, including the Security Network of America, the Central Station Alarm Association and California Alarm Association. All members of the board of directors set forth in this prospectus have been elected in accordance with a stockholders agreement that was entered into in connection with the recapitalization. There are no family relationships between any of our directors or executive officers. Our executive officers are elected by and serve at the discretion of the board of directors. See "Certain Relationships and Related Transactions--Shareholders Agreement." 66 Executive Compensation The following table summarizes the compensation we paid to our named executive officers, consisting of our chief executive officer and four most highly compensated executive officers for the fiscal year ended December 31, 1998. None of the perquisites and other benefits paid to each named executive officer exceeded the lesser of $50,000 or 10% of the total annual salary and bonus received by that officer. "All Other Compensation" reflects matching contributions we made under our 401(k) plan on behalf of such officer. The amount listed under "All Other Compensation" for Mr. La Rue includes $2,539 of long-term disability insurance premiums we paid on behalf of Mr. La Rue and 100% dental reimbursements in the amount of $1,015. Mr. Griffin's salary is from September 16, 1998, when he became a Pac-West employee. Prior to that time but in that same year, Mr. Griffin received additional compensation from Pac- West in the total amount of $203,000 under a consulting agreement. See "Certain Relationships and Related Transactions--Consulting Agreement." 1998 Summary Compensation Table
Special Non-Compete Name and Principal Regular Transaction Covenant Other Annual All Other Position Held Salary Bonus Bonus Payment Compensation Compensation ------------------ -------- -------- ----------- ----------- ------------ ------------ Wallace W. Griffin...... $ 87,500 $ 70,000 -- -- -- -- President, Chief Executive Officer and Director John K. La Rue.......... 327,081 140,000 $1,625,000 $300,000 -- $7,898 President, Chief Executive Officer and Director Jason R. Mills ......... 160,667 13,500 900,000 -- -- 4,820 Vice President--Network Operations Dennis V. Meyer......... 106,614 40,250 300,000 -- -- 3,198 Chief Financial Officer and Treasurer Jeff M. Webster......... 85,136 19,948 300,000 -- -- 2,554 Vice President-- Business Operations
67 Stock Incentive Plan After the recapitalization, the executive committee of the board of directors adopted the Pac-West Telecomm, Inc. 1999 Stock Incentive Plan, which authorizes the granting of stock options, including restricted stock, SARS, dividend equivalent rights, performance units, performance shares or other similar rights or benefits to our or our subsidiaries' current or future employees, directors, consultants, advisors. Under the Pac-West 1999 Stock Incentive Plan, the Board is authorized to issue options to purchase shares of common stock in such quantity, at such exercise prices, on such terms and subject to such conditions as established by the Board. After giving effect to the Pac-West ten for one stock split, an aggregate of 2,250,000 shares of common stock have been reserved for option grants under the Pac-West 1999 Stock Incentive Plan, subject to adjustment upon the occurrence of certain events to prevent any dilution or expansion of the rights of participants that might otherwise result from the occurrence of such events. In 1998, in accordance with their employment agreements and after giving effect to the Pac-West ten for one stock split, options to purchase certain shares of common stock were granted to Messrs. Wallace W. Griffin and Richard E. Bryson as described below. Such options will be issued under the Pac-West 1999 Stock Incentive Plan. In addition, in 1999, and after giving effect to the Pac-West ten for one stock split, options to purchase 335,000 shares were granted under the Pac-West 1999 Stock Incentive Plan to Messrs. John K. La Rue, Dennis V. Meyer, Jason R. Mills and Jeff M. Webster. No options were exercised during 1998. The amounts shown for realizable potential value are calculated assuming that the market value of the common stock was equal to the exercise price per share as of the date of grant of the options. This value is the approximate price per share at which shares of the common stock would have been sold in private transactions on or about the date on which the options were granted. The dollar amounts under these columns assume a compounded annual market price increase for the underlying shares of the common stock from the date of grant to the end of the option term of 5% and 10%. This format is prescribed by the SEC and is not intended to forecast future appreciation of shares of the common stock. The actual value, if any, a named officer may realize will depend on the excess of the market price for shares of the common stock on the date the option is exercised over the exercise price. Accordingly, there is no assurance that the value realized by a named officer will be at or near the value estimated above. Option Grants in 1998
Potential Realizable % of Total Value at Assumed Number of Options Annual Rates of Stock Securities Granted to Price Appreciation Underlying Employees Exercise or for Option Term Options in Fiscal Base Price Expiration --------------------- Name Granted (#) Year ($/Sh) Date 5% ($) 10% ($) - ---- ----------- ---------- ----------- ---------- ---------- ---------- Wallace W. Griffin...... 250,000 61.5% $0.67 09/16/2008 105,000 267,000 Richard E. Bryson....... 156,250 38.5% $0.67 10/30/2008 66,000 167,000
Qualified 401(k) and Profit Sharing Plan We maintain a tax-qualified 401(k) plan. Employees who are 21 years of age may elect to participate in the plan after completing six months of service with us. We match 50% of employee contributions up to 6% of compensation deferred. Pac-West matching contributions vest at a rate 20% per year starting with the employee's second year of service. Although we have not historically done so, we may also make discretionary profit-sharing contributions to all employees who satisfy plan participation requirements. Pension Plans We do not maintain a pension plan. 68 Employment Agreements Messrs. Wallace W. Griffin, John K. La Rue, Richard E. Bryson, Dennis V. Meyer and Jason R. Mills have each entered into employment agreements with us. The employment agreements provide for initial base salaries and bonuses upon our achievement of certain objective and subjective criteria and contain terms as follows:
Employee Effective Date Term Base Salary Bonus -------- ------------------ ------- ----------- ----- Wallace W. Griffin........... September 16, 1998 3 years $350,000 40% John K. La Rue............... September 16, 1998 2 years $350,000 40% Richard E. Bryson............ October 30, 1998 2 years $225,000 40% Dennis V. Meyer.............. October 21, 1998 1 year $115,000 25% Jason R. Mills............... September 16, 1998 2 years $180,000 25%
The employment agreements also provide for participation in all benefit plans made available to Pac-West executives. Each of the employment agreements may be terminated earlier by us or the respective executive under certain conditions and Mr. Meyer's employment agreement is automatically extended for successive one-year periods unless terminated by either party upon 60 days notice. In connection with their respective employment agreements, and after giving effect to the Pac-West ten for one stock split, Mr. Griffin purchased 375,000 shares of common stock for an aggregate purchase price of $250,000 and Mr. Bryson purchased 62,470 shares of common stock for an aggregate purchase price of $41,667. In each case, the executives purchased said shares through a combination of cash and promissory notes, the payments of which notes were secured by pledge agreements pledging all of stock so purchased. We have a right to repurchase such shares in the event of the termination of such executive's employment with us for any reason. In addition, their respective employment agreements granted to Mr. Griffin and Mr. Bryson options to purchase 250,000 shares and 156,250 shares, respectively, of common stock at a purchase price of $0.67 per share. Upon termination by us without cause, as defined in the respective employment agreement, that executive will be entitled to receive severance payments which, subject to certain conditions, equal: . in the case of Mr. La Rue, base salary for the remainder of the term of employment under the employment agreement plus the one-year period thereafter; . in the case of Mr. Griffin, base salary for the greater of the remainder of the term of employment under the employment agreement or the six-month period thereafter; . in the case of Mr. Bryson, base salary for one year following termination plus our payment of all health insurance premiums with respect to Mr. Bryson's continuation coverage rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, or any similar statute or regulation then in effect, for a maximum of the one-year period after such termination; . in the case of Mr. Meyer, base salary for the one-year period after such termination; and . in the case of Mr. Mills, base salary for the remainder of the term of employment under the employment agreement. If the employment period is terminated as a result of the executive's disability, then the executive and/or his estate or beneficiaries, as the case may be, will be entitled to receive benefits under our employee benefit programs as in effect on the date of such termination to the extent permitted under such programs and, in addition, will be entitled to receive: (1) an amount equal to that executive's base salary for the one-year period after the termination of the employment period; and (2) the amount of any annual bonus otherwise payable to the executive for the fiscal year in which executive's employment is terminated, except that the amount of any such annual bonus otherwise payable will be allocated on the basis of the number of days during such fiscal year that executive was employed by us. 69 If the employment period is terminated as a result of the executive's death, then the executive and/or his estate or beneficiaries, as the case may be, will be entitled to receive benefits under our employee benefit programs as in effect on the date of such termination to the extent permitted under such programs and, in addition, will be entitled to receive the amount of any annual bonus otherwise payable to the executive for the fiscal year in which the executive's employment is terminated, except that the amount of any such annual bonus otherwise payable will be allocated on the basis of the number of days during such fiscal year that the executive was employed by us. If we terminate the employment period for cause or if the executive resigns for any reason, other than a termination without cause under the respective employment agreement, then the executive will be entitled to receive his base salary through the date of termination and we will have no further liability whatsoever to executive. Each of the executives have agreed to forfeit any severance obligations owing to such executives in the event they breach certain noncompetition provisions. See "Certain Relationships and Related Transactions--Non- Competition; Non-Solicitation; Confidentiality Agreements." 70 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Recapitalization Our recapitalization was completed on September 16, 1998 in accordance with the merger agreement between us, Bay Alarm Company and John K. La Rue, the preexisting investors, and PWT Acquisition Corp. a corporation newly formed by an equity investment group led by Safeguard 98 Capital, L.P. and William Blair Capital Partners VI, L.P. to effect the recapitalization. PWT was capitalized through an investment of approximately $31.5 million in preferred stock and $0.9 million in common stock of PWT by certain equity investors, including Safeguard 98 Capital, L.P., SCP Private Equity Partners, L.P., TL Ventures III L.P., EnerTech Capital Partners, William Blair Capital Partners VI, L.P., and Mr. Wallace W. Griffin, who was named our President and Chief Executive Officer upon the completion of the recapitalization. Immediately following the merger, we sold approximately $4.7 million of additional common stock to the equity investors. In accordance with the merger agreement: (1) PWT was merged with and into Pac-West, with Pac-West being the surviving corporation; (2) the outstanding preferred stock of PWT Acquisition Corp. was converted into our convertible redeemable preferred stock and the outstanding common stock of PWT Acquisition Corp. was converted into Pac-West's common stock; (3) the existing stockholders received an aggregate of $73.6 million in cash, shares of convertible redeemable preferred stock and common stock having an aggregate value for purposes of the recapitalization of approximately $15.5 million, and an aggregate of $400,000 for their respective agreements not to compete with us following the recapitalization; and (4) we paid bonuses to certain of our executive officers and employees in the aggregate amount of approximately $3.5 million. Prior to the recapitalization, Mr. John K. La Rue and Bay Alarm Company held 22% and 78%, respectively, of our outstanding common stock. In connection with the recapitalization, and after giving effect to the Pac-West ten for one stock split, Mr. La Rue received approximately $16.2 million in cash, 80,395 shares of convertible redeemable preferred stock and 763,800 shares of common stock and Bay Alarm Company received $57.4 million in cash, 285,038 shares of convertible redeemable preferred stock and 2,707,900 shares of common stock. Immediately after the recapitalization, Mr. La Rue and Bay Alarm held 6.1% and 21.7%, respectively, of our outstanding common stock. Under the merger agreement, Mr. La Rue and Bay Alarm Company will also be entitled to receive additional consideration in the form of an earnout payment in the event we achieve certain adjusted EBITDA levels following the recapitalization. The amount of such payment will be based upon: (1) our adjusted EBITDA for the earnout period from January 1, 1998 through December 31, 1998, which includes the amount of unpaid reciprocal compensation from Pacific Bell and GTE for the earnout period we receive before December 31, 1999, if any; and (2) the amount of unpaid reciprocal compensation for the earnout period we receive from Pacific Bell and GTE after December 31, 1999. The earnout payment will be equal to: (1) $2.50 for every $1.00 that our adjusted EBITDA for the fiscal year ended December 31, 1998, including any unpaid reciprocal compensation related to the earnout period received on or prior to December 31, 1999, exceeds $17.0 million; plus (2) the amount by which the sum of (A) the amount of any unpaid reciprocal compensation we receive after December 31, 1999 with respect to the earnout period plus 71 (B) the amount our adjusted EBITDA during the earnout period exceeds $17.0 million. The earnout payment cannot exceed $20.0 million. The earnout payment will be calculated and paid after the delivery of the final audited financial statements for the earnout period and on each separate occasion thereafter that we receive any unpaid compensation. Any earnout payment will take into account any prior earnout payment made under the merger agreement. The earnout payment is also subject to possible adjustment under the merger agreement by agreement between us and Mr. LaRue and Bay Alarm Company as a result of a material acquisition, divestiture or other material transaction outside of the ordinary course of our business during the earnout period. No earnout payment was payable as of December 31, 1998. In 1999, the maximum cash distribution under the terms of the recapitalization could be up to approximately $15 million, net of the after tax proceeds from the withheld reciprocal compensation. In accordance with the merger agreement, Mr. La Rue and Bay Alarm Company have agreed to indemnify us and certain of our related parties for all liabilities and other losses arising from, among other things: (1) any breach by Pac-West of any representation, warranty, covenant or agreement we made in the merger agreement or in any schedule, exhibit, or other related document; (2) any claims of any brokers, finders, our employees or consultants relating to the transactions contemplated by the merger agreement not specifically set forth in or contemplated by the merger agreement; or (3) any claim by any person other than PWT Acquisition Corp. or its affiliates with respect to, or arising as a result of, any reorganization, liquidation, dissolution, recapitalization, non due course borrowing, merger, consolidation, sale or purchase of assets or similar transactions proposed prior to closing of the merger; provided that Mr. La Rue and Bay Alarm Company receive notice of such loss within the applicable time periods set forth in the merger agreement. Subject to certain exceptions, Mr. La Rue and Bay Alarm Company do not have any obligation to indemnify any of the indemnified parties from any losses caused by the breach or alleged breach of any representation or warranty contained in the merger agreement until the indemnified parties collectively suffer related aggregate losses in excess of $500,000, which acts as a deductible. Mr. La Rue and Bay Alarm Company have an obligation to indemnify the indemnified parties for all losses suffered by any of the indemnified parties in excess of the deductible, provided that Mr. La Rue and Bay Alarm Company do not have any obligation to indemnify the indemnified parties from such aggregate losses in excess of an indemnity cap of $15.0 million. Despite the above, breaches or alleged breaches of certain post-closing covenants or agreements contained in the merger agreement will not be subject to the deductible or the indemnity cap. The merger agreement contains representations and warranties typical of those kinds of agreements, including, for example, those relating to corporate organization and capitalization, the valid authorization, execution, delivery and enforceability of all transaction documents, the financial statements, the absence of material adverse changes in the business, assets, financial condition and results of operations, the absence of material undisclosed liabilities, tax matters, the quality and title of personal and real property, material contracts, intellectual property, employee benefits plans, environmental matters, compliance with laws, governmental authorizations, permits and licenses and insurance matters. Generally, our representations and warranties expire thirty days after receipt of the audited financial statements for fiscal 1999 except that those relating to tax matters survive until the expiration of the applicable statute of limitations and certain other representations and warranties which survive indefinitely. The foregoing summary of the material terms of the merger agreement and related matters does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all of the provisions of the merger agreement, including the definitions of certain terms therein and the exhibits and schedules hereto. 72 Consulting Agreement On June 30, 1998, we entered into a Consulting Agreement with Wallace W. Griffin which terminated September 16, 1998. In accordance with such agreement Mr. Griffin provided financial and management consulting services to us and received fees totaling approximately $60,000. In addition, in accordance with the merger agreement, we reimbursed Safeguard for payments of $143,000 made to Mr. Griffin in connection with services rendered prior to June 30, 1998. After the recapitalization, Mr. Griffin became our President and Chief Executive Officer in accordance with his employment agreement with us. Shareholders Agreement In connection with the recapitalization, all of our shareholders entered into a shareholders agreement. This agreement provides for, among other things, the nomination of and voting for a total of seven directors of Pac-West, as follows: (1) one representative to be designated by John K. La Rue, provided that John K. La Rue initially serves as that representative; (2) one representative to be designated by Bay Alarm Company, provided that Bruce A. Westphal initially serves as that representative; (3) one representative to be designated by the holders of a majority of the common stock originally purchased by William Blair Capital Partners VI, L.P. and its permitted transferees, provided that David G. Chandler initially serves as that representative; (4) one representative to be designated by the holders of a majority of the common stock originally purchased by SCP Private Equity Partners, L.P. and its permitted transferees, provided that Samuel A. Plum initially serves as that representative; (5) one representative to be designated by the holders of a majority of the common stock originally purchased by Safeguard 98 Capital, L.P. and its permitted transferees, provided that Jerry L. Johnson initially serves as that representative; (6) one representative to be designated by TL Ventures III, L.P. and its permitted transferees for so long as it holds any shares, provided that Mark J. DeNino initially serves as that representative; and (7) our chief executive officer. Our shareholders have amended their shareholders agreement to increase our board of directors to nine members. The two additional members will be independent directors, one of whom would serve on our compensation committee and one of whom would serve on our audit committee. The voting provisions of the shareholders agreement will automatically terminate upon the consummation of a sale of Pac-West or an underwritten public offering of shares or rights to purchase shares of our common stock having an aggregate value of at least $15 million and which results in an equity valuation of Pac-West immediately prior to such offering of at least $100 million. The shareholders agreement will generally restrict the transfer of any shares of convertible redeemable preferred or common stock held by the parties thereto by granting certain parties thereto rights of first offer and participation rights in connection with any proposed transfer by any other party, subject to certain exceptions. In addition, the shareholders agreement will require each party to consent to a sale of Pac-West to an independent third party if such sale is approved by the board of directors. Subject to certain exceptions, we have agreed not to issue, sell or otherwise transfer for consideration to any person at any time prior to a registered public offering, any shares of common stock, or securities convertible or exercisable into common stock, unless certain of the parties to the shareholders agreement are given the opportunity to subscribe for and purchase their pro rata portion of such additional shares at the same price and on the same terms. Registration Agreement In connection with the recapitalization, all of our shareholders entered into a registration agreement. In accordance with the registration agreement, at any time prior to the third anniversary of the closing of the 73 recapitalization, Safeguard may request we grant a rights offering to the holders of our common stock, consisting of the right to purchase a number of shares of our common stock as determined by our board of directors. The exercise price of such rights in the rights offering will be determined by negotiation among ourselves, the underwriters and the selling stockholders. After the earlier of 180 days after the consummation of the rights offering or the third anniversary of the closing of the recapitalization, the registration agreement will grant demand registration rights to each of the four equity investors in the recapitalization and their successors. Each of the four equity investors in the recapitalization may request one registration at our expense under the Securities Act of 1933 of all or any portion of their Pac-West common stock on Form S-1 or other similar long-form registration and an unlimited number of Form S-2 or S-3 or other similar short-form registrations, provided that the aggregate offering value of the registrable securities requested to be registered in any long-form registration must equal at least $25 million if the registration is our initial registered public offering, at least $5 million in all other long-form registrations and at least $1 million in all short-form registrations. In the event that any one of the four equity investors in the recapitalization makes such a demand registration request, all other parties to the registration agreement will be entitled to participate in such registration. The registration agreement will also grant to the parties thereto piggyback registration rights with respect to all other registrations of our common stock and we, subject to limited exceptions, will pay all expenses related to the piggyback registrations. Non-Competition; Non-Solicitation; Confidentiality Agreements In connection with the recapitalization and in accordance with the terms of the merger agreement, Mr. La Rue and Bay Alarm Company each have entered into a covenant not to compete with Pac-West, not to engage, and not to permit any affiliate to engage, for a noncompete period of two years after the closing date of the recapitalization in any business which: (1) provides telecommunication services of the type provided as of the closing date by Pac-West; or (2) provides services of the type which we have taken significant actions as of the closing date to begin providing or of the type we have indicated that we plan to begin providing in any business plan or similar document delivered to PWT Acquisition Corp. or our shareholders prior to the closing date, in each case within Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and Washington, the province of British Columbia, Canada and the territories and jurisdictions of Mexico. The noncompete restrictions do not prohibit any party from being a passive owner of not more than 5% of the outstanding stock of any class of a corporation which is publicly traded; and provided further that the noncompete restrictions do not restrict the activities of any party to the extent such party has received the consent of our board of directors to such activities. In accordance with their respective employment agreements, Messrs. La Rue, Griffin, Bryson, Meyer and Mills have agreed to forfeit any severance obligations owing to such executives in the event of their breach of similar noncompetition provisions. For purposes of Mr. Meyer's and Mr. Mills' respective agreements, the restricted territories include Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and Washington, the province of British Columbia, Canada and the territories and jurisdictions of Mexico. For purposes of Mr. Griffin's and Mr. Bryson's respective agreements, the restricted territories include the United States of America, Canada and the territories and jurisdictions of Mexico. Messrs. La Rue, Griffin, Bryson, Meyer, Mills and Bay Alarm have also agreed to maintain the confidentiality of our information and not to solicit our employees and customers as provided in the merger agreement or their respective employment agreements, as the case may be. 74 Transaction Bonuses In accordance with the terms of the merger agreement, each of the following Pac-West officers and directors received a cash bonus upon consummation of the merger, as follows:
Transaction Employee Bonus -------- ----------- Wallace W. Griffin............................................ -- John K. La Rue................................................ $1,625,000 Richard E. Bryson............................................. -- Brian K. Johnson.............................................. -- Joel A. Effron................................................ $ 50,000 Dennis V. Meyer............................................... $ 300,000 Jason R. Mills................................................ $ 900,000 Gregory Joksch................................................ $ 200,000 Jeff M. Webster............................................... $ 300,000
Transactions with Significant Stockholders Prior to the recapitalization, Bay Alarm Company held approximately 78% of our outstanding common stock. Sales to Bay Alarm accounted for approximately $245,000, $987,000, $1,211,000 and $231,000, or 5.8%, 3.3%, 2.9% and 1.6%, of our revenues for the period from date of commencement on October 1, 1996 to December 31, 1996, the years ended December 31, 1997 and 1998 and for the three month period ended March 31, 1999, respectively. In addition, Bay Alarm Company provides us with security monitoring services at its normal commercial rates. Bay Alarm Company has recently purchased the real property at which our Oakland switch facility is located. In connection with that purchase, we have negotiated a lease with Bay Alarm Company for our continued use of that commercial space. The monthly lease payments under the lease are approximately $13,000 effective December 1998. Sales to InReach Internet LLC accounted for approximately $151,000, $1,122,000, $1,469,000 and $423,000, or 3.6%, 3.8%, 3.5% and 2.9%, of our revenue for the period from date of commencement on October 1, 1996 to December 31, 1996, the years ended December 31, 1997 and 1998 and for the three month period ended March 31, 1999, respectively. Mr. Bruce A. Westphal, who served as our Chairman of the Board until the recapitalization and as a Director of the Board since the recapitalization, is the principal stockholder and serves as Chairman of the Board of InReach Internet. Utility Telephone, Inc. is 100% owned by Mr. Jason R. Mills. We made a one- time purchase of equipment from Utility Telephone, Inc. in June 1997 in the amount of approximately $350,000. In accordance with the terms of the La Rue/Mills Stock Transfer Agreement dated November 23, 1998, and after giving effect to the Pac-West ten for one stock split, Mr. La Rue has transferred 127,300 shares of common stock to Mr. Mills. We and Mr. La Rue retain the right to repurchase this stock upon the termination of Mr. Mills' employment with Pac-West for any reason. Upon repurchase, the purchase price of Mr. Mills' stock will be at fair market value unless he is terminated with cause, in which case the purchase price will be the lesser of original cost or fair market value. Loans from Significant Stockholder Mr. John K. La Rue, our founder and President prior to the recapitalization, made various loans to Pac-West from time to time during periods up to and including 1995. The maximum amount loaned to us at any one time was $151,000. These loans bore interest at 9.5% to 10.0% and did not contain specified repayment terms. We repaid the balance of these loans in June 1997. 75 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding ownership of our common stock and convertible redeemable preferred stock as of June 30, 1999, and after giving effect to the Pac-West ten for one stock split, by: (1) each person who we know to own beneficially more than 5% of the outstanding common stock or convertible redeemable preferred stock; (2) each of our directors and named executive officers; and (3) all of our directors and executive officers as a group. Data shown on this chart relating to TL Ventures III L.P. and related equity investors includes, after giving effect to the Pac-West ten for one stock split: (a) 153,133 shares of convertible redeemable preferred stock and 1,433,100 shares of common stock held by TL Ventures III L.P., located at the address shown above; (b) 32,054 shares of convertible redeemable preferred stock and 300,000 shares of common stock held by TL Ventures III Offshore L.P., located at c/o Trident Trust Company (Cayman) Limited, P.O. Box 847, One Capital Place, Fourth Floor, Grand Cayman, Cayman Islands; and (c) 5,000 shares of convertible redeemable preferred stock and 46,800 shares of common stock held by TL Ventures III Interfund L.P., located at c/o TL Ventures L.L.C., 800 The Safeguard Building, 435 Devon Park Drive, Wayne, PA 19087-1515. Safeguard Delaware, Inc. is the general partner of Safeguard 98 Capital, L.P. and a wholly-owned subsidiary of Safeguard Scientifics, Inc. Each of these entities may be deemed to beneficially own the shares owned by Safeguard 98 Capital. All shares of stock shown in the following table for Messrs. Chandler, DeNino, Plum and Westphal are owned by William Blair Capital Partners VI, L.P.; TL Ventures III, L.P., TL Ventures III Offshore L.P. or TL Ventures III Interfund L.P.; SCP Private Equity Partners, L.P. and Bay Alarm Company, respectively. Mr. Chandler is a Managing Director of William Blair Capital Partners VI, L.L.C., which is the sole general partner of William Blair Capital Partners VI, L.P. Mr. DeNino is a Managing Director of each of the TL Ventures investment funds above listed. Mr. Plum is a Managing General Partner of SCP Private Equity Partners, L.P. and Mr. Westphal is the principal stockholder and Chairman of Bay Alarm Company. As a result of these relationships, each of these individuals may be deemed to be a beneficial owner of such shares. Each of Messrs. Chandler, DeNino, Plum and Westphal, however, disclaim beneficial ownership with respect to all such shares in which he does not have a pecuniary interest. The addresses of each of these officers or directors is as follows:
Name Address ---- ------- Chandler............................ c/o William Blair Capital Partners 222 W. Adams Street Chicago, IL 60606. DeNino.............................. c/o TL Ventures III L.P. 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087. Plum................................ c/o SCP Private Equity Partners, L.P. 435 Devon Park Drive Building 300 Wayne, PA 19087. Westphal............................ c/o Bay Alarm Company 925 Ygnacio Valley Road Walnut Creek, CA 94596
76 The data reflected in the following table for Mr. La Rue also reflects the fact that, in accordance with the La Rue/Mills Stock Transfer Agreement dated November 23, 1998, and after giving effect to the Pac-West ten for one stock split, Mr. La Rue agreed to transfer 127,300 shares of his common stock to Mr. Mills, subject to obtaining the necessary consents from certain other stockholders of Pac-West in accordance with the terms of the shareholders agreement. All necessary consents have been obtained.
Shares of Shares of Participating Common Percent of Preferred Percent of Beneficial Owner Stock Class Stock Class ---------------- --------- ---------- ------------- ---------- Significant Stockholders: Bay Alarm Company........... 2,707,900 21.6% 285,038 22.8% 925 Ygnacio Valley Road Walnut Creek, CA 94596 SCP Private Equity Partners, L.P........................ 1,995,000 15.9 213,170 17.1 435 Devon Park Drive, Building 300 Wayne, PA 19087 William Blair Capital Partners VI, L.P........... 1,995,000 15.9 213,170 17.1 222 West Adams Street Chicago, IL 60606 Safeguard 98 Capital, L.P. and related entities....... 1,995,000 15.9 213,170 17.1 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 TL Ventures III L.P. and related equity investors... 1,779,900 14.2 190,187 15.2 700 Building 435 Devon Park Drive Wayne, PA 19087-1990 Directors and Named Executive Officers: David G. Chandler........... 1,995,000 15.9 213,170 17.1 Mark J. DeNino.............. 1,779,900 14.2 190,187 15.2 Wallace W. Griffin.......... 375,000 3.0 -- -- John K. La Rue.............. 254,600 2.0 80,395 6.4 Jason R. Mills.............. 127,300 1.0 -- -- Samuel A. Plum.............. 1,995,000 15.9 213,170 17.1 Bruce A. Westphal........... 2,707,900 21.6 285,038 22.8 All of Pac-West's directors and executive officers as a group (14 persons)........... 9,234,700 73.5% 981,960 78.6%
77 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock, after giving effect to the ten for one stock split of the issued and outstanding common and convertible redeemable preferred stock which became effective on March 19, 1999, consist of 1,750,000 shares of convertible redeemable preferred stock and 15,000,000 shares of common stock. As of June 30, 1999, our outstanding equity securities consist of 1,250,000 shares of convertible redeemable preferred stock and 12,562,470 shares of common stock. Set forth below is a summary of the material terms of our capital stock. Distributions. The convertible redeemable preferred stock has a preference amount over the common stock with respect to any distribution by Pac-West to the holders of our capital stock or with respect to any liquidation, dissolution or winding up of Pac-West equal to the liquidation value of such shares, $36, plus an amount which accrues on a daily basis at a rate of 10% per annum on the original cost of such shares, $36, compounded quarterly, after giving effect to the Pac-West ten for one stock split. After payment of the preference amount, the convertible redeemable preferred stock and the common stock share ratably in any distribution made by us to the holders of our capital stock or with respect to any liquidation, dissolution or winding up of Pac-West. Conversion Rights. The holders of a majority of the outstanding convertible redeemable preferred stock have the right to convert all of the outstanding convertible redeemable preferred stock into shares of common stock in connection with the consummation of a public offering of our debt or equity securities or rights to acquire any of our debt or equity securities offered to the public. In addition, any holder of the outstanding convertible redeemable preferred stock may convert its shares of convertible redeemable preferred stock to shares of common stock in connection with a public offering. Each share of convertible redeemable preferred stock will be convertible into that number of shares of common stock determined by dividing the preference amount by the initial public offering price of the common stock. Redemption Rights. The holders of a majority of the outstanding convertible redeemable preferred stock have the right to require us to redeem the convertible redeemable preferred stock at a redemption price equal to the preference amount: (1) at any time after December 31, 2003; or (2) at any time with the net proceeds of a public offering. In addition, any holder of the outstanding convertible redeemable preferred stock may require us to redeem our shares of convertible redeemable preferred stock with the net proceeds of a public offering. Despite the above, the majority holders also have the right to require us to redeem all or any portion of the convertible redeemable preferred stock in the event that: (1) we fail to make any required redemption payment for the convertible redeemable preferred stock; or (2) we default on any obligation or agreement causing an amount in excess of $500,000 to become due prior to its stated maturity. The convertible redeemable preferred stock is subject to immediate redemption upon certain events of bankruptcy and insolvency. The foregoing redemption rights are all subject to our having sufficient funds that are: (1) legally available in accordance with the General Corporation Law of California for the redemption of the shares of convertible redeemable preferred stock; and (2) permitted to be used for the redemption of such shares of convertible redeemable preferred stock in accordance with any debt financing agreements of Pac-West, including the indenture governing the notes. Voting Rights. The holders of convertible redeemable preferred stock have no right to vote on matters submitted to a vote of our stockholders, except as otherwise required by law. The shares of common stock will each entitle the holder thereof to one vote per share on all matters to be voted upon by our stockholders. 78 DESCRIPTION OF INDEBTEDNESS We have entered into a new senior credit facility providing for initial borrowings of $20.0 million and future borrowings from time to time of up to an additional $20.0 million for working capital and other corporate purposes. The new senior credit facility has a three-year term and our indebtedness under that facility is secured by all of our assets, including but not limited to our equipment, inventory, receivables and related contracts, investment property, computer hardware and software, bank accounts and all other goods and rights of every kind and description. Our borrowings under the new senior credit facility will bear interest, at our option, at: (1) the base rate, as defined in the new senior credit facility, or (2) the Eurodollar rate, as defined in the new senior credit facility, plus between 2.25 and 3.5%. As of May 31, 1999, the borrowing rate under this facility would have been 7.69%. We will be required to pay the lender under the new senior credit facility a commitment fee, payable in arrears on a quarterly basis, on the average unused portion of the new senior credit facility during such period. We may also be required to pay an annual agency fee to the agent of the lender. In addition, we will pay an arrangement fee. The agent and the lender will receive and continue to receive such other fees as may be separately agreed upon with the agent. The new senior credit facility requires us to meet certain financial tests, including, for example, maximum levels of debt as a ratio of EBITDA, as defined in the new senior credit facility, minimum interest coverage and maximum amount of capital expenditures. The new senior credit facility contains certain covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, including the notes, liens and encumbrances and other matters customarily restricted in such agreements. The new senior credit facility contains customary events of default including, for example, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, judgment defaults, failure of any guaranty or security document supporting the new senior credit facility to be in full force and effect and change of control of Pac-West. 79 DESCRIPTION OF NOTES You can find the definitions of certain terms used in this description under the subheading "Certain Definitions." The form and terms of the new notes are the same as the form and terms of the old notes, which they replace, except that: (1) the new notes bear a Series B designation and a different CUSIP number from the old notes; (2) the new notes have been registered under the Securities Act of 1933 and, therefore, will not bear legends restricting the transfer thereof; and (3) the holders of new notes will not be entitled to certain rights under the registration rights agreement entered into in connection with the private offering of the old notes, including the provisions providing for an increase in the interest rate on the old notes in certain circumstances relating to the timing of this exchange offer, which rights will terminate when this exchange offer is consummated. We issued the notes under an indenture between ourselves and Norwest Bank Minnesota, N.A., as trustee, in a private transaction that is not subject to the registration requirements of the Securities Act of 1933. The terms of the notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939. The following description is a summary of the material provisions of the indenture and the registration rights agreement. It does not restate those agreements in their entirety. We urge you to read the indenture and the registration rights agreement because they, and not this description, define your rights as holders of these notes. Copies of the indenture and the registration rights agreement are available as set forth below under the subheading "Additional Information." Brief Description of the Notes The Notes The notes: . are Pac-West's general obligations; . are effectively subordinated in right of payment to all of Pac-West's existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; . are equal in right of payment to all of Pac-West's existing and future unsubordinated, unsecured indebtedness; and . are senior in right of payment to any of Pac-West's future subordinated indebtedness. The indenture permits us to incur additional indebtedness, including secured indebtedness. We have entered into a new senior credit facility and secured our borrowings under that facility with a first priority lien on substantially all of our assets. As of the date of the indenture, we have no subsidiaries. However, we may establish subsidiaries in the future and our subsidiaries will not guarantee these notes. The notes will therefore be effectively subordinated in right of payment to the liabilities, including trade payables, of any future subsidiary to the extent of the value of that subsidiary. In addition, under the circumstances described below under the subheading "Certain Covenants-- Designation of Restricted and Unrestricted Subsidiaries," we may designate one or more of our future subsidiaries as unrestricted subsidiaries. Unlike restricted subsidiaries, unrestricted subsidiaries will not be subject to many of the restrictive covenants in the indenture. Principal, Maturity and Interest We issued notes with a maximum aggregate principal amount of $150.0 million in denominations of $1,000 and integral multiples of $1,000. The notes will mature on February 1, 2009. 80 Interest on these notes accrues at the rate of 13 1/2% per annum and is payable semi-annually in arrears on February 1 and August 1, beginning on February 1, 2000. We make each interest payment to the holders of record of these notes on the immediately preceding January 15 and July 15. Interest on these notes accrues from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. Interest Reserve Account A portion of our obligations under the notes is secured pending disbursement in accordance with the Pledge Agreement by a pledge of a portfolio of U.S. government securities. Upon the consummation of the private offering of the old notes, we purchased and pledged to the trustee, for the benefit of the holders of the notes, the Pledged Securities, which were in an amount intended to be sufficient upon receipt of scheduled interest and principal payments, to provide for payment in full when due of the first two scheduled interest payments under the notes. We used approximately $19.7 million of the net proceeds from the sale of the old notes to purchase the Pledged Securities. We pledged the Pledged Securities as security for the payment of the principal of and interest under the notes and all other of our Obligations under the indenture and the notes. On each of the first two interest payment dates, the trustee will apply the proceeds of a sufficient amount of Pledged Securities to pay the interest then due. Upon the acceleration of the maturity of the notes or upon certain redemptions and repurchases of the notes, the trustee will apply the proceeds of a sufficient amount of Pledged Securities to pay the amounts we owe to holders of the notes at such time. Immediately following the earlier of: (a) the payment in full of the two scheduled interest payment under the notes; and (b) the day on which all of the notes have been repurchased, redeemed or defeased, if no Default or Event of Default is then continuing, the remaining Pledged Securities, if any, will be released from the Pledge and the outstanding old notes, if any, will be our unsecured obligations. The ability of holders of the notes to realize upon any such funds or receive payment from the proceeds of the Pledged Securities may be subject to certain bankruptcy law limitations in the event of our bankruptcy. Methods of Receiving Payments under the Notes If a holder has given wire transfer instructions to us, we will make all principal, premium, if any, and interest payments on that holder's notes in accordance with those instructions. All other payments on these notes will be made at the office or agency of the paying agent and Registrar within the City and State of New York unless we elect to make interest payments by check mailed to the holders at their address set forth in the register of holders. Paying Agent and Registrar for the Notes The trustee will initially act as paying agent and Registrar. We may change the paying agent or Registrar without prior notice to the holders of the notes, and we or any of our subsidiaries may act as paying agent or Registrar. Transfer and Exchange A holder may transfer new notes in accordance with the indenture. The Registrar and the trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents and we may require a holder to pay any taxes and fees required by law or permitted by the indenture. We are not required to transfer or exchange any note selected for redemption. Also, we are not required to transfer or exchange any note for a period of 15 days before a selection of notes to be redeemed. The registered holder of a note will be treated as the owner of it for all purposes. 81 Optional Redemption At any time prior to February 1, 2002, we may redeem up to 35% of the aggregate principal amount of notes originally issued under the indenture at a redemption price of 113.50% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more underwritten public equity offerings of common stock of Pac-West in which the gross proceeds to Pac-West are at least $20.0 million; provided that (1) at least $97.5 million in aggregate principal amount of notes remains outstanding immediately after the occurrence of such redemption, excluding notes held by Pac-West and its subsidiaries; and (2) the redemption occurs within 45 days of the date of the closing of such public equity offering. Except in accordance with the preceding paragraph, the notes will not be redeemable at our option prior to February 1, 2004. After February 1, 2004, we may redeem all or a part of the notes upon not less than 30 nor more than 60 days' notice, at the redemption prices set forth below plus accrued and unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on February 1 of the years indicated below. The redemption prices are expressed as percentages of principal amount.
Year Percentage ---- ---------- 2004.......................... 106.75% 2005.......................... 104.50% 2006.......................... 102.25% 2007 and thereafter........... 100.00%
Repurchase at the Option of Holders Change of Control If a change of control occurs, each holder of notes will have the right to require us to repurchase all or any part of that holder's notes in accordance with the change of control offer. All repurchases in part will be in $1,000 increments. In the change of control offer, we will offer a change of control payment in cash equal to 101% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest thereon, if any, to the date of purchase. Within ten business days following any change of control, we will mail a notice to each holder describing the transaction or transactions that constitute the change of control and offering to repurchase notes on the change of control payment date specified in such notice, in accordance with the procedures required by the indenture and described in such notice. We will comply with the requirements of Rule 14e-1 and any other securities laws and regulations under the Securities Exchange Act of 1934 to the extent such laws and regulations are applicable in connection with the repurchase of the notes as a result of a change of control. On the change of control payment date, we will, to the extent lawful: (1) accept for payment all notes or portions thereof properly tendered in accordance with the change of control offer; (2) deposit with the paying agent an amount equal to the change of control payment in respect of all notes or portions thereof so tendered; and (3) deliver or cause to be delivered to the trustee the notes so accepted together with an officers' certificate stating the aggregate principal amount of notes or portions thereof being purchased by Pac-West. The paying agent will promptly mail to each holder of notes so tendered the change of control payment for such notes, and the trustee will promptly authenticate and mail, or cause to be transferred by book entry, to each holder a new note equal in principal amount to any unpurchased portion of the notes surrendered, if any; provided that each such new note will be in a principal amount of $1,000 or an integral multiple thereof. 82 We will publicly announce the results of the change of control offer on or as soon as practicable after the change of control payment date. The provisions described above that require us to make a change of control offer following a change of control will be applicable regardless of whether or not any other provisions of the indenture are applicable. Except as described above with respect to a change of control, the indenture does not contain provisions that permit the holders of the notes to require that we repurchase or redeem the notes in the event of a takeover, recapitalization or similar transaction. We will not be required to make a change of control offer upon a change of control if a third party makes the change of control offer in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to a change of control offer made by Pac-West and purchases all notes validly tendered and not withdrawn under such change of control offer. The definition of change of control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of all or substantially all of our and our subsidiaries' assets taken as a whole. Although there is a limited body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of notes to require us to repurchase such notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of our and our subsidiaries' assets taken as a whole to another person or group may be uncertain. Asset Sales Pac-West will not, and will not permit any of its restricted subsidiaries to, consummate an Asset Sale unless: (1) Pac-West or the restricted subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets or Equity Interests issued or sold or otherwise disposed of; (2) such fair market value is determined by Pac-West's board of directors and evidenced by a resolution of the board of directors set forth in an officers' certificate delivered to the trustee; and (3) at least 75% of the consideration therefor received by Pac-West or such restricted subsidiary is in the form of cash or Cash Equivalents. For purposes of this provision, each of the following will be deemed to be cash: (a) any liabilities as shown on Pac-West's or such restricted subsidiary's most recent balance sheet of our or any restricted subsidiary other than contingent liabilities and liabilities that are by their terms subordinated to the notes, that are assumed by the transferee of any such assets in accordance with a customary novation agreement that releases Pac-West or such restricted subsidiary from further liability; and (b) any securities, notes or other obligations received by Pac-West or any such restricted subsidiary from such transferee that are contemporaneously, subject to ordinary settlement periods, converted by Pac-West or such restricted subsidiary into cash to the extent of the cash received in that conversion. Within 365 days after the receipt of any Net Proceeds from an Asset Sale, we may apply such Net Proceeds at our option: (1) to permanently reduce indebtedness of ourselves or a restricted subsidiary, other than Subordinated Indebtedness or intercompany indebtedness; (2) to acquire all or substantially all of the assets of, or a majority of the Voting Stock of, another person; (3) to make capital expenditures; or (4) to acquire other long-term assets in the case of (2), (3) or (4), in or used or useful in a Permitted Business. 83 Pending the final application of any such Net Proceeds, we may temporarily reduce revolving credit borrowings or otherwise invest such Net Proceeds in any manner that is not prohibited by the indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the preceding paragraph will constitute Excess Proceeds. When the aggregate amount of Excess Proceeds exceeds $5.0 million, we will make an Asset Sale Offer to all holders of notes and all holders of other indebtedness that is ranked equally with the notes containing provisions similar to those set forth in the indenture with respect to offers to purchase or redeem with the proceeds of sales of assets to purchase the maximum principal amount of notes and such other equally ranking indebtedness that may be purchased out of the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to 100% of principal amount plus accrued and unpaid interest, if any, to the date of purchase, and will be payable in cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer, we may use such Excess Proceeds for any purpose not otherwise prohibited by the indenture. If the aggregate principal amount of notes and such other equally ranking indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee will select the notes and such other equally ranking indebtedness to be purchased on a proportionate basis. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds will be reset at zero. Selection and Notice If less than all of the notes are to be redeemed at any time, the trustee will select notes for redemption as follows: (1) if the notes are listed, in compliance with the requirements of the principal national securities exchange on which the notes are listed; or (2) if the notes are not so listed, on a proportionate basis, by lot or by such method as the trustee will deem fair and appropriate. No notes of $1,000 or less will be redeemed in part. Notices of redemption will be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each holder of notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any note is to be redeemed in part only, the notice of redemption that relates to that note will state the portion of the principal amount thereof to be redeemed. A new note in principal amount equal to the unredeemed portion of the old note will be issued in the name of the holder thereof upon cancellation of the old note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on notes or portions of them called for redemption. Certain Covenants Incurrence of Indebtedness and Issuance of Convertible Redeemable Preferred Stock Pac-West will not, and will not permit any of its restricted subsidiaries to, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to, any indebtedness, including Acquired Debt. We will not issue any Disqualified Stock and will not permit any of our restricted subsidiaries to issue any shares of preferred stock. We may, however, incur indebtedness, including Acquired Debt, and may issue Disqualified Stock, if the Debt to Cash Flow Ratio for our most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional indebtedness is incurred or such Disqualified Stock is issued would have been greater than zero and less than 6.0 to 1. This will be determined on a pro forma basis, including a pro forma 84 application of the net proceeds therefrom, as if the additional indebtedness had been incurred, or the Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. So long as no Default will have occurred and be continuing or would be caused thereby, the first paragraph of this covenant will not prohibit the incurrence of any of the following items of permitted debt: (1) the incurrence by Pac-West and any restricted subsidiary of term indebtedness under any Credit Facility; provided that the aggregate principal amount of all term indebtedness of Pac-West and the restricted subsidiaries outstanding under all Credit Facilities after giving effect to such incurrence does not exceed an amount equal to $50.0 million less the aggregate amount of all repayments of term indebtedness under a Credit Facility that have been made by Pac-West or any of its restricted subsidiaries since the date of the indenture; (2) the incurrence by Pac-West and its restricted subsidiaries of existing indebtedness; (3) the incurrence by Pac-West of indebtedness represented by the notes and the new notes; (4) the incurrence by Pac-West and its restricted subsidiaries of Subordinated Indebtedness in an aggregate principal amount outstanding at any one time not to exceed $100.0 million; (5) the incurrence by Pac-West or any of its restricted subsidiaries of indebtedness to finance the cost to acquire equipment, inventory or network assets, to the extent of the fair market value of the equipment, inventory or network assets so acquired less, in the case of an acquisition of Capital Stock, the Acquired Debt, if any, incurred in connection with such acquisition; (6) the incurrence by Pac-West of indebtedness maturing after the Stated Maturity of the notes and having an Average Life longer than the notes in an amount not to exceed, at any one time outstanding, two times the difference between: (a) the sum of (1) all net cash proceeds received by Pac-West after the date of the indenture as a capital contribution or from the issuance and sale of Equity Interests, other than Disqualified Stock, to a person that is not a subsidiary of Pac-West; and (2) 80% of the fair market value of property, other than cash and cash equivalents, received by Pac-West after the date of the indenture as a capital contribution or from the issuance and sale of Equity Interests, other than Disqualified Stock, to a person that is not a Subsidiary of Pac-West, and (b) the sum of (1) the amount of any capital contribution used in accordance with clause 4(c)(ii) of the first paragraph, or clauses (2) or (8) of the second paragraph, of the "--Restricted Payments" covenant described below to make a Restricted Payment; and (2) the amount of any capital contribution or net cash proceeds used to consummate a transaction in accordance with which Pac-West incurs Acquired Debt in an amount equal to at least 2 times the amount of such capital contribution or, in the case of the receipt of property, 2.5 times the fair market value thereof; (7) the incurrence by Pac-West or any restricted subsidiary of Acquired Debt; (8) the incurrence by Pac-West or any of its subsidiaries of permitted refinancing indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace indebtedness, other than intercompany indebtedness that was permitted by the indenture to be incurred under the first paragraph of the covenant or clauses (2), (3), (4), (5), (6) or (14) of this paragraph; 85 (9) the incurrence by Pac-West or any of its restricted subsidiaries of intercompany indebtedness between or among Pac-West and any of its wholly owned restricted subsidiaries; provided, however, that: (a) if Pac-West is the obligor on such indebtedness, such indebtedness must be expressly subordinated to the prior payment in full in cash of all Obligations with respect to the notes; and (b) (1) any subsequent issuance or transfer of Equity Interests that results in any such indebtedness being held by a person other than Pac-West or a wholly owned restricted subsidiary thereof; and (2) any sale or other transfer of any such indebtedness to a person that is not either Pac-West or a wholly owned restricted subsidiary thereof will be deemed, in each case, to constitute an incurrence of such indebtedness by Pac-West or such restricted subsidiary, as the case may be, that was not permitted by this clause (9); (10) the incurrence by Pac-West or any of its restricted subsidiaries of Hedging Obligations that are incurred for the purpose of: (a) fixing or hedging interest rate risk with respect to any floating rate indebtedness that is permitted by the terms of this indenture to be outstanding or (b) protecting Pac-West and its restricted subsidiaries against changes in currency exchange rates; (11) the guarantee by Pac-West or any of the restricted subsidiaries of indebtedness of Pac-West or a restricted subsidiary of Pac-West that was permitted to be incurred by another provision of this covenant; (12) the incurrence by Pac-West or any of its restricted subsidiaries of indebtedness constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business in respect of workers' compensation claims or self-insurance, or other indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; provided, however, that obligations arising upon the drawing of such letters of credit or the incurrence of such indebtedness are reimbursed within 30 days following such drawing or incurrence; (13) the incurrence of indebtedness by Pac-West or a restricted subsidiary under an agreement providing for indemnification, adjustment of purchase price or similar obligations in connection with the disposition of any business, assets or restricted subsidiary of Pac- West, other than guarantees of indebtedness incurred by any person acquiring all or any portion of such business, assets or restricted subsidiary for the purpose of financing such acquisition; provided that: (a) such indebtedness is not reflected on the balance sheet of Pac-West or any restricted subsidiary; and (b) the maximum assumable liability in respect of all such indebtedness never exceeds the gross proceeds actually received by Pac-West and its restricted subsidiaries in connection with such disposition; (14) the incurrence by Pac-West or any of its restricted subsidiaries of additional indebtedness in an aggregate principal amount or accreted value, as applicable, at any time outstanding, including all permitted refinancing indebtedness incurred to refund, refinance or replace any indebtedness incurred in accordance with this clause (14), not to exceed $10.0 million; and (15) the incurrence by Pac-West's unrestricted subsidiaries of non-recourse debt; provided, however, that if any such indebtedness ceases to be non-recourse debt of an unrestricted subsidiary, such event will be deemed to constitute an incurrence of indebtedness by a restricted subsidiary of Pac-West that was not permitted by this clause (15). We will not incur any indebtedness, including the above-described permitted debt, that is contractually subordinated in right of payment to any of our other indebtedness unless such indebtedness is also contractually subordinated in right of payment to the notes on substantially identical terms; provided, however, that none of 86 our indebtedness will be deemed to be contractually subordinated in right of payment to any of our other indebtedness solely by virtue of being unsecured. For purposes of determining compliance with this "Incurrence of Indebtedness and Issuance of Preferred Stock" covenant, in the event that an item of proposed indebtedness meets the criteria of more than one of the categories of permitted debt described in clauses (1) through (15) above, or is entitled to be incurred in accordance with the first paragraph of this covenant, we will be permitted to classify such item of indebtedness on the date of its incurrence in any manner that complies with this covenant. Restricted Payments Pac-West will not, and will not permit any of its restricted subsidiaries to, directly or indirectly: (1) declare or pay any dividend or make any other payment or distribution on account of Pac-West's or any of its restricted subsidiaries' Equity Interests, including, for example, any payment in connection with any merger or consolidation involving Pac-West or any of its restricted subsidiaries, or to the direct or indirect holders of Pac-West's or any of its restricted subsidiaries' Equity Interests in their capacity as such, other than dividends or distributions payable in Equity Interests, other than Disqualified Stock, of Pac-West or to Pac-West or a restricted subsidiary of Pac-West; (2) purchase, redeem or otherwise acquire or retire for value, including, for example, in connection with any merger or consolidation involving Pac-West, any Equity Interests of Pac-West or any direct or indirect parent of Pac-West or any restricted subsidiary of Pac-West, other than any such Equity Interests owned by Pac-West or any restricted subsidiary of Pac-West; (3) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any indebtedness that is subordinated to the notes, except a payment of interest or principal at the Stated Maturity thereof; or (4) make any Restricted Investment, all such payments and other actions set forth in clauses (1) through (4) above being collectively referred to as "Restricted Payments", unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default will have occurred and be continuing or would occur as a consequence thereof; and (b) Pac-West would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional indebtedness in accordance with the Debt to Cash Flow Ratio test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by Pac-West and its restricted subsidiaries after the date of the indenture, excluding Restricted Payments permitted by clauses (2), (3), (4) and (5) of the next succeeding paragraph, is less than the sum, without duplication, of (1) 50% of the Consolidated Net Income of Pac-West for the period, taken as one accounting period, from the beginning of the first fiscal quarter beginning after the date of the indenture to the end of Pac-West's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit; plus (2) 100% of the aggregate net cash proceeds received by Pac-West since the date of the indenture as a contribution to its common equity capital or from the issue or sale of Equity Interests of Pac-West, other than Disqualified Stock, or from the issue or sale of convertible or exchangeable Disqualified Stock or convertible or exchangeable debt securities of Pac-West that have been converted into or exchanged for such Equity Interests, other than 87 Equity Interests, or Disqualified Stock or debt securities, sold to a subsidiary of Pac-West, except to the extent such net cash proceeds are used to incur indebtedness in accordance with clause (6) of the covenant described above under the caption "-- Incurrence of indebtedness and Issuance of Preferred Stock," or to make a Restricted Payment in accordance with clause (2) or (8) of the next succeeding paragraph, plus (3) to the extent that any Restricted Investment that was made after the date of the indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of: (x) the cash return of capital with respect to such Restricted Investment, less the cost of disposition, if any; and (y) the initial amount of such Restricted Investment, plus (4) 50% of any cash dividends received by Pac-West or any restricted subsidiary after the date of the indenture from an unrestricted subsidiary, to the extent such dividends were not otherwise included in Consolidated Net Income of Pac-West for such period, plus (5) to the extent that any unrestricted subsidiary of Pac-West is designated as a restricted subsidiary after the date of the indenture, the lesser of: (x) the fair market value of Pac-West's Investment in such subsidiary as of the date of such subsidiary's designation as a restricted subsidiary; and (y) the sum of the fair market value of Pac-West's Investment in such subsidiary as of the date on which such subsidiary was originally designated as an unrestricted subsidiary and the amount of any Investments made in such subsidiary subsequent to such designation and treated as Restricted Payments by Pac-West or any restricted subsidiary, plus (6) $2.0 million. So long as no Default has occurred and is continuing or would be caused thereby, the preceding provisions will not prohibit: (1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the indenture; (2) the redemption, repurchase, retirement, defeasance or other acquisition of any Subordinated Indebtedness of Pac-West or any restricted subsidiary or of any Equity Interests of Pac-West or any restricted subsidiary in exchange for, or out of the net cash proceeds of the substantially concurrent sale, other than to a Subsidiary of Pac-West, of, Equity Interests of Pac-West, other than Disqualified Stock; except to the extent such Net Cash Proceeds are used to incur indebtedness in accordance with clause (6) under the Limitation on indebtedness or to make Restricted Payments in accordance with clause 4(c)(ii) of the first paragraph, or clause (8) of this paragraph, of this "Limitation on Restricted Payments" covenant; (3) the defeasance, redemption, repurchase or other acquisition of Subordinated Indebtedness of Pac-West or any restricted subsidiary with the net cash proceeds from an incurrence of permitted refinancing indebtedness; (4) the payment of any dividend by a restricted subsidiary of Pac-West to the holders of its common Equity Interests on a proportionate basis; (5) the making of any Earnout Payments in an amount not to exceed $20.0 million in the aggregate; (6) the making of payments or distributions to dissenting stockholders in accordance with applicable law in connection with a consolidation, merger or transfer of assets permitted under the covenant described below under the caption "--Merger, Consolidation or Sale of Assets"; (7) payments made to retire Capital Stock of Pac-West to the extent necessary, as determined in good faith by a majority of Pac-West's board of directors, to prevent the loss of, or to secure the renewal or reinstatement of, any governmental license or authorization held by Pac-West or any restricted subsidiary; 88 (8) Investments in any person the primary business of which is related, ancillary or complementary to the business of Pac-West and its restricted subsidiaries on the date of such Investments; provided that the aggregate amount of Investments made in accordance with this clause (8) does not exceed the sum of: (a) $20 million; and (b) the amount of Net Cash Proceeds received by Pac-West after the issue date as a capital contribution or from the sale of its Capital Stock, other than Disqualified Stock, to a person who is not a subsidiary of Pac-West, except to the extent such Net Cash Proceeds are used to incur indebtedness in accordance with clause (6) under the "Limitation on Indebtedness" covenant or to make Restricted Payments in accordance with clause 4(c)(ii) of the first paragraph, or clause (2) of this paragraph, of this "Limitation on Restricted Payments" covenant, plus (z) the net reduction in Investments made in accordance with this clause (8) resulting from distributions on or repayments of such Investments or from the Net Cash Proceeds from the sale of any such Investment, except in each case to the extent any such payment or proceeds is included in the calculation of Consolidated Net Income, or from such person becoming a restricted subsidiary, valued in each case as provided in the definition of "Investments", provided that the net reduction in any Investment will not exceed the amount of such Investment; and (9) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of Pac-West or any restricted subsidiary of Pac-West held by any member of Pac-West's, or any of its subsidiaries', management in accordance with any management equity subscription agreement or stock option agreement; provided that such repurchase, redemption or other acquisition is made in connection with the cessation of employment by Pac-West or any restricted subsidiary of a manager or officer, and the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests will not exceed $5.0 million in the aggregate. The amount of all Restricted Payments, other than cash, will be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by Pac-West or such restricted subsidiary, as the case may be, in accordance with the Restricted Payment. The fair market value of any assets or securities that are required to be valued by this covenant will be determined by the board of directors whose resolution with respect thereto will be delivered to the trustee. The board of directors' determination must be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if the fair market value exceeds $5.0 million. Not later than the date of making any Restricted Payment, Pac-West will deliver to the trustee an officers' certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this "Restricted Payments" covenant were computed, together with a copy of any fairness opinion or appraisal required by the indenture. Liens Pac-West will not, and will not permit any of its restricted subsidiaries to create incur, assume or suffer to exist any Lien of any kind securing indebtedness, Attributable Debt or trade payables on any asset now owned or hereafter acquired, or any income or profit therefrom or assign or convey any right to receive income therefrom except Permitted Liens. Dividend and Other Payment Restrictions Affecting Subsidiaries Pac-West will not, and will not permit any of its restricted subsidiaries to create or permit to exist or become effective any encumbrance or restriction on the ability of any restricted subsidiary to: (1) pay dividends or make any other distributions on its Capital Stock to Pac-West or any of its restricted subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any indebtedness owed to Pac-West or any of its restricted subsidiaries; 89 (2) make loans or advances to Pac-West or any of its restricted subsidiaries; or (3) transfer any of its properties or assets to Pac-West or any of its restricted subsidiaries. However, the preceding restrictions will not apply to encumbrances or restrictions existing under or by reason of: (1) the indenture and the notes; (2) applicable law; (3) any instrument governing indebtedness or Capital Stock of a person acquired by Pac-West or any of its restricted subsidiaries as in effect at the time of such acquisition, except to the extent such indebtedness was incurred in connection with or in contemplation of such acquisition, which encumbrance or restriction is not applicable to any person, or the properties or assets of any person, other than the person, or the property or assets of the person, so acquired, provided that, in the case of indebtedness, such indebtedness was permitted by the terms of the indenture to be incurred; (4) customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices; (5) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on the property so acquired of the nature described in clause (3) of the preceding paragraph; (6) any agreement for the sale or other disposition of a restricted subsidiary that restricts distributions by such restricted subsidiary pending its sale or other disposition; (7) permitted refinancing indebtedness, provided that the restrictions contained in the agreements governing such permitted refinancing indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the indebtedness being refinanced; (8) Liens securing indebtedness otherwise permitted to be incurred in accordance with the provisions of the covenant described above under the caption "--Liens" that limit the right of Pac-West or any of its restricted subsidiaries to dispose of the assets subject to such Lien; (9) provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements entered into in the ordinary course of business; and (10) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business. Merger, Consolidation, or Sale of Assets Pac-West may not: (a) consolidate or merge with or into another person, whether or not Pac- West is the surviving corporation; or (b) sell, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets, in one or more related transactions, to another person; unless: (1) either: (a) Pac-West is the surviving entity; or (b) the person formed by or surviving any such consolidation or merger, if other than Pac-West, or to which such sale, assignment, transfer, conveyance or other disposition will have been made is an entity organized or existing under the laws of the United States, any state thereof or the District of Columbia; 90 (2) the person formed by or surviving any such consolidation or merger, if other than Pac-West, or the person to which such sale, assignment, transfer, conveyance or other disposition will have been made assumes all the obligations of Pac-West under the notes, the indenture and the registration rights agreement in accordance with a supplemental indenture reasonably satisfactory to the trustee; (3) immediately after such transaction no Default or Event of Default exists; and (4) except in the case of the merger of Pac-West with or into a wholly owned restricted subsidiary or a merger entered into solely for the purpose of reincorporating Pac-West in another jurisdiction, Pac-West, or the person formed by or surviving any such consolidation or merger, if other than Pac-West, will, on the date of such transaction after giving pro forma effect thereto and any related financing transactions as if the same had occurred at the beginning of the applicable four- quarter period, be permitted to incur at least $1.00 of additional indebtedness in accordance with the Debt to Cash Flow Ratio test set forth in the first paragraph of the covenant described above under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock." In addition, Pac-West may not lease all or substantially all of its properties or assets, in one or more related transactions, to any other person. This "Merger, Consolidation, or Sale of Assets" covenant will not apply to a sale, assignment, transfer, conveyance or other disposition of assets between or among Pac-West and any of its wholly owned restricted subsidiaries. Transactions with Affiliates Pac-West will not, and will not permit any of its restricted subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Pac- West Affiliate, unless: (1) such Affiliate transaction is on terms that are no less favorable to Pac-West or the relevant restricted subsidiary than those that would have been obtained in a comparable transaction by Pac-West or such restricted subsidiary with an unrelated person; and (2) Pac-West delivers to the trustee: (a) with respect to any Affiliate transaction or series of related Affiliate transactions involving aggregate consideration in excess of $1.0 million, a resolution of the board of directors set forth in an officers' certificate certifying that such Affiliate transaction complies with this covenant and that such Affiliate transaction has been approved by a majority of the disinterested members of the board of directors; and (b) with respect to any Affiliate transaction or series of related Affiliate transactions involving aggregate consideration in excess of $5.0 million, an opinion as to the fairness to the holders of such Affiliate transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. The following items will not be deemed to be Affiliate transactions and, therefore, will not be subject to the provisions of the prior paragraph: (1) any employment, noncompetition, confidentiality, indemnification or similar agreement or arrangement entered into by Pac-West or any of its restricted subsidiaries in the ordinary course of business and consistent with the past practice of Pac-West or such restricted subsidiary; (2) transactions between or among Pac-West and/or its restricted subsidiaries; (3) payment of reasonable directors fees to persons who are not otherwise Affiliates of Pac-West; (4) any sale or other issuance of Equity Interests, other than Disqualified Stock, of Pac-West; (5) the sale of telecommunications services to any Affiliate on an arm's length basis which is undertaken in the ordinary course of Pac-West's business; 91 (6) transactions in accordance with the Merger Agreement or any agreement executed prior to the date of the indenture in connection therewith, including for example the shareholders agreement and the registration agreement, or any renewal, replacement, extension, amendment or other modification thereof, provided such modifications are not, on balance, disadvantageous to the holders of the notes; (7) payments to Bay Alarm Company in accordance with the existing lease between Pac-West and the Bay Alarm Company for Pac-West's Oakland facility and for security monitoring services offered at Bay Alarm Company's prevailing commercial rates; and (8) Restricted Payments that are permitted by the provisions of the indenture described above under the caption "--Restricted Payments." Issuances of Guarantees by Restricted Subsidiaries Pac-West will not permit any restricted subsidiary to guarantee, assume or in any other manner become liable with respect to any indebtedness of Pac-West which is ranking equally with or subordinate in right of payment to the notes, other than any indebtedness incurred under a Credit Facility, unless: (1) such restricted subsidiary simultaneously executes and delivers a supplemental indenture to the indenture providing for a guarantee of payment of the notes by such restricted subsidiary; and (2) such restricted subsidiary waives and will not in any manner whatsoever claim, or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against Pac-West or any other restricted subsidiary as a result of any payment by such restricted subsidiary under its Subsidiary Guarantee; provided that this paragraph will not be applicable to any guarantee of any restricted subsidiary that existed at the time such person became a restricted subsidiary and was not incurred in connection with, or in contemplation of, such person becoming a restricted subsidiary. If the Guaranteed indebtedness is: a. ranked equally with the notes, then the guarantee of such Guaranteed indebtedness will be ranked equally with, or subordinated to, the subsidiary Guarantee or b. subordinated to the notes, then the guarantee of such Guaranteed indebtedness will be subordinated to the subsidiary Guarantee at least to the extent that the Guaranteed indebtedness is subordinated to the notes. Despite the above, any subsidiary Guarantee by a restricted subsidiary may provide by its terms that it will be automatically and unconditionally released and discharged upon: (1) any sale, exchange or transfer, to any person that is not an Affiliate of Pac-West, of all of Pac-West's and each restricted subsidiary's Capital Stock in, or all or substantially all of the assets of, such restricted subsidiary, which sale, exchange or transfer is not prohibited by the indenture; or (2) the release or discharge of the guarantee which resulted in the creation of such subsidiary Guarantee, except a discharge or release by or as a result of payment under such guarantee; provided, that, with respect to clause (2), such restricted subsidiary has no indebtedness. Designation of Restricted and Unrestricted Subsidiaries The board of directors may designate any restricted subsidiary to be an unrestricted subsidiary if that designation would not cause a Default. If a restricted subsidiary is designated as an unrestricted subsidiary, all outstanding Investments owned by Pac-West and its restricted subsidiaries in the subsidiary so designated will be deemed to be an Investment made as of the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of the covenant described above under the caption "--Restricted Payments" or Permitted Investments, as applicable. All such outstanding Investments will be valued at their fair market value at the time of such designation. That designation will be permitted only if such 92 Restricted Payment would be permitted at that time and if such restricted subsidiary otherwise meets the definition of an unrestricted subsidiary. The board of directors may redesignate any unrestricted subsidiary to be a restricted subsidiary if the redesignation would not cause a Default. Sale and Leaseback Transactions Pac-West will not, and will not permit any of its restricted subsidiaries to, enter into any sale and leaseback transaction; provided that Pac-West or any restricted subsidiary of Pac-West restricted subsidiary may enter into a sale and leaseback transaction if: (1) Pac-West or that restricted subsidiary, as applicable, could have: (a) incurred indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction under the Debt to Cash Flow Ratio test in the first paragraph of the covenant described above under the caption "--Incurrence of Additional Indebtedness and Issuance of Preferred Stock"; and (b) incurred a Lien to secure such indebtedness in accordance with the covenant described above under the caption "--Liens"; (2) the gross cash proceeds of that sale and leaseback transaction are at least equal to the fair market value, as determined in good faith by the board of directors and set forth in an officers' certificate delivered to the trustee, of the property that is the subject of such sale and leaseback transaction; and (3) the transfer of assets in that sale and leaseback transaction is permitted by, and Pac-West applies the proceeds of such transaction in compliance with, the covenant described above under the caption "-- Repurchase at the Option of Holders--Asset Sales." Limitation on Issuances and Sales of Equity Interests in Wholly Owned Subsidiaries Pac-West will not, and will not permit any of its restricted subsidiaries to, transfer, convey, sell, lease or otherwise dispose of any Equity Interests in any wholly owned restricted subsidiary of Pac-West to any person, other than Pac-West or a wholly owned restricted subsidiary of Pac-West, unless: (1) such transfer, conveyance, sale, lease or other disposition is of all the Equity Interests in such wholly owned restricted subsidiary; and (2) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales." In addition, Pac-West will not permit any wholly owned restricted subsidiary of Pac-West to issue any of its Equity Interests, other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares, to any person other than to Pac-West or a wholly owned restricted subsidiary of Pac-West. Business Activities Pac-West will not, and will not permit any restricted subsidiary to, engage in any business other than Permitted Businesses. Payments for Consent Pac-West will not, and will not permit any of its subsidiaries to pay or cause to be paid any consideration to or for the benefit of any holder of notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the indenture or the notes unless such consideration is offered to be paid and is paid to all holders of the notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. 93 Reports Whether or not required by the SEC, so long as any notes are outstanding, Pac-West will furnish to the holders of notes, within the time periods specified in the SEC's rules and regulations: (1) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if Pac- West were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report on the annual financial statements by Pac-West's certified independent accountants; and (2) all current reports that would be required to be filed with the SEC on Form 8-K if Pac-West were required to file such reports. If Pac-West has designated any of its subsidiaries as unrestricted subsidiaries, then the quarterly and annual financial information required by the preceding paragraph will include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes thereto, and in Management's Discussion and Analysis of Financial Condition and Results of Operations, of the financial condition and results of operations of Pac-West and its restricted subsidiaries separate from the financial condition and results of operations of the unrestricted subsidiaries of Pac-West. In addition, whether or not required by the SEC, Pac-West will file a copy of all of the information and reports referred to in clauses (1) and (2) above with the SEC for public availability within the time periods specified in the SEC's rules and regulations, unless the SEC will not accept such a filing, and make such information available to securities analysts and prospective investors upon request. Events of Default and Remedies Each of the following is an Event of Default: (1) default for 30 days in the payment when due of interest under the notes; (2) default in payment when due of the principal of or premium, if any, under the notes; (3) failure by Pac-West or any of its subsidiaries to comply with the provisions described under the captions "--Repurchase at the Option of Holders--Change of Control" or "--Repurchase at the Option of Holders-- Asset Sales"; (4) failure by Pac-West or any of its restricted subsidiaries for 60 days after notice from either the trustee or the holders of at least 25% in aggregate principal amount of the outstanding notes to comply with any of the other agreements in the indenture or the notes; (5) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by Pac-West or any of its restricted subsidiaries, or the payment of which is guaranteed by Pac-West or any of its restricted subsidiaries, whether such idebtedness or guarantee now exists, or is created after the date of the indenture, if that default: (a) is caused by a payment default due to failure to pay principal of or premium, if any, or interest on such indebtedness prior to the expiration of the grace period provided in such indebtedness on the date of such default; or (b) results in the acceleration of such indebtedness prior to its express maturity, and, in each case, the principal amount of any such indebtedness, together with the principal amount of any other such indebtedness under which there has been a payment default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (6) failure by Pac-West or any of its restricted subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; 94 (7) Pac-West asserts in writing that the Pledge Agreement ceases to be in full force and effect before payment in full of the obligations under that agreement; and (8) certain events of bankruptcy or insolvency with respect to Pac-West or any of its restricted subsidiaries. In the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to Pac-West, any restricted subsidiary that is a Significant Subsidiary or any group of restricted subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding old notes will become due and payable immediately without further action or notice. If any other Event of Default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding old notes may declare all the notes to be due and payable immediately. Holders of the notes may not enforce the indenture or the notes except as provided in the indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding old notes may direct the trustee in its exercise of any trust or power. The trustee may withhold from holders of the notes notice of any continuing Default or Event of Default, except a Default or Event of Default relating to the payment of principal or interest, if it determines that withholding notice is in their interest. The holders of a majority in aggregate principal amount of the notes then outstanding by notice to the trustee may on behalf of the holders of all of the notes waive any existing Default or Event of Default and its consequences under the indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the notes. In the case of any Event of Default occurring by reason of any willful action or inaction taken or not taken by or on behalf of Pac-West with the intention of avoiding payment of the premium that Pac-West would have had to pay if Pac-West then had elected to redeem the notes in accordance with the optional redemption provisions of the indenture, an equivalent premium will also become and be immediately due and payable to the extent permitted by law upon the acceleration of the notes. If an Event of Default occurs prior to February 1, 2004, by reason of any willful action or inaction taken or not taken by or on behalf of Pac-West with the intention of avoiding the prohibition on redemption of the notes prior to February 1, 2004, then the premium specified in the indenture will also become immediately due and payable to the extent permitted by law upon the acceleration of the notes. Pac-West is required to deliver to the trustee annually a statement regarding compliance with the indenture. Upon becoming aware of any Default or Event of Default, Pac-West is required to deliver to the trustee a statement specifying such Default or Event of Default. No Personal Liability of Directors, Officers, Employees and Stockholders No director, officer, employee, incorporator or stockholder of Pac-West or any subsidiary, as such, will have any liability for any obligations of Pac- West or the subsidiaries under the notes or the indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of notes by accepting a note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. The waiver may not be effective to waive liabilities under the federal securities laws. Legal Defeasance and Covenant Defeasance Pac-West may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding notes as legal defeasance except for: (1) the rights of holders of outstanding notes to receive payments in respect of the principal of, premium, if any, and interest on the notes when such payments are due from the trust referred to below; 95 (2) Pac-West's obligations with respect to the notes concerning issuing temporary notes, registration of notes, mutilated, destroyed, lost or stolen notes and the maintenance of an office or agency for payment and money for security payments held in trust; (3) the rights, powers, trusts, duties and immunities of the trustee, and Pac-West's obligations in connection therewith; and (4) the legal defeasance provisions of the indenture. In addition, Pac-West may, at its option and at any time, elect to have the obligations of Pac-West and the restricted subsidiaries released with respect to certain covenants that are described in the indenture as covenant defeasance and thereafter any omission to comply with those covenants will not constitute a Default or Event of Default with respect to the notes. In the event covenant defeasance occurs, certain events, described under "Events of Default," will no longer constitute an Event of Default with respect to the notes. These events do not include non-payment, bankruptcy, receivership, rehabilitation and insolvency events. In order to exercise either legal defeasance or covenant defeasance: (1) Pac-West must irrevocably deposit with the trustee, in trust, for the benefit of the holders of the notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding notes on the stated maturity or on the applicable redemption date, as the case may be, and Pac-West must specify whether the notes are being defeased to maturity or to a particular redemption date; (2) in the case of legal defeasance, Pac-West will have delivered to the trustee an opinion of counsel reasonably acceptable to the trustee confirming that: (a) Pac-West has received from, or there has been published by, the Internal Revenue Service a ruling; or (b) since the date of the indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel will confirm that, the holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such legal defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred; (3) in the case of covenant defeasance, Pac-West will have delivered to the trustee an opinion of counsel reasonably acceptable to the trustee confirming that the holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (4) no Default or Event of Default will have occurred and be continuing either: (a) on the date of such deposit, other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit; or (b) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (5) such legal defeasance or covenant defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument, other than the indenture, to which Pac-West or any of its restricted subsidiaries is a party or by which Pac-West or any of its restricted subsidiaries is bound; (6) Pac-West must have delivered to the trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; 96 (7) Pac-West must deliver to the trustee an officers' certificate stating that the deposit was not made by Pac-West with the intent of preferring the holders of notes over the other creditors of Pac-West with the intent of defeating, hindering, delaying or defrauding creditors of Pac-West or others; and (8) Pac-West must deliver to the trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent relating to the legal defeasance or the covenant defeasance have been complied with. Amendment, Supplement and Waiver Without the consent of each holder affected, an amendment or waiver may not, with respect to any notes held by a non-consenting holder: (1) reduce the principal amount of notes whose holders must consent to an amendment, supplement or waiver; (2) reduce the principal of or change the fixed maturity of any note or alter the provisions with respect to the redemption of the notes, other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of Holders"; (3) reduce the rate of or change the time for payment of interest on any note; (4) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest under the notes, except a rescission of acceleration of the notes by the holders of at least a majority in aggregate principal amount of the notes and a waiver of the payment default that resulted from such acceleration; (5) make any note payable in money other than that stated in the notes; (6) make any change in the provisions of the indenture relating to waivers of past Defaults or the rights of holders of notes to receive payments of principal of or premium, if any, or interest under the notes; (7) waive a redemption payment with respect to any note, other than a payment required by one of the covenants described above under the caption "--Repurchase at the Option of Holders"; or (8) make any change in the preceding amendment and waiver provisions. Despite the above, without the consent of any holder of notes, Pac-West and the trustee may amend or supplement the indenture or the notes: (1) to cure any ambiguity, defect or inconsistency; (2) to provide for uncertificated notes in addition to or in place of certificated notes; (3) to provide for the assumption of Pac-West's obligations to holders of notes in the case of a merger or consolidation or sale of all or substantially all of Pac-West's assets; (4) to make any change that would provide any additional rights or benefits to the holders of notes or that does not adversely affect the legal rights under the indenture of any such holder; or (5) to comply with requirements of the SEC in order to effect or maintain the qualification of the indenture under the Trust Indenture Act of 1939. Concerning the Trustee If the trustee becomes a creditor of Pac-West or any restricted subsidiary, the indenture limits its right to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign. 97 The holders of a majority in principal amount of the then outstanding notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the trustee, subject to certain exceptions. The indenture provides that in case an Event of Default will occur and be continuing, the trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any holder of notes, unless such holder will have offered to the trustee security and indemnity satisfactory to it against any loss, liability or expense. Book-Entry, Delivery and Form The new notes issued to qualified institutional buyers, as defined in Rule 144A under the Securities Act of 1933, initially will be in the form of one or more registered global notes without interest coupons. Upon issuance, these U.S. global notes will be deposited with the trustee, as custodian for DTC and registered in the name of DTC or its nominee, in each case for credit to the accounts of DTC's direct and indirect participants. In addition, a registered, coupon-less U.S. global note will be established to accommodate transfers to institutional accredited investors, as defined in Rule 501(a)(1)(2)(3) or (7) of Regulation D under the Securities Act of 1933. The new notes issued to non- U.S. persons will initially be in the form of a separate Regulation S global note. Beneficial interests in the Regulation S global notes may be transferred to a person that takes delivery in the form of an interest in the U.S. global notes and beneficial interests in the U.S. global notes may be transferred to a person that takes delivery in the form of an interest in the Regulation S global notes. See "--Transfers of Interests in One Global Note for Interests in Another Global Note." The global notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee in certain limited circumstances. Beneficial interests in the global notes may be exchanged for notes in certificated form in certain limited circumstances. See "--Transfers of Interests in Global Notes for Certificated Notes." Depositary Procedures DTC has advised Pac-West that DTC is a limited-purpose trust company created to hold securities for its direct participant organizations and to facilitate the clearance and settlement of transactions in those securities between direct participant organizations through electronic book-entry changes in the accounts of direct participant organizations. The direct participant organizations include securities brokers and dealers, including the initial purchasers of the notes, banks, trust companies, clearing corporations and certain other organizations, including Euroclear and CEDEL. Access to DTC's system is also available to other indirect participant organizations that clear through or maintain a direct or indirect, custodial relationship with a direct participant organization. DTC may hold securities beneficially owned by other persons only through the direct participant organizations or indirect participant organizations and such other persons' ownership interest and transfer of ownership interest will be recorded only on the records of the direct participant organization and/or indirect participant organization, and not on the records maintained by DTC. DTC has also advised Pac-West that, in accordance with DTC's procedures: (1) upon deposit of the global notes, DTC will credit the accounts of the direct participant organizations designated by the initial purchasers of the notes with portions of the principal amount of the global notes allocated by the indirect participant organizations to such direct participant organizations; and (2) DTC will maintain records of the ownership interests of such direct participant organizations in the global notes and the transfer of ownership interests by and between direct participant organizations. DTC will not maintain records of the ownership interests of, or the transfer of ownership interests by and between, indirect participant organizations or other owners of beneficial interests in the global notes. Direct participant organizations and indirect participant organizations must maintain their own records of the ownership interests of, and the transfer of ownership interests by and between, indirect participant organizations and other owners of beneficial interests in the global notes. 98 Investors in the U.S. global notes may hold their interests therein directly through DTC if they are direct participant organizations in DTC or indirectly through organizations that are direct participant organizations in DTC. Investors in the Regulation S global notes may also hold interests in the Regulation S global notes through organizations that are direct participant organizations in the DTC system. The laws of some states require that certain persons take physical delivery in definitive, certificated form of securities that they own. This may limit or curtail the ability to transfer beneficial interests in a global note to such persons. Because DTC can act only on behalf of direct participant organizations, which in turn act on behalf of indirect participant organizations and others, the ability of a person having a beneficial interest in a global note to pledge such interest to persons or entities that are not direct participant organizations in DTC, or to otherwise take actions in respect of such interests, may be affected by the lack of physical certificates evidencing such interests. Except as described in "Transfers of Interests in Global Notes for Certificated Notes," owners of beneficial interests in the global notes will not have notes registered in their names, will not receive physical delivery of notes in certificated form and will not be considered the registered owners or holders thereof under the indenture for any purpose. Under the terms of the indenture, Pac-West and the trustee will treat the persons in whose names the notes are registered, including notes represented by global notes, as the owners thereof for the purpose of receiving payments and for any and all other purposes whatsoever. Payments in respect of the principal, premium and interest on global notes registered in the name of DTC or its nominee will be payable by the trustee to DTC or its nominee as the registered holder under the indenture. Consequently, neither Pac-West, the trustee nor any agent of Pac-West or the trustee has or will have any responsibility or liability for: (1) any aspect of DTC's records or any direct participant organization's or indirect participant organization's records relating to or payments made on account of beneficial ownership interests in the global notes or for maintaining, supervising or reviewing any of DTC's records or any direct participant organization's or indirect participant organization's records relating to the beneficial ownership interests in any global note; or (2) any other matter relating to the actions and practices of DTC or any of its direct participant organizations or indirect participant organizations. DTC has advised Pac-West that its current payment practice for payments of principal, interest and the like with respect to securities such as the notes is to credit the accounts of the relevant direct participant organizations with such payment on the payment date in amounts proportionate to such direct participant organization's respective ownership interests in the global notes as shown on DTC's records. Payments by direct participant organizations and indirect participant organizations to the beneficial owners of the notes will be governed by standing instructions and customary practices between them and will not be the responsibility of DTC, the trustee or Pac-West. Neither Pac- West nor the trustee will be liable for any delay by DTC or its direct participant organizations or indirect participant organizations in identifying the beneficial owners of the notes, and Pac-West and the trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee as the registered owner of the notes for all purposes. Interests in the global notes are expected to be eligible to trade in DTC's Same-Day Funds Settlement System and, therefore, transfers between direct participant organizations in DTC will be effected in accordance with DTC's procedures, and will be settled in immediately available funds. Transfers between indirect participant organizations who hold an interest through a direct participant organization will be effected in accordance with the procedures of such direct participant organization but generally will settle in immediately available funds. DTC has advised Pac-West that it will take any action permitted to be taken by a holder of notes only at the direction of one or more direct participant organizations to whose account interests in the global notes are credited and only in respect of such portion of the aggregate principal amount of the notes as to which such 99 direct participant organization or direct participant organizations has or have given direction. However, if there is an Event of Default under the notes, DTC reserves the right to exchange global notes, without the direction of one or more of its direct participant organizations, for notes in certificated form, and to distribute such certificated forms of notes to its direct participant organizations. See "--Transfers of Interests in Global Notes for Certificated Notes." Although DTC has agreed to the foregoing procedures to facilitate transfers of interests in the Regulation S global notes and in the U.S. global notes among direct participant organizations, it is under no Obligation to perform or to continue to perform such procedures, and such procedures may be discontinued at any time. Neither Pac-West nor the trustee will have any responsibility for the performance by DTC or its respective Direct and indirect participant organizations of their respective obligations under the rules and procedures governing any of their operations. The information in this section concerning DTC and its book-entry system has been obtained from sources that Pac-West believes to be reliable, but Pac-West takes no responsibility for the accuracy thereof. Transfers of Interests in One Global Note for Interests in Another Global Note Transfers involving an exchange of a beneficial interest in Regulation S global notes for a beneficial interest in U.S. global notes or vice versa will be effected by DTC by means of an instruction originated by the trustee through DTC Deposit/Withdraw at Custodian system. Accordingly, in connection with such transfer, appropriate adjustments will be made to reflect a decrease in the principal amount of the one global note and a corresponding increase in the principal amount of the other global note, as applicable. Any beneficial interest in the one global note that is transferred to a person who takes delivery in the form of an interest in the other global note will, upon transfer, cease to be an interest in such first global note and become an interest in such other global note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in such other global note for as long as it remains such an interest. Transfers of Interests in Global Notes for Certificated Notes An entire global note may be exchanged for definitive notes in registered, certificated form without interest coupons if: (1) DTC (a) notifies Pac-West that it is unwilling or unable to continue as depositary for the global notes and Pac-West thereupon fails to appoint a successor depositary within 90 days; or (b) has ceased to be a clearing agency registered under the Exchange Act; (2) Pac-West, at its option, notifies the trustee in writing that it elects to cause the issuance of certificated notes; or (3) there will have occurred and be continuing a Default or an Event of Default with respect to the notes. In any such case, Pac-West will notify the trustee in writing that, upon surrender by the direct and indirect participant organizations of their interest in such global note, certificated notes will be issued to each person that such Direct and indirect participant organizations and DTC identify as being the beneficial owner of the related notes. Beneficial interests in global notes held by any Direct or indirect participant organization may be exchanged for certificated notes upon request to DTC, by such direct participant organization, for itself or on behalf of an indirect participant organization, but only upon at least 20 days' prior written notice given to the 100 trustee by or on behalf of DTC in accordance with customary DTC procedures. Certificated notes delivered in exchange for any beneficial interest in any global note will be registered in the names, and issued in any approved denominations, requested by DTC on behalf of such Direct or indirect participant organizations, in accordance with DTC's customary procedures. In all cases described herein, such certificated notes will bear the restrictive legend referred to in "Notice to Investors," unless Pac-West determines otherwise in compliance with applicable law. Neither Pac-West nor the trustee will be liable for any delay by the holder of the global notes or the DTC in identifying the beneficial owners of notes, and Pac-West and the trustee may conclusively rely on, and will be protected in relying on, instructions from the holder of the global note or the DTC for all purposes. Transfers of Certificated Notes for Interests in Global Notes Certificated notes may only be transferred if the transferor first delivers to the trustee a written certificate and, in certain circumstances, an opinion of counsel confirming that, in connection with such transfer, it has complied with any applicable restrictions on transfer. Same Day Settlement and Payment The indenture requires that payments in respect of the notes represented by the global notes, including principal, premium, if any, and interest, be made by wire transfer of immediately available funds to the accounts specified by the holder of such global note. With respect to certificated notes, Pac-West will make all payments of principal, premium, if any, and interest by wire transfer of immediately available funds to the accounts specified by the holders thereof or, if no such account is specified, by mailing a check to each such holder's registered address. Pac-West expects that secondary trading in the certificated notes will also be settled in immediately available funds. Fraudulent Conveyance Matters A significant portion of the net proceeds of the private offering of the notes was used to repay indebtedness received in connection with our recapitalization. If a bankruptcy case or lawsuit is initiated by unpaid creditors of Pac-West, the debt which we incurred to finance the recapitalization and the debt represented by the notes may be reviewed under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws. Under these laws, the debt could be voided, or claims in respect of the debt could be subordinated to all of our other debts if, among other things, at the time we incurred the indebtedness, we: . received less than reasonably equivalent value or fair consideration for the incurrence of such debt, and were insolvent or rendered insolvent by reason of such incurrence; or . were engaged in a business or transaction for which our remaining assets constituted unreasonably small capital; or . intended to incur, or believed that we would incur, debts beyond our ability to pay such debts as they mature. In addition, any payment by us could be voided and required to be returned to us, or to a fund for the benefit of our creditors. The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a debtor would be considered insolvent if: . the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets; or . if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or 101 . it could not pay its debts as they become due. We believe that we received fair market value for the indebtedness received in connection with the recapitalization and the old notes. On the basis of historical financial information, recent operating history and other factors, we believe that we, after giving effect to the recapitalization and the private offering of the old notes was not insolvent, do not have unreasonably small capital for the business in which we are engaged and did not incur debts beyond our ability to pay such debts as they mature. There can be no assurance, however, as to what standard a court would apply in making such determinations or that a court would agree with our conclusions in this regard. Certain Definitions Set forth below are certain defined terms used in the indenture. Reference is made to the indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified person, indebtedness of any other person existing at the time such other person is merged with or into or became a subsidiary of such specified person, but excluding indebtedness secured by a Lien encumbering any assets acquired by such person and excluding: (1) indebtedness incurred in connection with, or in anticipation of contemplation of, such other person merging with or into, or becoming a subsidiary of, such specified person; and (2) indebtedness extinguished, retired or repaid in connection with such other person merging with or into or becoming a subsidiary of such specified person. "Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For purposes of this definition, "control," as used with respect to any person, will mean the possession of the power to direct or cause the direction of the management or policies of such person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a person will be deemed to be control. For purposes of this definition, the terms "controlling," "controlled by" and "under common control with" will have correlative meanings. "Asset Sale" means: (1) the sale, lease, conveyance or other disposition of any assets or rights, including, for example, by way of a sale and leaseback, other than sales of inventory in the ordinary course of business consistent with past practices; provided that the sale, conveyance or other disposition of all or substantially all of the assets of Pac-West and its restricted subsidiaries taken as a whole will be governed by the provisions of the indenture described above under the caption "-- Repurchase at Option of Holders--Change of Control" and/or the provisions described above under the caption "--Certain Covenants-- Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant; and (2) the issuance of Equity Interests by any of Pac-West's restricted subsidiaries or the sale of Equity Interests in any of Pac-West's subsidiaries. Despite the above, the following items will not be deemed to be Asset Sales: (1) any single transaction or series of related transactions that: (a) involves assets having a fair market value of less than $1.0 million; or (b) results in net proceeds to Pac-West and its restricted subsidiaries of less than $1.0 million; 102 (2) a transfer of assets between or among Pac-West and its wholly owned restricted subsidiaries; (3) an issuance of Equity Interests by a wholly owned restricted subsidiary to Pac-West or to another wholly owned restricted subsidiary; (4) disposals or replacements of obsolete telecommunications equipment in the ordinary course of business; and (5) a Restricted Payment that is permitted by the covenant described above under the caption "Certain Covenants--Restricted Payments." "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended. Such present value will be calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with GAAP. "Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, except that in calculating the beneficial ownership of any particular person, as such term is used in Section 13(d)(3) of the Exchange Act, such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at that time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means: (1) in the case of a corporation, corporate stock; (2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents, however designated, of corporate stock; (3) in the case of a partnership or limited liability company, partnership or membership interests, whether general or limited; and (4) any other interest or participation that confers on a person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing person. "Cash Equivalents" means: (1) United States dollars; (2) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof, provided that the full faith and credit of the United States is pledged in support thereof, having maturities of not more than six months from the date of acquisition; (3) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case, with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better; (4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2) and (3) above entered into with any financial institution meeting the qualifications specified in clause (3) above; (5) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition; and 103 (6) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (1) through (5) of this definition. "Change of control" means the occurrence of any of the following: (1) the sale, transfer, conveyance or other disposition, other than by way of merger or consolidation, in one or a series of related transactions, of all or substantially all of the assets of Pac-West and its subsidiaries taken as a whole to any person, as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, other than a Principal or a Related Party of a Principal; (2) the adoption of a plan relating to the liquidation or dissolution of Pac-West; (3) the consummation of any transaction, including, for example, any merger or consolidation, the result of which is that any person, as defined above, other than the Principals and their Related Parties, becomes the Beneficial Owner of more than 35% of the Voting Stock of Pac-West, measured by voting power rather than number of shares; (4) the first day on which a majority of the members of the board of directors of Pac-West are not Continuing Directors; or (5) Pac-West consolidates with, or merges with or into, any person, or any person consolidates with, or merges with or into, Pac-West, in any such event in accordance with a transaction in which any of the outstanding Voting Stock of Pac-West is converted into or exchanged for cash, securities or other property, other than any such transaction where the Voting Stock of Pac-West outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock, other than Disqualified Stock, of the surviving or transferee person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee person immediately after giving effect to such issuance. "Consolidated Cash Flow" means, with respect to any person for any period, the Consolidated Net Income of such person for such period plus: (1) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale, to the extent such losses were deducted in computing such Consolidated Net Income; plus (2) provision for taxes based on income or profits of such person and its restricted subsidiaries for such period, to the extent that such provision for taxes was deducted in computing such Consolidated Net Income; plus (3) consolidated interest expense of such person and its restricted subsidiaries for such period, whether paid or accrued and whether or not capitalized, including, for example, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments, if any, in accordance with Hedging Obligations, to the extent that any such expense was deducted in computing such Consolidated Net Income; plus (4) depreciation, amortization, including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period, and other non-cash expenses, excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period, of such person and its restricted subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income; minus (5) non-cash items increasing such Consolidated Net Income for such period, other than items that were accrued in the ordinary course of business, 104 in each case, on a consolidated basis and determined in accordance with GAAP. Despite the above, the provision for taxes based on the income or profits of, and the depreciation and amortization and other non-cash charges of, a restricted subsidiary of Pac-West will be added to Consolidated Net Income to compute Consolidated Cash Flow of Pac-West only to the extent that a corresponding amount would be permitted at the date of determination to be dividended to Pac-West by such restricted subsidiary without prior approval, that has not been obtained, in accordance with the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to that restricted subsidiary or its stockholders. "Consolidated Indebtedness" means, with respect to any person as of any date of determination, the sum, without duplication, of: (1) the total amount of indebtedness of such person and its restricted subsidiaries; plus (2) the total amount of indebtedness of any other person, to the extent that such indebtedness has been Guaranteed by the referent person or one or more of its restricted subsidiaries; plus (3) the aggregate liquidation value of all preferred stock of restricted subsidiaries of such person, in each case, determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" means, with respect to any specified person for any period, the aggregate of the Net Income of such person and its restricted subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that: (1) the Net Income, but not loss, of any person that is not a restricted subsidiary or that is accounted for by the equity method of accounting will be included only to the extent of the amount of dividends or distributions paid in cash to the specified person or a wholly owned restricted subsidiary thereof; (2) the Net Income of any restricted subsidiary will be excluded to the extent that the declaration or payment of dividends or similar distributions by that restricted subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval, that has not been obtained, or by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that restricted subsidiary or its stockholders; (3) the Net Income of any person acquired in a pooling of interests transaction for any period prior to the date of such acquisition will be excluded; (4) the Net Income, but not loss, of any unrestricted subsidiary will be excluded, whether or not distributed to the specified person or one of its subsidiaries, except for purposes of the covenant described under the caption "--Certain Covenants--Restricted Payments," in which case the Net Income of any unrestricted subsidiary will be included to the extent provided under clause (1) of this definition; (5) the portion of Net Income of any person attributable to the receipt of Unpaid Reciprocal Compensation; and (6) the cumulative effect of a change in accounting principles will be excluded. "Continuing Directors" means, as of any date of determination, any member of the board of directors of Pac-West who: (1) was a member of such board of directors on the date of the indenture; or (2) was nominated for election or elected to such board of directors with the approval of a majority of the Continuing Directors who were members of such board at the time of such nomination or election. 105 "Credit Facilities" means, with respect to Pac-West or any restricted subsidiary, one or more debt facilities or commercial paper facilities, in each case with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "Debt to Cash Flow Ratio" means, as of any date of determination, the ratio of: (a) the Consolidated indebtedness of Pac-West as of such date to (b) the Consolidated Cash Flow of Pac-West of the four most recent full fiscal quarters ending immediately prior to such date for which internal financial statements are available, determined on a pro forma basis after giving effect to all acquisitions or dispositions of assets made by Pac-West and its restricted subsidiaries from the beginning of such four-quarter period through and including such date of determination (including any related financing transactions and any Pro Forma cost savings, as if such acquisitions and dispositions had occurred at the beginning of such four-quarter period. In addition, for purposes of making the computation referred to above, (1) acquisitions that have been made by Pac-West or any of its restricted subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date, as defined herein, will be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period will be calculated without giving effect to clause (c) of the proviso set forth in the definition of Consolidated Net Income; and (2) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, will be excluded. "Default" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. "Disqualified Stock" means any Capital Stock that, by its terms, or by the terms of any security into which it is convertible, or for which it is exchangeable, in each case at the option of the holder thereof, or upon the happening of any event, matures or is mandatorily redeemable, in accordance with a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the notes mature. Despite the above sentence, any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require Pac-West to repurchase such Capital Stock upon the occurrence of a change of control or an asset sale will not constitute Disqualified Stock if the terms of such Capital Stock provide that Pac-West may not repurchase or redeem any such Capital Stock in accordance with such provisions unless such repurchase or redemption complies with the covenant described above under the caption "--Certain Covenants--Restricted Payments." "Earnout Payments" means all earnout payments made after the date of the indenture to former shareholders and employees of Pac-West in accordance with the Merger Agreement. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock, but excluding any debt security that is convertible into, or exchangeable for, Capital Stock. "Existing Indebtedness" means the indebtedness of Pac-West and its restricted subsidiaries in existence on the date of the indenture, until such amounts are repaid. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the indenture. 106 "Guarantee" means a guarantee, other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including, for example, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any indebtedness. "Hedging Obligations" means, with respect to any person, the obligations of such person under: (1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements; and (2) other agreements or arrangements designed to protect such person against fluctuations in interest rates. "Investments" means, with respect to any person, all investments by such person in other persons, including Affiliates, in the forms of direct or indirect loans, including guarantees of indebtedness or other obligations, advances or capital contributions, excluding commission, travel and similar advances to officers and employees made in the ordinary course of business, purchases or other acquisitions for consideration of indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If Pac-West or any restricted subsidiary of Pac-West sells or otherwise disposes of any Equity Interests of any direct or indirect restricted subsidiary of Pac-West such that, after giving effect to any such sale or disposition, such person is no longer a restricted subsidiary of Pac-West, Pac- West will be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such restricted subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Certain Covenants--Restricted Payments." "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code, or equivalent statutes, of any jurisdiction. "Merger Agreement" means the Agreement and Plan of Merger, dated as of June 30, 1998, by and among PWT Acquisition Corp., a California corporation, Pac- West, Bay Alarm Company, a California corporation, and John K. La Rue. "Net Income" means, with respect to any person, the net income or loss of such person and its restricted subsidiaries, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however: (1) any gain, but not loss, together with any related provision for taxes on such gain, but not loss, realized in connection with: (a) any Asset Sale; or (b) the disposition of any securities by such person or any of its restricted subsidiaries or the extinguishment of any indebtedness of such person or any of its restricted subsidiaries; and (2) any extraordinary gain, but not loss, together with any related provision for taxes on such extraordinary gain, but not loss. "Net Proceeds" means the aggregate cash proceeds received by Pac-West or any of its restricted subsidiaries in respect of any Asset Sale, including, for example, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale, net of the direct costs relating to such Asset Sale, including, for example, legal, accounting and investment banking fees, and sales commissions, and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof, in each case after taking into account any available tax credits or deductions and any tax sharing arrangements and amounts required to be applied to the repayment of indebtedness, other than indebtedness under a Credit Facility, secured by a Lien on the asset or assets that were the subject of such Asset Sale. 107 "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any indebtedness. "Permitted Business" means any business engaged primarily in the development, ownership or operation of one or more telephone, telecommunications or information systems or the provision of telephony, telecommunications or information services, including, for example, any voice, video transmission, data or Internet services, and any related, ancillary or complementary business; provided that the determination of what constitutes a Permitted Business will be made in good faith by the board of directors of Pac- West. "Permitted Investments" means: (1) any Investment in Pac-West or in a wholly owned restricted subsidiary of Pac-West; (2) any Investment in Cash Equivalents; (3) any Investment by Pac-West or any restricted subsidiary of Pac-West in a person, if as a result of such Investment: (a) such person becomes a wholly owned restricted subsidiary of Pac- West; or (b) such person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, Pac-West or a wholly owned restricted subsidiary of Pac-West; (4) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made in accordance with and in compliance with the covenant described above under the caption "-- Repurchase at the Option of Holders--Asset Sales"; (5) any acquisition of assets solely in exchange for the issuance of Equity Interests, other than Disqualified Stock, of Pac-West; (6) loans and advances for business-related travel, moving or similar expenses to employees and officers of Pac-West and its restricted subsidiaries in the ordinary course of business; (7) investments in securities of trade creditors or customers received in accordance with any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; (8) Investments in prepaid expenses, negotiable instruments held for collection, and lease, utility, workers' compensation, performance and other similar deposits; and (9) other Investments in any person having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made in accordance with this clause (9) since the date of the indenture, not to exceed $5.0 million, provided, however, that the transfer from Pac-West to a restricted subsidiary, or to an entity that becomes a restricted subsidiary, of the property, plant and equipment that support or are necessary to Pac-West's operations in California will not be a Permitted Investment. "Permitted Liens" means: (1) Liens on the assets of Pac-West and any restricted subsidiary securing indebtedness and other Obligations under Credit Facilities that were permitted by the terms of the indenture to be incurred; (2) Liens on the property or assets of one or more restricted subsidiaries of Pac-West securing indebtedness of one or more restricted subsidiaries of Pac-West that was permitted by the terms of the indenture to be incurred; (3) Liens in favor of Pac-West or its restricted subsidiaries; (4) Liens on property of a person existing at the time such person is merged with or into or consolidated with Pac-West or any restricted subsidiary of Pac-West; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the person merged into or consolidated with Pac-West or the restricted subsidiary; 108 (5) Liens on property existing at the time of acquisition thereof by Pac- West or any restricted subsidiary of Pac-West, provided that such Liens were in existence prior to the contemplation of such acquisition; (6) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (7) Liens to secure indebtedness, including Capital Lease Obligations, permitted by clause (5) of the second paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock" covering only the assets acquired with such indebtedness; (8) Liens existing on the date of the indenture; (9) Liens for taxes, assessments, duties or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as will be required in conformity with GAAP will have been made therefor; (10) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as will be required by GAAP will have been made in respect thereof; (11) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance and return-of-money bonds and other similar obligations, exclusive of obligations for the payment of borrowed money; (12) judgment Liens not giving rise to an Event of Default; (13) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property that do not, in the aggregate, materially detract from the value of such property or interfere in any material respect with the use of such property in the ordinary conduct of the business of Pac-West or any of its restricted subsidiaries; (14) Liens incurred in the ordinary course of business of Pac-West or any restricted subsidiary of Pac-West with respect to obligations that do not exceed $10.0 million at any one time outstanding and that: (a) are not incurred in connection with the borrowing of money or the obtaining of advances or credit other than trade credit in the ordinary course of business; and (b) do not in the aggregate materially detract from the value of the property or materially impair the use thereof in the operation of business by Pac-West or such restricted subsidiary; (15) Liens upon specific items of inventory or other goods and proceeds of any person securing such person's obligations in respect of bankers' acceptances issued or created for the account of such person to facilitate the purchase, shipment, or storage of such inventory or other goods; (16) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (17) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of Pac- West or any of its restricted subsidiaries, including rights of offset and set-off; (18) leases or subleases granted to others that do not materially interfere with the ordinary course of business of Pac-West and its restricted subsidiaries; and (19) Liens on assets of unrestricted subsidiaries that secure non-recourse debt of unrestricted subsidiaries. 109 "Permitted refinancing indebtedness" means any indebtedness of Pac-West or any of its restricted subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other indebtedness of Pac-West or any of its restricted subsidiaries other than intercompany indebtedness; provided that: (1) the principal amount or accreted value, if applicable, of such permitted refinancing indebtedness does not exceed the principal amount of, or accreted value, if applicable, plus accrued interest on, the indebtedness so extended, refinanced, renewed, replaced, defeased or refunded, plus the amount of reasonable expenses incurred in connection therewith; (2) such permitted refinancing indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (3) if the indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the notes, such permitted refinancing indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the notes on terms at least as favorable to the holders of notes as those contained in the documentation governing the indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (4) such indebtedness is incurred either by Pac-West or by the restricted subsidiary who is the obligor on the indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Pledge Agreement" means the Pledge Agreement dated as of the date of the indenture between Pac-West and the trustee, as amended from time to time. "Pledged Securities" means the securities, which will be direct obligations of or obligations guaranteed by the U.S. government, purchased by Pac-West with a portion of proceeds from the notes and pledged to the trustee for the benefit of the holders of the notes. "Principals" means William Blair & Company, L.L.C., William Blair Capital Partners VI, L.P., Safeguard Scientifics, Inc., SCP Private Equity Partners, L.P., Safeguard 98 Capital, L.P., TL Ventures III L.P. and Mr. Wallace W. Griffin. "Pro Forma Cost Savings" means, with respect to any period, the net reduction in cash operating costs achieved during or after such period and on or prior to the date of determination that are directly attributable to an asset acquisition, which savings will be calculated on a basis consistent with Article 11 of Regulation S-X, as such Regulation is in effect on the date hereof. "Related Party" with respect to any Principal means: (1) any controlling stockholder, 80% or more owned subsidiary, or spouse or immediate family member, in the case of an individual, of such Principal; or (2) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other persons referred to in the immediately preceding clause (1). "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted subsidiary" of a person means any subsidiary of the referent person that is not an Unrestricted Subsidiary. "Significant Subsidiary" means any subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated in accordance with the Securities Exchange Act of 1934, as such Regulation is in effect on the date hereof. "Stated Maturity" means, with respect to any installment of interest or principal on any series of indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original 110 documentation governing such indebtedness, and will not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subordinated Indebtedness" means any indebtedness of Pac-West and its restricted subsidiaries which is subordinated in right of payment to the notes and with respect to which no payments of principal, by way of sinking fund, mandatory redemption, maturity or otherwise, including, for example, at the option of the holder thereof, other than in accordance with an offer to repurchase such Subordinated Indebtedness following a change of control, which offer may not be completed until 45 days after completion of the Offer described under "--Repurchase at the Option of Holders--Change of Control," are required to be made by Pac-West and its restricted subsidiaries at any time prior to the Stated Maturity of the notes. "Unpaid Reciprocal Compensation" means all amounts owing but not paid to Pac-West as of December 31, 1998 by Pacific Bell or GTE California in accordance with Pac-West's interconnection agreements with such parties. "Unrestricted subsidiary" means any subsidiary of Pac-West that is designated by the board of directors as an unrestricted subsidiary in accordance with a Board Resolution, but only to the extent that such Subsidiary: (1) has no indebtedness other than non-recourse debt; (2) is not party to any agreement, contract, arrangement or understanding with Pac-West or any restricted subsidiary of Pac-West unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to Pac-West or such restricted subsidiary than those that might be obtained at the time from persons who are not Affiliates of Pac-West; (3) is a person with respect to which neither Pac-West nor any of its restricted subsidiaries has any direct or indirect obligation: (a) to subscribe for additional Equity Interests; or (b) to maintain or preserve such person's financial condition or to cause such person to achieve any specified levels of operating results; (4) has not guaranteed or otherwise directly or indirectly provided credit support for any indebtedness of Pac-West or any of its restricted subsidiaries; and (5) has at least one director on its board of directors that is not a director or executive officer of Pac-West or any of its restricted subsidiaries and has at least one executive officer that is not a director or executive officer of Pac-West or any of its restricted subsidiaries. Any designation of a subsidiary of Pac-West as an unrestricted subsidiary will be evidenced to the trustee by filing with the trustee a certified copy of the board resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the preceding conditions and was permitted by the covenant described above under the caption "--Certain Covenants--Restricted Payments." If, at any time, any unrestricted subsidiary would fail to meet the preceding requirements as an unrestricted subsidiary, it will thereafter cease to be an unrestricted subsidiary for purposes of the indenture and any indebtedness of such subsidiary will be deemed to be incurred by a restricted subsidiary of Pac-West as of such date and, if such indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "Incurrence of indebtedness and Issuance of Preferred Stock," Pac-West will be in default of such covenant. The board of directors of Pac-West may at any time designate any unrestricted subsidiary to be a restricted subsidiary; provided that such designation will be deemed to be an incurrence of indebtedness by a restricted subsidiary of Pac-West of any outstanding indebtedness of such unrestricted subsidiary and such designation will only be permitted if: (1) such indebtedness is permitted under the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period; and (2) no Default or Event of Default would be in existence following such designation. 111 "Voting Stock" of any person as of any date means the Capital Stock of such person that is at the time entitled to vote in the election of the board of directors of such person. "Weighted Average Life to Maturity" means, when applied to any indebtedness at any date, the number of years obtained by dividing: (1) the sum of the products obtained by multiplying: (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years, calculated to the nearest one-twelfth, that will elapse between such date and the making of such payment; by (2) the then outstanding principal amount of such indebtedness. 112 CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS The following is a discussion of certain material U.S. federal income tax consequences of the acquisition, ownership and disposition of the notes. Unless otherwise stated, this discussion is limited to the tax consequences to those persons who are original owners of the notes and who are holders of such notes as capital assets. The discussion does not purport to address specific tax consequences that may be relevant to particular persons, including, for example, financial institutions, broker-dealers, insurance companies, tax- exempt organizations, and persons in special situations, such as those who hold notes as part of a straddle, hedge, conversion transaction, or other integrated investment. In addition, this discussion does not address U.S. federal alternative minimum tax consequences or any aspect of state, local or foreign taxation. This discussion is based upon the Internal Revenue Code of 1986, as amended, the U.S. Treasury Department regulations promulgated under the Internal Revenue Code of 1986, and administrative and judicial interpretations of such code and regulations, all of which are subject to change, possibly with retroactive effect. Pac-West will treat the notes as indebtedness for federal income tax purposes, and the following discussion assumes that such treatment is correct. For purposes of this discussion, a U.S. holder is a holder of a note who is a United States citizen or resident, a corporation or partnership created or organized in or under the laws of the United States or any state, an estate the income of which is subject to U.S. federal income taxation regardless of its source, or a trust if a United States court exercises primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions. A non-U.S. holder is a holder of a note who is not a U.S. holder. Prospective purchasers of the notes are urged to consult their tax advisors concerning the United States federal income and estate tax consequences to them of acquiring, owning and disposing of the notes, as well as the application of state, local and foreign income and other tax laws. Tax Consequences to U.S. Holders Taxation of Interest Interest paid under the notes will be includible in the income of a U.S. holder in accordance with the U.S. holder's regular method of tax accounting. A U.S. holder may be entitled to treat interest income under the notes as investment income for purposes of computing certain limitations concerning the deductibility of investment interest expense. In the event of a change of control, a holder of a note will have the right to require us to purchase such note at a price equal to 101% of the principal amount thereof. The U.S. Treasury Department regulations provide that the right of a holder of a note to require redemption of such note upon the occurrence of a change of control will not affect the yield or maturity date of the note if, based on all the facts and circumstances as of the issue date, it is significantly more likely than not that a change of control giving rise to the redemption right will not occur. We believe that the redemption provisions of the notes will not affect the computation of the yield to maturity of the notes and intends to report in a manner consistent with this belief. We may redeem the notes at any time on or after February 1, 2004, and in certain circumstances, may redeem a portion of the notes at any time prior to February 1, 2002. Under the U.S. Treasury Department regulations, we are deemed to exercise any option to redeem if the exercise of such option would lower the yield of the debt instrument. We believe that we will not be treated as having exercised an option to redeem under these rules and intend to report in a manner consistent with this belief. 113 Sale, Exchange or Retirement of the Notes Upon the sale, exchange or retirement of the notes, other than on exchange of old notes for new notes in accordance with this exchange offer, a U.S. holder will recognize gain or loss equal to the difference between the amount realized upon the sale, exchange or retirement, less a portion allocable to any accrued and unpaid interest, which will be taxable as ordinary income, and the U.S. holder's adjusted tax basis in the notes. A U.S. holder's adjusted tax basis in the notes generally will be the U.S. holder's cost therefor, less any principal payments received by such holder. Gain or loss recognized by a U.S. holder on the sale, exchange or retirement of the notes will be capital gain or loss. The gain or loss will be long-term capital gain or loss if the notes have been held by the U.S. holder for more than twelve months. Long-term capital gain is subject to a maximum federal tax rate of 20%. The deductibility of capital losses by U.S. holders is subject to limitation. Exchange Offer A U.S. holder will not recognize any taxable gain or loss on the exchange of the old notes for new notes in accordance with this exchange offer, and a U.S. holder's tax basis and holding period in the new notes will be the same as in the old notes. Tax Consequences to Non-U.S. Holders Taxation of Interest A non-U.S. holder generally will not be subject to U.S. federal income or withholding tax on interest paid under the notes so long as such interest is not effectively connected with the non-U.S. holder's conduct of a trade or business within the United States, and the non-U.S. holder: (1) does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of Pac-West; (2) is not a "controlled foreign corporation" with respect to which we are a "related person" within the meaning of the Internal Revenue Code of 1986, as amended; and (3) satisfies the requirements of Sections 871(h) or 881(c) of the Internal Revenue Code of 1986, as amended, as set forth below under "Owner Statement Requirement." If the foregoing conditions (1)-(3) are not satisfied, then interest paid under the notes will be subject to U.S. withholding tax at a rate of 30%, unless such rate is reduced or eliminated in accordance with an applicable tax treaty. Sale, Exchange or Retirement of the Notes Any capital gain a non-U.S. holder recognizes on the sale, exchange, retirement or other taxable disposition of a note will be exempt from U.S. federal income and withholding tax, provided that: (1) the gain is not effectively connected with the non-U.S. holder's conduct of a trade or business within the United States; and (2) in the case of a non-U.S. holder that is an individual, the non-U.S. holder is not present in the United States for 183 days or more during the taxable year. Effectively Connected Income If the interest, gain or other income a non-U.S. holder recognizes on a note is effectively connected with the non-U.S. holder's conduct of a trade or business within the United States, the non-U.S. holder, although exempt from the withholding tax previously discussed if an appropriate statement is furnished, generally will be 114 subject to U.S. federal income tax on the interest, gain or other income at regular federal income tax rates. In addition, if the non-U.S. holder is a corporation, it may be subject to a branch profits tax equal to 30% of its "effectively connected earnings and profits," as adjusted for certain items, unless it qualifies for a lower rate under an applicable tax treaty. Federal Estate Taxes A note held by an individual who at the time of death is not a citizen or resident of the United States will not be subject to United States federal estate tax as a result of such individual's death, provided that the individual does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of Pac-West entitled to vote and that the interest accrued on such notes was not effectively connected with the non-U.S. holder's conduct of a trade or business within the United States. Owner Statement Requirement Sections 871(h) and 881(c) of the Internal Revenue Code of 1986, as amended, require that either the beneficial owner of a note or a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business and that holds a note on behalf of such owner files a statement with Pac-West or its agent to the effect that the beneficial owner is not a United States person in order to avoid withholding of United States federal income tax. Under current regulations, this requirement will be satisfied if Pac-West or its agent receives (1) a statement from the beneficial owner of a note in which such owner certifies, under penalties of perjury, that such owner is not a United States person and provides such owner's name and address; or (2) a statement from the financial institution holding the note on behalf of the beneficial owner in which the financial institution certifies, under penalties of perjury, that it has received the owner statement together with a copy of the owner statement. The beneficial owner must inform Pac-West or its agent or, in the case of a statement described in clause (2) of the immediately preceding sentence, the financial institution, within 30 days of any change in information on the owner statement. The Internal Revenue Service has amended the transition period relating to recently issued U.S. Treasury Department regulations governing backup withholding and information reporting requirements. Withholding certificates or statements that are valid on December 31, 1999, may be treated as valid until the earlier of their expiration or December 31, 2000. Certificates or statements received under the currently effective rules will fail to be effective after December 31, 2000. Information Reporting and Backup Withholding We will, where required, report to the holders of notes and the Internal Revenue Service the amount of any interest paid under the notes in each calendar year and the amounts of tax withheld, if any, with respect to such payments. A noncorporate U.S. holder may be subject to information reporting and to backup withholding at a rate of 31% with respect to payments of principal and interest made on a note, or on proceeds of the disposition of a note before maturity, unless such U.S. holder provides a correct taxpayer identification number or proof of an applicable exemption, and otherwise complies with applicable requirements of the information reporting and backup withholding rules. In the case of payments of interest to non-U.S. holders, current U.S. Treasury Department regulations provide that the 31% backup withholding tax and certain information reporting requirements will not apply to such payments with respect to which either the requisite certification, as described above, has been received or an exemption has otherwise been established, provided that neither Pac-West nor its payment agent has actual knowledge that the holder is a United States person or that the conditions of any other exemption are not in fact satisfied. Under current U.S. Treasury Department regulations, these information reporting and backup 115 withholding requirements will apply, however, to the gross proceeds paid to a non-U.S. holder on the disposition of the notes by or through a United States office of a United States or foreign broker, unless the non-U.S. holder otherwise establishes an exemption. Information reporting requirements, but not backup withholding, will also apply to payment of the proceeds of a disposition of the notes by or through a foreign office of a United States broker or foreign brokers with certain types of relationships to the United States unless such broker has documentary evidence in its file that the holder of the notes is not a United States person and such broker has no actual knowledge to the contrary, or the holder establishes an exemption. Neither information reporting nor backup withholding generally will apply to payment of the proceeds of a disposition of the notes by or through a foreign office of a foreign broker not subject to the preceding sentence. The Treasury Department has released new U.S. Treasury Department regulations governing the backup withholding and information reporting requirements. The new regulations would not generally alter the treatment of a non-U.S. holder who furnishes an owner statement to the payor. The new regulations may change certain procedures applicable to the foreign office of a United States broker or foreign brokers with certain types of relationships to the United States. The new regulations are generally effective for payments made after December 31, 2000. Non-U.S. holders should consult their own tax advisors with respect to the impact, if any, of the new final regulations. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against the holder's United States federal income tax liability, provided that the required information is furnished to the Internal Revenue Service. 116 PLAN OF DISTRIBUTION Each participating broker-dealer that receives new notes for its own account in accordance with this exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a participating broker-dealer in connection with resales of new notes received in exchange for old notes where such old notes were acquired as a result of market-making activities or other trading activities. Pac-West has agreed that for a period of one year after the expiration date of this exchange offer, we will make this prospectus, as amended or supplemented, available to any participating broker-dealer for use in connection with any such resale. We will not receive any proceeds from any sales of the new notes by participating broker-dealers. New notes received by participating broker- dealers for their own account in accordance with this exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the new notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such participating broker-dealer and/or the purchasers of any such new notes. Any participating broker-dealer that resells the new notes that were received by it for its own account in accordance with this exchange offer and any broker or dealer that participates in a distribution of such new notes may be deemed to be an "underwriter" within the meaning of the Securities Act of 1933 and any profit on any such resale of new notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act of 1933. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a participating broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act of 1933. For a period of one year after the expiration date we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any participating broker-dealer that requests such documents in the letter of transmittal. Prior to this exchange offer, there has not been any public market for the old notes. The old notes have not been registered under the Securities Act of 1933 and will be subject to restrictions on transferability to the extent that they are not exchanged for new notes by holders who are entitled to participate in this exchange offer. The holders of old notes, other than any such holder that is an affiliate of Pac-West within the meaning of Rule 405 under the Securities Act of 1933, who are not eligible to participate in this exchange offer are entitled to certain registration rights, and we are required to file a shelf registration statement with respect to such old notes. The new notes will constitute a new issue of securities with no established trading market. We do not intend to list the new notes on any national securities exchange or to seek the admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. In addition, such market making activity will be subject to the limits imposed by the Securities Act of 1933 and the Exchange Act and may be limited during this exchange offer and the pendency of the shelf registration statements. Accordingly, no assurance can be given that an active public or other market will develop for the new notes or as to the liquidity of the trading market for the new notes. If a trading market does not develop or is not maintained, holders of the new notes may experience difficulty in reselling the new notes or may be unable to sell them at all. If a market for the new notes develops, any such market may be discontinued at any time. LEGAL MATTERS The validity of the new notes offered in this prospectus and certain other legal matters will be passed upon on behalf of Pac-West by Kirkland & Ellis. 117 EXPERTS The financial statements and schedule included in this prospectus or elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, to the extent and for the periods indicated in their reports, and are included herein in reliance upon the authority of said firm as experts in giving said reports. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC, Washington, D.C. 20549, a registration statement on Form S-4 under the Securities Act of 1933 with respect to the new notes offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. Certain items are omitted in accordance with the rules and regulations of the SEC. For further information with respect to Pac-West and the new notes, reference is made to the registration statement and the exhibits and any schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other documents filed as an exhibit to the registration statement, each statement being qualified in all respects by such reference. A copy of the registration statement, including the exhibits and schedules thereto, may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov, from which interested persons can electronically access the registration statement, including the exhibits and any schedules thereto. As a result of this exchange offer, we will become subject to the full informational requirements of the Securities Exchange Act of 1934, as amended. We will fulfill our obligations with respect to such requirements by filing periodic reports and other information with the SEC. We also maintain an Internet site at http://www.pacwest.com. Our web site and the information contained therein or connected thereto will not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part. 118 INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Arthur Andersen LLP, Independent Public Accountants.............. F-3 Balance Sheets............................................................. F-4 Statements of Operations................................................... F-6 Statements of Changes in Stockholders' Equity (Deficit).................... F-7 Statements of Cash Flows................................................... F-8 Notes to Financial Statements.............................................. F-9 Interim Condensed Balance Sheet (unaudited)................................ F-24 Interim Condensed Statements of Income (unaudited)......................... F-25 Interim Condensed Statements of Cash Flows (unaudited)..................... F-26 Notes to Interim Condensed Financial Statements (unaudited)................ F-27
F-1 [THIS PAGE INTENTIONALLY LEFT BLANK] F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Pac-West Telecomm, Inc.: We have audited the accompanying balance sheets of Pac-West Telecomm, Inc. (a California corporation) as of December 31, 1997 and 1998, and the related statements of operations, changes in stockholders' equity (deficit) and cash flows for the three-month period from date of commencement (October 1, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998. In addition, we have audited the statements of operations and cash flows of the predecessor telephone and answering service divisions of Pac-West Telecomm, Inc. (see Note 1) for the nine-month period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pac-West Telecomm, Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the three-month period from date of commencement (October 1, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998, and the results of operations and cash flows of the predecessor telephone and answering service divisions of Pac-West Telecomm, Inc. for the nine-month period ended September 30, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California, February 10, 1999 except with respect to Note 12 for which the date is March 19, 1999 F-3 PAC-WEST TELECOMM, INC. BALANCE SHEETS As of December 31, 1997 and 1998 ASSETS
1997 1998 ----------- ----------- Current Assets: Cash and cash equivalents.......................... $ 3,603,000 $15,236,000 Trade accounts receivable, net of allowances for doubtful accounts of $300,000 and $400,000 at December 31, 1997 and 1998, respectively.......... 3,662,000 4,623,000 Accounts receivable from related parties........... 161,000 64,000 Income taxes receivable............................ 0 1,971,000 Inventories........................................ 330,000 447,000 Prepaid expenses and other current assets.......... 398,000 861,000 Deferred financing costs, net...................... 0 457,000 Deferred tax assets................................ 160,000 151,000 ----------- ----------- Total current assets........................... 8,314,000 23,810,000 ----------- ----------- Equipment, Vehicles and Leasehold Improvements: Communications equipment........................... 17,193,000 29,817,000 Office furniture and equipment..................... 1,176,000 1,965,000 Vehicles........................................... 301,000 717,000 Leasehold improvements............................. 2,869,000 5,581,000 Construction-in-progress (Note 5).................. 0 25,597,000 ----------- ----------- 21,539,000 63,677,000 Less: Accumulated depreciation and amortization...... (2,460,000) (6,383,000) ----------- ----------- Equipment, vehicles and leasehold improvements, net........................................... 19,079,000 57,294,000 ----------- ----------- Other Assets, net.................................. . 135,000 1,389,000 ----------- ----------- Total assets................................... $27,528,000 $82,493,000 =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 PAC-WEST TELECOMM, INC. BALANCE SHEETS As of December 31, 1997 and 1998 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1997 1998 ----------- ------------ Current Liabilities: Current portion of notes payable.................. $ 2,034,000 $ 132,000 Current portion of capital lease obligations...... 1,432,000 0 Accounts payable.................................. 1,159,000 5,147,000 Accrued payroll and related expenses.............. 331,000 846,000 Other accrued liabilities......................... 760,000 2,153,000 ----------- ------------ Total current liabilities................... 5,716,000 8,278,000 ----------- ------------ Senior Secured Borrowings and Other Long-Term Obligations (Note 3)............................... 0 100,000,000 Notes Payable, less current portion................. 6,627,000 116,000 Capital Lease Obligations, less current portion..... 5,579,000 0 ----------- ------------ Total long-term debt and capital lease obligations................................ 12,206,000 100,116,000 ----------- ------------ Deferred Income Taxes............................... 934,000 1,888,000 ----------- ------------ Total liabilities........................... 18,856,000 110,282,000 ----------- ------------ Commitments and Contingencies (Note 5) Convertible Redeemable Preferred Stock, $0.001 par value; 1,750,000 shares authorized; 1,250,000 issued and outstanding at December 31, 1998 (preference in liquidation of $45,000,000, plus accrued cumulative dividends of $1,324,000)........ 0 46,324,000 Stockholders' Equity (Deficit): Common stock: December 31, 1997, no par value: Authorized shares--10,000,000 Issued and outstanding shares--100,000........ 4,037,000 0 December 31, 1998, $0.001 par value: Authorized shares--15,000,000 Issued and outstanding shares--12,562,470..... 0 13,000 Additional paid-in capital........................ 0 8,910,000 Notes receivable from stockholders................ 0 (233,000) Retained earnings (deficit)....................... 4,635,000 (82,803,000) ----------- ------------ Total stockholders' equity (deficit)........ 8,672,000 (74,113,000) ----------- ------------ Total liabilities and stockholders' equity (deficit).................................. $27,528,000 $ 82,493,000 =========== ============
The accompanying notes are an integral part of these financial statements. F-5 PAC-WEST TELECOMM, INC. STATEMENTS OF OPERATIONS For the Predecessor Telephone and Answering Service Divisions of Pac-West Telecomm, Inc. for the nine-month period ended September 30, 1996, and for Pac-West Telecomm, Inc. for the three-month period from date of commencement (October 1, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998
Predecessor Telephone and Answering Service Divisions (Note 1) Pac-West Telecomm, Inc. --------------------- --------------------------------------------- Period from Date of Nine-Month Period Commencement Year Ended Year Ended Ended (October 1, 1996) to December December September 30, 1996 December 31, 1996 31, 1997 31, 1998 --------------------- -------------------- ----------- ----------- Revenues (Note 5)........................................ $8,737,000 $4,232,000 $29,551,000 $42,211,000 ---------- ---------- ----------- ----------- Costs and Expenses: Operating.............................................. 4,202,000 2,064,000 12,060,000 15,344,000 Selling, general and administrative: Selling, general and administrative.................. 3,123,000 1,519,000 7,367,000 10,779,000 Transaction bonuses and consultant's costs (Note 1).. 0 0 0 3,798,000 Depreciation and amortization.......................... 549,000 299,000 2,204,000 4,106,000 ---------- ---------- ----------- ----------- Total costs and expenses........................... 7,874,000 3,882,000 21,631,000 34,027,000 ---------- ---------- ----------- ----------- Income from operations............................. 863,000 350,000 7,920,000 8,184,000 ---------- ---------- ----------- ----------- Other Expense (Income): Interest expense....................................... 33,000 105,000 932,000 4,199,000 Gain on disposal of answering service division......... 0 0 (385,000) 0 Costs of merger with PWT Acquisition Corp. and recapitalization (Note 1)............................. 0 0 0 3,004,000 Other expense (income), net............................ (34,000) 11,000 (119,000) (330,000) ---------- ---------- ----------- ----------- Total other expense (income), net.................. (1,000) 116,000 428,000 6,873,000 ---------- ---------- ----------- ----------- Income before provision for income taxes and extraordinary item................................ 864,000 234,000 7,492,000 1,311,000 Provision for Income Taxes............................... 345,000 94,000 2,997,000 1,561,000 ---------- ---------- ----------- ----------- Income (loss) before extraordinary item............ 519,000 140,000 4,495,000 (250,000) ---------- ---------- ----------- ----------- Extraordinary Item: Loss on early extinguishment of debt, net of income tax benefit of $278,000................... 0 0 0 (417,000) ---------- ---------- ----------- ----------- Net income (loss).................................. $ 519,000 $ 140,000 $ 4,495,000 $ (667,000) - -------------------------------------------------- ========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-6 PAC-WEST TELECOMM, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) For the three-month period from date of commencement (October 1, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998
Notes Total Common Stock Additional Receivable Retained Stockholders' --------------------- Paid-in from Earnings Equity Shares Amount Capital Stockholders (Deficit) (Deficit) ---------- ---------- ---------- ------------ ------------ ------------- Balance, September 30, 1996................... 0 $ 0 $ 0 $ 0 $ 0 $ 0 Issuance of common stock for contribution of predecessor telephone and answering service divisions by CalPage (Note 1)............. 100,000 4,037,000 0 0 0 4,037,000 ---------- ---------- ---------- --------- ------------ ------------ Balance, October 1, 1996................... 100,000 4,037,000 0 0 0 4,037,000 Net income for the three-month period from date of commencement (October 1, 1996) to December 31, 1996............. 0 0 0 0 140,000 140,000 ---------- ---------- ---------- --------- ------------ ------------ Balance, December 31, 1996................... 100,000 4,037,000 0 0 140,000 4,177,000 Net income for the year ended December 31, 1997............. 0 0 0 0 4,495,000 4,495,000 ---------- ---------- ---------- --------- ------------ ------------ Balance, December 31, 1997................... 100,000 4,037,000 0 0 4,635,000 8,672,000 Conversion to $0.001 par value stock...... 0 (4,037,000) 4,037,000 0 0 0 Effect of merger with PWT Acquisition Corp. and recapitalization (Note 1)............. 5,126,420 6,000 1,194,000 0 (86,771,000) (85,571,000) Issuance of common stock................ 6,898,580 7,000 4,711,000 0 0 4,718,000 Accrued cumulative dividends--preferred stock................ 0 0 (1,324,000) 0 0 (1,324,000) Issuances of common stock for cash and notes receivable..... 437,470 0 292,000 (233,000) 0 59,000 Net loss for the year ended December 31, 1998................. 0 0 0 0 (667,000) (667,000) ---------- ---------- ---------- --------- ------------ ------------ Balance, December 31, 1998................... 12,562,470 $ 13,000 $8,910,000 $(233,000) $(82,803,000) $(74,113,000) ========== ========== ========== ========= ============ ============
The accompanying notes are an integral part of these financial statements. F-7 PAC-WEST TELECOMM, INC. STATEMENTS OF CASH FLOWS For the Predecessor Telephone and Answering Service Divisions of Pac-West Telecomm, Inc. for the nine-month period ended September 30, 1996, and for Pac-West Telecomm, Inc. for the three-month period from date of commencement (October 1, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998
Predecessor Telephone and Answering Service Divisions (Note 1) Pac-West Telecomm, Inc. ----------------- ---------------------------------------------- Nine-Month Period Period from Date of Ended Commencement Year Ended Year Ended September 30, (October 1, 1996) to December 31, December 31, 1996 December 31, 1996 1997 1998 ----------------- -------------------- ------------ ------------ Operating Activities: Net income (loss).......................................... $ 519,000 $ 140,000 $4,495,000 $ (667,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary item--loss on early extinguishment of debt, net of income tax benefit............................... 0 0 0 417,000 Costs of merger with PWT Acquisition Corp. and recapitalization........................................ 0 0 0 3,004,000 Depreciation and amortization............................ 549,000 299,000 2,204,000 4,106,000 Amortization of deferred financing costs................. 0 0 0 1,438,000 Gain on disposal of answering service division........... 0 0 (385,000) 0 Gain on disposal of equipment............................ 0 0 (15,000) 0 Provision for doubtful accounts.......................... (19,000) 6,000 216,000 100,000 Deferred income tax provision............................ 0 93,000 711,000 963,000 Changes in operating assets and liabilities: Increase in trade accounts receivable.................. (442,000) (413,000) (2,034,000) (1,061,000) (Increase) decrease in accounts receivable from related parties............................................... 200,000 (94,000) (67,000) 97,000 Increase in income tax receivable...................... 0 0 0 (1,971,000) (Increase) decrease in inventories..................... (102,000) (177,000) 195,000 (117,000) Increase in prepaid expenses and other current assets.. (17,000) (90,000) (175,000) (263,000) (Increase) decrease in other assets.................... 45,000 (15,000) (56,000) 91,000 Increase (decrease) in accounts payable................ (267,000) 527,000 654,000 3,988,000 Increase (decrease) in accrued compensation and other liabilities........................................... 626,000 (201,000) 133,000 1,908,000 ---------- ---------- ---------- ----------- Net cash provided by operating activities............. 1,092,000 75,000 5,876,000 12,033,000 ---------- ---------- ---------- ----------- Investing Activities: Purchase of equipment, vehicles and leasehold improvements.............................................. (2,730,000) (1,682,000) (7,103,000) (42,176,000) Proceeds from disposal of answering service division....... 0 0 402,000 0 Proceeds from disposal of equipment........................ 207,000 0 82,000 145,000 ---------- ---------- ---------- ----------- Net cash used in investing activities................. (2,523,000) (1,682,000) (6,619,000) (42,031,000) ---------- ---------- ---------- ----------- Financing Activities: Proceeds from notes payable................................ 2,274,000 2,508,000 5,931,000 10,514,000 Repayments on notes payable................................ (87,000) (892,000) (1,332,000) (2,658,000) Principal payments on capital leases....................... (366,000) (67,000) (730,000) (828,000) Payment for deferred financing costs associated with senior notes.............................................. 0 0 0 (1,195,000) Proceeds from senior secured borrowings.................... 0 0 0 15,587,000 Increase in other long-term obligations.................... 0 0 0 9,000,000 Proceeds from issuance of common stock..................... 0 0 0 9,000 Merger with PWT Acquisition Corp. and recapitalization: Proceeds from the issuance of preferred stock............ 0 0 0 31,844,000 Proceeds from the issuances of common stock.............. 0 0 0 5,968,000 Proceeds from senior secured borrowings.................. 0 0 0 75,413,000 Payments to existing stockholders........................ 0 0 0 (74,015,000) Extinguishments of notes payable and capital leases...... 0 0 0 (23,159,000) Payment for deferred financing costs..................... 0 0 0 (1,895,000) Costs of merger with PWT Acquisition Corp. and recapitalization........................................ 0 0 0 (2,954,000) Repayment of loans payable to officers and stockholder..... (43,000) 0 (211,000) 0 ---------- ---------- ---------- ----------- Net cash provided by financing activities............. 1,778,000 1,549,000 3,658,000 41,631,000 ---------- ---------- ---------- ----------- Net increase (decrease) in cash and cash equivalents.. 347,000 (58,000) 2,915,000 11,633,000 Cash and Cash Equivalents: Beginning of period........................................ 399,000 746,000 688,000 3,603,000 ---------- ---------- ---------- ----------- End of period.............................................. $ 746,000 $ 688,000 $3,603,000 $15,236,000 - -------------------------------------------------- ========== ========== ========== ===========
The accompanying notes are an integral part of these financial statements. F-8 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 1. Organization: Pac-West Telecomm, Inc. (the Company) is engaged in the business of providing switched local and long-distance telecommunications services and "one-stop" integrated telecommunications services to Internet Service Providers (ISPs), paging companies and other inbound call service providers, as well as to medium and small businesses, principally within California. The Company was incorporated in May 1996 in the state of California as a wholly owned subsidiary of CalPage (a telephone, answering and paging services company), also formerly named Pac-West Telecomm, Inc. CalPage transferred its telephone and answering service divisions (the Predecessor Telephone and Answering Service Divisions or the "Predecessor") to the Company effective September 30, 1996 (the Initial Transfer). In conjunction with the Initial Transfer, CalPage spun off the Company to the stockholders of CalPage. The accompanying financial statements are presented on the same historical cost basis as was used prior to the Initial Transfer. During 1997, the Company sold the customer base and other assets of its answering service division (see Note 10). The success of the Company is highly dependent upon several factors. These factors include the Company's ability to penetrate additional markets and to manage network growth and technological change within the telecommunications industry, the successful implementation of local and enhanced services to its customers including ISPs, and competition from preexisting and new providers of local and long-distance services, as well as positive and timely responses regarding governmental regulations. Additionally, the Company is managed by a limited number of key individuals, several of whom are subject to employment contracts. The Company is also dependent on the development of an effective sales force and the retention of skilled and qualified personnel. As of December 31, 1998, the Company's borrowings and other long-term obligations totaled $100,248,000 and the Company had a stockholders' deficit of $74,113,000. As discussed in Note 11, in January 1999, the Company issued $150,000,000 of 13.5 percent senior notes due on February 1, 2009. A portion of the proceeds from these notes was used to repay the senior secured borrowings. The balance of the proceeds will be used for future capital expenditures and working capital needs, including the establishment of an interest reserve to cover certain initial interest payments due under the senior notes. Basis of Presentation The accompanying financial statements present the financial position of the Company as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the period from commencement (October 1, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998. In addition, the accompanying financial statements present the results of the Predecessor's operations and cash flows for the nine-month period ended September 30, 1996. The Predecessor was a division of CalPage during the nine-month period ended September 30, 1996. Accordingly, the results of the Predecessor's operations and its cash flows were recorded and reported by CalPage as an integral part of CalPage's total operations. The Company has used its best efforts to derive the appropriate information from the books and records of CalPage and has by necessity applied certain F-9 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) assumptions in identifying and allocating costs and expenses to separately report the results of operations and cash flows of the Predecessor for the nine-month period ended September 30, 1996 in the accompanying financial statements. Allocated selling, general and administrative expenses for the nine-month period ended September 30, 1996, were $1,111,000. Assumptions used were based on headcount and job descriptions, facility utilization, and divisional revenues. Management believes this method is a reasonable allocation method and that the resulting amounts approximate the amounts that would have been incurred if the Predecessor was operated on a stand-alone basis. Revenues, direct costs, depreciation and amortization and interest expense have been recorded based on the specific activities of the Predecessor. Due to the significant changes in the Company's operations since September 30, 1996, the Company believes that the financial information of the Predecessor is not directly comparable to the Company's results of operations. Merger and Recapitalization On September 16, 1998, the Company completed a merger with PWT Acquisition Corp. (PWT) and a recapitalization of the Company (the Transaction). PWT was formed by a group of investors (the New Stockholders) for the purpose of injecting additional equity into the Company and effecting the recapitalization. In connection with the Transaction, PWT was merged into the Company, with the Company being the surviving corporation. In connection with the Transaction, Bay Alarm Company and Mr. John La Rue (the Existing Stockholders) received cash payments of approximately $74 million (primarily financed through senior secured borrowings--see Note 3), as well as shares of newly issued preferred and common stock of the Company in exchange for a substantial portion of their ownership interests. Additionally, at the consummation of the Transaction, the Company paid transaction bonuses and consultant's costs totaling approximately $3.8 million which are included in the accompanying statements of operations. Under the terms of the Transaction, the Existing Stockholders of the Company are entitled to receive additional consideration up to $20 million in the event that the Company achieves certain earnings targets (including receipt of certain billings under dispute--see Note 5) subsequent to the recapitalization. As of December 31, 1998, none of these earnings targets were achieved and accordingly, no amounts have been accrued at December 31, 1998 for payment of any additional consideration. Immediately following consummation of the Transaction, the Existing Stockholders continued to hold approximately 28 percent of the issued and outstanding common stock of the Company. As a result of the continued significant ownership interests of the Existing Stockholders, no adjustments have been made to the historical carrying amounts of the Company's assets and liabilities as a result of the Transaction. F-10 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) A summary of the Transaction is as follows: Issuance of convertible redeemable preferred stock*....... $ 31,844,000 Issuance of common stock, $0.001 par value................ 5,968,000 Proceeds from senior secured borrowings................... 75,413,000 ------------- Total sources of cash................................... 113,225,000 ------------- Payments to Existing Stockholders including $400,000 for noncompete agreements*................................... (74,015,000) Extinguishment of debt**.................................. (23,437,000) Transaction bonuses and consultant's costs................ (3,798,000) Transaction costs***...................................... (4,593,000) ------------- Total uses of cash...................................... (105,843,000) ------------- Net cash provided from Transaction...................... $ 7,382,000 =============
- -------- *Net of $13,156,000 of noncash convertible redeemable preferred stock issued as part of the Transaction payments to Existing Stockholders. **Includes $695,000 of early extinguishment costs before income tax benefit (see Note 4). ***Includes costs of merger with PWT Acquisition Corp. and recapitalization of $3,004,000 (less amortization of noncompete agreements of $50,000 during 1998) and deferred financing costs incurred in connection with the senior secured borrowings of $1,895,000; net of $256,000 of common stock issued as payment for professional services provided. In order to effect the above, the Company amended its articles of incorporation such that the authorized capital of the Company consists of 15,000,000 shares of common stock and 1,750,000 shares of convertible redeemable preferred stock (the Preferred Stock). The issued and outstanding preferred stock and common stock of PWT was converted into Preferred Stock and common stock of the Company, respectively, on a one-for-one basis. 2. Summary of Significant Accounting Policies: Concentration of Customers and Suppliers The relative concentrations of customers and suppliers are:
Predecessor (Note 1) Pac-West Telecomm, Inc. ------------------- -------------------------------------- Period from Date of Commencement (October 1, Nine-Month Period 1996) to Year Ended Year Ended Ended September 30, December 31, December 31, December 31, 1996 1996 1997 1998 ------------------- ------------ ------------ ------------ Revenues (percent of revenues): Incumbent Local Exchange Companies (ILECs, see Note 5).. 2% 14% 37% 37% Suppliers (percent of operating costs): Largest supplier...... 58 54 44 50 Next largest supplier. 9 11 9 7
F-11 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The largest supplier is also the largest ILEC, as shown above in the concentration of revenues. See Note 8 for revenues from related parties. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. See Note 1 for assumptions used for Predecessor financial reporting. Regulation and Competition Rates charged by the Company for certain telephone services are subject to the approval of various regulatory authorities. Trends in the telecommunications industry point toward increased competition in virtually all markets and the continued deregulation or alternative regulation of telecommunications services in many jurisdictions. Revenue Recognition Except for certain billings under dispute with two significant ILEC's as described in Note 5, the Company recognizes revenues for telecommunications services when service is provided. Revenues from the sale of telecommunications products are recognized upon installation, or if no installation is required, upon shipment. Initial non-recurring installation revenues are recognized upon completion of installation to the extent of direct costs incurred. Cash Equivalents For purposes of reporting cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Inventories Inventories consist of telephone equipment, parts and installation materials, which are valued at the lower of cost or market. Cost is determined by the average-cost method. Provision is made to reduce slow moving inventory to reflect its estimated net realizable value. Other Comprehensive Income There were no items of other comprehensive income in any period presented. Segment Reporting The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information". As an integrated telecommunications provider, the Company has one reportable operating segment. While the Company's chief decision-maker monitors the revenue streams of various services, operations are managed and financial performance is evaluated based upon the delivery of multiple services over common networks and facilities. This allows the Company to leverage its costs in an effort to maximize return. As a result, there are many shared expenses generated by the various revenue streams; because management believes that any allocation of the expenses to multiple revenue streams would be impractical and arbitrary, management does not currently make such allocations internally. The chief decision-maker does however, monitor revenues streams at a more detailed level than those depicted in the Company's historical general purpose financial statements. F-12 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Specifically, the following table presents revenues by service type:
Pac-West Telecomm, Inc. -------------------------------------------- Period from Date of Commencement Year Ended Year Ended (October 1, 1996) to December December December 31, 1996 31, 1997 31, 1998 -------------------- ----------- ----------- Local services.............. $1,515,000 $17,810,000 $28,147,000 Long distance services...... 1,223,000 5,133,000 6,328,000 Dedicated transport services................... 651,000 3,312,000 4,155,000 Product and services........ 577,000 2,073,000 2,104,000 Other....................... 266,000 1,223,000 1,477,000 ---------- ----------- ----------- $4,232,000 $29,551,000 $42,211,000 ========== =========== ===========
Reclassifications Certain reclassifications have been made to the Company's comparative financial statements to conform to the current year presentation. Equipment, Vehicles and Leasehold Improvements Equipment, vehicles and leasehold improvements transferred to the Company are stated at the net book value on the date of the Initial Transfer. Subsequent additions are stated at cost. Equipment includes assets acquired under capital leases. Expenditures for maintenance are charged to expense as incurred. Upon retirement, the asset cost and the related accumulated depreciation are removed from the accounts. Gains and losses associated with dispositions of equipment, vehicles and leasehold improvements are reflected as a component of other income, net in the accompanying statements of operations. Equipment, vehicles and leasehold improvements from the Initial Transfer are depreciated or amortized over their remaining useful lives as of the date of the Initial Transfer. For subsequent additions including assets acquired under capital leases, depreciation and amortization is computed using the straight- line method based on the following estimated useful lives: Equipment.............. 3 to 7 years Vehicles............... 5 years Leasehold improvements. 10 years or life of lease, whichever is shorter
The Company capitalizes interest on self-constructed capital projects when construction involves considerable time and major expenditures. Such interest is capitalized as part of the cost of the equipment and leasehold improvement and is amortized over the remaining life of the assets. Interest is capitalized based on rates for borrowings that are outstanding over the period required to complete the asset. In 1998, the Company capitalized $303,000 of interest related to the construction of assets. Capitalizable interest in all other periods presented was insignificant. Depreciation and amortization of equipment, vehicles and leasehold improvements was $299,000, $2,204,000 and $4,106,000, for the period from commencement (October 1, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998, respectively. Depreciation and amortization of equipment, vehicles and leasehold improvements was $549,000 for the Predecessor's nine-month period ended September 30, 1996. F-13 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Deferred Financing Costs, Net Deferred financing costs, net consist of capitalized amounts for bank financing fees, professional fees, and other expenses related to the senior secured borrowings obtained on September 16, 1998 (see Note 3). Amortization is computed using the straight-line method over the term of the borrowings through January 29, 1999. Amortization expense for the year ended December 31, 1998, was $1,438,000 and is included within interest expense in the accompanying statements of operations. Other Assets At December 31, 1998, other assets consist primarily of deferred financing costs of $1,195,000 associated with the Company's subsequent issuance of senior notes (see Note 11) and the long-term portion of covenants not to compete of $150,000. Upon issuance of the senior notes, the deferred financing costs will be amortized over the estimated maturity of the debt of 10 years. Other Accrued Liabilities Other accrued liabilities include approximately $424,000 and $1,018,000 as of December 31, 1997 and 1998, respectively, of amounts collected from customers for taxes due to various governmental and regulatory authorities. Supplemental Statements of Cash Flow Information
Predecessor (Note 1) Pac-West Telecomm, Inc. ------------------ --------------------------------------------- Period from Date of Commencement Nine-Month Period (October 1, 1996) Year Ended Year Ended Ended to December 31, December 31, December 31, September 30, 1996 1996 1997 1998 ------------------ ------------------- ------------ ------------ Cash paid during the period for: Interest (net of amounts capitalized). $ 33,000 $ 101,000 $ 924,000 $ 2,565,000 Income taxes.......... 145,000 0 2,351,000 2,195,000 Supplemental disclosure of non-cash transactions: Acquisition of fixed assets using capital lease obligations.... 844,000 2,217,000 4,781,000 290,000 Issuance of the Preferred Stock in conjunction with the Transaction.......... 0 0 0 13,156,000 Refinancing of capital lease obligation with note payable......... 0 0 0 1,599,000
Income Taxes The Company provides for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying the applicable statutory tax rate to the differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date based on the applicable tax rate. F-14 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities," effective for fiscal years beginning after June 15, 1999. Management does not expect adoption of SFAS No. 133 in future periods to have a significant impact on the Company's financial statements. 3. Senior Secured Borrowings: On September 16, 1998, concurrent with the Transaction discussed in Note 1, the Company entered into a senior secured borrowing agreement with several financial institutions allowing for borrowings up to $100,000,000. The outstanding balance under this agreement was due at the earlier of the completion of a high-yield debt offering (see Note 11) or March 16, 1999, with interest due monthly, bearing interest at a floating rate equal to, at the Company's option, the base rate (defined as the higher of (a) 0.5 percent above the latest Federal Funds Rate; and (b) the rate of interest in effect as publicly announced by the principal lender as its "reference rate"), or the offshore rate (as defined in the senior secured borrowings agreement) plus 2.0 percent. As of December 31, 1998, the Company had elected to utilize the offshore rate, which was 8.625 percent, including the additional 2.0 percent. The borrowings were secured by substantially all assets of the Company. The Company was subject to certain covenants, which included limitations on additional debt, restrictions on the payment of dividends and maintenance of certain interest coverage requirements. At December 31, 1998, the Company had senior secured borrowings outstanding of $91,000,000 and other obligations of $9,000,000. The $9,000,000 of other obligations related to equipment purchases incurred as of December 31, 1998, which were subsequently financed through additional senior secured borrowings (see Note 5). On January 29, 1999, the Company paid off all outstanding senior secured borrowings and accrued interest through the issuance of a high-yield debt offering due February 1, 2009 (see Note 11). As a result of the subsequent refinancing, the senior secured borrowings and other obligations have been classified as long-term debt and other long-term obligations in the accompanying balance sheet as of December 31, 1998. 4. Notes Payable, Extraordinary Item and Line of Credit: Notes Payable Notes payable consisted of the following:
1997 1998 ----------- --------- Contracts payable to banks and finance companies for equipment, requiring monthly principal and interest payments of $1,474 to $69,921 at interest rates from 8.6 percent to 9.6 percent, due through June 2003, repaid in full in September 1998............. $ 8,454,000 $ 0 Contracts payable to banks and finance companies for vehicles, requiring monthly principal and interest payments of $355 to $1,510 at interest rates from 0.9 percent to 8.3 percent due through June 2001... 207,000 248,000 ----------- --------- 8,661,000 248,000 Less: Current portion............................... (2,034,000) (132,000) ----------- --------- $ 6,627,000 $ 116,000 =========== =========
F-15 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Notes payable are secured by all of the Company's owned equipment and vehicles. Aggregate future principal payments by year on notes payable are as follows: 1999............................ $132,000 2000............................ 99,000 2001............................ 17,000 -------- $248,000 ========
Extraordinary Item--Loss on Early Extinguishment of Debt In conjunction with the Transaction (see Note 1) and the receipt of the senior secured borrowings during 1998, as discussed in Note 3, the Company repaid amounts outstanding under notes payable and capital leases for equipment. The resulting loss from the early extinguishment of the debt of $695,000, less the applicable income tax benefit of $278,000, has been reflected as an extraordinary item in the accompanying statements of operations. Line of Credit The Company maintained a credit agreement with a bank that provided for a line of credit with a maximum borrowing limit of $2,500,000. The credit agreement and related security agreement contained various restrictive covenants, including restrictions on the incurrence of new liens and long-term indebtedness except for the financing of new equipment, the payment of dividends, the entering into business combinations or mergers, and requirements to maintain certain financial ratios. For the years ended December 31, 1997 and 1998, no amounts were borrowed under this line of credit. During 1998, the Company terminated the line of credit. 5. Commitments and Contingencies: Leases The Company leases its four principal facilities in Stockton, Oakland, Los Angeles and Las Vegas pursuant to noncancelable operating leases that expire in 2002, 2003, 2006 and 2009, respectively. The lease expiring in 2002 also contains five two-year renewal options. The leases expiring in 2003, 2006 and 2009 also contain two five-year renewal options. Prior to September 16, 1998, the Company leased certain equipment under capital leases that were repaid in connection with the Transaction (see Note 1). The Company also leases telephone equipment and telephone circuits on both a month-to-month basis, as well as under annual and long-term noncancellable leases. Management of the Company expects that these leases will be renewed or replaced by other leases in the normal course of business. The Company's future minimum lease payments with initial terms in excess of one year for the years ending December 31 are as follows:
Operating Leases ---------------------- Telephone Circuits and Space Equipment ---------- ----------- 1999............................................... $ 947,000 $ 4,516,000 2000............................................... 908,000 4,114,000 2001............................................... 907,000 3,982,000 2002............................................... 768,000 2,456,000 2003............................................... 640,000 599,000 2004 and thereafter................................ 1,911,000 0 ---------- ----------- $6,081,000 $15,667,000 ========== ===========
F-16 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Rental expense charged to operations for the period from commencement (October 1, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998, for all operating leases for space was $76,000, $432,000 and $650,000, respectively. Rental expense charged to operations by the Predecessor for space for the nine-month period ended September 30, 1996 was $125,000. Rental expense for space is included in selling, general and administrative expense in the accompanying statements of operations. Rental expense charged to operations for telephone circuits and equipment was approximately $1,000,000, $6,000,000 and $9,935,000 for the period from commencement (October 1, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998, respectively. Rental expense charged to operations by the Predecessor for telephone circuits and equipment for the nine-month period ended September 30, 1996 was approximately $1,700,000. Rental expense for telephone circuits and equipment is included in operating costs in the accompanying statements of operations. Rental expense paid to related parties was approximately $35,000 for the year ended December 31, 1998 and $0 for all other periods presented. Purchase Commitments At December 31, 1998, the Company had commitments under various contracts for the purchase of telephone switch equipment. The Company has recorded $25,597,000 of construction-in-progress in the accompanying balance sheet as of December 31, 1998, for equipment received prior to year-end but not yet installed. This amount includes $9,000,000 of purchases that were subsequently financed through the issuance of additional senior secured borrowings (see Note 3). In addition, at December 31, 1998, the Company had approximately $52,000,000 of purchase orders outstanding for telephone switching equipment due for delivery during 1999 and 2000. These purchase orders are cancelable up to 60 days prior to delivery and are expected to be financed from proceeds received from the senior notes (see Note 11) and from internally generated cash flows. Employment Agreements The Company has entered into employment agreements with certain key executives that provide for minimum annual base salaries, bonus entitlements upon the achievement of certain objectives, and the issuance of options under the new 1999 Employee Stock Option Plan (see Note 11). These employment agreements, which were approved by the Company's stockholders in 1998 in connection with the Transaction (see Note 1), granted options to two executives to purchase up to 406,250 shares of the Company's common stock. The exercise price of these options of $0.67 per share approximated the fair market value of the Company's common stock at the date of grant. These options vest over various dates through October 2001 and expire at various dates through October 2008. The Company accounted for the option grants under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly, no compensation cost has been recognized in the accompanying financial statements as the option exercise price approximated the estimated fair market value of the stock on the date of grant. Had compensation cost for the options been determined in accordance with SFAS No. 123, "Accounting for Stock Based Compensation," the Company's pro forma net loss would have increased $3,000 to $670,000 for the year ended December 31, 1998. No options were exercisable at December 31, 1998. The weighted average fair value of options granted during 1998 was $0.09 and the weighted average contractual life remaining at December 31, 1998 was 9.8 years. F-17 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model, with the following weighted-average assumptions used for grants during the year ended December 31, 1998: weighted average risk-free interest rate of 5.0 percent; expected dividend yields of 0 percent; expected lives of two to three years; and expected volatility of 0 percent. The employment agreements were effective as of or subsequent to the close of the Transaction and have terms varying from one to three years; however, they may be terminated by either party at an earlier date under certain circumstances. As of December 31, 1998, the Company accrued approximately $304,000 in accrued payroll and related expenses in the accompanying balance sheet for bonuses payable under these agreements. Revenue Recognition--Billings under Dispute The Company has established interconnection agreements with certain Incumbent Local Exchange Companies (ILECs) in California. The Telecommunications Act of 1996 requires ILECs to enter into interconnection agreements with Competitive Local Exchange Companies (CLECs, such as the Company) and other competitors and requires state Public Utilities Commissions (PUCs) to arbitrate such agreements. The interconnection agreements outline, among other items, compensation arrangements for calls originating or terminating in the other party's switching equipment, payment terms, and level of services. Two ILECs with which the Company has interconnection agreements have withheld payments from amounts billed by the Company under their agreements during the years ended December 31, 1997 and 1998, as follows:
1997 1998 ----------- ----------- Total amount billed to specified ILECs during the year.............................................. $14,858,000 $48,264,000 Amount withheld by specified ILECs and not recorded as revenue in the Company's statements of operations........................................ (3,793,000) (32,845,000) Amounts received for prior withholding and recorded as revenue........................................ 0 254,000 ----------- ----------- Net amount recorded as revenue from the specified ILECs during the year........................... $11,065,000 $15,673,000 =========== ===========
The ILECs withheld no payments before August 1997. The first ILEC withheld payment of 48 percent of the Company's August 1997 billing and continued to withhold payments monthly, at declining percentages, including a withholding of 20 percent of the December 1997 billing. During 1998, this ILEC withheld an average of 69 percent of amounts billed. The ILEC has indicated that it has paid the withheld amounts into an escrow account pursuant to a dispute claim. The other ILEC has withheld payments on 100 percent of the monthly amounts billed by the Company for October 1997 through December 1997 and has withheld an average of 59 percent of amounts billed during 1998. In 1998, this ILEC paid $254,000 of amounts previously withheld from 1997 billings. This ILEC has made no escrow payments. Both ILECs have continued to withhold significant percentages of payments during 1999. The issue giving rise to the dispute, based on correspondence with the first ILEC, relates to the classification of telephone calls entering the Company's system and terminating to an ISP. Under the interconnection agreements, the ILECs are obligated to pay the Company for calls originating in the ILECs' systems and terminating in the Company's system. Local calls are the most prevalent calls compensated for under the interconnection agreements. F-18 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The first ILEC filed a complaint with the Superior Court of the State of California that outlined its opinion that Internet traffic calls made to an ISP are not local calls (but rather interstate calls), and as such are not covered by the interconnection agreement and are not subject to the jurisdiction of the PUC. Management understands a similar position was taken by the other ILEC. The Superior Court ordered this complaint stayed pending the California PUC's (CPUC's) review of the issues raised by the complaint. The first ILEC has requested (without specifying any particular monetary claims) that the Company refund, with interest, all amounts previously paid to the Company for Internet traffic calls. All revenues recognized from this ILEC in the Company's financial statements since the Company's commencement, including those amounts associated with ISP calls previously paid to the Company, total $24,998,000, consisting of $10,533,000 and $13,861,000 for the years ended December 31, 1997 and 1998, respectively. It is not possible for the Company or for the ILECs (based on the Company's understanding of their systems) to determine which calls to an ISP telephone number are then connected, by way of the ISP's equipment, on to the Internet network. Accordingly, it is not possible to identify amounts specifically billed to or paid by the ILECs for calls actually connected, by way of the ISP's equipment, on to the Internet network. Management, after consultation with its regulatory attorneys, believes that calls originated in the ILECs' systems and terminated in the Company's system at an ISP, including all calls actually connected by way of the ISP's equipment on to the Internet network, are local calls, and, accordingly, the Company is entitled to compensation pursuant to its interconnection agreements with the ILECs. Further, the Company believes decisions and actions taken by PUCs of various states, including California, support the Company's position. As a result, no amounts have been accrued for in the Company's financial statements for any potential refunds of any amounts previously received from these ILECs. In October 1998, the CPUC issued a decision supporting the Company's position that local telephone calls placed to ISPs terminate at the ISP and, therefore, are local calls entitled to reciprocal compensation. Subsequent to this decision, the ILEC involved in this complaint filed an Application for Rehearing of the above decision. In addition, in February 1999, the Federal Communications Commission (FCC) issued a Declaratory Ruling on the issue of reciprocal compensation for calls bound to ISP's. The FCC ruled that these calls are jurisdictionally interstate calls. The FCC, however, determined that this issue did not resolve the question of whether reciprocal compensation is owed. The FCC noted a number of factors that would allow the state PUC's to leave their decisions requiring the payment of compensation undisturbed. The Company cannot predict the impact of the FCC's ruling on existing state decisions, or the outcome of pending appeals or on additional cases in this matter. Given the uncertainty concerning the final outcome of the CPUC proceedings, the possibility of future extended appeals or additional litigation, and future decisions by the FCC, management continues to record the revenue associated with reciprocal compensation billings to the two ILECs discussed above on a cash-received basis. 6. Stockholders' Equity: Common Stock Pursuant to the Transaction, the stockholders of the Company entered into a Shareholders' Agreement that provides for, among other things, the election of certain individuals as Directors of the Company, restrictions on transfers, rights of first-offer, and participation rights in any shares of Preferred Stock or common stock. Under this agreement, the Company has agreed not to issue or sell additional shares of common stock prior to an initial public offering, unless certain parties to the Shareholders' Agreement are given the opportunity to subscribe for and purchase their pro rata portion of the additional shares at the same price and same terms. The stockholders of the Company also entered into a Registration Agreement, whereby at any time prior to September 26, 2001, a certain stockholder may request the Company grant holders of its common stock the right to purchase a certain number of shares of the Company's common stock (the Rights Offering). Within a F-19 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) certain period after the Rights Offering closes, the Company's stockholders may request that the Company register all or any portion of the stockholders' common stock in the Company with the Securities and Exchange Commission (SEC), when the offering value of the Company's securities in an initial public offering is at least $25,000,000. Convertible Redeemable Preferred Stock On September 16, 1998, the Company, as discussed in Note 1, amended and restated its articles of incorporation to allow for the issuance of the 1,750,000 shares of nonvoting $0.001 par value Preferred Stock. The Preferred Stock has preference over common stock in liquidation equal to the liquidation value of $36 per share, plus accrued dividends computed at a 10 percent rate, compounded quarterly (the Preference Amount). After payment of the Preference Amount, the Preferred Stock and the common stock share ratably in any distribution by the Company. At December 31, 1998, $1,324,000 (or $1.059 per outstanding share of Preferred Stock) is accrued for cumulative preferred dividends. The holders of a majority of the outstanding Preferred Stock have the right to convert all of the outstanding Preferred Stock into shares of common stock in connection with the consummation of a public offering of debt or equity securities or rights to acquire any debt or equity securities of the Company offered to the public (a Public Offering). Additionally, any holder of at least 5 percent of the outstanding Preferred Stock may convert its shares of Preferred Stock to shares of common stock in connection with a Public Offering. Each share of Preferred Stock will be convertible into a number of shares of common stock determined by dividing the Preference Amount by the initial Public Offering price of the common stock. The Company is required to redeem at the request of a majority of the holders in the event of a Public Offering or after December 31, 2003, all of the Preferred Stock outstanding. In addition, any 5 percent holder may require the Company to redeem its shares of Preferred Stock with the net proceeds of a Public Offering at a redemption price equal to 100 percent of the liquidation preference thereof, plus accumulated and unpaid dividends at the date of redemption. 7. Income Taxes: The provision for income taxes consists of the following:
Pac-West Telecomm, Inc. ---------------------------------------------- Period from Date of Commencement Year Ended Year Ended (October 1, 1996) to December 31, December 31, December 31, 1996 1997 1998 -------------------- ------------ ------------ Current: Federal.................. $ 0 $1,783,000 $ 353,000 State.................... 1,000 503,000 245,000 Deferred: Federal.................. 76,000 546,000 861,000 State.................... 17,000 165,000 102,000 ------- ---------- ---------- $94,000 $2,997,000 $1,561,000 ======= ========== ==========
The provision for income taxes for the nine-month period of the Predecessor has been calculated using the Company's overall effective tax rate for the period from commencement (October 1, 1996) to December 31, 1996. In conjunction with the Initial Transfer, CalPage assumed various liabilities of the Predecessor including deferred taxes of $280,000 at September 30, 1996. F-20 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The Company's provision for income tax differed from the amount computed by applying the statutory federal income tax rate to income before income taxes and extraordinary item, as follows:
Predecessor (Note 1) Pac-West Telecomm, Inc. ----------------- --------------------------------------------- Period from Date of Nine-Month Period Commencement Ended (October 1, 1996) Year Ended Year Ended September 30, to December 31, December 31, December 31, 1996 1996 1997 1998 ----------------- ------------------- ------------ ------------ Income tax determined by applying the statutory federal income tax rate to income before income taxes and extraordinary item....................................... $294,000 $79,000 $2,547,000 $ 446,000 State income taxes, net of federal income tax benefit..... 51,000 15,000 450,000 230,000 Federal income tax effect of nondeductible costs related to the Transaction (see Note 1)............................................. 0 0 0 885,000 -------- ------- ---------- ---------- Provision for income taxes................................ $345,000 $94,000 $2,997,000 $1,561,000 ======== ======= ========== ==========
The cumulative balance sheet effects of deferred tax items are:
1997 1998 ----------- ----------- Trade accounts receivable allowances.............. $ 129,000 $ 171,000 Vacation and other accrued expenses............... 26,000 76,000 Inventory reserves................................ 46,000 46,000 Tax credits....................................... 0 876,000 State taxes....................................... 250,000 163,000 ----------- ----------- Deferred tax assets............................. 451,000 1,332,000 ----------- ----------- Depreciation...................................... (1,097,000) (2,834,000) Capitalized interest.............................. 0 (130,000) Prepaid expenses and other........................ (128,000) (105,000) ----------- ----------- Deferred tax liabilities........................ (1,225,000) (3,069,000) ----------- ----------- Net deferred tax liability........................ (774,000) (1,737,000) Less: Amounts classified as current deferred tax assets........................................... 160,000 151,000 ----------- ----------- Net noncurrent deferred tax liability........... $ (934,000) $(1,888,000) =========== ===========
Tax credits of $876,000, shown above, represent tax credits associated with the payment of Alternative Minimum Tax (AMT) arising in 1998. Such credits, which do not expire, may be used to offset future income taxes payable. 8. Related-Party Transactions: Loans Payable to Officers and Stockholder The Predecessor and the Company had loans payable to certain former officers and a stockholder of the Company. The loans payable bore interest at 9.5 percent to 10.0 percent and did not contain specified F-21 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) repayment terms. Interest expense related to these loans was $4,000 and $7,000, for the period from commencement (October 1, 1996) to December 31, 1996, and for the year ended December 31, 1997, respectively. Interest expense related to these loans was $14,000 for the Predecessor's nine-month period ended September 30, 1996. The principal and related accrued interest were paid in full for all such loans during 1997. Bay Alarm Company (Bay Alarm) Bay Alarm (a major stockholder of the Company) and its subsidiary, InReach Internet, LLC, are collectively one of the Company's largest customers of telephone network services, comprising approximately $396,000, $2,109,000, and $2,680,000, or 9.4 percent, 7.1 percent and 6.4 percent of the Company's revenues for the three-month period from commencement (October 1, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998, respectively. Revenues from Bay Alarm and InReach Internet LLC comprised approximately $891,000, or 10.2 percent of the Predecessor's revenues for the nine-month period ended September 30, 1996. The Company also had amounts due from Bay Alarm as of December 31, 1997 and 1998. These amounts are included in accounts receivable from related parties in the accompanying balance sheets. The Company owed Bay Alarm $850,000 at the date of commencement (October 1, 1996) related to debt assumed from the Initial Transfer. This amount was repaid in full by December 31, 1996. Bay Alarm provides the Company with security monitoring services at its normal commercial rates. The Company has recorded $10,000, $48,000 and $58,000 as selling, general and administrative expense for these services for the three-month period from commencement (October 1, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998, respectively. The Predecessor recorded approximately $11,000 as selling, general and administrative expense for services received from Bay Alarm for the nine-month period ended September 30, 1996. As outlined in Note 5, Leases, the company began leasing its facility in Oakland from Bay Alarm during 1998. In addition to rent paid under this lease, the company recorded selling, general and administrative expense of $59,000 for the year ended 1998 for related utility charges. Notes Receivable from Stockholders In 1998, in connection with the Transaction, a stockholder of the Company, who is also an officer, purchased 375,000 shares of common stock from the Company for $250,000. The Company received $50,000 in cash from the stockholder and entered into a note receivable for the remaining balance of $200,000. Subsequent to the Transaction, another officer of the Company acquired 62,470 shares of common stock for $42,000. The Company received $9,000 in cash and entered into a note receivable for the remaining $33,000 due from the officer. The notes accrue interest at 5.54 percent and 5.12 percent, respectively, compounded annually, with any unpaid accrued interest and principal due at the earlier of (1) the sale of the above stock with proceeds received first applied to unpaid interest, then to principal; (2) sale of the Company; (3) 60 days from the date the stockholder is no longer an employee of the Company or a subsidiary; or (4) September 16, 2003 and October 16, 2003, respectively. 9. Retirement Plan: In October 1996, the Company adopted a 401(k) retirement plan (the Plan) for all full-time employees who have completed six months of service. The plan year is from January 1 to December 31, and the Company will contribute $0.50 for every $1.00 contributed by the employee, subject to the Company's contribution not exceeding 3 percent of the employee's salary. Participants become fully vested after six years of service, F-22 PAC-WEST TELECOMM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) although they vest incrementally on an annual basis after two years of service and until the six-year period is completed. The Company recorded selling, general and administrative expense of $63,000 and $58,000 for the years ended December 31, 1997 and 1998, respectively, for the Company's matching contributions. Employees of the Company previously contributing to the CalPage 401(k) retirement plan (with identical provisions to the Plan) were able to roll their accumulated benefits into the Plan at date of commencement (October 1, 1996), with all prior employer contributions becoming fully vested on the date of rollover. 10. Sale of Answering Service Division: In March 1997, the Company sold the customer base and other assets of its answering service division for $420,000, payable $200,000 in cash and a promissory note of $220,000. The promissory note was paid in October 1997 at a discount of $18,000. The Company recognized a net gain of $385,000 on the sale in the year ended December 31, 1997. 11. Subsequent Events: On January 29, 1999, the Company issued $150,000,000 of senior unsecured ten-year notes (the Senior Notes) at par. The Senior Notes bear interest at 13.5 percent payable in semiannual installments, with principal due on February 1, 2009. Proceeds of the Senior Notes were used to repay the senior secured borrowings (see Note 3) and to establish an interest reserve account to cover certain initial interest payments due under the Senior Notes. The Senior Notes carry provisions that allow the Company, at its option, to (i) redeem up to 35 percent of the notes with proceeds of certain public offerings of equity prior to February 1, 2002, (ii) redeem all or part of the notes at specified prices on or after February 1, 2004, or (iii) offer to exchange the notes within 180 days from the issue date for a new issue of identical debt securities registered under the Securities Act of 1933, as amended (the Securities Act). The Company intends to register these notes under the Securities Act during the first six months of 1999. Basic covenants of these notes restrict the Company's future ability to pay dividends, repurchase stock, pledge or sell assets as security for other transactions, or engage in mergers and business combinations. The covenants allow the Company to incur additional debt subject to various limitations. In January 1999, the Company's Board of Directors approved the terms of the 1999 Employee Stock Option Plan (the 1999 Stock Plan) pursuant to which qualified employees and members of the Board of Directors can be issued options to purchase the Company's common stock at the fair market value at the date of grant. An aggregate of 2,250,000 shares of common stock have been reserved for option grants under the 1999 Stock Plan. 12. Ten-for-One Stock Split: On March 19, 1999, the board of directors authorized a ten-for-one split of the Company's authorized and outstanding common stock and Preferred Stock. All share and per share data have been restated to reflect the ten-for-one split. F-23 PAC-WEST TELECOMM, INC. INTERIM CONDENSED BALANCE SHEET (Unaudited)
March 31, ASSETS 1999 ------ ------------ Current Assets: Cash and cash equivalents...................................... $ 41,372,000 Restricted cash................................................ 19,844,000 Trade accounts receivable, net of allowance for doubtful accounts of $450,000.......................................... 4,597,000 Accounts receivable from related parties....................... 100,000 Income taxes receivable........................................ 544,000 Inventories.................................................... 450,000 Prepaid expenses and other current assets...................... 989,000 Deferred financing costs, net.................................. 600,000 Deferred tax assets............................................ 556,000 ------------ Total current assets......................................... 69,052,000 Equipment, Vehicles and Leasehold Improvements, net.............. 59,528,000 Deferred Financing Costs, net.................................... 5,467,000 Other Assets..................................................... 264,000 ------------ Total assets................................................. $134,311,000 ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current Liabilities: Current portion of notes payable............................... $ 121,000 Accounts payable............................................... 2,492,000 Accrued payroll and related expenses........................... 694,000 Accrued interest on Senior Notes............................... 3,485,000 Other accrued liabilities...................................... 2,207,000 ------------ Total current liabilities.................................... 8,999,000 Senior Notes and Other Long-Term Obligations..................... 150,088,000 Deferred Income Taxes............................................ 2,366,000 ------------ Total liabilities............................................ 161,453,000 ------------ Convertible Redeemable Preferred Stock, $0.001 par value; 1,750,000 shares authorized; 1,250,000 issued and outstanding (preference in liquidation of $45,000,000, plus accrued cumulative dividends of $2,466,000)............................. 47,466,000 Stockholders' Equity (Deficit): Common stock, $0.001 par value, 15,000,000 shares authorized and 12,562,470 shares issued and outstanding.................. 13,000 Additional paid-in capital..................................... 7,768,000 Notes receivable from stockholders............................. (233,000) Retained earnings (deficit).................................... (82,156,000) ------------ Total stockholders' equity (deficit)......................... (74,608,000) ------------ Total liabilities and stockholders' equity (deficit)......... $134,311,000 ============
See notes to the interim condensed financial statements. F-24 PAC-WEST TELECOMM, INC. INTERIM CONDENSED STATEMENTS OF INCOME (Unaudited)
Three-Month Period Ended ----------------------------- March 31, 1998 March 31, 1999 -------------- -------------- Revenues $10,252,000 $14,416,000 ----------- ----------- Costs and Expenses: Operating....................................... 3,731,000 4,062,000 Selling, general and administrative............. 2,002,000 4,303,000 Depreciation and amortization................... 845,000 1,449,000 ----------- ----------- Total costs and expenses...................... 6,578,000 9,814,000 ----------- ----------- Income from operations........................ 3,674,000 4,602,000 Other Expense (Income): Interest expense................................ 377,000 4,050,000 Interest income................................. (48,000) (527,000) Other expense................................... 23,000 -- ----------- ----------- Total other expense, net...................... 352,000 3,523,000 ----------- ----------- Income before provision for income taxes...... 3,322,000 1,079,000 Provision for Income Taxes........................ 1,329,000 432,000 ----------- ----------- Net income.................................... $ 1,993,000 $ 647,000 =========== ===========
See notes to the interim condensed financial statements. F-25 PAC-WEST TELECOMM, INC. INTERIM CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Three Month Period Ended ----------------------------- March 31, 1998 March 31, 1999 -------------- -------------- Operating Activities: Net income..................................... $ 1,993,000 $ 647,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................ 845,000 1,449,000 Amortization of deferred financing costs..... -- 625,000 Interest earned on restricted cash........... -- (148,000) Provision for doubtful accounts.............. 20,000 50,000 Deferred income taxes provision.............. 300,000 73,000 Changes in operating assets and liabilities: (Increase) decrease in trade accounts receivable................................ 1,059,000 (60,000) Decrease in income tax receivable.......... -- 1,427,000 Increase in inventories.................... (40,000) (3,000) Increase in prepaid and other current assets.................................... (416,000) (128,000) Increase in other assets................... (17,000) (120,000) Increase (decrease) in accounts payable and accrued liabilities....................... 485,000 (2,885,000) Increase in accrued interest on Senior Notes..................................... -- 3,485,000 Increase in income taxes payable........... 1,329,000 132,000 ----------- ------------- Net cash provided by operating activities.............................. 5,558,000 4,544,000 ----------- ------------- Investing Activities: Purchase of equipment, vehicles and leasehold improvements.................................. (1,275,000) (3,633,000) Purchase of investments (classified as restricted cash).............................. -- (19,696,000) Proceeds from disposal of equipment............ 90,000 -- ----------- ------------- Cash used in investing activities........ (1,185,000) (23,329,000) ----------- ------------- Financing Activities: Proceeds from issuance of Senior Notes......... -- 150,000,000 Payments for financing costs................... -- (5,040,000) Repayment of senior secured borrowings......... -- (100,000,000) Borrowings under notes payable and capital leases........................................ 847,000 -- Principal payments on notes payable and capital leases........................................ (1,102,000) (39,000) ----------- ------------- Net cash provided by (used in) financing activities.............................. (255,000) 44,921,000 ----------- ------------- Net increase in cash and cash equivalents............................. 4,118,000 26,136,000 Cash and Cash Equivalents: Beginning of period............................ 3,603,000 15,236,000 ----------- ------------- End of period.................................. $ 7,721,000 $ 41,372,000 =========== =============
See notes to the interim condensed financial statements. F-26 PAC-WEST TELECOMM, INC. NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS March 31, 1999 (Unaudited) 1. Basis of Presentation: The accompanying unaudited interim condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation for the periods indicated have been included. Operating results for the three-month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto of Pac- West Telecomm, Inc. (the Company) as of and for the year ended December 31, 1998. 2. Restricted Cash: Restricted cash represents short-term investments deposited in an interest reserve trust account to fund initial interest payments due through February 1, 2000 under the $150,000,000 of Senior Notes. 3. Equipment, Vehicles and Leasehold Improvements: Equipment, vehicles and leasehold improvements include network and other communication equipment, office furniture and equipment, vehicles, leasehold improvements and construction in progress. These assets are stated at cost, which includes direct costs and capitalized interest, and are depreciated once placed in service using the straight-line method. Capitalized interest of $0 and $624,000 was recorded during the three-month periods ended March 31, 1998 and 1999, respectively. Repair and maintenance costs are expensed as incurred. Equipment, vehicles and leasehold improvements at March 31, 1999 consist of the following: Network and other communication equipment.................... $34,289,000 Office furniture and equipment............................... 2,267,000 Vehicles..................................................... 865,000 Leasehold improvements....................................... 6,062,000 Construction-in-progress..................................... 23,827,000 ----------- 67,310,000 Less: Accumulated depreciation and amortization.............. (7,782,000) ----------- Equipment, vehicles and leasehold improvements, net.......... $59,528,000 ===========
4. Deferred Financing Costs, net: Deferred financing costs, net consist primarily of capitalized amounts for underwriter fees, professional fees and other expenses related to the issuance of the $150,000,000 of Senior Notes. The deferred financing costs are being amortized over the expected 10-year term of the Notes beginning January 29, 1999. Amortization expense for the three-month period ended March 31, 1999 was $100,000, which is included in interest expense in the accompanying condensed statements of income. F-27 PAC-WEST TELECOMM, INC. NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS--(Continued) (Unaudited) 5. Income Taxes: The provision for income taxes for the three month periods ended March 31, 1998 and 1999 consist of the income tax determined by applying the applicable statutory federal income tax rate of 34% plus 6% for state income taxes net of federal income tax benefit. 6. Senior Notes and Other Long-term Obligations: Senior Notes and other long-term obligations at March 31, 1999 consist of the following: Senior Notes................................................ $150,000,000 Notes payable, less current portion......................... 88,000 ------------ Total....................................................... $150,088,000 ============
On January 29, 1999, the Company issued $150,000,000 of Senior Notes at par. The Senior Notes bear interest at 13.5 percent payable in semiannual installments, with principal due on February 1, 2009. Proceeds of the Senior Notes were used to repay $100,000,000 of senior secured borrowings (including $9,000,000 of other long-term obligations subsequently financed through senior secured borrowings) and to establish an interest reserve account to cover interest payments due under the Senior Notes through February 1, 2000. The Senior Notes carry provisions that allow the Company, at its option, to (i) redeem up to 35 percent of the notes with proceeds of certain public offerings of equity prior to February 1, 2002, (ii) redeem all or part of the notes at specified prices on or after February 1, 2004, or (iii) offer to exchange the notes within 180 days from the issue date for a new issue of identical debt securities registered under the Securities Act of 1933, as amended (the Securities Act). The Company is in the process of registering these notes under the Securities Act. Basic covenants of these notes restrict the Company's future ability to pay dividends, repurchase stock, pledge or sell assets as security for other transactions, or engage in mergers and business combinations. The covenants allow the Company to incur additional debt subject to various limitations. The Company has a new three-year senior credit facility that will permit initial borrowings of $20.0 million and future borrowings of up to an additional $20.0 million to finance working capital, the cost of the Company's planned capital expansion and other corporate transactions. The borrowings will be secured by substantially all of the Company's assets. Borrowings under this new senior credit facility will bear interest, at the Company's option, at (1) the Base Rate (as defined) or (2) the Eurodollar Rate (as defined) plus between 2.25 and 3.5%. The credit facility requires the Company to meet certain financial tests, including, without limitation, maximum levels of debt as a ratio of EBITDA (as defined), minimum interest coverage and maximum amount of capital expenditures. The credit facility will contain certain covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness (including the Senior Notes), liens and encumbrances and other matters customarily restricted in such agreements. 7. Purchase Commitments: At March 31, 1999, the Company has approximately $53,000,000 of purchase orders outstanding for network equipment due for delivery during 1999 and 2000. These purchase orders are cancelable up to 60 days prior to delivery and are expected to be financed from proceeds received from the Senior Notes (see Note 6) and from internally generated cash flows. F-28 PAC-WEST TELECOMM, INC. NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS--(Continued) (Unaudited) In addition, the Company is in the process of implementing a new billing and operations support system. Total estimated costs for this system aggregate approximately $15,000,000 of which approximately $7,500,000 is estimated to be incurred in 1999, $6,000,000 in 2000, and $1,500,000 in 2001. 8. Revenue Recognition: Service revenues are recognized in the month in which the service is provided, except for reciprocal compensation generated by calls placed to Internet service providers connected through the Company's network. The rights of CLECs (such as the Company) to receive this type of compensation is the subject of numerous regulatory and legal challenges. Until this issue is ultimately resolved, the Company will recognize this revenue on a cash-received basis. The two ILECs with which the Company has interconnection agreements have withheld payments from amounts billed by the Company under their agreements since August 1997. Amounts withheld during the three-month periods ended March 31, 1998 and 1999 are as follows:
Three Month Period Ended ----------------------------- March 31, 1998 March 31, 1999 -------------- -------------- Total amount billed to specified ILECs..... $ 9,322,000 $ 19,465,000 Amount withheld by specified ILECs and not recorded as revenue in the Company's statements of operations.................. (5,032,000) (13,401,000) ----------- ------------ Net amount recorded as revenue from the specified ILECs........................... $ 4,290,000 $ 6,064,000 =========== ============
The cumulative amount of reciprocal compensation withheld by the specified ILECs and not recorded as revenue by the Company through March 31, 1999 is $49,785,000. 9. Stockholders' Equity: Ten-for-One Stock Split On March 19, 1999, the board of directors authorized a ten-for-one split of the Company's authorized and outstanding common stock and Preferred Stock. All share and per share data have been restated to reflect the ten-for-one split. Convertible Redeemable Preferred Stock The Preferred Stock has preference over common stock in liquidation equal to the liquidation value of $36 per share, plus accrued dividends computed at a 10 percent rate, compounded quarterly (the Preference Amount). After payment of the Preference Amount, the Preferred Stock and the common stock share ratably in any distribution by the Company. At March 31, 1999, $2,466,000 (or $1.973 per outstanding share of Preferred Stock) is accrued for cumulative preferred dividends. Stock Options In January 1999, the Company's Board of Directors approved the terms of the 1999 Employee Stock Option Plan (the 1999 Stock Plan) pursuant to which qualified employees and members of the Board of Directors can be issued options to purchase the Company's common stock at the fair market value at the date of grant. An aggregate of 2,250,000 shares of common stock have been reserved for option grants under the 1999 Stock Plan. F-29 PAC-WEST TELECOMM, INC. NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS--(Continued) (Unaudited) 10. Comprehensive Income: In September 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes reporting and disclosure requirements for comprehensive income and its components within the financial statements. There were no items of other comprehensive income for the three month periods ended March 31, 1998 and 1999; therefore comprehensive income is the same as net income for both periods. 11. Legal Proceedings: The Company is a party to the Pacific Bell and California Public Utility Commission proceedings related to reciprocal compensation payment and other interconnection agreement issues. See Note 8 to these condensed financial statements and the Company's 1998 audited financial statements. 12. Segment Reporting: The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information". As an integrated telecommunications provider, the Company has one reportable operating segment. While the Company's chief decision-maker monitors the revenue streams of various services, operations are managed and financial performance is evaluated based upon the delivery of multiple services over common networks and facilities. This allows the Company to leverage its costs in an effort to maximize return. As a result, there are many shared expenses generated by the various revenue streams; because management believes that any allocation of the expenses to multiple revenue streams would be impractical and arbitrary, management does not currently make such allocations internally. The chief decision-maker does however, monitor revenue streams at a more detailed level than those depicted in the Company's historical general purpose financial statements. Specifically, the following table presents revenues by service type:
Three Month Period Ended ----------------------- March 31, March 31, 1998 1999 ----------- ----------- Local services................................... $ 6,855,000 $10,662,000 Long distance services........................... 1,583,000 1,879,000 Dedicated transport services..................... 910,000 1,132,000 Product and services............................. 503,000 345,000 Other............................................ 401,000 398,000 ----------- ----------- $10,252,000 $14,416,000 =========== ===========
13. Subsequent Event: On June 24, 1999, the California PUC adopted a decision in the arbitration proceeding described in Note 11 between the Company and Pacific Bell which held that reciprocal compensation would be payable for Internet service provider calls under our new interconnection agreement with Pacific Bell which became effective on June 29, 1999. However, this decision is subject to possible appeal by Pacific Bell and does not address reciprocal compensation withheld under the prior agreement. Management does not know at this time what action Pacific Bell will take with respect to this decision. F-30 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $150,000,000 Pac-West Telecomm, Inc. Exchange Offer for 13 1/2% Senior Notes due 2009 ---------------- PROSPECTUS ---------------- , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers. We are incorporated under the laws of the State of California. Section 317 of the General Corporation Law of the State of California provides that a California corporation may indemnify any person who is, or is threatened to be made, party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that the person is or was an agent of the corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the proceeding if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. A corporation has power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was an agent of the corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be in the best interests of the corporation and its shareholders. Under Article IV of our Amended and Restated Articles of Incorporation and Article VI of our Amended and Restated By-Laws, we will indemnify each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she, is or was a director or officer, of Pac-West or is or was serving at the request of Pac-West as a director, officer, employee, fiduciary, or agent of another corporation or of a partnership, joint venture, trust or other enterprise including service with respect to employee benefit plans, whether the basis of such action, suit or proceeding is alleged action in an official capacity as a director, officer, employee, fiduciary or agent or in any other capacity while serving as a director, officer, employee, fiduciary or agent, to the fullest extent which we are empowered to do so by the General Corporation Law of the State of California, as the same exists or may hereafter be amended against all expense, liability and loss including attorneys' fees actually and reasonably incurred by such person in connection with such action, suit or proceeding. We may, by action of our board of directors, provide indemnification to our employees and agents with the same scope and effect as the foregoing indemnification of directors and officers. Such right of indemnification will be a contract right and will not be exclusive of any other right which such directors, officers or representatives may have or hereafter acquire under any statute, our Certificate of Incorporation, our By-Laws, agreement, vote of stockholders or disinterested directors or otherwise. In addition, Section 204 of the General Corporation Law of the State of California allows a corporation to eliminate the personal liability of a director of a corporation to the corporation or to any of its stockholders for monetary damages for a breach of fiduciary duty as a director, provided, however, that: (A) such a provision may not eliminate or limit the liability of directors: (1) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (2) for acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director; (3) for any transaction from which a director derived an improper personal benefit; (4) for acts or omissions that show a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the corporation or its shareholders; (5) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation or its shareholders, (6) under Section 310, or (7) under Section 316; II-1 (B) no such provision will eliminate or limit the liability of a director for any act or omission occurring prior to the date when the provision becomes effective; and (C) no such provision will eliminate or limit the liability of an officer for any act or omission as an officer, notwithstanding that the officer is also a director or that his or her actions, if negligent or improper, have been ratified by the directors. Article IV of our Amended and Restated Articles of Incorporation includes a provision which eliminates directors' personal liability to the full extent permitted under the General Corporation Law of the State of California. We maintain a policy of directors and officers liability insurance covering certain liabilities incurred by our directors and officers in connection with the performance of their duties. Item 21. Exhibits and Financial Statement Schedules. (a) Exhibits. The following exhibits are filed in connection with Item 601 of Regulation S-K:
Exhibit Number Description ------- ----------- *2.1 Agreement of Merger, dated September 16, 1998, between PWT Acquisition Corp. and Pac-West Telecomm, Inc., as amended. *2.2 Agreement and Plan of Merger, dated June 30, 1998, between PWT Acquisition Corp., Pac-West Telecomm, Inc., Bay Alarm Company and John K. La Rue, as amended. *3.1 Amended and Restated Articles of Incorporation of Pac-West Telecomm, Inc. *3.2 Amended and Restated By-Laws of Pac-West Telecomm, Inc. *4.1 Purchase Agreement, dated January 29, 1999, between Pac- West Telecomm, Inc. and NationsBanc Montgomery Securities LLC, CIBC Oppenheimer Corp. and First Union Capital Markets, as initial purchasers of the notes. *4.2 Indenture, dated January 29, 1999, between Pac-West Telecomm, Inc. and Norwest Bank Minnesota, N.A., pursuant to which the Series B 13 1/2% senior notes due 2009 will be issued. *4.3 Form of Series B 13 1/2% senior notes due 2009 (included in Exhibit 4.2). *4.4 Registration Rights Agreement, dated January 29, 1999, between Pac-West Telecomm, Inc. and NationsBanc Montgomery Securities LLC, CIBC Oppenheimer Corp. and First Union Capital Markets, as initial purchasers of the notes. 5.1 Opinion of Kirkland & Ellis regarding legality of securities being registered. *10.1 Shareholders Agreement, dated September 16, 1998, between Pac-West, John K. La Rue, Bay Alarm Company, certain named investors and certain named executives. *10.2 A/B Exchange Registration Rights Agreement, dated September 16, 1998, between Pac-West, John K. La Rue, Bay Alarm Company, certain investors and certain executives. *10.3 Stock Purchase Agreement, dated September 16, 1998, between PWT Acquisition Corp. and certain named investors. *10.4 Stock Purchase Agreement, dated September 16, 1998, between Pac-West and certain named investors. *10.5 Pledge and Security Agreement, dated January 29, 1999, between Pac-West and Norwest Bank Minnesota, N.A.
II-2 *10.6(a) Pac-West Telecomm, Inc. 1999 Stock Incentive Plan. *10.6(b) Pac-West Telecomm, Inc. 1999 Stock Incentive Plan form of notice of Stock Option Award and Stock Option Award Agreement between Pac-West and its grantees as designated. *10.7 Employment Agreement, dated June 30, 1998, between Pac- West and John K. La Rue. *10.8 Executive Agreement, dated September 16, 1998, between Pac-West and Wallace W. Griffin. *10.9 Executive Agreement, dated October 30, 1998, between Pac- West and Richard E. Bryson. *10.10 Employment Agreement, dated October 21, 1998, between Pac- West and Dennis V. Meyer. *10.11 Employment Agreement, dated September 14, 1998, between Pac-West and Jason R. Mills. *10.12 Confidentiality Agreement, dated September 16, 1998, between Pac-West and John K. La Rue. *10.13 Confidentiality Agreement, dated September 16, 1998, between Pac-West and Wallace W. Griffin. *10.14 Confidentiality Agreement, dated September 16, 1998, between Pac-West and Richard E. Bryson. *10.15 Confidentiality Agreement, dated October 22, 1998, between Pac-West and Dennis V. Meyer. *10.16 Confidentiality Agreement, dated September 16, 1998, between Pac-West and Jason R. Mills. *10.17 Lease Agreement, dated as of June 23, 1995, as amended, by and between Geremia Brothers and Pac-West for 4202 and 4210 Coronado Avenue, Stockton, California. *10.18 Lease Agreement, dated as of July 3, 1996, as amended, by and between One Wilshire Arcade Imperial, Ltd., Paramount Group, Inc. and Pac-West for 624 South Grand Avenue, Suite 1210, Los Angeles, California. *10.19 Balco Properties Office Lease, dated as of November 10, 1998, by and between Balco Properties and Pac-West for Franklin Building, 1624 Franklin Street, Suites 40, 100, Mezzanine, 201, 203, 210, 214 and 222, Oakland, California. *10.20 Lease Agreement, dated as of December 17, 1998, by and between Wing Fong & Associates LLC and Pac-West for 302 and 304 East Carson Street, Las Vegas, Nevada. *10.21 Promissory Note, dated September 16, 1998, between Pac- West and Wallace W. Griffin, and related Executive Stock Pledge Agreement between same parties of even date. *10.22 Promissory Note, dated October 30, 1998, between Pac-West and Richard Bryson, and related Executive Stock Pledge Agreement between same parties of even date. *10.23 Loan and Security Agreement, dated June 15, 1999, between Pac-West, Union Bank of California, N.A., and other lenders as designated. 10.24 Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996, dated June 29, 1999, between Pac-West and Pacific Bell, and related Errata to Approved Interconnection Agreement dated June 30, 1999. 10.25 Telecommunication Facility Interconnection Agreement, dated June 21, 1996, between Pac-West and GTE California Inc. 10.26 Master Interconnection and Resale Agreement for the State of Nevada, dated January 15, 1999, between Pac-West and The Nevada Division of Central Telephone Company d/b/a Sprint of Nevada. *12.1 Statement regarding computation of ratio. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1). *24.1 Powers of Attorney (included on the signature page to the original filing). *25.1 Statement of Eligibility of Trustee. *27.1 Financial Data Schedule. *99.1 Form of Letter of Transmittal.
II-3 *99.2 Form of Notice of Guaranteed Delivery. *99.3 Form of Tender Instructions.
- -------- * Previously filed. (b) Financial Statement Schedules. The following financial statement schedules are included in this registration statement: Schedule II--Valuation and Qualifying Accounts All other schedules for which the provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, are inapplicable or not material, or the information called for thereby is otherwise included in the financial statements and therefore has been omitted. Item 22. Undertakings. (a) We will undertake: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (A) To include any prospectus required by Section10(a)(3) of the Securities Act of 1933; (B) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (C) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (1)(A) and (1)(B) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the SEC by us pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment will be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time will be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) For purposes of determining any liability under the Securities Act of 1933, each filing of our annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement will be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Pac-West pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of Pac-West in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the II-4 question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (d) We will respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (e) We will supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, Pac-West Telecomm, Inc. has duly caused this amendment no. 2 to its registration statement to be signed on its behalf by the undersigned, who is duly authorized to do so, in the City of Stockton, California, as of July 29, 1999. PAC-WEST TELECOMM, INC. /s/ Wallace W. Griffin By: _________________________________ Wallace W. Griffin Chief Executive Officer In accordance with the requirements of the Securities Act of 1933, this amendment no. 2 to its registration statement has been signed by the following persons in the capacities indicated as of July 29, 1999.
Signature Title --------- ----- /s/ Wallace W. Griffin President, Chief Executive Officer and ___________________________________________ Director Wallace W. Griffin (Principal Executive Officer) /s/ Richard E. Bryson Chief Financial Officer (Principal ___________________________________________ Financial Officer) Richard E. Bryson /s/ Dennis V. Meyer Vice President--Finance and Treasurer ___________________________________________ (Principal Accounting Officer) Dennis V. Meyer Jerry L. Johnson* Chairman of the Board of Directors ___________________________________________ Jerry L. Johnson John K. La Rue* Director and Executive Vice President-- ___________________________________________ Technology and Network Operations John K. La Rue David G. Chandler* Director ___________________________________________ David G. Chandler Mark J. DeNino* Director ___________________________________________ Mark J. DeNino Samuel A. Plum* Director ___________________________________________ Samuel A. Plum Director ___________________________________________ Dr. Jagdlish N. Sheth Bruce A. Westphal* Director ___________________________________________ Bruce A. Westphal
/s/ Richard E. Bryson *By _________________________________ Richard E. Bryson Attorney-in-fact II-6 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE We have audited in accordance with generally accepted auditing standards, the financial statements of Pac-West Telecomm, Inc. included in this registration statement and have issued our report thereon dated February 10, 1999 except with respect to Note 12 for which the date is March 19, 1999. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying Schedule II--Valuation and Qualifying Accounts is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Francisco, California, February 10, 1999 S-1 PAC-WEST TELECOMM, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1998
Balance Balance at Charged to Charged to at End Beginning Costs and Other of Description of Period Expenses Accounts Deductions Period ----------- --------- ---------- ---------- ---------- -------- Allowance for doubtful accounts.................. $300,000 $100,000 -- -- $400,000
FOR THE YEAR ENDED DECEMBER 31, 1997
Balance Balance at Charged to Charged to at End Beginning Costs and Other of Description of Period Expenses Accounts Deductions Period ----------- ---------- ---------- ---------- ---------- -------- Allowance for doubtful accounts................. $84,000 $216,000 -- -- $300,000
FOR THE THREE-MONTH PERIOD FROM DATE OF COMMENCEMENT (OCTOBER 1, 1996) TO DECEMBER 31, 1996
Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period ----------- ---------- ---------- ---------- ---------- ---------- Allowance for doubtful accounts............... $78,000 $6,000 -- -- $84,000
S-2 Exhibit Index
Exhibit Number Description ------- ----------- *2.1 Agreement of Merger, dated September 16, 1998, between PWT Acquisition Corp. and Pac-West Telecomm, Inc., as amended. *2.2 Agreement and Plan of Merger, dated June 30, 1998, between PWT Acquisition Corp., Pac-West Telecomm, Inc., Bay Alarm Company and John K. La Rue, as amended. *3.1 Amended and Restated Articles of Incorporation of Pac-West Telecomm, Inc. *3.2 Amended and Restated By-Laws of Pac-West Telecomm, Inc. *4.1 Purchase Agreement, dated January 29, 1999, between Pac- West Telecomm, Inc. and NationsBanc Montgomery Securities LLC, CIBC Oppenheimer Corp. and First Union Capital Markets, as initial purchasers of the notes. *4.2 Indenture, dated January 29, 1999, between Pac-West Telecomm, Inc. and Norwest Bank Minnesota, N.A., pursuant to which the Series B 13 1/2% senior notes due 2009 will be issued. *4.3 Form of Series B 13 1/2% senior notes due 2009 (included in Exhibit 4.2). *4.4 Registration Rights Agreement, dated January 29, 1999, between Pac-West Telecomm, Inc. and NationsBanc Montgomery Securities LLC, CIBC Oppenheimer Corp. and First Union Capital Markets, as initial purchasers of the notes. 5.1 Opinion of Kirkland & Ellis regarding legality of securities being registered. *10.1 Shareholders Agreement, dated September 16, 1998, between Pac-West, John K. La Rue, Bay Alarm Company, certain named investors and certain named executives. *10.2 A/B Exchange Registration Rights Agreement, dated September 16, 1998, between Pac-West, John K. La Rue, Bay Alarm Company, certain investors and certain executives. *10.3 Stock Purchase Agreement, dated September 16, 1998, between PWT Acquisition Corp. and certain named investors. *10.4 Stock Purchase Agreement, dated September 16, 1998, between Pac-West and certain named investors. *10.5 Pledge and Security Agreement, dated January 29, 1999, between Pac-West and Norwest Bank Minnesota, N.A. *10.6(a) Pac-West Telecomm, Inc. 1999 Stock Incentive Plan. *10.6(b) Pac-West Telecomm, Inc. 1999 Stock Incentive Plan form of Notice of Stock Option Award and Stock Option Award Agreement between Pac-West and its grantees as designated. *10.7 Employment Agreement, dated June 30, 1998, between Pac- West and John K. La Rue. *10.8 Executive Agreement, dated September 16, 1998, between Pac-West and Wallace W. Griffin. *10.9 Executive Agreement, dated October 30, 1998, between Pac- West and Richard E. Bryson. *10.10 Employment Agreement, dated October 21, 1998, between Pac- West and Dennis V. Meyer. *10.11 Employment Agreement, dated September 14, 1998, between Pac-West and Jason R. Mills.
Exhibit Number Description ------- ----------- *10.12 Confidentiality Agreement, dated September 16, 1998, between Pac-West and John K. La Rue. *10.13 Confidentiality Agreement, dated September 16, 1998, between Pac-West and Wallace W. Griffin. *10.14 Confidentiality Agreement, dated September 16, 1998, between Pac-West and Richard E. Bryson. *10.15 Confidentiality Agreement, dated October 22, 1998, between Pac-West and Dennis V. Meyer. *10.16 Confidentiality Agreement, dated September 16, 1998, between Pac-West and Jason R. Mills. *10.17 Lease Agreement, dated as of June 23, 1995, as amended, by and between Geremia Brothers and Pac-West for 4202 and 4210 Coronado Avenue, Stockton, California. *10.18 Lease Agreement, dated as of July 3, 1996, as amended, by and between One Wilshire Arcade Imperial, Ltd., Paramount Group, Inc. and Pac-West for 624 South Grand Avenue, Suite 1210, Los Angeles, California. *10.19 Balco Properties Office Lease, dated as of November 10, 1998, by and between Balco Properties and Pac-West for Franklin Building, 1624 Franklin Street, Suites 40, 100, Mezzanine, 201, 203, 210, 214 and 222, Oakland, California. *10.20 Lease Agreement, dated as of December 17, 1998, by and between Wing Fong & Associates LLC and Pac-West for 302 and 304 East Carson Street, Las Vegas, Nevada. *10.21 Promissory Note, dated September 16, 1998, between Pac- West and Wallace W. Griffin, and related Executive Stock Pledge Agreement between same parties of even date. *10.22 Promissory Note, dated October 30, 1998, between Pac-West and Richard Bryson, and related Executive Stock Pledge Agreement between same parties of even date. *10.23 Loan and Security Agreement, dated June 15, 1999, between Pac-West, Union Bank of California, N.A., and other lenders as designated. 10.24 Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996, dated June 29, 1999, between Pac-West and Pacific Bell, and related Errata to Approved Interconnection Agreement dated June 30, 1999. 10.25 Telecommunication Facility Interconnection Agreement, dated June 21, 1996, between Pac-West and GTE California Inc. 10.26 Master Interconnection and Resale Agreement for the State of Nevada, dated January 15, 1999, between Pac-West and The Nevada Division of Central Telephone Company d/b/a Sprint of Nevada. *12.1 Statement regarding computation of ratio. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1). *24.1 Powers of Attorney (included on the signature page to the original filing). *25.1 Statement of Eligibility of Trustee. *27.1 Financial Data Schedule. *99.1 Form of Letter of Transmittal. *99.2 Form of Notice of Guaranteed Delivery. *99.3 Form of Tender Instructions.
- -------- * Previously filed. EX-5.1 2 OPINION OF KIRKLAND & ELLIS Exhibit 5.1 [Kirkland & Ellis Letterhead] July 28, 1999 Pac-West Telecomm, Inc. 4210 Coronado Avenue Stockton, California 95204 Re: Series B 13 1/2% Senior Notes due 2009 --------------------------------------- Ladies and Gentlemen: We are acting as special counsel to Pac-West Telecomm, Inc., a California corporation (the "Company"), in connection with the proposed registration by the Company of up to $150,000,000 in aggregate principal amount of the Company's Series B 13 1/2% Senior Notes due 2009 (the "New Notes"), pursuant to a Registration Statement on Form S-4, filed with the Securities and Exchange Commission (the "Commission") on April 21, 1999 under the Securities Act of 1933, as amended (the "Securities Act") (such Registration Statement, as amended or supplemented, is hereinafter referred to as the "Registration Statement"), for the purpose of effecting an exchange offer (the "Exchange Offer") for the Company's 13 1/2% Senior Notes due 2009 (the "Old Notes"). The New Notes are to be issued pursuant to an Indenture (the "Indenture"), dated as of January 29, 1999, between the Company and Norwest Bank Minnesota, as Trustee. In that connection, we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary for the purposes of this opinion, including (1) the corporate and organizational documents of the Company, (2) minutes and records of the corporate proceedings of the Company with respect to the issuance of the New Notes, and (3) the Registration Statement and exhibits thereto. For purposes of this opinion, we have assumed the authenticity of all documents submitted to us as originals, the conformity to the originals of all documents submitted to us as copies and the authenticity of the originals of all documents submitted to us as copies. We have also assumed the genuineness of the signatures of persons signing all documents in connection with which this opinion is rendered, the authority of such persons signing on behalf of the parties thereto other than the Company and the due authorization, execution and delivery of all documents by the parties thereto other than the Company. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. Based upon and subject to the foregoing qualifications, assumptions and limitations and the further limitations set forth below, we are of the opinion that: (1) The Company is a corporation existing and in good standing under the General Corporation Law of the State of California. (2) The sale and issuance of the New Notes has been validly authorized by the Company. (3) When, as and if (a) the Registration Statement shall have become effective pursuant to the provisions of the Securities Act, (b) the Indentures shall have been qualified pursuant to the provisions of the Trust Indenture Act of 1939, as amended, (c) the Old Notes shall have been validly tendered to the Company, (d) the New Notes shall have been issued in the form and containing the terms described in the Registration Statement, the Indentures, the resolutions of the Company's Board of Directors (or authorized committee thereof) authorizing the foregoing and any legally required consents, approvals, authorizations and other order of the Commission and any other regulatory authorities to be obtained, and (e) the New Notes have been authenticated by the Trustee, the New Notes when issued pursuant to the Exchange Offer will be legally issued, fully paid and nonassessable and will constitute valid and binding obligations of the Company. Our opinions expressed above are subject to the qualifications that we express no opinion as to the applicability of, compliance with, or effect of (1) any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent conveyance, moratorium or other similar law affecting the enforcement of creditors' rights generally, (2) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and (3) any laws except the laws of the State of New York and on our review of the applicable provisions of the California Business Corporation Act as such statute relates to the Company set forth therein. For purposes of the opinion in paragraph 1, we have relied exclusively upon certificates issued by the California Secretary of State and such opinions are not intended to provide any conclusion or assurance beyond that conveyed by such certificates. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement. We also consent to the reference to our firm under the heading "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of the rules and regulations of the Commission. We do not find it necessary for the purposes of this opinion, and accordingly we do not purport to cover herein, the application of the securities or "Blue Sky" laws of the various states to the issuance of the New Notes. 2 This opinion is limited to the specific issues addressed herein, and no opinion may be inferred or implied beyond that expressly stated herein. We assume no obligation to revise or supplement this opinion should the present laws of the State of New York or the California Business Corporation Act be changed by legislative action, judicial decision or otherwise. This opinion is furnished to you in connection with the filing of the Registration Statement, and is not to be used, circulated, quoted or otherwise relied upon for any other purposes. Yours very truly, /s/ Kirkland & Ellis KIRKLAND & ELLIS 3 EX-10.24 3 PACIFIC BELL INTERCONNECTION AGREEMENT GENERAL TERMS AND CONDITIONS PACIFIC/PAC-WEST TELECOM 022499 INTERCONNECTION AGREEMENT UNDER SECTIONS 251 AND 252 OF THE TELECOMMUNICATIONS ACT OF 1996 by and between PACIFIC BELL AND PAC-WEST TELECOMM GENERAL TERMS AND CONDITIONS Page i of v PACIFIC/PAC-WEST TELECOM 022499 TABLE OF CONTENTS 1. DEFINITIONS.......................................................................... 1 2. INTERPRETATION AND CONSTRUCTION...................................................... 7 3. IMPLEMENTATION SCHEDULE AND INTERCONNECTION ACTIVATION DATES......................... 7 4. INTERCONNECTION PURSUANT TO SEC 251(c)(2)(A),(B),(C); 47 CFR (S)51.305(a)(1)......... 7 4.1 Scope............................................................................ 7 4.2 Interconnection Coverage (S) 251(c)(2)(B) and (C), 47 CFR (S)51.305(a)(2)........ 8 4.3 Methods for Interconnection...................................................... 8 5. TRANSMISSION AND ROUTING OF TELEPHONE EXCHANGE SERVICE TRAFFIC PURSUANT TO SECTION 251(c)(2)(D); 252(d)(1) AND (2); 47 CFR (S) 51.305(a)(5)........................ 9 5.1 Scope of Traffic................................................................. 9 5.2 Responsibilities of the Parties.................................................. 10 5.3 Reciprocal Compensation for Termination of Local Traffic......................... 12 5.3.2 Applicability of Rates...................................................... 12 5.3.3 Rate Elements............................................................... 12 5.3.4 Local Traffic Interconnection Rates......................................... 13 5.4 Reciprocal Compensation for Transit Traffic...................................... 13 5.5 Reciprocal Compensation for Termination of IntraLATA Interexchange Traffic....... 14 5.6 Compensation for Origination and Termination of Switched Access Service Traffic to or from an IXC (Meet-Point Billing ("MPB") Arrangements).............. 14
GENERAL TERMS AND CONDITIONS Page ii of v PACIFIC/PAC-WEST TELECOM 022499 5.7 Maintenance of Service.............................................................. 16 6. TRANSMISSION AND ROUTING OF SWITCHED ACCESS TRAFFIC PURSUANT TO 251(c)(2).............. 17 6.1 Scope of Traffic.................................................................... 17 7. TRANSPORT AND TERMINATION OF OTHER TYPES OF TRAFFIC.................................... 17 7.1 Information Services Traffic........................................................ 17 8. SIGNALING.............................................................................. 17 9. NUMBERING.............................................................................. 18 9.9 NXX Migration....................................................................... 19 10. RESALE -- SECTIONS 251(b)(1); 251(c)(4); 252(d)(3); and 271(c)(2)(B)(xiv).............. 19 10.1 Availability of PACIFIC Retail Telecommunications Services for Resale............... 19 10.2 Availability of CLEC Retail Telecommunication Services for Resale................... 19 11. UNBUNDLED NETWORK ELEMENTS -- SECTIONS 251(c)(3), 271(c)(2)(B) (ii),(iv),(v),(vi),(x).. 19 12. NOTICE OF CHANGES -- SECTION 251(c)(5)................................................. 19 13. COLLOCATION -- SECTION 251(c)(6)....................................................... 20 14. NUMBER PORTABILITY -- SECTIONS 251(b)(2) and 271(c)(2)(B)(xi).......................... 20 15. DIALING PARTY - SECTION 251(b)(3); 271(c)(2)(B)(xii); and 271(e)(2).................... 20 16. ACCESS TO RIGHTS-OF-WAY -- SECTION 251(b)(4) and 271(c)(2)(B)(iii)..................... 20 17. DATABASE ACCESS -- SECTION 271(c)(2)(B)(x)............................................ 21 18. INTERCEPT REFERRAL ANNOUNCEMENTS....................................................... 21 19. COORDINATED REPAIR CALLS............................................................... 21
GENERAL TERMS AND CONDITIONS Page iii of v PACIFIC/PAC-WEST TELECOM 022499 20. OTHER SERVICES 271(c)(b)(2)(vii) and 271(c)(2)(b)(viii)................................... 21 20.1 White Pages............................................................................ 21 20.2 911 and E911 Services.................................................................. 22 20.3 Directory Assistance ("DA")............................................................ 22 20.4 Operator Services...................................................................... 22 20.5 Hosting................................................................................ 22 20.6 Signaling System 7 Interconnection..................................................... 22 21. GENERAL RESPONSIBILITIES OF THE PARTIES................................................... 22 22. EFFECTIVE DATE, TERM, AND TERMINATION..................................................... 24 23. DISCLAIMER OF REPRESENTATIONS AND WARRANTIES.............................................. 25 24. CHANGES IN END USER LOCAL EXCHANGE SERVICE PROVIDER SELECTION............................. 25 25. SEVERABILITY.............................................................................. 26 26. INTELLECTUAL PROPERTY..................................................................... 26 27. INDEMNIFICATION........................................................................... 26 28. LIMITATION OF LIABILITY................................................................... 29 29. REGULATORY APPROVAL....................................................................... 30 30. MISCELLANEOUS............................................................................. 30 30.1 Authorization.......................................................................... 30 30.2 Compliance and Certification........................................................... 31 30.3 Law Enforcement........................................................................ 31
GENERAL TERMS AND CONDITIONS Page iv of v PACIFIC/PAC-WEST TELECOM 022499 (a) Intercept Devices:................................................................. 31 (b) Subpoenas:......................................................................... 31 (c) Emergencies:....................................................................... 31 30.4 Independent Contractor................................................................. 32 30.5 Force Majeure.......................................................................... 32 30.6 Confidentiality........................................................................ 32 30.7 Governing Law.......................................................................... 34 30.8 Taxes.................................................................................. 35 30.9 Non-Assignment......................................................................... 36 30.10 Non-Waiver............................................................................. 37 30.11 Audits................................................................................. 37 30.12 Disputed Amounts....................................................................... 37 30.13 Dispute Resolution..................................................................... 38 30.14 Notices................................................................................ 39 30.15 Publicity and Use of Trademarks or Service Marks....................................... 40 30.16 Section 252(i) Obligations............................................................. 40 30.17 Joint Work Product..................................................................... 41 30.18 Intervening Law........................................................................ 41 30.19 No Third Party Beneficiaries; Disclaimer of Agency..................................... 42 30.20 No License............................................................................. 42 30.21 Survival............................................................................... 42
GENERAL TERMS AND CONDITIONS Page v of v PACIFIC/PAC-WEST TELECOM 022499 30.22 Scope of Agreement............................................... 42 30.23 Entire Agreement................................................. 43
GENERAL TERMS AND CONDITIONS PAGE 1 OF 48 PACIFIC/PAC-WEST TELECOM 022499 INTERCONNECTION AGREEMENT UNDER SECTIONS 251 AND 252 OF THE TELECOMMUNICATIONS ACT OF 1996 This Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 ("Agreement") is by and between Pacific Bell, a California Corporation ("PACIFIC"), and PAC-WEST TELECOM, INC, ("CLEC") a California Corporation doing business at 4202 Coronado Avenue, Stockton, CA. WHEREAS, the Parties want to interconnect their networks at mutually agreed upon points of interconnection to provide, directly or indirectly, Telephone Exchange Services and Exchange Access to residential and business end users predominantly over their respective telephone exchange service facilities in California; and WHEREAS, the Parties are entering into this Agreement to set forth the respective obligations of the Parties and the terms and conditions under which the Parties will interconnect their networks and provide other services as required by the Telecommunications Act of 1996 ("the Act") and additional services as set forth herein; and WHEREAS, for purposes of this Agreement, the Parties intend to operate where PACIFIC is the incumbent local exchange carrier and CLEC, a competitive local exchange carrier, is certified by the California Public Utilities Commission, as required. NOW, THEREFORE, CLEC and PACIFIC hereby agree as follows: 1. DEFINITIONS ----------- 1.1 "Act" means the Communications Act of 1934 [47 U.S.C. 153(R)], as amended by the Telecommunications Act of 1996. 1.2 "Affiliate" is as defined in the Act. 1.3 "AMA" means the Automated Message Accounting structure inherent in switch technology that initially records telecommunication message information. AMA format is contained in the Automated Message Accounting document published by Bellcore as GR-1100-CORE which defines the industry standard for message recording. 1.4 "Automatic Number Identification" or "ANI" is a Feature Group D or a CAMA signaling parameter that forwards the telephone ("CAMA") or billing number ("FG-D") of the calling party. GENERAL TERMS AND CONDITIONS PAGE 2 OF 48 PACIFIC/PAC-WEST TELECOM 022499 1.5 "Busy Line Verification Interrupt" or "BLVI" means a service in which an End User requests an operator to confirm the busy status of a line and requests an interruption of the call. 1.6 "Calling Party Number" or "CPN" is a Signaling System 7 ("SS7") parameter whereby the ten (10) digit number of the calling party is forwarded from the End Office. 1.7 "Central Office Switch" means a single switching system within the public switched telecommunications network, including the following: (a) "End Office Switches" which are Class 5 switches where End User Exchange Services are directly connected and offered; and (b) "Tandem Office Switches" or "Access Tandems" which are switches used to connect and switch calls over interoffice trunks between End Office Switches. Central Offices may be employed as combination End Office/Tandem Office switches. 1.8 "CLASS Features" mean certain CCS-based features available to End Users including, but not limited to: Automatic Call Back; Call Trace; Distinctive Ringing/Call Waiting; Selective Call Forward; and Selective Call Rejection. 1.9 "Collocation" is defined in Appendix PHYSICAL COLLOCATION. Generally, however, "collocation" refers to an arrangement whereby one Party's (the "Collocating Party") facilities are terminated in its equipment necessary for Interconnection or for access to Network Elements on an unbundled basis which has been installed and maintained at the premises of a second Party (the "Housing Party"). Collocation may be "physical" or "virtual." "Physical Collocation" is defined in Appendix PHYSICAL COLLOCATION and generally refers to the Collocating Party installing and maintaining its own equipment in the Housing Party's premises. "Virtual Collocation is defined in Appendix NIM and generally refers to the "Housing Party" owning, installing and maintaining the collocated equipment in the Housing Party's premises. 1.10 "Commission" or "CPUC" means the California Public Utilities Commission. 1.11 "Common Channel Signaling" or "CCS" is a special network, fully separate from the transmission path of the public switched network, that digitally transmits call GENERAL TERMS AND CONDITIONS PAGE 3 OF 48 PACIFIC/PAC-WEST TELECOM 022499 set-up and network control data. Unless otherwise agreed by the Parties, the CCS protocol used by the Parties shall be SS7. 1.12 "Competitive Local Exchange Carriers - "CLEC" is as defined in the Act. 1.13 "Control Office" means an exchange carrier center or office designated as its company's single point of contact for the provisioning and maintenance of its portion of interconnection arrangements. 1.14 "Dialing Parity" is as defined in the Act. As used in this Agreement, Dialing Parity refers to both Local Dialing Parity and Toll Dialing Parity. 1.15 "Digital Signal Level" means one of several transmission rates in the time-division multiplex hierarchy. 1.16 "Digital Signal Level 0" or "DS-0" means the 64 Kbps zero-level signal in the time-division multiplex hierarchy. 1.17 "Digital Signal Level 1" or "DS-1" means the 1.544 Mbps first-level signal in the time-division multiplex hierarchy. In the time-division multiplexing hierarchy of the telephone network, DS-1 is the initial level of multiplexing. 1.18 "Digital Signal Level 3" or "DS-3" means the 44.736 Mbps third-level in the time-division multiplex hierarchy. In the time-division multiplexing hierarchy of the telephone network, DS-3 is defined as the third level of multiplexing. 1.19 "End User" means a third-party residence or business that subscribes to Telecommunications Services provided by either of the Parties or by another telecommunications service provider. 1.20 "Exchange Access" see Switched Access. 1.21 "Exchange Message Record" or "EMR" means the standard used for exchange of Telecommunications message information among Telecommunications Carriers for billable, non-billable, sample, settlement and study data. EMR format is contained in Bellcore Practice BR-010-200-010 CRIS Exchange Message Record. 1.22 "Fiber Meet" means an Interconnection architecture method whereby the Parties physically interconnect their networks via an optical fiber interface (as opposed to an electrical interface) at a mutually agreed-upon location. 1.23 "Interconnection" is as defined in the Act. GENERAL TERMS AND CONDITIONS PAGE 4 OF 48 PACIFIC/PAC-WEST TELECOM 022499 1.24 "Interconnection Activation Date" is the date that the construction of the joint facility Interconnection arrangement has been completed, trunk groups have been established, and joint trunk testing is completed. 1.25 "Interexchange Carrier" or "IXC" (also referred to as "Switched Access Customer") means a carrier that provides, directly or indirectly, interLATA or intraLATA Telephone Toll Services. For purposes of Section 6 of this Agreement, the term "IXC" includes any entity which purchases FGB or FGD Switched Access Service in order to originate or terminate traffic to/from CLEC's End Users. 1.26 "IntraLATA Toll Traffic" means those intraLATA station calls that are not defined as Local Traffic in this Agreement. 1.27 "Line Side" refers to End Office switch connections that have been programmed to treat the circuit as a local line connected to a terminating station (e.g., an ordinary subscriber's telephone station set, a PBX, answering machine, facsimile machine or computer). Line Side connections offer only those transmission and signal features appropriate for a connection between an End Office and such terminating station. 1.28 "Local Exchange Routing Guide" or "LERG" means a Bellcore Reference Document used by LECs and IXCs to identify NPA-NXX routing and homing information as well as Network Element and equipment designations. 1.29 "Local Exchange Traffic" is as defined in the Act. 1.30 "Local Interconnection Trunks/Trunk Groups" are used for the termination of Local Exchange Traffic, using Bellcore Technical Reference GR-317-CORE ("GR-317"). 1.31 "Local Calls" are as defined by the Commission. Local Calls currently include all 0-12 mile calls based on the rate centers of the originating and terminating NPA-NXXs of the callers, irrespective of whether the routing point of an NPA-NXX is different than the rate center of that NPA-NXX (these include but are not limited to ZUM Zone 1 and ZUM Zone 2 calls) and, where established in incumbent LEC tariffs, ZUM Zone 3 and Extended Area Service (EAS) calls. 1.32 "Losses" means any and all losses, costs (including court costs), claims, damages (including fines, penalties, and criminal or civil judgments and settlements), injuries, liabilities and expenses (including attorneys' fees). GENERAL TERMS AND CONDITIONS PAGE 5 OF 48 PACIFIC/PAC-WEST TELECOM 022499 1.33 "MECAB" refers to the Multiple Exchange Carrier Access Billing ("MECAB") document prepared by the Billing Committee of the Ordering and Billing Forum ("OBF"), which functions under the auspices of the Carrier Liaison Committee ("CLC") of the Alliance for Telecommunications Industry Solutions ("ATIS"). The MECAB document, published by Bellcore as Special Report SR-BDS-000983, contains the recommended guidelines for the billing of access services provided to an IXC by two or more LECs, or by one LEC in two or more states within a single LATA. 1.34 "MECOD" refers to the Multiple Exchange Carriers Ordering and Design "MECOD") Guidelines for Access Services - Industry Support Interface, a document developed by the Ordering/Provisioning Committee of the Ordering and Billing Forum ("OBF"), which functions under the auspices of the Carrier Liaison Committee ("CLC") of the Alliance for Telecommunications Industry Solutions ("ATIS"). The MECOD document, published by Bellcore as Special Report SR STS-002643, establishes methods for processing orders for access service which is to be provided to an IXC by two or more telecommunications providers. 1.35 "Meet-Point Billing" or "MPB" refers to a billing arrangement whereby two or more Telecommunications Carriers jointly provide for Switched Access Service to an IXC, with each LEC receiving an appropriate share of its switched access revenues as defined by its effective access tariffs. 1.36 "Meet Point Trunks/Trunk Groups" ("MPTGs") are used for the joint provision of Switched Access services, utilizing Bellcore Technical References GR-394-CORE ("GR-394") and GR-317-CORE ("GR-317"). MPTGs are those between a local End Office and an Access Tandem as described in FSD 20-24-0000 and 20-24-0300. 1.37 "Mid-Span Meet" means an interconnection between two LECs whereby each provides its own cable and equipment up to the meet point of the cable facilities. The meet point is the demarcation establishing ownership of and responsibility for each LEC's portion of the transmission facility. 1.38 "Network Element Bona Fide Request" or "BFR" means the process described in Appendix UNE that is attached hereto and incorporated herein that prescribes the terms and conditions relating to a Party's request that the other Party provide a Network Element. GENERAL TERMS AND CONDITIONS PAGE 6 OF 48 PACIFIC/PAC-WEST TELECOM 022499 1.39 "Originating Line Information ("OLI")" is an SS7 Feature Group D signaling parameter which refers to the number transmitted through the network identifying the billing number of the calling party. 1.40 "Point of Interconnection" or "POI" means a physical location at which the Parties' networks meet for the purpose of establishing interconnection. POIs include a number of different technologies and technical interfaces based on the Parties' mutual agreement. 1.41 "Rating Point" means the Vertical and Horizontal ("V&H") coordinates associated with a particular telephone number for rating purposes. 1.42 "Routing Point" means a location which a LEC has designated on its own network as the homing or routing point for traffic inbound to Exchange Service provided by the LEC which bears a certain NPA-NXX designation. The Routing Point is employed to calculate mileage measurements for the distance-sensitive transport element charges of Switched Access services. The Routing Point need not be the same as the Rating Point, nor must it be located within the Rate Center area, but must be in the same LATA as the NPA-NXX. 1.43 "Switched Access" service means an offering of access to services or facilities for the purpose of the origination or termination of traffic from or to Exchange Service customers in a given area pursuant to a Switched Access tariff. Switched Access Services includes: Feature Group A ("FGA)", Feature Group B ("FGB"), Feature Group C ("FGC"), Feature Group D ("FGD"), Toll Free Service, 700 and 900 access. Switched Access service does not include traffic exchanged between LECs for the purpose of local exchange interconnection. 1.44 "Synchronous Optical Network" or "SONET" means an optical interface standard that allows inter-networking of transmission products from multiple vendors. The base rate is 51.84 Mbps ("OC-1/STS-1") and higher rates are direct multiples of the base rate, up to 13.22 Gbps. 1.45 "Telephone Exchange Service" is as defined in the Act. 1.46 "Toll Free Service" means service provided with any dialing sequence that invokes toll-free, i.e., 800-like, service processing. Toll Free Service includes calls to the Toll Free Service 800/888 NPA SAC codes and excludes services using standard NPA-NXX dialing patterns, irrespective of whether the routing point of the NPA-NXX is in a different rate center than the rating point of that NPA-NXX. GENERAL TERMS AND CONDITIONS PAGE 7 OF 48 PACIFIC/PAC-WEST TELECOM 022499 1.47 "Trunk-Side" refers to a Central Office Switch connection that is capable of, and has been programmed to treat the circuit as connecting to another switching entity, for example, another Central Office switch. Trunk-Side connections offer those transmission and signaling features appropriate for the connection of switching entities and cannot be used for the direct connection of ordinary telephone station sets. 1.48 "Wire Center" means an occupied structure or portion thereof in which a Party has the exclusive right of occupancy and which serves as a Routing Point for Switched Access Service. 2. INTERPRETATION AND CONSTRUCTION ------------------------------- [Section Deleted] 3. IMPLEMENTATION SCHEDULE AND INTERCONNECTION ACTIVATION DATES ------------------------------------------------------------ Subject to the terms and conditions of this Agreement, Interconnection of the Parties' facilities and equipment pursuant to Sections 4, 5, and 6 for the transmission and routing of Telephone Exchange Service Traffic and Exchange Access Traffic shall be established for each Exchange Area on Appendix DCO attached hereto and incorporated by reference. Appendix DCO may be revised and supplemented from time to time upon the mutual agreement of the Parties to reflect the Interconnection of additional Exchange Areas by modifying or updating Appendix DCO. 4. INTERCONNECTION PURSUANT TO SECTION 251(C)(2)(A),(B),(C); 47 CFR (S) 51.305(A)(1) 4.1 Scope ----- This Section refers to the physical architecture for Interconnection of the Parties' facilities and equipment for the transmission and routing of Telephone Exchange Service traffic and Exchange Access traffic pursuant to Section 251(c)(2) of the Act. Appendix ITR (Interconnection Trunking Requirements), attached hereto and incorporated by reference prescribes the specific trunk groups (and traffic routing parameters). Appendixes NIM and PHYSICAL COLLOCATION describe the facilities for the transmission and routing of traffic as described in Appendix ITR. GENERAL TERMS AND CONDITIONS PAGE 8 OF 48 PACIFIC/PAC-WEST TELECOM 022499 4.2 Interconnection Coverage (S) 251(c)(2)(B) and (C), 47 CFR (S) ------------------------------------------------------------- 51.305(a)(2) ------------ The Parties will provide for interconnection of their networks that is at least equal in quality to that provided by PACIFIC to itself or to any subsidiary, affiliate, or any other party to which PACIFIC provides interconnection and shall interconnect at any technically feasible point in their network as defined in Appendix NIM and COLLOCATION, attached hereto and incorporated by reference. The Parties will establish Local Interconnection Trunks to exchange Local and IntraLATA Toll traffic. All traffic exchanged over Local Interconnection Trunk Groups will be treated as CLEC traffic and subject to the terms and conditions of this Agreement. Neither Party shall terminate Switched Access traffic over Local Interconnection Trunks. Separate two-way Meet Point trunks will be established for the joint provisioning of Switched Access traffic. Local Interconnection will be provided via two-way trunks unless both Parties agree to implement one-way trunks on a case-by-case basis. In depth description is included in Appendix ITR. 4.2.1 The Parties shall interconnect their facilities as follows: ---------------------------------------------------------- (a) Each Party will establish a Local Interconnection Trunk Group with each Access Tandem in the LATA(s) in which it originates or terminates Local and/or Toll traffic with the other Party. Parties may not route Local Interconnection traffic to an Access Tandem destined for an NXX that subtends another tandem. The Parties agree that direct trunking to an End Office from either Party's End Office or Access Tandem is permitted under the terms of this section. (b) In addition to the tandem interconnection described above, either Party may establish End Office-to-End Office or End Office-to-tandem or tandem-to-tandem trunk groups. In the case of host-remote End Offices, such interconnection shall occur at the location of the host or remote, at the option of the Party deploying the host-remote End Office. 4.3 Methods for Interconnection --------------------------- Methods for Interconnection and Physical Architecture shall be as defined in Appendix NIM. GENERAL TERMS AND CONDITIONS PAGE 9 OF 48 PACIFIC/PAC-WEST TELECOM 022499 5. TRANSMISSION AND ROUTING OF TELEPHONE EXCHANGE SERVICE TRAFFIC PURSUANT TO -------------------------------------------------------------------------- SECTION 251(c)(2)(D); 252(d)(1) AND (2); 47 CFR (S)51.305(a)(5) --------------------------------------------------------------- 5.1 Scope of Traffic ---------------- This Section 5 prescribes traffic routing parameters for Local Interconnection Trunk Group(s) the Parties shall establish over the Interconnections specified in Section 4. 5.1.1 Either Party may opt at any time to terminate, i.e., overflow, to the other Party some or all Local Exchange Traffic and intraLATA Toll traffic originating on its network, together with Switched Access traffic, via Feature Group D or Feature Group B Switched Access Services. Either Party may otherwise purchase these Switched Access Services from the other Party subject to the rates, terms and conditions specified in its standard intrastate access tariffs, including any usage- sensitive rates for the Local Exchange or intraLATA Toll traffic terminated over the Switched Access service. 5.1.2 Each Party shall deliver to the other Party over the Local Interconnection Trunk Group(s) only such traffic which is destined for those publicly dialable NPA-NXX codes served by End Offices that directly subtend the Access Tandem or to those Wireless Service Providers that directly subtend the Access Tandem. 5.1.3 Unless otherwise agreed to, each Party shall deliver all traffic destined to terminate at either Party's End Office or tandem in accordance with the serving arrangements defined in the LERG Common Language Location Identifier (CLLI) Code. 5.1.4 Where the Parties deliver over the Local Interconnection Trunk Group(s) miscellaneous calls (e.g., time, weather, NPA-555, Mass Calling Codes) destined for each other, they shall deliver such traffic in accordance with the serving arrangements defined in the LERG Common Language Location Identifier Code. 5.1.5 N11 codes (e.g., 611, 811, & 911) shall not be sent between CLEC's and PACIFIC's network over the Local Interconnection Trunk Group(s). 5.1.6 For purposes of compensation under this Agreement, the traffic traded between CLEC and PACIFIC will be classified as either Local Traffic, Transit Traffic, IntraLATA Interexchange Traffic, or interLATA Interexchange Traffic. The Parties agree that, notwithstanding the GENERAL TERMS AND CONDITIONS PAGE 10 OF 48 PACIFIC/PAC-WEST TELECOM 022499 classification of traffic under this Agreement, either Party is free to define its own "local" calling area(s) for purposes of its provision of Telecommunications Services to its End Users. 5.1.7 All Local Calls, including Local Calls originated by or terminated to any internet service provider, are subject to payment of local reciprocal compensation under the terms of this Agreement. 5.1.8 Calls originated by one Party's End User and terminated to the other Party's End User will be classified as "Local Traffic" for purposes of intercompany compensation, if they are "Local Calls" as defined by this Agreement (Section 1.31). 5.1.9 PACIFIC shall deliver all traffic destined to terminate at CLEC's End Office in accordance with the serving arrangements defined in the Common Language Location Identifier Code, except PACIFIC will not deliver calls destined to CLEC End Office(s) via another LEC's or CLEC's tandem. 5.1.10 PACIFIC shall terminate traffic from third party LECs, CLECs, or Wireless Service Providers delivered to PACIFIC's network through CLEC's tandem. Prior to the routing of such traffic, the Parties agree to negotiate the issues of network capacity and forecasting caused by such termination. The Parties shall conduct such negotiations in good faith and shall not unreasonably withhold consent to the routing of such traffic. 5.1.11 PACIFIC shall complete traffic delivered from CLEC destined to third-party LECs, CLECs or WSPs in the LATA, when these third parties subtend PACIFIC's tandem(s). PACIFIC shall have no responsibility to ensure that any third party LEC, CLEC or WSP will accept such traffic. 5.2 Responsibilities of the Parties ------------------------------- 5.2.1 Each Party to this Agreement will be responsible for the accuracy and quality of its data as submitted to the respective Parties involved. 5.2.2 Each Party will include in the information transmitted to the other for each call being terminated on the other's network, where available, the originating Calling Party Number ("CPN"). 5.2.3 If the percentage of calls passed with CPN is greater than ninety percent (90%), all calls exchanged without CPN information will be billed as GENERAL TERMS AND CONDITIONS PAGE 11 OF 48 PACIFIC/PAC-WEST TELECOM 022499 either Local Traffic or IntraLATA Toll Traffic in direct proportion to the minutes of use ("MOU") of calls exchanged with CPN information. If the percentage of calls passed with CPN is less than ninety percent (90%), all calls passed without CPN will be billed as Switched Access. 5.2.4 For intraLATA Toll Free Service calls where such service is provided by one of the Parties, the compensation shall be charged by the Party originating the call, rather than the Party terminating the call. This includes originating charges as well as a Basic Toll Free Access Query charge as specified in Appendix PRICING or CLEC's local exchange tariff. 5.2.5 Each Party will calculate terminating interconnection minutes of use based on standard Automatic Message Accounting ("AMA") recordings made within each Party's network. These recordings are the basis for each Party to generate bills to the other Party. 5.2.6 Measurement of minutes of use over Local Interconnection Trunk Groups shall be in actual conversation seconds. The total conversation seconds over each individual Local Interconnection Trunk Group will be totaled for the entire monthly bill and then rounded to the next whole minute. 5.2.7 Each Party will provide the other, within thirty (30) calendar days or by mutually agreed upon date after the end of each calendar quarter, a usage report with the following information regarding traffic it sent to (i.e., terminated over) the Local Interconnection Trunk arrangements. 5.2.7.1 Total traffic volume described in terms of minutes and messages and by call type (local, toll and other) terminated to each other over the Local Interconnection Trunk Groups; and 5.2.7.2 Percent Local Usage ("PLU") and Percent Local Minutes. 5.2.8 Upon mutual agreement of the Parties, originating records for local, transit, and intraLATA toll traffic shall be exchanged for the purposes of billing intercompany terminating compensation. 5.2.8.1 On a monthly basis, each Party will record its originating MOUs including identification of the originating and terminating NXXs for all intercompany calls. GENERAL TERMS AND CONDITIONS PAGE 12 OF 48 PACIFIC/PAC-WEST TELECOM 022499 5.2.8.2 Each Party will transmit the summarized originating MOUs above to the transiting and/or terminating Party for subsequent monthly intercompany settlement billing. 5.2.8.3 Bills rendered by either Party will be paid within fifteen (15) days of receipt subject to subsequent audit verification. 5.2.8.4 MOUs for the rates contained herein will be measured in seconds by call type, and accumulated each billing period into one (1) minute increments for billing purposes in accordance with industry rounding standards. 5.2.8.5 Each Party will multiply the tandem routed and end office routed terminating MOUs by the appropriate rate contained in this Section to determine the total monthly billing to each Party. 5.3 Reciprocal Compensation for Termination of Local Traffic -------------------------------------------------------- 5.3.1 The Compensation set forth below will apply to all Local Traffic as defined in Section 5.3.2 Applicability of Rates ---------------------- 5.3.2.1 The rates, terms, conditions in this Section 5.3 apply only to the termination of Local Traffic, unless otherwise noted in Section 5. 5.3.3 Rate Elements ------------- 5.3.3.1 The Parties will pay to one another the charges for the following rate elements for the termination of Local Traffic. (a) Tandem Switching - (where used) compensation for the use of tandem switching functions (which includes subtending tandem offices: (i) Setup per Call, and (ii) MOU; (b) Common Transport ("where used") - compensation for the transmission facilities between the local tandem and the End Offices subtending that tandem. GENERAL TERMS AND CONDITIONS PAGE 13 OF 48 PACIFIC/PAC-WEST TELECOM 022499 (i) Fixed Mileage and (ii) Variable Mileage (c) Basic Switching- Interoffice Terminating: (i) Setup per Call (ii) MOU; 5.3.4 Local Traffic Interconnection Rates ----------------------------------- See Appendix Pricing 5.4 Reciprocal Compensation for Transit Traffic ------------------------------------------- 5.4.1 Transit Traffic allows one Party to send traffic to a third party network through the other Party's tandem. A Transit Traffic rate element applies to all MOUs between a Party and third party networks that transit the other Party's tandem switch. The originating Party will be billed Transit Traffic rate element unless otherwise specified. The Transit Traffic rate element shall be equal to the Tandem Switching rate plus two times the Common Transport Fixed rate element as specified in Appendix PRICING. 5.4.2 When CLEC uses a PACIFIC access tandem to transit a toll call to another LEC end office, and that LEC is a member of the California Toll Pool, ("Pooling LEC"), PACIFIC will bill, and CLEC will pay, PACIFIC's local switching and proportionate local transport rates in addition to the transit rate above. PACIFIC will remit such revenues to the California Toll Pool. When a Pooling LEC originates a toll call that terminates to a Party's NXX, Party will bill and PACIFIC will pay, Party's local switching and local transport rates as if the call originated from a PACIFIC end office. 5.4.3 If either Party receives a call through the other Party's Access Tandem that originates from another LEC, CLEC or Wireless Service Provider, the Party receiving the transited call will not charge the other Party any rate element for this call regardless of whether the call is local or toll. The Parties will establish appropriate billing relationships directly with the Wireless Service Provider, other CLEC or LEC with the exception of the independent LECs listed in Section 21.11 of this Agreement. GENERAL TERMS AND CONDITIONS PAGE 14 OF 48 PACIFIC/PAC-WEST TELECOM 022499 5.4.4 In the event one Party originates traffic that transits the second Party's network to reach a third party telecommunications carrier with whom the originating Party does not have a traffic interchange agreement, then originating Party will indemnify the second Party against any and all charges levied by such third party telecommunications carrier, including any termination charges related to such traffic and any attorneys fees and expenses. 5.5 Reciprocal Compensation for Termination of IntraLATA Interexchange ------------------------------------------------------------------ Traffic ------- For intrastate intraLATA interexchange service traffic, compensation for termination of intercompany traffic will be at terminating access rates for Message Telephone Service ("MTS") and originating access rates for 800 Service as set forth in each Party's Intrastate Access Service Tariff. For interstate intraLATA intercompany service traffic (i.e., when a LATA crosses a state boundary), compensation for termination of intercompany traffic will be at terminating access rates for Message Telephone Service ("MTS") and originating access rates for 800 Service as set forth in each Party's Intrastate Access Service Tariff. 5.6 Compensation for Origination and Termination of Switched Access --------------------------------------------------------------- Service Traffic to or from an IXC (Meet-Point Billing ("MPB") ------------------------------------------------------------- Arrangements) ------------- 5.6.1 The Parties will establish MPB arrangements in order to provide Switched Access Services to IXCs via PACIFIC's Access Tandem switches in accordance with the MPB guidelines adopted by and contained in the Ordering and Billing Forum's MECOD and MECAB documents. 5.6.2 For interstate, interLATA traffic, the Parties will charge IXCs according to access rates as set forth in each Party's own applicable tariffs. 5.6.3 Billing to IXCs for the Switched Access Services jointly provided by the Parties via Meet-Point Billing arrangement shall be according to the multiple bill/single tariff method. As described in the MECAB document, each Party will render a bill in accordance with its own tariff for that portion of the service it provides. For the purpose of this Agreement, CLEC is the Initial Billing Company ("IBC") and PACIFIC is the Subsequent Billing Company ("SBC"). The actual rate values for each element shall be the rates contained in that Party's own applicable access tariffs. GENERAL TERMS AND CONDITIONS PAGE 15 OF 48 PACIFIC/PAC-WEST TELECOM 022499 5.6.4 The Parties will maintain provisions in their respective federal and state access tariffs, or provisions within the National Exchange Carrier Association ("NECA") Tariff No. 4, or any successor tariff, sufficient to reflect this MPB arrangement, including MPB percentages. 5.6.5 As detailed in the MECAB document, the Parties will, in accordance with accepted time intervals, exchange all information necessary to accurately, reliably, and promptly bill third Parties for Switched Access Services traffic jointly handled by the Parties via the Meet Point Arrangement. Each Party reserves the right to charge the other Party for the recording/processing functions it performs. Information shall be exchanged in Exchange Message Record ("EMR") format, on magnetic tape or via a mutually acceptable electronic file transfer protocol. 5.6.6 Meet-Point Billing shall also apply to all jointly provided MOU traffic bearing the 900, 800, and 888 NPAs or any other non- geographic NPAs which may likewise be designated for such traffic in the future where the responsible party is an IXC. When PACIFIC performs 800 database queries, PACIFIC will charge the service provider for the database query in accordance with standard industry practices and applicable tariffs. 5.6.7 Each Party shall coordinate and exchange the billing account reference ("BAR") and billing account cross reference ("BACR") numbers for the Meet Point Billing service. Each Party shall notify the other if the level of billing or other BAR/BACR elements change, resulting in a new BAR/BACR number. 5.6.8 Each Party will provide the other with the Switched Access detailed usage data within thirty (30) days of the end of the billing period. Each Party will provide to the other the Switched Access summary usage data within ten (10) working days after the date that a bill is rendered to the IXC by the initial Party. To the extent CLEC provides PACIFIC with Access Usage Records, PACIFIC will compensate CLEC on the same terms as CLEC compensates PACIFIC. PACIFIC acknowledges that currently there is no charge for Summary Usage Data Records but that such a charge may be appropriate. At CLEC's request, PACIFIC will negotiate a mutual and reciprocal charge for provision of Summary Usage Data Records. 5.6.9 Errors may be discovered by CLEC, the IXC or PACIFIC. Both PACIFIC and CLEC agree to provide the other Party with notification of any discovered errors within two (2) business days of the discovery. GENERAL TERMS AND CONDITIONS PAGE 16 OF 48 PACIFIC/PAC-WEST TELECOM 022499 5.6.10 In the event of a loss of data, both Parties shall cooperate to reconstruct the lost data within sixty (60) days of notification and if such reconstruction is not possible, shall accept a reasonable estimate of the lost data, based upon at least three (3), but no more than twelve (12) months of prior usage data, if available. 5.7 Maintenance of Service ---------------------- 5.7.1 A Maintenance of Service charge applies whenever either Party requests the dispatch of the other Party's personnel for the purpose of performing maintenance activity on the interconnection trunks, and any of the following conditions exist: (a) no trouble is found in the interconnection trunks; or (b) the trouble condition results from equipment, facilities or systems not provided by the Party whose personnel were dispatched; or (c) trouble clearance did not otherwise require dispatch and, upon dispatch requested for repair verification, the interconnection trunk did not exceed Maintenance Limits. 5.7.2 If a Maintenance of Service initial charge has been applied and trouble is subsequently found in the facilities of the Party whose personnel were dispatched, the charge will be canceled. 5.7.3 Billing for Maintenance of Service is based on each half-hour or fraction thereof expended to perform the work requested. The time worked is categorized and billed at one of the following three rates: (a) basic time; (b) overtime; or (c) premium time, as defined for billing by PACIFIC in PACIFIC's revised tariff CPUC . No. 175-T and in CLEC's Exchange tariff. GENERAL TERMS AND CONDITIONS PAGE 17 OF 48 PACIFIC/PAC-WEST TELECOM 022499 6. TRANSMISSION AND ROUTING OF SWITCHED ACCESS TRAFFIC PURSUANT TO 251(c)(2) ------------------------------------------------------------------------- 6.1 Scope of Traffic ---------------- Section Appendix ITR (Interconnection Trunking Requirements) attached to this Interconnection Agreement prescribes parameters for certain trunk groups ("Meet Point Trunks") to be established over the Interconnections. 7. TRANSPORT AND TERMINATION OF OTHER TYPES OF TRAFFIC --------------------------------------------------- 7.1 Reserved for Future Use ----------------------- 8. SIGNALING --------- 8.1 The Parties will interconnect their networks using SS7 signaling as defined in GR-000317-CORE and GR-000394-CORE, including ISDN User Part ("ISUP") for trunk signaling and Transaction Capabilities Application Part ("TCAP") for CCS-based features in the interconnection of their networks. Either Party may establish CCS interconnections either directly and/or through a third party. Whether direct or by third party, CCS interconnection shall be pursuant to PUB L-780023-PB/NB. If CCS interconnection is established through a third party, the rates, terms, and conditions of the parties' respective tariffs will apply. If CCS interconnection is established directly between CLEC and PACIFIC, the rates, terms, and conditions of Appendix SS7 will apply. 8.2 The Parties will cooperate in the exchange of TCAP messages to facilitate full interoperability of CCS-based features between their respective networks, including all CLASS features and functions, to the extent each carrier offers such features and functions to its own End Users. All CCS signaling parameters deployed by both Parties will be provided including CPN. All privacy indicators will be honored. 8.3 CCS shall be used in conjunction with Meet Point Trunks; except multifrequency ("MF") signaling will be used on a separate Meet Point Trunk Group to complete originating calls to Switched Access customers that use MF FGD signaling protocol. MF and CCS trunk groups shall not be provided within a DS-1 facility; a separate DS-1 per signaling type must be used. 8.4 Originating FGB calls delivered to PACIFIC's tandem(s) shall use GR-317 signaling format unless the associated FGB carrier employs GR- 394 signaling for its FGB traffic at the serving Access Tandem. GENERAL AND CONDITIONS PAGE 18 OF 48 PACIFIC/PAC-WEST TELECOM 022499 9. NUMBERING --------- 9.1 Nothing in this Agreement shall be construed to limit or otherwise adversely impact in any manner either Party's right to employ or to request and be assigned any North American Numbering Plan ("NANP") number resources including, but not limited to, central office ("NXX") codes pursuant to the Central Office Code Assignment Guidelines', or to establish, by tariff or otherwise, Exchanges and Rating Points corresponding to such NXX codes. Each Party is responsible for administering the NXX codes it is assigned. 9.2 At a minimum, in those areas where CLEC intends to provide facilities-based local exchange service, CLEC shall obtain at least one NXX per incumbent local exchange carrier rate center which is required to ensure compliance with the industry-approved Central Office Code NXX Assignment Guidelines (April, 1997) and the FCC's Second Report and Order in CC Docket 96-116 released August 18, 1997 (Local Number Portability). 9.3 Each Party agrees to make available via the LERG, up-to-date listings of its own assigned NPA-NXX codes, along with associated Rating Points and Exchanges. 9.4 Each Party is responsible to program and update its own switches and network systems to recognize and route traffic to the other Party's assigned NXX codes at all times. Neither Party shall impose fees or charges on the other Party for such required programming and updating activities. 9.5 Each Party is responsible to input required data into the Routing Data Base Systems ("RDBS") and into the Bellcore Rating Administrative Data Systems ("BRADS") or other appropriate system(s) necessary to update the Local Exchange Routing Guide ("LERG"), unless negotiated otherwise. 9.7 Upon the request of CLEC, PACIFIC shall perform LERG input for CLEC. CLEC agrees to pay PACIFIC the sum of $110 per NXX in exchange for PACIFIC's input of required data necessary to update the Local Exchange Routing Guide ("LERG") on CLEC's behalf. PACIFIC shall not be liable for any losses or damages arising out of errors, defects, or failures associated with the input of CLEC's data into the LERG. - ---------------------- /1/ Last published by the Industry Numbering Committee ("INC") as INC 95-0407- 008, Revision April 1997, formerly ICCF 93-0729-010. GENERAL AND CONDITIONS PAGE 19 OF 48 PACIFIC/PAC-WEST TELECOM 022499 9.8 Neither Party is responsible for notifying the other Parties' End Users of any changes in dialing arrangements, including those due to NPA exhaust, unless otherwise ordered by the law, the Commission, the FCC, or a court. 9.9 NXX Migration ------------- Where either Party has activated an entire NXX for a single End User, or activated more than half of an NXX for a single End User with the remaining numbers in that NXX either reserved for future use or otherwise unused, if such End User chooses to receive service from the other Party, the first Party shall cooperate with the second Party to have the entire NXX reassigned in the LERG (and associated industry databases, routing tables, etc.) to an End Office operated by the second Party. Such transfer will require development of a transition process to minimize impact on the Network and on the End User(s)' service and will be subject to appropriate industry lead times (currently forty-five (45) days) for movements of NXXs from one switch to another. The Party to whom the NXX is migrated will pay NXX migration charges of $10,000 per NXX to the Party formerly assigned the NXX. 10. RESALE -- SECTIONS 251(b)(1); 251(c)(4); 252(d)(3); and 271(c)(2)(B)(xiv) ------------------------------------------------------------------------- 10.1 Availability of PACIFIC Retail Telecommunications Services for Resale --------------------------------------------------------------------- PACIFIC shall offer to CLEC for resale at wholesale rates its Telecommunications Services, as described in Section 251(c)(4) of the Act, pursuant to the terms and conditions of Appendix RESALE attached hereto and incorporated herein by this reference. 10.2 Availability of CLEC Retail Telecommunication Services for Resale ----------------------------------------------------------------- CLEC shall make available its Telecommunications Services for resale at wholesale rates to PACIFIC in accordance with Section 251(b)(1) of the Act. 11. UNBUNDLED NETWORK ELEMENTS -- SECTIONS 251(c)(3), 271(c)(2)(B) -------------------------------------------------------------- (ii),(iv),(v),(vi),(x) ---------------------- Pursuant to Appendix UNE, which is attached hereto and made a part hereof, PACIFIC will provide CLEC access to Unbundled Network Elements for the provision of a telecommunication service as required by Sections 251 and 252 of the Act and in compliance with those portions of the FCC's First Report and Order in CC Docket No. 96-98 that are in effect, subject to any modifications on reconsideration, stay or appeal, under the terms and conditions described herein and in the Appendices hereto. 12. NOTICE OF CHANGES -- SECTION 251(c)(5) -------------------------------------- GENERAL AND CONDITIONS PAGE 20 OF 48 PACIFIC/PAC-WEST TELECOM 022499 Nothing in this Agreement shall limit either Party's ability to upgrade its network through the incorporation of new equipment, new software or otherwise. Both Parties will comply with the Network Disclosure rules adopted by the FCC in CC Docket No. 96-98, Second Report and Order, as may be amended from time to time. Both Parties agree to coordinate interconnection matters consistent with the requirements of the Americans with Disabilities Act (42 U.S.C. 12101) and with Sections 255 and 256 of the Act. 13. COLLOCATION -- SECTION 251(c)(6) -------------------------------- 13.1 PACIFIC shall provide to CLEC Physical Collocation pursuant to Appendix PHYSICAL COLLOCATION. 13.2 PACIFIC shall provide to CLEC Virtual Collocation pursuant to Appendix NIM. 14. NUMBER PORTABILITY -- SECTIONS 251(b)(2) and 271(c)(2)(B)(xi) ------------------------------------------------------------- The Parties shall provide to each other Interim Number Portability ("INP") and Permanent Number Portability ("PNP") on a reciprocal basis. Pursuant to the provisions in the Act and the FCC's First Report and Order, and in accordance with the terms and conditions outlined in Appendix PORT, which is attached hereto and incorporated herein, PACIFIC will provide CLEC Interim Number Portability through Remote Call Forwarding and Direct Inward Dialing technology. 15. DIALING PARITY -- SECTION 251(b)(3); 271(c)(2)(B)(xii); and 271(e)(2) --------------------------------------------------------------------- 15.1 The Parties shall provide Local Dialing Parity to each other as required under Section 251(b)(3) of the Act. 15.2 PACIFIC shall provide IntraLATA Dialing Parity in accordance with Section 271(e)(2) of the Act and Section 8 of the Commission's regulations in Docket 97-2010. 16. ACCESS TO RIGHTS-OF-WAY -- SECTION 251(b)(4) and 271(c)(2)(B)(iii) ------------------------------------------------------------------ Each Party shall provide the other Party access to its poles, ducts, rights-of-way and conduits it owns or controls, pursuant to Appendix ROW, in accordance with Section 224 of the Act on terms, conditions, and prices comparable to those offered to any other Telecommunications provider pursuant to each Party's applicable tariffs and/or standard agreements. GENERAL AND CONDITIONS PAGE 21 OF 48 PACIFIC/PAC-WEST TELECOM 022499 17. DATABASE ACCESS -- SECTION 271(c)(2)(B)(x) ------------------------------------------- In accordance with Section 27 (c)(2)(B)(x) of the Act, PACIFIC shall provide CLEC with nondiscriminatory access to databases and associated signaling necessary for call routing and completion. When requesting access to databases not otherwise provided for in this Agreement, or appropriate interfaces, regardless of whether they constitute Unbundled Network Elements, CLEC will use the Network Element Bona Fide Request process. This process is defined in Appendix UNE, which is attached hereto and incorporated herein by reference. 18. INTERCEPT REFERRAL ANNOUNCEMENTS -------------------------------- When an End User customer changes from one Party to the other Party and does not retain its original telephone number, the Party formerly providing service to the End User will provide a referral announcement on the abandoned telephone number. This announcement will provide details on the new number to be dialed to reach this customer. These arrangements will be provided reciprocally for the same period of time and under the same terms and conditions as either provides to its existing End User customers. 19. COORDINATED REPAIR CALLS ------------------------ To avoid and minimize the potential for End User confusion, each Party shall inform their respective End Users of their respective repair bureau telephone number(s) to access such bureaus. In the event that either Party receives a misdirected repair call, the Parties agree to employ the following procedures for handling such calls: (a) To the extent the correct provider can be determined, misdirected repair calls will be referred to the proper provider of local exchange service in a courteous manner, at no charge, and the End User will be provided the correct contact telephone number. (b) In responding to repair calls, neither Party shall make disparaging remarks about the other, nor shall they use these repair calls as the basis for internal referrals, to solicit customers, or to market services, nor shall they initiate extraneous communications beyond the direct referral to the correct repair telephone number. 20. OTHER SERVICES 271(c)(B)(2)(vii) and 271(c)(2)(B)(viii) ------------------------------------------------------- 20.1 White Pages ----------- In accordance with Section 271(c)(2)(B)(viii) of the Act, PACIFIC will make nondiscriminatory access to White Pages service available under the terms and conditions of Appendix WP, attached hereto and incorporated by reference. GENERAL AND CONDITIONS PAGE 22 OF 48 PACIFIC/PAC-WEST TELECOM 022499 20.2 911 and E911 Services --------------------- Pursuant to Section 271(c)(2)(B)(vii)(I) of the Act, PACIFIC will make nondiscriminatory access to 911 and E911 services available under the terms and conditions of Appendix 911, attached hereto and incorporated by reference. 20.3 Directory Assistance ("DA") --------------------------- Pursuant to Section 271(c)(2)(B)(vii)(II) of the Act, PACIFIC will provide nondiscriminatory access to DA services under the terms and conditions identified in Appendix DA, attached hereto and incorporated by reference. 20.4 Operator Services ----------------- Pursuant to Section 271(c)(2)(B)(vii)(III) of the Act, PACIFIC shall provide nondiscriminatory access to Operator Services under the terms and conditions identified in Appendix OS, attached hereto and incorporated by reference. 20.5 Hosting ------- At CLEC's request, PACIFIC shall perform hosting responsibilities for the provision of billable message data and/or access usage data received from a CLEC for distribution to the appropriate billing and/or processing location or for delivery to a CLEC of such data via PACIFIC's internal network or the nationwide CMDS network pursuant. 20.6 Signaling System 7 Interconnection ---------------------------------- At CLEC's request, PACIFIC shall perform SS7 interconnection services for CLEC pursuant to Appendix SS7, attached hereto and incorporated by reference. 21. GENERAL RESPONSIBILITIES OF THE PARTIES --------------------------------------- 21.1 Each Party is individually responsible to provide facilities within its network that are necessary for routing, transporting, measuring, and billing traffic from the other Party's network and for delivering such traffic to the other Party's network in the standard format compatible with PACIFIC's network as referenced in Bellcore's BOC Notes on LEC Networks Practice No. SR-TSV-002275, and to terminate the traffic it receives in that standard format to the proper address on its network. The Parties are each solely responsible for participation in and compliance with national network plans, including the National Network Security Plan and the Emergency Preparedness Plan. 21.2 Neither Party shall use any service related to or use any of the services or elements provided in this Agreement in any manner that interferes with other persons in the use of their service, prevents other persons from using their service, or otherwise impairs the quality of service to other carriers or to either Party's End GENERAL AND CONDITIONS PAGE 23 OF 48 PACIFIC/PAC-WEST TELECOM 022499 Users. Either Party may discontinue or refuse service, but only for so long as the other Party is violating this provision. Upon such violation, either Party shall provide the other Party notice of the violation at the earliest practicable time. 21.3 Each Party is solely responsible for the services it provides to its End Users and to other Telecommunications Carriers. 21.4 The Parties shall work cooperatively to minimize fraud associated with third-number billed calls, calling card calls, and any other services related to this Agreement. 21.5 At all times during the term of this Agreement, each Party shall keep and maintain in force at each Party's expense all insurance required by law (e.g. workers' compensation insurance) as well as general liability insurance for personal injury or death to any one person, property damage resulting from any one incident, and automobile liability with coverage for bodily injury for property damage. Upon request from the other Party, each Party shall provide to the other Party evidence of such insurance (which may be provided through a program of self insurance). 21.6 Unless otherwise stated, each Party will render a monthly bill to the other for service(s) provided hereunder. Remittance in full will be due within fifteen (15) days of that billing date. Interest shall apply on overdue amounts (other than disputed amounts which are subject to Section 30.12) at the rate specified in Section 30.12, unless otherwise specified in an applicable tariff. Each Party reserves the right to net delinquent amounts against amounts otherwise due the other. 21.7 PACIFIC participates at OBF to develop standardized methods and shall implement ordering and billing formats/processes consistent with industry guidelines as capabilities are deployed. Where such guidelines are not available or PACIFIC decides not to fully utilize industry guidelines, PACIFIC will provide CLEC with information on its ordering and billing format/process and requirements at the earliest practicable time. 21.8 For the purposes of establishing provisioning and billing service to CLEC, CLEC is required to provide to PACIFIC its PACIFIC authorized and nationally recognized OCN for facilities-based business (interconnection and/or Unbundled Network Elements) in PACIFIC. CLEC name associated with specific OCN must be consistent in PACIFIC. 21.9 Unless otherwise agreed, if the designated Party fails to file the jointly signed agreement with the Commission within thirty (30) days of both Parties signatures, then the signed agreement is null and no longer valid. If the contract becomes null, either Party can initiate negotiations to a new agreement. GENERAL AND CONDITIONS PAGE 24 OF 48 PACIFIC/PAC-WEST TELECOM 022499 22. EFFECTIVE DATE, TERM, AND TERMINATION ------------------------------------- 22.1 This Agreement shall be effective upon approval by the CPUC (the "Effective Date"). 22.2 The initial term of this Agreement shall be two (2) years (the "Term") which shall commence on the Effective Date. Absent the receipt by one Party of written notice from the other Party at least sixty (60) days prior to the expiration of the Term to the effect that such Party does not intend to extend the Term of this Agreement, this Agreement shall automatically renew and remain in full force and effect on and after the expiration of the Term until terminated by either Party pursuant to Section 22.3, below. 22.3 Either Party may terminate this Agreement in the event that the other Party fails to perform a material obligation that disrupts the operation of either Party's network and/or End User service and fails to cure such material nonperformance within forty-five (45) days after written notice thereof. 22.4 If pursuant to Section 22.2, above, this Agreement continues in full force and effect after the expiration of the Term, either Party may terminate this Agreement ninety (90) days after delivering written notice to the other Party of its intention to terminate this Agreement, subject to Section 22.5, below. Neither Party shall have any liability to the other Party for termination of this Agreement pursuant to this Section 22.4 other than its obligations under Section 22.5, below. 22.5 Upon termination or expiration of this Agreement in accordance with this Section 22, above: (a) each Party shall comply immediately with its obligations set forth in Section 30.6, below; and (b) each Party shall promptly pay all amounts (including any late payment charges) owed under this Agreement; and (c) each Party 's indemnification obligations shall survive. 22.6 If upon expiration or termination the Parties are negotiating a successor agreement, during such period each Party shall continue to perform its obligations and provide the services described herein that are to be included in the successor agreement until such time as the latter agreement becomes effective; provided however, that if the Parties are unable to reach agreement GENERAL AND CONDITIONS PAGE 25 OF 48 PACIFIC/PAC-WEST TELECOM 022499 within six (6) months after termination or expiration of this Agreement, either Party has the right to submit this matter to the Commission for resolution. Until a survivor agreement is reached or the Commission resolves the matter, whichever is sooner, the terms, conditions, rates, and charges stated herein will continue to apply, subject to a true-up based on the successor agreement, if any. Each Party agrees that it will negotiate in good faith concerning a successor agreement to this Agreement, upon request of the other Party, commencing nine months before the end of the initial term. 22.7 No remedy set forth in this Agreement is intended to be exclusive and each and every remedy shall be cumulative and in addition to any other rights or remedies now or hereafter existing under applicable law or otherwise. 23. DISCLAIMER OF REPRESENTATIONS AND WARRANTIES -------------------------------------------- EXCEPT AS EXPRESSLY PROVIDED UNDER THIS AGREEMENT, NO PARTY MAKES OR RECEIVES ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE SERVICES, FUNCTIONS AND PRODUCTS IT PROVIDES UNDER OR CONTEMPLATED BY THIS AGREEMENT AND THE PARTIES DISCLAIM THE IMPLIED WARRANTIES OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE. ADDITIONALLY, NEITHER PACIFIC NOR CLEC ASSUMES RESPONSIBILITY WITH REGARD TO THE CORRECTNESS OF DATA OR INFORMATION SUPPLIED BY THE OTHER WHEN THIS DATA OR INFORMATION IS ACCESSED AND USED BY A THIRD PARTY. 24. CHANGES IN END USER LOCAL EXCHANGE SERVICE PROVIDER SELECTION ------------------------------------------------------------- Each Party will abide by applicable state or federal laws and regulations in obtaining End User authorization prior to changing End User's local service provider to itself and in assuming responsibility for any applicable charges as specified in Section 258(b) of the Telecommunications Act of 1996. CLEC shall make authorization available to PACIFIC upon request and at no charge. Only an End User can initiate a challenge to a change in its local exchange service provider. If an End User notifies PACIFIC or CLEC that the End User requests local exchange service, the Party receiving such request shall be free to immediately provide service to such End User. When an End User changes or withdraws authorization, each Party shall release customer-specific facilities in accordance with the End User's direction or the End User's authorized agent. Further, when an End User abandons the premise, PACIFIC is free to reclaim the unbundled network element facilities for use by another customer and is free to issue service orders required to reclaim such facilities. GENERAL AND CONDITIONS PAGE 26 OF 48 PACIFIC/PAC-WEST TELECOM 022499 25. SEVERABILITY ------------ 25.1 The Parties negotiated the services, arrangements, Interconnection, terms and conditions of this Agreement as a total arrangement and it is intended to be nonseverable, subject only to Section 30.16 of this Agreement. 25.2 In the event the Commission, the FCC, or a court rejects any portion or determines that any provision of this Agreement is contrary to law, or is invalid or unenforceable for any reason, the Parties shall continue to be bound by the terms of this Agreement, insofar as possible, except for the portion rejected or determined to be unlawful, invalid, or unenforceable. In such event, the Parties shall negotiate in good faith to replace the rejected, unlawful, invalid, or unenforceable provision and shall not discontinue service to the other Party during such period if to do so would disrupt existing service being provided to an End User. Nothing in this Agreement shall be construed as requiring or permitting either Party to contravene any mandatory requirement of federal or state law, or any regulations or orders adopted pursuant to such law. 26. INTELLECTUAL PROPERTY --------------------- CLEC as the provider of the Unbundled Network Elements will provide all features, functions, and capabilities of the individual elements. PACIFIC will provide a list of all vendors/licensers applicable to the subject Unbundled Network Element(s) (which vendors have provided PACIFIC a software license) within seven (7) days of a request for such a list by CLEC. PACIFIC agrees to use its best efforts to facilitate the obtaining of any necessary license or right to use agreement. PACIFIC makes no warranties, express or implied, concerning CLEC's (or any third party's) rights with the respect to use of intellectual property (including without limitation, patent, copyright, and trade secret rights). PACIFIC reserves the right to amend the Intellectual Property provision of this Agreement to reflect the FCC ruling (and any appeal therefrom) in CC Docket No. 96-98 (File No. CCBPol 97-4), In the Matter of Petition of MCI for Declaratory ------------------------------------------------ Ruling. ------- 27. INDEMNIFICATION --------------- 27.1 Except as otherwise provided herein or in specific appendices, each Party shall be responsible only for service(s) and facility(ies) which are provided by that Party, its authorized agents, subcontractors, or others retained by such parties, and neither Party shall bear any responsibility for the service(s) and facility(ies) provided by the other Party, its agents, subcontractors, or others retained by such parties. 27.2 Except as otherwise provided herein or in specific appendices, and to the extent not prohibited by law and not otherwise controlled by tariff, each Party (the "Indemnifying Party") shall defend and indemnify the other Party (the GENERAL AND CONDITIONS PAGE 27 OF 48 PACIFIC/PAC-WEST TELECOM 022499 "Indemnified Party") and hold such Indemnified Party harmless against any loss to a third party arising out of the negligence or willful misconduct by such Indemnifying Party, its agents, its End User, contractors, or others retained by such parties, in connection with the indemnifying provision of services or functions under this Agreement. 27.3 In the case of any loss alleged or made by an End User of either Party, the Party whose End User alleged or made such loss ("Indemnifying Party") shall defend and indemnify the other Party ("Indemnified Party") against any and all such claims or loss by its End Users regardless of whether the underlying service was provided or unbundled element was provisioned by the Indemnified Party, unless the loss was caused by the gross negligence or intentional misconduct of the other ("Indemnified") Party. 27.4 CLEC agrees to indemnify, defend and hold PACIFIC harmless from any loss arising out of PACIFIC's provision of 911 services to CLEC or out of CLEC's End Users' use of the 911 service, whether suffered, made, instituted, or asserted by CLEC or its End Users, including for any personal injury or death of any person or persons, except for loss which is the direct result of PACIFIC'S own negligence or willful misconduct. 27.5 PACIFIC shall not be liable for damages to an End User's premises resulting from the furnishing of unbundled elements, including the installation and removal of equipment and associated wiring, unless the damage is caused by PACIFIC's negligence or willful misconduct. PACIFIC does not guarantee or make any warranty with respect to unbundled elements when used in an explosive atmosphere. 27.6 Each Party shall be indemnified, defended and held harmless by the other Party against any loss arising from a Party's use of services or elements provided under this Agreement involving: (a) tort claims, including claims for libel; (b) slander; (c) invasion of privacy; or (d) infringement of copyright arising from a Party's own communications or the communications of its End Users. This includes, but is not limited to, suits arising from disclosure of any customer-specific information associated with either the originating or terminating numbers GENERAL TERMS AND CONDITIONS PAGE 28 OF 48 PACIFIC/PAC-WEST TELECOM 022499 used to provision unbundled elements provided hereunder or all other claims arising out of any act or omission of the End User in the course of using services or functions provided pursuant to this Agreement. 27.7 The Indemnifying Party agrees to defend any suit brought against the Indemnified Party for any loss identified in this Section or specific appendices. The Indemnified Party agrees to notify the Indemnifying Party promptly in writing of any written claims, lawsuits or demands for which the Indemnifying Party may be responsible under this Agreement. The Indemnified Party shall cooperate in every reasonable way to facilitate defense or settlement. The Indemnifying Party shall have the right to control and conduct the defense and settlement of any action or claim subject to the consultation of the Indemnified Party. The Indemnifying Party shall not be responsible for any settlement unless the Indemnifying Party approved such settlement in advance and agrees to be bound by the settlement agreement. 27.8 CLEC acknowledges that its right under this contract to interconnect with PACIFIC's network and to unbundle and/or combine PACIFIC's network elements (including combining with CLEC's network elements) may be subject to or limited by intellectual property (including, without limitation, patent, copyright, and trade secret rights) and contract rights of third parties. It is the sole obligation of CLEC to obtain any consents, authorizations, or licenses under intellectual property or proprietary rights held by third parties that may be necessary for its use of PACIFIC network facilities under this Agreement. PACIFIC hereby conveys no licenses to use such intellectual property rights and makes no warranties, express or implied, concerning CLEC's (or any third party's) rights with respect to such intellectual property and contract rights, including, without limitation, whether such rights will be violated by such interconnection or unbundling and/or combining of elements (including combining with CLEC's network elements) in PACIFIC's network. PACIFIC does not and shall not indemnify or defend, nor be responsible for indemnifying or defending CLEC for any liability losses, claims, costs, damages, demand, penalties, or other expenses arising out of, caused by, or relating to CLEC's interconnection with PACIFIC's network and unbundling and/or combining PACIFIC's network elements (including combining with CLEC's network elements). 27.9 CLEC agrees to indemnify and hold PACIFIC harmless from and against all liability, losses, claims, costs, damages, demand, penalties, or other expenses, including but not limited to costs of litigation and reasonable attorneys fees, arising out of, caused by, or relating to any real or potential claim, demand, or action that CLEC's interconnection with PACIFIC's network, or CLEC's use of services or functions offered hereunder, or unbundling and/or combining of GENERAL TERMS AND CONDITIONS PAGE 29 OF 48 PACIFIC/PAC-WEST TELECOM 022499 PACIFIC's network elements (including combining with CLEC's network elements) violates or infringes upon any intellectual property rights of any third party or constitutes a breach of contract. CLEC shall notify PACIFIC in writing within ten (10) days after CLEC receives notification of any claim or suit subject to this provision. PACIFIC shall undertake and control the defense and settlement of any such claim or suit and CLEC shall cooperate fully with PACIFIC in connection herewith. In no event shall PACIFIC be liable for any consequential damages or loss of profits which CLEC may suffer arising out of same. 27.10 CLEC shall reimburse PACIFIC for damages to PACIFIC facilities utilized to provide unbundled elements hereunder caused by the negligence or willful act of CLEC or resulting from CLEC's improper use of PACIFIC facilities, or due to malfunction of any facilities or equipment provided by other than PACIFIC. Nothing in the foregoing provision shall be interpreted to hold one CLEC liable for another local service provider or End User's actions. Upon reimbursement for damages, PACIFIC will cooperate with CLEC in prosecuting a claim against the person causing such damage. CLEC shall be subrogated to the right of recovery by PACIFIC for the damages to the extent of such payment. 28. LIMITATION OF LIABILITY ----------------------- 28.1 Except for indemnity obligations under this Agreement, or except as otherwise provided in specific appendices, each Party's liability to the other Party for any loss relating to or arising out of any negligent act or omission in its performance under this Agreement, whether in contract or tort, shall not exceed in total the amount PACIFIC or CLEC has to or would have charged the other Party for the affected service(s) or function(s) which were not performed or were otherwise improperly performed. 28.2 Except for losses alleged or made by an End User of either Party, or except as otherwise provided in specific appendices, in the case of any loss alleged or made by a third party arising under the negligence or willful misconduct of both Parties, each Party shall bear, and its obligation under this section shall be limited to, that portion (as mutually agreed to by the Parties) of the resulting expense caused by its own negligence or willful misconduct or that of its agents, servants, contractors, or others acting in aid or concert with it. 28.3 In no event shall either Party have any liability whatsoever to the other Party for any indirect, special, consequential, incidental, or punitive damages, including but not limited to, loss of anticipated profits or revenue or other economic loss in connection with or arising from anything said, omitted, or done hereunder (collectively, "Consequential Damages"), even if the other Party has been advised GENERAL TERMS AND CONDITIONS PAGE 30 OF 48 PACIFIC/PAC-WEST TELECOM 022499 of the possibility of such damages; provided that the foregoing shall not limit a Party's obligation under this Agreement to indemnify, defend, and hold the other Party harmless against any amounts payable to a third party, including any losses, costs, fines, penalties, criminal or civil judgments or settlements, expenses (including attorney's fees) and Consequential Damages of such third party. 29. REGULATORY APPROVAL ------------------- 29.1 The Parties understand and agree that this Agreement will be filed with the Commission and may thereafter be filed with the FCC. The Parties believe in good faith and agree that the terms in this Agreement, to which they have agreed (i.e. excluding arbitrated provisions) are not inconsistent with the specifically mentioned sections of the Act and are in the public interest. Each Party covenants and agrees to fully support approval of this Agreement by the Commission or the FCC under Section 252 of the Act without modification. 30. MISCELLANEOUS ------------- 30.1 Authorization ------------- 30.1.1 PACIFIC is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has full power and authority to execute and deliver this Agreement and to perform the obligations hereunder. 30.1.2 CLEC is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. 30.2 Compliance and Certification ---------------------------- 30.2.1 Each Party shall comply with all federal, state, and local laws, rules, and regulations applicable to its performance under this Agreement. 30.2.2 Each Party warrants that it has obtained all necessary state certification required in those states in which it has ordered services from the other Party pursuant to this Agreement. Upon request by any state governmental entity, each Party shall provide proof of certification. GENERAL TERMS AND CONDITIONS PAGE 31 OF 48 PACIFIC/PAC-WEST TELECOM 022499 30.2.3 Each Party represents and warrants that any equipment, facilities or services provided to the other Party under this Agreement comply with the Communications Law Enforcement Act ("CALEA"). Each Party shall indemnify and hold the other Party harmless from any and all penalties imposed upon the other Party for such noncompliance and shall at the non-compliant Party's sole cost and expense, modify or replace any equipment, facilities or services provided to the other Party under this Agreement to ensure that such equipment, facilities and services fully comply with CALEA. 30.3 Law Enforcement --------------- PACIFIC and CLEC shall handle law enforcement requests as follows: (a) Intercept Devices: ----------------- Local and federal law enforcement agencies periodically request information or assistance from local telephone service providers. When either Party receives a request associated with an End User of the other Party, it shall refer such request to the Party that serves such End User, unless the request directs the receiving Party to attach a pen register, trap-and-trace or form of intercept on the Party's facilities, in which case that Party shall comply with any valid request. (b) Subpoenas: --------- If a Party receives a subpoena for information concerning an End User the Party knows to be an End User of the other Party, it shall refer the subpoena to the requesting party with an indication that the other Party is the responsible company, unless the subpoena requests records for a period of time during which the Party was the End User's service provider, in which case the Party will respond to any valid request. (c) Emergencies: ----------- If a Party receives a request from a law enforcement agency for temporary number change, temporary disconnect, or one-way denial of outbound calls for an End User of the other Party by the receiving Party's switch, that Party will comply with a valid emergency request. However, neither Party shall be held liable for any claims or damages arising from compliance with such requests on behalf of the other Party's End User and the Party serving such End User agrees to indemnify and hold the other Party harmless against any and all such claims. GENERAL TERMS AND CONDITIONS PAGE 32 OF 48 PACIFIC/PAC-WEST TELECOM 022499 30.4 Independent Contractor ---------------------- Each Party and each Party's contractor shall be solely responsible for the withholding or payment of all applicable federal, state and local income taxes, social security taxes and other payroll taxes with respect to its employees, as well as any taxes, contributions or other obligations imposed by applicable state unemployment or workers' compensation acts. Each Party has sole authority and responsibility to hire, fire and otherwise control its employees. 30.5 Force Majeure ------------- Neither Party shall be liable for any delay or failure in performance of any part of this Agreement from any cause beyond its control and without its fault or negligence including, without limitation, acts of nature, acts of civil or military authority, government regulations, embargoes, epidemics, terrorist acts, riots, insurrections, fires, explosions, earthquakes, nuclear accidents, floods, work stoppages, equipment failure, cable cuts, power blackouts, volcanic action, other major environmental disturbances, unusually severe weather conditions, inability to secure products or services of other persons or transportation facilities or acts or omissions of transportation carriers In such event, the Party affected shall, upon giving prompt notice to the other Party, be excused from such performance on a day- to-day basis to the extent of such interference (and the other Party shall likewise be excused from performance of its obligations on a day-for-day basis to the extent such Party's obligations related to the performance so interfered with). The affected Party shall use its best efforts to avoid or remove the cause of nonperformance and both Parties shall proceed to perform with dispatch once the causes are removed or cease. 30.6 Confidentiality --------------- 30.6.1 All information, including but not limited to specifications, microfilm, photocopies, magnetic disks, magnetic tapes, drawings, sketches, models, samples, tools, technical information, data, employee records, maps, financial reports, and market data: (a) furnished by one Party (the "Disclosing Party") to the other Party (the "Receiving Party") dealing with customer-specific, facility-specific, or usage-specific information, other than customer information communicated for the purpose of publication or directory database inclusion, 911, call processing, billing or settlement or as otherwise mutually agreed upon; or GENERAL TERMS AND CONDITIONS PAGE 33 OF 48 PACIFIC/PAC-WEST TELECOM 022499 (b) in written, graphic, electromagnetic, or other tangible form and marked at the time of delivery as "Confidential" or "Proprietary;"; or (c) communicated orally and declared to the Receiving Party at the time of delivery, or by written notice given to the Receiving Party within ten (10) days after declaration to be "Confidential" or "Proprietary" (collectively referred to as "Proprietary Information"), shall remain the property of the Disclosing Party. 30.6.2 Upon request by the Disclosing Party, the Receiving Party shall return all tangible copies of Proprietary Information, whether written, graphic, or otherwise. In the event of the expiration or termination of this Agreement for any reason whatsoever, each Party shall return to the other Party or destroy all Proprietary Information and other documents, work papers and other material (including all copies thereof) obtained from the other Party in connection with this Agreement. 30.6.3 Each Party shall keep all the other Party's Proprietary Information confidential in the same manner in which it keeps its own Proprietary Information confidential, and shall use the other Party's Proprietary Information only for performing the covenants contained in the Agreement and shall disclose such Proprietary Information only to those employees, contractors, agents or Affiliates who have a need to know. Neither Party shall use the other Party's Proprietary Information for any other purpose except upon such terms and conditions as may be agreed upon between the Parties in writing. 30.6.4 Unless otherwise agreed, the obligations of confidentiality and nonuse set forth in the Agreement do not apply to such Proprietary Information that: (a) was at the time of receipt, already known to the Receiving Party, free of any obligation to keep confidential and evidenced by written records prepared prior to delivery by the Disclosing Party; (b) is, or becomes publicly known through no wrongful act of the receiving Party; (c) is rightfully received from a third person having no direct or indirect secrecy or confidentiality obligation to the Disclosing Party with respect to such information; GENERAL TERMS AND CONDITIONS PAGE 34 OF 48 PACIFIC/PAC-WEST TELECOM 022499 (d) is independently developed by an employee, agent, or contractor of the Receiving Party which individual is not involved in any manner with the provision of services pursuant to the Agreement and does not have any direct or indirect access to the Proprietary Information; (e) is disclosed to a third person by the Disclosing Party without similar restrictions on such third person's rights; (f) is approved for release by written authorization of the Disclosing Party; (g) is required to be made public by the Receiving Party pursuant to applicable law or regulation provided that the Receiving Party shall provide the Disclosing Party with written notice of such requirement as soon as possible and prior to such disclosure. The Disclosing Party may then either seek appropriate protective relief from all or part of such requirement or, if it fails to successfully do so, it shall be deemed to have waived the Receiving Party's compliance with Section 30.6 with respect to all or part of such requirement. The Receiving Party shall use all commercially reasonable efforts to cooperate with the Disclosing Party in attempting to obtain any protective relief which such Disclosing Party chooses to obtain. Notwithstanding the foregoing, PACIFIC shall be entitled to disclose confidential information on a confidential basis to regulatory agencies upon request for information as to PACIFIC's activities under the Act. 30.6.5 Notwithstanding any other provision of this Agreement, the Proprietary Information provisions of this Agreement shall apply to all information furnished by either Party to the other in furtherance of the purpose of this Agreement, even if furnished before the date of this Agreement. 30.6.6 Pursuant to Section 222(b) of the Act, both Parties agree to limit their use of Proprietary Information received from the other to the permitted purposed identified in the Act. 30.7 Governing Law ------------- For all claims under this Agreement that are based upon issues within the jurisdiction (primary or otherwise) of the FCC, the exclusive jurisdiction and remedy for all such claims shall be as provided for by the FCC and the Act. For all claims under this Agreement that are based upon issues within the jurisdiction GENERAL TERMS AND CONDITIONS PAGE 35 OF 48 PACIFIC/PAC-WEST TELECOM 022499 (primary or otherwise) of the Commission, the exclusive jurisdiction for all such claims shall be with such Commission, and the exclusive remedy for such claims shall be as provided for by such Commission. In all other respects, this Agreement shall be governed by the domestic laws of the State of California without reference to conflict of law provisions. 30.8 Taxes ----- 30.8.1 Each Party purchasing services hereunder shall pay or otherwise be responsible for all federal, state, or local sales, use, excise, gross receipts, transaction or similar taxes, fees, or surcharges (hereinafter "Tax") imposed on or with respect to the services provided by or to such Party, except for any Tax on either Party's corporate existence, status, or income. Whenever possible, these amounts shall be billed as a separate item on the invoice. To the extent a sale is claimed to be for resale tax exemption, the purchasing Party shall furnish the providing Party a proper resale tax exemption certificate as authorized or required by statute or regulation by the jurisdiction providing said resale tax exemption. Failure to timely provide said resale tax exemption certificate will result in no exemption being available to the purchasing Party until such time as the purchasing Party presents a valid certificate. 30.8.2 With respect to any purchase of services, facilities or other arrangements, if any Tax is required or permitted by applicable law to be collected from the purchasing Party by the providing Party, then: (a) the providing Party shall bill the purchasing Party for such Tax; (b) the purchasing Party shall remit such Tax to the providing Party; and (c) the providing Party shall remit such collected Tax to the applicable taxing authority. 30.8.3 With respect to any purchase hereunder of services, facilities or arrangements that are resold to a third party, if any Tax is imposed by applicable law on the End User in connection with any such purchase, then: (a) the purchasing Party shall be required to impose and/or collect such Tax from the End User; and GENERAL TERMS AND CONDITIONS PAGE 36 OF 48 PACIFIC/PAC-WEST TELECOM 022499 (b) the purchasing Party shall remit such Tax to the applicable taxing authority. The purchasing Party agrees to indemnify and hold harmless the providing Party on an after-tax basis for any costs incurred by the providing Party as a result of actions taken by the applicable taxing authority to collect the Tax from the providing Party due to the failure of the purchasing Party to pay or collect and remit such tax to such authority. 30.8.4 If the providing Party fails to collect any Tax as required herein, then, as between the providing Party and the purchasing Party: (a) the purchasing Party shall remain liable for such uncollected Tax; and (b) the providing Party shall be liable for any penalty and interest assessed with respect to such uncollected Tax by such authority. However, if the purchasing Party fails to pay any taxes properly billed, then, as between the providing Party and the purchasing Party, the purchasing Party will be solely responsible for payment of the taxes, penalty and interest. 30.8.5 If the purchasing Party fails to impose and/or collect any Tax from End Users as required herein, then, as between the providing Party and the purchasing Party, the purchasing Party shall remain liable for such uncollected Tax and any interest and penalty assessed thereon with respect to the uncollected Tax by the applicable taxing authority. With respect to any Tax that the purchasing Party has agreed to pay or impose on and/or collect from End Users, the purchasing Party agrees to indemnify and hold harmless the providing Party on an after-tax basis for any costs incurred by the providing Party as a result of actions taken by the applicable taxing authority to collect the Tax from the providing Party due to the failure of the purchasing Party to pay or collect and remit such Tax to such authority. 30.9 Non-Assignment -------------- Each Party covenants that, if it sells or otherwise transfers to a third party its Telephone Exchange and Switched Access network facilities within any territory within which PACIFIC is an Incumbent Local Exchange Carrier ("PACIFIC's Territory")as of the date of this Agreement, or any portion thereof, to a third party, it will require as a condition of such transfer that the transferee agree to be GENERAL TERMS AND CONDITIONS PAGE 37 OF 48 PACIFIC/PAC-WSET TELECOM 022499 bound by this Agreement with respect to services provided over the transferred facilities. Except as provided in this paragraph, neither Party may assign or transfer (whether by operation of law or otherwise) this Agreement (or any rights or obligations hereunder) to a third party without the prior written consent of the other Party; provided that each Party may assign this Agreement to a corporate Affiliate or an entity under its common control or an entity acquiring all or substantially all of its assets or equity by providing prompt written notice to the other Party of such assignment or transfer. Any attempted assignment or transfer that is not permitted is void ab initio. Without limiting the generality of the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the Parties' respective successors and assigns. 30.10 Non-Waiver ---------- Failure of either Party to insist on performance of any term or condition of this Agreement or to exercise any right or privilege hereunder shall not be construed as a continuing or future waiver of such term, condition, right or privilege. 30.11 Audits ------ Each Party to this Agreement will be responsible for the accuracy and quality of its data as submitted to the respective Parties involved. 30.11.1 Upon reasonable written notice and at its own expense, each Party or its authorized representative (providing such authorized representative does not have a conflict of interest related to other matters before one of the Parties) shall have the right to conduct an audit of the other Party to give assurances of compliance with the provisions of this Agreement; provided, that neither Party may request more than two (2) such audits within any twelve (12) month period. This includes on-site audits at the other Party's or the Party's vendor locations. Each Party, whether or not in connection with an audit, shall maintain reasonable records for a minimum of twenty-four (24) months and provide the other Party with reasonable access to such information as is necessary to determine amounts receivable or payable under this Agreement. Each Party's right to access information for audit purposes is limited to data not in excess of twenty-four (24) months in age. 30.12 Disputed Amounts ---------------- 30.12.1 Any undisputed amounts not paid when due shall accrue interest from the date such amounts were due at the lesser of: (a) one and one-half percent (1-1/2%) per month; or GENERAL TERMS AND CONDITIONS PAGE 38 OF 48 PACIFIC/PAC-WSET TELECOM 022499 (b) the highest rate of interest that may be charged under applicable law. 30.13 DISPUTE RESOLUTION. ------------------ 30.13.1 Alternative to Litigation. Except as provided under Section 252 ------------------------- of the Act with respect to the approval of this Agreement by the Commission, the Parties desire to resolve disputes arising out of or relating to this Agreement without litigation. Accordingly, except for action seeking a temporary restraining order or an injunction related to the purposes of this Agreement, or suit to compel compliance with this dispute resolution process, the Parties agree to use the following alternative dispute resolution procedures as their sole remedy with respect to any controversy or claim arising out of or relating to this Agreement or its breach. 30.13.2 Negotiations. At the written request of a Party, each Party will ------------ appoint a knowledgeable, responsible representative to meet and negotiate in good faith to resolve any dispute arising out of or relating to this Agreement. The Parties intend that these negotiations be conducted by non-lawyer, business representatives. The location, format, frequency, duration, and conclusion of these discussions shall be left to the discretion of the representatives. Upon agreement, the representatives may utilize other alternative dispute resolution procedures such as mediation to assist in the negotiations. Discussions and correspondence among the representatives for purposes of these negotiations shall be treated as Confidential Information developed for purposes of settlement, exempt from discovery, and shall not be admissible in the arbitration described below or in any lawsuit without the concurrence of all Parties. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise discoverable, be discovered or otherwise admissible, be admitted in evidence, in the arbitration or lawsuit. 30.13.3 Arbitration. If the negotiations do not resolve the dispute ----------- within sixty (60) business days of the initial written request, the dispute shall be submitted to binding arbitration by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association ("AAA") then in effect except that the Parties may select an arbitrator outside AAA rules upon mutual agreement. A Party may demand such arbitration in accordance with the procedures set out in those rules. The Parties shall mutually agree upon a discovery plan including the type and number of interrogatories and depositions allowed. If unable to agree on the discovery plan the Parties will ask the arbitrator to issue an arbitration plan consistent with the AAA rules. The arbitration hearing shall be commenced within sixty (60) business days of the GENERAL TERMS AND CONDITIONS PAGE 39 OF 48 PACIFIC/PAC-WSET TELECOM 022499 demand for arbitration. The arbitration shall be held in a mutually agreeable city. The arbitrator shall control the scheduling so as to process the matter expeditiously. The Parties may submit written briefs. The arbitrator shall rule on the dispute by issuing a written opinion within thirty (30) business days after the close of hearings. The times specified in this section may be extended upon mutual agreement of the Parties or by the arbitrator upon a showing of good cause. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. 30.13.4 Expedited Arbitration Procedures. If the issue to be resolved -------------------------------- through the negotiations referenced in Sections 30.13.2 and 30.13.3 directly and materially affects service to either Party's End Users, then the period of resolution of the dispute through negotiations before the dispute is to be submitted to binding arbitration shall be five (5) business days. Once such a service affecting dispute is submitted to arbitration, the arbitration shall be conducted pursuant to the expedited procedures rules of the Commercial Arbitration Rules of the AAA (i.e., rules 53 through 57) then in effect. 30.13.5 Costs. Each Party shall bear its own costs of these procedures. ----- A Party seeking discovery shall reimburse the responding Party the costs of production of documents (including search time and reproduction costs). The Parties shall equally split the fees of the arbitration and the arbitrator. 30.13.6 Continuous Service. The Parties shall continue providing ------------------ services to each other during the pendency of any dispute resolution procedure, and each Party shall continue to perform its obligations (including making payments in accordance with this Agreement). 30.13.7 No Conflict ----------- 30.13.7.1 The Dispute Resolution procedures set forth in this Agreement are not intended to conflict with applicable requirements of the Act or the state commission with regard to procedures for the resolution of disputes arising out of this Agreement. In the event of any such conflict, the requirements of the Act or the Commission shall control. 30.14 Notices ------- Any notice to a Party required or permitted under this Agreement shall be in writing and shall be deemed to have been received on the date of service if served personally; on the date receipt is acknowledged in writing by the recipient if GENERAL TERMS AND CONDITIONS PAGE 40 OF 48 PACIFIC/PAC-WSET TELECOM 022499 delivered by regular mail; or on the date stated on the receipt if delivered by certified or registered mail or by a courier service that obtains a written receipt. Notice may also be provided by facsimile, which shall be effective on the next Business Day following the date of transmission as reflected in the facsimile confirmation sheet. "Business Day" shall mean Monday through Friday, PACIFIC/CLEC holidays excepted. Any notice shall be delivered using one of the alternatives mentioned in this section and shall be directed to the applicable address indicated below or such address as the Party to be notified has designated by giving notice in compliance with this section. ==================================================================== NOTICE CONTACT CLEC CONTACT PACIFIC CONTACT -------------------------------------------------------------------- NAME/TITLE Jeff Webster Jerry Gilmore - Director -------------------------------------------------------------------- STREET ADDRESS 4202 Coronado Ave. 370 Third St., Room 716 -------------------------------------------------------------------- CITY, STATE, ZIP CODE Stockton, CA 95204 San Francisco, CA 94107 -------------------------------------------------------------------- TELEPHONE NUMBER 209 926-3275 415 542-3010 -------------------------------------------------------------------- FAX NUMBER 209 926-4272 415 543-2516 -------------------------------------------------------------------- 30.15 Publicity and Use of Trademarks or Service Marks ------------------------------------------------ 30.15.1 The Parties agree not to use in any advertising or sales promotion, press releases, or other publicity matters any endorsements, direct or indirect quotes, or pictures implying endorsement by the other Party or any of its employees without such Party's prior written approval. The Parties will submit to each other for written approval, prior to publication, all publicity matters that mention or display one another's name and/or marks or contain language from which a connection to said name and/or marks may be inferred or implied; the Party to whom a request is directed shall respond promptly. Nothing herein, however, shall be construed as preventing either Party from publicly stating the fact that it has executed this Agreement with the other Party. 30.15.2 Nothing in this Agreement shall grant, suggest, or imply any authority for one Party to use the name, trademarks, service marks, or trade names of the other for commercial purposes without prior written approval. 30.16 Section 252(i) Obligations -------------------------- If Pacific enters into an agreement (the "Other Agreement") approved by the Commission or FCC pursuant to Section 252 of the Act (regardless of whether the approved agreement was negotiated or arbitrated) which provides for the provision of any individual interconnection, service, or network element arrangement covered in this Agreement to another requesting GENERAL TERMS AND CONDITIONS PAGE 41 OF 48 PACIFIC/PAC-WSET TELECOM 022499 Telecommunications Carrier, including an Affiliate, Pacific shall make available to CLEC such individual interconnection, service, or network element arrangement upon the terms and conditions provided in the Other Agreement which are legitimately related to the purchase of the individual element being sought. CLEC shall notify Pacific in writing of the terms and conditions which it desires to incorporate into this Agreement, and Pacific shall submit the request by advice letter to the Commission for approval within 30 days after such notice from CLEC. At its sole option, CLEC may also avail itself of the Other Agreement in its entirety. Nothing in this Section 30.16 is intended to or shall be construed to restrict in any manner any Party's rights pursuant to Section 252 of the Act or any regulations adopted thereunder. 30.17 Joint Work Product ------------------ This Agreement is the joint work product of the Parties and has been negotiated by the Parties and their respective counsel and shall be fairly interpreted in accordance with its terms and, in the event of any ambiguities, no inferences shall be drawn against either Party. 30.18 Intervening Law --------------- This Agreement is entered into as a result of both private negotiation between the Parties and the incorporation of the results of arbitration by the California Public Utilities Commission. If the actions of the State of California or federal legislative bodies, courts, or regulatory agencies of competent jurisdiction, including but not limited to the United States Supreme Court's decision in AT&T Corp. v. Iowa Utilities Bd., 1999 WL 24568 (U.S.), and any --------------------------------- remand thereof, invalidate, modify, or stay the enforcement of laws or regulations that were the basis for a provision of this Agreement, the affected provision shall be invalidated, modified, or stayed, consistent with the action of the legislative body, court, or regulatory agency. In such event, the Parties shall expend diligent efforts to arrive at an agreement respecting the modifications to the Agreement. If negotiations fail, disputes between the Parties concerning the interpretation of the actions required or provisions affected by such governmental actions shall be resolved pursuant to the dispute resolution process provided for in this Agreement. The Parties further acknowledge and agree that by executing this Agreement, neither Party waives any of its rights, remedies, or arguments with respect to AT&T Corp. v. Iowa Utilities Bd., 1999 WL --------------------------------- 24568 (U.S.), or the outcome of any remand thereof including its rights under this paragraph. Finally, whenever GENERAL TERMS AND CONDITIONS PAGE 42 OF 48 PACIFIC/PAC-WSET TELECOM 022499 a tariffed rates is cited or quoted, it is understood that said cite incorporates any changes to said tariffs as required by the Telecommunications Act of 1996. 30.19 No Third Party Beneficiaries; Disclaimer of Agency -------------------------------------------------- This Agreement is for the sole benefit of the Parties and their permitted assigns, and nothing herein express or implied shall create or be construed to create any third-party beneficiary rights hereunder. Except for provisions herein expressly authorizing a Party to act for another, nothing in this Agreement shall constitute a Party as a legal representative or agent of the other Party, nor shall a Party have the right or authority to assume, create or incur any liability or any obligation of any kind, express or implied, against or in the name or on behalf of the other Party unless otherwise expressly permitted by such other Party. Except as otherwise expressly provided in this Agreement, no Party undertakes to perform any obligation of the other Party, whether regulatory or contractual, or to assume any responsibility for the management of the other Party's business. 30.20 No License ---------- No license under patents, copyrights or any other intellectual property right (other than the limited license to use consistent with the terms, conditions and restrictions of this Agreement) is granted by either Party or shall be implied or arise by estoppel with respect to any transactions contemplated under this Agreement. 30.21 Survival -------- The Parties' obligations under this Agreement which by their nature are intended to continue beyond the termination or expiration of this Agreement shall survive the termination or expiration of this Agreement. 30.22 Scope of Agreement ------------------ This Agreement is intended to describe and enable specific Interconnection and compensation arrangements between the Parties. This Agreement does not obligate either Party to provide arrangements not specifically provided herein. 30.23 Entire Agreement ---------------- The terms contained in this Agreement and any Schedules, Exhibits, Appendices, tariffs and other documents or instruments referred to herein, which are incorporated into this Agreement by this reference, constitute the entire agreement between the Parties with respect to the subject matter hereof, superseding all prior understandings, proposals and other communications, oral or written. Neither Party shall be bound by any preprinted terms additional to or different from those in this Agreement that may appear subsequently in the other Party's form documents, purchase orders, quotations, acknowledgments, invoices or other GENERAL TERMS AND CONDITIONS PAGE 43 OF 48 PACIFIC/PAC-WSET TELECOM 022499 communications. This Agreement may only be modified in writing signed by an officer of each Party. PAC-WEST TELECOM Pacific Bell By SBC Telecommunication, Inc. Its authorized agent Signature: /s/ Wallance W. Griffin Signature: /s/ Sandy Kinney -------------------------- ----------------------------- Name: WALLACE W. GRIFFIN Name: Sandy Kinney ------------------------------- ---------------------------------- (Print or Type) (Print or Type) Title: PRESIDENT & CEO Title: President - Industry Markets ------------------------------ (Print or Type) Date: June 29, 1999 Date: June 28, 1999 ------------------------------- --------------------------------- BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA In the Matter of the Application of Pacific Bell ) (U-1001-C) for arbitration of an interconnection ) agreement with Pac-West Telecomm, Inc. ) Application 98-11-024 (U-5266-C) pursuant to Section 252(b) of the ) Telecommunications Act of 1996 ) ____________________________________________________) ERRATA TO APPROVED INTERCONNECTION AGREEMENT Pac-West Telecomm, Inc. ("Pac-West") hereby submits the following corrected pages to the Approved Interconnection Agreement between Pacific Bell and Pac- West Telecomm, Inc., filed on June 29, 1999, pursuant to Ordering Paragraph 1 of Decision 99-06-088 dated June 24, 1999, and an additional letter from counsel for Pacific Bell to counsel for Pac-West as follows: 1. "Pac-West Telecom" on the title page has been corrected to "Pac-West Telecomm, Inc." 2. "Pac-West Telecom, Inc." in the third line of the first paragraph on page 1 of 48 of the General Terms and Conditions has been corrected to "Pac-West Telecomm, Inc." Please note that the page headers throughout the document include the identifier "Pacific/Pac-West Telecom." The header should state "Pacific/Pac-West Telecomm." Since this language is not part of the text of the Interconnection Agreement and in an effort to conserve resources, Pac-West is merely noting this correction and not including separate errata pages. 3. A letter dated June 29, 1999 from Daniel J. McCarthy of Pacific Bell to James M. Tobin of Morrison & Foerster, counsel for Pac-West. This letter was attached to the copies of the Interconnection Agreement executed by Pacific Bell and delivered to Pac-West for execution. Counsel Pacific Bell has concurred in the contents of this Errata. Respectfully submitted, /s/ James M. Tobin James M. Tobin Mary E. Wand Ruth Ann Keene Morrison & Foerster LLP 425 Market Street San Francisco, CA 94105-2482 (415) 268-7000 (telephone) (415) 268-7522 (facsimile) June 30, 1999 EX-10.25 4 GTE INTERCONNECTION AGREEMENT TELECOMMUNICATION FACILITY INTERCONNECTION AGREEMENT ---------------------------------------------------- PURSUANT TO THIS TELECOMMUNICATION FACILITY INTERCONNECTION AGREEMENT ("Agreement") for wireline interconnection, GTE California Inc. (GTEC), with its address for purposes of this Agreement at One GTE Place, Thousand Oaks, California, and Pac-West Telecomm Inc. (Pac-West) with its address for the purposes of this Agreement at 4210 Coronado Avenue, Stockton, California (collectively, "the Parties") will extend certain arrangements to one another within each LATA in which they both operate within the State of California, as described and according to the terms, conditions, and pricing specified hereunder. The Parties enter into this Agreement without prejudice to any positions they have taken previously, or may take in the future in any legislative, regulatory, or other forum. This Agreement shall at all times be subject to such changes or modifications by the California Public Utilities Commission (CPUC or Commission) or Federal Communication Commission as either may, from time to time, direct the exercise of its jurisdiction. If any such modifications renders the Agreement inoperable or creates any ambiguity or requirement for further amendment to the Agreement, the Parties will negotiate in good faith to agree upon any necessary amendments to the Agreement. ARTICLE 1 RECITALS WHEREAS, The Telecommunications Act of 1996, signed into law February 8, 1996, --(Pub.L. NO.104-104), gives to the Commission and to the Federal Communications Commission the authority to promulgate rules and regulations in accordance therewith; and WHEREAS, Pac-West and GTE intend to act in accordance with the requirements, duties and obligations and rights contained in the Telecommunications Act of 1996 and with any rules and regulations promulgated thereunder, and WHEREAS, GTE and Pac-West desire to enter into arrangements for interconnectivity between their respective common carrier networks, for the purposes of terminating traffic on each other's network; and WHEREAS, in the service of inter-operability, the Parties should be able to efficiently exchange traffic and signaling at well-defined and standardized points of mutually agreed interconnection; NOW, THEREFORE, in consideration of the mutual provisions contained herein and good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. "GTEC" and Pac-West hereby covenant and agree as follows: ARTICLE 2 DEFINITIONS 2.01 "Automatic Number Identification" or " ANI" is a signaling parameter which refers to the number transmitted through the network identifying the billing number of the calling party. 2.02 "Calling Party Number" or CPN is a Common Channel Signaling parameter which refers to the number transmitted through the network identifying the calling party. 2.03 "Centum Call Seconds (CCS) is a traffic measurement wherein a scan interval of 100 seconds is used to record usage. 2.04 "End Office Switches" which are Class 5 switches from which end user Exchange Services are directly connected and offered. 2.05 "Tandem Office Switches" are Class 4 switches which are used to connect and switch trunks between and among other network Switches. One Switch may be employed as combination End Office/Tandem Office switches (combination Class 5/Class 4). 2.06 "Commission" or "CPUC" means the California Public Utilities Commission. 2.07 "Common Channel Signaling" or "CCS" denotes a method of digitally transmitting call set-up and network control data over a special network fully separate from the public switched network that carries the actual call. 2.08 "Cross Connection" means an intra-wire center channel connecting the parties' separate pieces of telecommunications equipment. 2.09 "DS1" is a digital signal rate of 1.544 Mbps. 2.10 "DS3" is a digital signal rate of 44.736 Mbps. 2.11 "Electronic File Transfer" refers to any system/process which utilizes an electronic format and protocol to send/receive data files. 2.12 "Exchange Message Record" or "EMR" is the standard used for the exchange of telecommunications message information among Local Exchange Carriers for billable, non-billable, sample, settlement and study data. EMR format is contained in BR-010-200-010-CRIS Exchange 2 Message Record, a Bellcore document which defines industry standards for exchange message records. 2.13 "Exchange Service" means a service offered to end users which provides the end user with a telephonic connection to, and a unique local telephone number address on, the public switched telecommunications network, and which enables such end user to generally place calls to, or receive calls from, all other stations on the public switched telecommunications network. Exchange services includes, but not limited to basic residence and business line service PBX-trunk, CentraNet(sm) line service and ISDN line services. Exchange Service does not include Private Line, Toll, Switched and Special Access Services. 2.14 "Interconnection" denotes the physical interconnection of transmission facilities used by parties to operate their respective communication networks. Unless expressly agreed to otherwise, the facilities will be fiber transmission facilities. The architecture in interconnection may include several methods, including, but not limited to: virtual expanded interconnection service (EIS) as provided in GTEC's CPUC Tariff Schedule C-1, Section 17, mid-span meet, tarriffed special access services, and transmission capacity furnished by third parties. 2.15 "Interexchange Carrier" or "IXC" means a provider of stand-alone interLATA telecommunications services. 2.16 "ISDN" means Integrated Services digital network which is a switched network service providing end-to-end digital connectivity for the simultaneous transmission of voice and data. ISDN is provisioned end- to-end pursuant to TR-444. 2.17 "Local Exchange Traffic" means Zone Usage Measurement ("ZUM") Zone 1, Zone 2, Zone 3 and Extended Area Service Calls. 2.18 "Local Exchange Carrier" or "LEC" and "Competitive Local Exchange Carrier" or "CLC" shall have the meanings as set forth in Commission rules for Local Competition, D. 95-07-054, App. A., Sections 3.A and B, respectively. 2.19 "MECAB" refers to the Multiple Exchange Carrier Access Billing ("MECAB") document prepared by the Billing Committee of the Ordering and Billing Forum ("OBF"), which functions under the auspices of the Carrier Liaison Committee ("CLC") of the Alliance for Telecommunication Industry Solutions ("ATIS"). The 3 MECAB document, published by Bellcore as Special Report SR-BDS-000983, contains the recommended guidelines for the billing of an access service provided by two or more LECs, or by one LEC in two or more states within a single LATA. 2.20 "MECOD" refers to the Multiple Exchange Carriers Ordering and Design ("MECOD") Guidelines for Access Services - Industry Support Interface, a document developed by the Ordering/Provisioning Committee under the auspices of the Ordering and Billing forum ("OBF"), which functions under the auspices of the Carrier Liaison Committee ("CLC") of the alliance for Telecommunications Industry solutions ("ATIS"). The MECOD document published by Bellcore as Special Report SR STS-002643, established methods for processing orders for access service which is to be provided by two or more LECs. 2.21 "Meet-Point-Billing" or "MPB" refers to an arrangement whereby GTE and Pac-West jointly provide facilities between a GTE tandem switch and an PAC-West end office switch (or vise versa) in order to provide switched access service to one or more interexchange carriers. MPB establishes the procedures to bill the interexchange carriers for the jointly provided switched access. 2.22 "Mid-Span Fiber Meet" is an interconnection architecture whereby two carriers mutually agree to jointly plan and engineer their facility meet-point at a designated manhole or junction location by means of a fiber splice transmission facility. 2.23 "NANP" means the "North America Numbering Plan", the system of telephone numbering employed in the United States, Canada and the Caribbean countries which employ NPA 809. 2.24 "Numbering Plan area" or "NPA" is also sometimes referred to as an area code. This is the three digit indicator which is defined by the "A", "B", and "C" digits of each 10-digit telephone number within the North American Numbering Plan ("NANP"). Each NPA contains 800 possible NXX Codes. There are two general categories of NPA, "Geographic NPA" and Non-Geographic NPAs". A "Geographic NPA" is associated with a defined geographic area, and all telephone numbers bearing such NPA are associated with services provided within that geographic area. A "Non-Geographic NPA", also known as a "Service Access Code" or SAC Code" is typically associated with a specialized telecommunications 4 service which may be provided across multiple geographic NPA area; 800,900,700, and 888 are examples of Non-Geographic NPAs. 2.25 "NXX", "NXX Code", "Central Office Code" or "CO Code" is the three digit switch entity indicator which is defined by the "D", "E", and "F" digit of a 10-digit telephone number within the North America Numbering Plan ("NANP"). Each NXX Code contains 10,000 station numbers. Historically entire NXX code blocks have been assigned to specific individual local exchange end office switches. 2.26 "Percent of Local Usage" (PLU) is a calculation which represents the ratio of local minutes to the sum of local and intralata toll minutes between exchange carriers sent over Local Interconnection Trunks. Directory Assistance, BLV/BLVI, 900, 967 transiting calls from other exchange carriers or wireless carriers and switched access calls are not included in the calculation of PLU. 2.27 "Point of Interconnection (POI)" denotes the physical equipment interface that establishes the technical interface, the test point and the point of operational responsibility hand-off between GTE and the CLC for the Local Interconnection of their networks. The splice point at a mid-span fiber meet is not a POI. 2.28 "Rate Center" means a specific geographic point associated with a specific geographic area, and the NPA-NXX(s) that service that area, for the provision of local exchange service. The rate center point is identified by V and H coordinates. It is used to classify end user traffic as toll or local and to calculate mileage for distance sensitive end user rates based on the originating and terminating rate centers. 2.29 "Routing Point" means a location which a LEC or CLC has designated on its own network as the homing (routing) point for traffic inbound to Exchange Services provided by the LEC or CLC which bear a certain NPA-NXX designation. The Routing Point is employed to calculate mileage measurements for the distance sensitive transport element charges of Switched Access Services. The Routing Point need not be the same as the Rating Point, nor must it be located within the rate center area, but must be in the same LATA as the NPA-NXX. 2.30 "Referral Service" means a process in which calls are 5 ================================================================================ Pac-West Pac-West POI GTE Access Switches Routing Point Tandem - -------------------------------------------------------------------------------- LSANCARC9KD LSANCARC9KD SNMNCAXP SNMNCAXP43T - -------------------------------------------------------------------------------- LSANCARC0KD LSANCARC0KD SNMNCAXP LNBHCAXP45T - -------------------------------------------------------------------------------- LSANCARCAKD LSANCARCAKD LSANCAXP THOKCAXF81T - -------------------------------------------------------------------------------- LSANCARCBKD LSANCARCBKD SNMNCAXP ONTRCAXP80T - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SNBBCAMC0KD SNBBCAMC0KD SNBBCAXF SNBBCAXF83T - -------------------------------------------------------------------------------- PLSPCAXG1KD PLSPCAXG1KD PLSPCAXG PLSPCAXG88T ================================================================================ 3.03 Connection at All GTE Tandems Within Each LATA: Pac-West will connect with each and every GTE access tandem in the LATA(s) in which it originates traffic and interconnects with GTE. 3.04 Single POI Model, for each GTE access tandem where Pac-West and GTE interconnect for the exchange of local and intraLATA toll and meet point Switched Access traffic, Pac-West and GTE agree that there will be a single POI located within GTE's franchise territory within the serving area for that particular access tandem. 3.05 Notwithstanding Section 3.03, above, GTE shall not permit direct connections (optical patch panel) or cross-connections (DSX) between any Virtual EIS arrangement at the same wire center location. However, this Agreement does not preclude Pac-West from acquiring from GTE special access service to connect a Virtual EIS arrangement for the purpose of establishing a POI at a distant GTE wire center or to connect between Virtual EIS arrangements in different wire centers. 3.06 The Parties will use best efforts to install meet point and local interconnection trunks, including expedited in-service requests. In no case however, will the installation interval exceed 35 days, unless agreed to by the ordering Party. 3.07 All final trunk groups between the Parties carrying meet-point traffic will be engineered to a P.005 grade of service. All other final trunk groups between the Parties will be engineered to a P.01 grade of service. 7 ================================================================================ Pac-West Pac-West POI GTE Access Switches Routing Point Tandem - -------------------------------------------------------------------------------- LSANCARC9KD LSANCARC9KD SNMNCAXP SNMNCAXP43T - -------------------------------------------------------------------------------- LSANCARC0KD LSANCARC0KD SNMNCAXP LNBHCAXP45T - -------------------------------------------------------------------------------- LSANCARCAKD LSANCARCAKD LSANCAXP THOKCAXF81T - -------------------------------------------------------------------------------- LSANCARCBKD LSANCARCBKD SNMNCAXP ONTRCAXP80T - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SNBBCAMC0KD SNBBCAMC0KD SNBBCAXF SNBBCAXF83T - -------------------------------------------------------------------------------- PLSPCAXG1KD PLSPCAXG1KD PLSPCAXG PLSPCAXG88T ================================================================================ 3.03 Connection at All GTE Tandems Within Each LATA: Pac-West will connect with each and every GTE access tandem in the LATA(s) in which it originates traffic and interconnects with GTE. 3.04 Single POI Model, for each GTE access tandem where Pac-West and GTE interconnect for the exchange of local and intraLATA toll and meet point Switched Access traffic, Pac-West and GTE agree that there will be a single POI located within GTE's franchise territory within the serving area for that particular access tandem. 3.05 Notwithstanding Section 3.03, above, GTE shall not permit direct connections (optical patch panel) or cross-connections (DSX) between any Virtual EIS arrangement at the same wire center location. However this Agreement does not preclude Pac-West from acquiring from GTE special access service to connect a Virtual EIS arrangement for the purpose of establishing a POI at a distant GTE wire center or to connect between Virtual EIS arrangements in different wire centers. 3.06 The Parties will use best efforts to install meet point and local interconnection trunks, including expedited in-service requests. In no case however, will the installation interval exceed 35 days, unless agreed to by the ordering Party. 3.07 All final trunk groups between the Parties carrying meet-point traffic will be engineered to a P.005 grade of service. All other final trunk groups between the Parties will be engineered to a P.01 grade of service. 7 ========================================================= Pac-West Pac-West POI GTE Access Switches Routing Point Tandem - --------------------------------------------------------- LSANCARC9KD LSANCARC9KD SNMNCAXP SNMNCAXP43T - --------------------------------------------------------- LSANCARC0KD LSANCARC0KD SNMNCAXP LNBHCAXP45T - --------------------------------------------------------- LSANCARCAKD LSANCARCAKD LSANCAXP THOKCAXF8IT - --------------------------------------------------------- LSANCARCBKD LSANCARCBKD SNMNCAXP ONTRCAXP80T - --------------------------------------------------------- - --------------------------------------------------------- SNBBCAMC0KDD SNBBCAMC0KD SNBBCAXF SNBBCAXF83T - --------------------------------------------------------- PLSPCAXGIKD PLSPCAXGIKD PLSPCAXG PLSPCAXG88T - --------------------------------------------------------- 3.03 Connection all All GTE Tandems Within Each LATA: Pac-West will connect with each and every GTE access tandem in the LATA's in which it originates traffic and interconnects with GTE. 3.04 Single POI Model, for each GTE access tandem where Pac-West and GTE interconnect for the exchange of local and intraLATA toll and meet point Switched Access traffic, Pac-West and GTE agree that there will be a single POI located within GTE's franchise territory within the serving area for that particular access tandem. 3.05 Notwithstanding Section 3.03, above, GTE shall not permit direct connections (optical patch panel) or cross-connections (DSX) between any Virtual EIS arrangement at the same wire center location. However this Agreement does not preclude Pac-West from acquiring from GTE special access service to connect a Virtual EIS arrangement for the purpose of establishing a POI at a distant GTE wire center or to connect between Virtual EIS arrangements in different wire centers. 3.06 The Parties will use best efforts to install meet point and local interconnection trunks, including expedited in-service requests. In no case however, will the installation interval exceed 35 days, unless agreed to by the ordering Party. 3.07 All final trunk groups between the Parties carrying meet-point traffic will be engineered to a P.005 grade of service. All other final trunk groups between the Parties will be engineered to a P.01 grade of service. 7 ARTICLE 4 NUMBER RESOURCES AND NUMBER PORTABILITY 4.01 Nothing in this Agreement shall be construed to, in any manner, limit or otherwise adversely impact Pac-West's right to employ or to request and be assigned any North American Number Plan (NANP) number resources including, but not limited to central office (NXX) codes pursuant to the Central Office Code Assignment Guidelines. Any request for numbering resources by Pac-West shall be made directly to the NANP Number Plan Administrator. GTE shall not be responsible for the requesting or the assignment of number resources to Pac-West. Pac-West shall not request number resources to be assigned to any GTE switching entity. 4.02 If Pac-West establishes Rate Centers other than those maintained by GTE, the parties will work in good faith to plan and execute the necessary network and routing modifications to accommodate new Rate Centers established by Pac-West. 4.03 Pac-West shall use reasonable efforts to designate at least one POI in GTE's exchange area for all NPA-NXX's associated with GTE's rate centers. Pac West shall designate at least one location within a Rate Center as a Routing Point for its NPA-NXX's. 4.04 The Parties will comply with code administration requirements as prescribed by the Federal Communications Commission, the CPUC, and accepted industry guidelines. 4.05 It shall be the responsibility of each Party to program and update its own switches and network systems pursuant to the Local Exchange Routing Guide (LERG) guidelines to recognize and route traffic to the other Party's assigned NXX codes at all times. Neither Party shall impose any fees or charges whatsoever on the other Party for such activities. 4.06 Each Party shall provide the other Party with Service Provider Number Portability (SPNP) for the purpose of allowing end user customers to change service-providing Parties without changing their telephone number. GTE shall provide its SPNP to Pac-West at the rates and under the terms and conditions set forth in its tariff. Pac-West shall provide SPNP to GTE at rates and under the terms and conditions set forth in its tariff. ARTICLE 5 MEET POINT BILLING 8 5.01 Meet-Point Billing (MPB) arrangements shall be established between the Parties to enable Pac-West to provide, at its option, Switched Access Services interexchange carriers via a GTE access tandem in accordance with the Meet-Point billing guideline adopted by and contained in the Ordering and Billing Forum's MECAB and MECOD documents. In the case ???? Switched Access Services provided through a GTE tandem, GTE will not route traffic to or from an interexchange carrier until an order is received from the interexchange carrier for completion of such traffic. In no event will GTE be required to route access traffic through more than one tandem for connection to/from an interexchange carrier except cases in which Pac-West connects to a secondary tandem at the request of GTE due to a capacity ???? constraint in a GTE tandem as described in 5.02 ???? such cases, GTE will switch traffic to/from Pac-West and an IXC through the required number of tandems to complete a call. GTE will rate its portion ???? call as if the Pac- West meet point was located ???? the tandem where the capacity constraint exists Pac-West shall have sole responsibility to ensure that any interexchange carrier will accept traffic Pac-West directs to the interexchange carrier. 5.02 Except in instances of capacity limitations, GTE ???? permit and enable Pac-West to identify the GTE access tandem closest to the Pac- West Routing Point associated with the NPA-NXX as the home tandem ???? which Switched Access Services are interchanged ???? the Parties. In instances of capacity limitation designated access tandem switch, Pac- West shall ???? allowed to identify an adjacent GTE access tandem GTE ???? provision additional capacity. Pac-West will not incur any higher charges or degradation of ???? if it accepts service in a secondary tandem due ???? capacity constrain ts. 5.03 Pursuant to Section 5.02 above, Pac-West shall provide written notice to GTE identifying the a???? access tandem. Within ten (10) business days of receiving Pac-West notice, GTE shall provide a written notice back to Pac-West confirming its selection or stating why the access tandem is not appropriate and proposing an alternate. 5.04 Common Channel Signaling (CCS) shall be utilized in conjunction with meet-point billing arrangement ???? extent such signaling is resident in the GTE access tandem switch. 9 5.05 Pac-West and GTE will use their best reasonable efforts, individually and collectively, to maintain provisions in their respective federal and state access tariffs, and/or provisions within the National Exchange Carrier Association ("NECA") Tariff No. 4, or any successor tariff, sufficient to reflect this meet- point billing arrangement, including meet-point billing percentages. 5.06 As detailed in the MECAB document, Pac-West and GTE will in a timely fashion exchange all information necessary to accurately, reliably and promptly bill interexchange carriers for Switched Access Services traffic jointly handled by Pac-West and GTE via the meet-point arrangement. Information shall be exchanged in Electronic Message Record (EMR) format on magnetic tape or via a mutually acceptable electronic file transfer protocol. 5.07 GTE and Pac-West shall employ the thirty (30) day cycle interval billing period for meet-point billing, and shall provide each other, at no charge and once a month (unless the Parties otherwise mutually agree, the switched access detailed usage data. GTE will provide Pac-West with the switched access detailed usage data within ten (10) days of the end of the calendar month billing period. Pac-West will provide to GTE the switched access summary usage data within forty-five (45) days of receipt from GTE of the switched access detailed usage data. 5.08 Billing to interexchange carriers (including any future interexchange entities operated by GTE or its affiliates) for the Switched Access Services jointly provided by GTE and Pac-West via the meet-point billing arrangement shall be according to the multiple-bill/multiple-tariff/1/ method. However, upon mutual agreement, the Parties will enter into single bill arrangements. Switched Access charges to third parties shall be calculated utilizing the rates specified in GTE and Pac-West's respective federal and state access tariffs, in conjunction with the appropriate meet-point bill percentages specified for each meet- point arrangement either in those tariffs, in the NECA No. 4 tariff or any functional successor to the NECA No. 4 tariff. 5.09 MPB will apply to all traffic bearing the 800, 888 or ___________________ /1/NECA lists multiple bill/multiple tariff as multiple bill/single tariff 10 any other non-geographic NPA which may be likewise ???? designated for such traffic in the future, where t???? responsible party is an IXC. In those situations w???? the responsible party for such traffic is other th???? GTE full switched access rates will be charged to ???? responsible LEC or CLC. 5.10 Neither party will charge the other for meet point ???? billing trunks or the underlying facilities. Pac???? West and GTE shall use their best efforts to negot???? the terms and conditions for meet-point billing including but not limited to the Meet Point Billing???? options, bill period, and exchange of usage and bi???? data, and to sign such an agreement in a timely manner after the effective date of this Agreement. 5.11 There are certain types of calls that require excha???? of billing records between the Parties. These type???? calls include: Toll Free Service Calls, 900 calls, ???? Feature Group B and D Switched Access calls to and ???? IXCs, and intrastate alternate billed calls (e.g., ???? calling card, bill-to-third, and collect). The exchange of billing records for calls of this type ???? be distributed through the existing CMDS processes. ???? the parties will negotiate and execute a separate agreement within 30 days from the effective date of this Agreement, for the settlement of revenues associated with the calls described above. ARTICLE 6 INTERCONNECTION TRUNKING 6.01 The Parties shall reciprocally terminate local exch???? traffic and intraLATA toll calls, and meet-point switched access originating on each others' network ???? follows: A. Interconnection will be provided via two-way ???? trunks. Separate two-way trunks will be establi???? to exchange: 1. Local and IntaLATA toll two-way trunks bet???? GTE and Pac-West. 2. Meet-Point trunking for Switched Access tra???? between GTE as an access tandem provider an ???? West as a CLC. 3. Feature Group D (FGD) access trunking betwe???? GTE as a LEC and Pac-West as an IXC. Pac???? 11 West at its option, may terminate local c???? intraLATA toll traffic over FGD access tr???? with compensation subject to the terms and conditions of GTE's Schedule Cal. P.U.C. ???? Switched Access tariff. B. Tandem switching may be used for trunking be ???? GTE and Pac-West provided that: 1. GTE will switch calls that terminate on a ???? subtending GTE end office. 2. The Parties will jointly develop and agree???? Joint Interconnection Grooming Plan presc???? standards to ensure that traffic exchanged ???? jointly provided trunk groups experiences consistent P.01 or better grade of service ???? other appropriate, relevant industry-accep???? quality, reliability and availability stan???? Such plan shall also include mutually agre???? upon standards for the configuration of ???? segregated trunk groups. In addition, the ???? shall also include standards and procedure ???? notification of trunk disconnections and ???? discoveries of trunk disconnections; neither Party shall be expected to maintain active status for trunk disconnected by the other for an extended or indefinite period of ti???? The Parties will use their best collective ???? faith efforts to complete and agree on such within 90 days following the execution of ???? Agreement. 6.02 Intercompany forecast information must be currently provided by the Parties to each other twice a year. The Semi-annual forecasts shall include: A. Yearly forecasted CCS and trunk quantities for a minimum of five (5) years; B. The Common Language Location Identifiers (CLLI ???? and C. A description of major network projects antici???? for the following six (6) months. Based on available information in providing such descri???? the Parties agree to work in good faith. 6.03 If differences in semi-annual forecasts of the Parties vary by more than twenty-four (24) trunks, Parties shall meet to attempt to reconcile the for???? to within twenty-four (24) trunks. If the Parties, ???? 12 after escalation to an executive level, are unabl???? reach such reconcilation, either party may invoke default option of one-way trunking on the affected route. A. If a trunk group is under seventy-five percent (75%) of CCS capacity on a monthly average ba???? for each month of any six (6) month period, e???? Party may issue an order to resize the trunk ???? which shall be left with not less than twenty-five percent (25%) excess capacity. B. Each Party shall provide a specified point of contact for planning forecasting and servicing purposes. 6.04 Orders to add, change, or disconnect trunks shall ???? processed by the use by the use of an Access Service Request (ASR) or any order process determining the industry. A. Related orders requiring coordination shall be submitted at the same time. B. Prior to ordering trunk groups, the initiating Party will contact the other Party and exchange study data, and also review and negotiate the forecasted requirements. Orders for two-way ???? groups will not be processed until such action ???? taken and ordered quantities are agreed to. In the event however, will the forecast negotiation process exceed 20 business days. C. By mutual consent, either party may order one-way trunk groups to satisfy particular network nee???? D. Trunk orders shall include at a minimum the following information: 1. Correct CLLI codes 2. CLCI-MSG identifiers; 3. If SS7 signaling is required, Pac-West's SS ???? point code must be included; 4. Orders to augment or disconnect trunk groups shall include the GTE two-six code, which identifies the particular signaling, routing digits; and 5. Software translations and routing 13 information (e.g., feature group signaling, routing digits; and 6. Correctly populated fields denoting NC/NCI codes. E. An order for two-way trunking may be converted to an order for one-way trunking at the option of either Party if: 1. No agreement can be reached between the Parties within the standards set forth in this Agreement, including but not limited to the standards for network design or the capacity or grade of service required. 2. The order is received without compliance with Section 6.04 A.& B. F. The Parties agree that the ASR or other forms used for ordering must be complete for the order to be processed. Trunk orders shall include at a minimum the following information: 1. Correct CLLI codes; 2. CLCI-MSG identifiers; 3. If SS7 signaling is required, Pac-West SS7 point code must be included; 6.05 Two-way trunk groups shall be jointly managed by GTE and Pac- West. One way trunk groups are under exclusive control of the trunk group originator. 6.06 The Parties will work cooperatively to develop trouble resolution procedures, including procedures between the parties respective network control centers. If either Party receives a call from the subscriber of the other Party, the employees of the Party receiving the call will not make any damaging or disparaging remarks about the other Party whatsoever, and will refer the call to the other party. If the receiving Party receiving the call cannot determine to which Party the call should be referred, or does not have the appropriate telephone number, the receiving party will suggest that the caller refer to an invoice to find the appropriate telephone number. ARTICLE 7 DATA BASE SERVICES 14 7.01 Pac-West may order E-911 Interconnection trunks, and GTE shall provide the service to Pac-West as authorized and at the approved tariffed rates as specified in GTE tariff Schedule Cal P.U.C. No. K6. 7.02 When an end user changes service from GTE to Pac-West, or from Pac-West to GTE and does not retain its original telephone number, the party formerly providing service to the end user will provide a referral service on the abandoned telephone number. The Parties shall provide these arrangements reciprocally. For residential customers, referral will be provided for thirty (30) days. For business customers, referral will be provided for the life of their current directory listing. ARTICLE 8 COMPENSATION 8.01 As Ordered in CPUC D. 95-12-056, traffic volumes on jointly provided two-way trunk groups shall be measured by both Parties. On a quarterly basis, the Parties shall submit to each other the amount of local traffic which is terminating on the other Party's network. Compensation for traffic other than the local usage will be determined based on the Percentage of Local Usage (PLU). Unless otherwise required by CPUC order or bill processing requirements, the reporting interval for PLU should be the same as reporting intervals for PIU (Percentage of Interstate Usage) as authorized for access purposes. Compensation shall be paid for IntraLATA toll calls, toll free (i.e., 800/888) directory assistance, busy line verification, emergency interrupt. Compensation shall be paid using each Party's CPUC approved tariffs and as specified below for local call termination. Data used to determine compensation is subject to verification by the other Party. 1. The following compensation rates shall apply for traffic carried from Pac-West to GTE: a. Applicable to all local (Zone 1, Zone 2 and Zone 3 Usage Measurement ("ZUM"), Extended Area Service based on Switched Access rates from Schedule Cal P.U.C. No. C-1. - Tandem switched transport - facility Per mile/min 15 - Mileage is calculated based on airline miles between the Vertical and Horizontal ("V&H") coordinates of the POI and the GTE end office. - Fixed transport Termination - Two terminations per minute of use (MOU) - Tandem switching - per MOU - End Office Switching b. Toll Rate: Applicable to intraLATA toll calls, based on intrastate Switched Access rates. - Tandem switched transport - facility Per mile/min - Mileage is calculated based on airline miles between the Vertical and Horizontal ("V&H") coordinates of the POI and the GTE end office. - Fixed transport Termination - Two terminations per minute of use (MOU) - Tandem switching - per MOU - Network Interconnection Charge - per MOU - End Office Switching - Information Surcharge The applicable rates for the above elements can be found in GTE's Schedule Cal. P.U.C. No. C-1. c. Transit Rate: When Pac-West uses a GTE access tandem to originate a call to a third party LEC, another CLC, a wireless service provider or another Pac-West end office, Pac-West shall compensate GTE at the rate of $.0015 per minute. If GTE enters into an interconnection agreement with another CLC that provides for a transit rate lower that the rate set forth in GTE's tariff, that transit rate will be substituted for the rate set in this paragraph upon the effective date of that agreement. If Pac-West receives a call through a GTE access tandem that originates from another 16 CLC, LEC, or wireless provider, Pac-West will not charge GTE any rate elements for this call, regardless of whether the call is local or toll. Pac-West will establish appropriate billing relationships directly with the other CLC, LEC or wireless provider. Pac-West will not route calls through GTE's access tandems to any other CLC, LEC or wireless provider with which GTE has not entered into an interconnection agreement (including but not limited to, Type 1, Type 2A and Type 2B interconnection agreements entered into pursuant to D. 95-12-056) that has been filed with and approved by the CPUC. If such calls are nonetheless so routed, GTE will not complete such calls. 2. The following compensation rates shall apply for traffic carried from GTE to Pac-West: a. Applicable to all local (Zone 1, Zone 2 and Zone 3 Usage Measurement ("ZUM"), Extended Area Service. - Set-up (per call) .01434 - MOU .003 b. Toll Rate: Applicable to intraLATA toll calls, - Set-up (per call) - MOU The applicable rates for the above elements can be found in Pac-West tariff Cal PUC 2-T c. Transit rate: GTE shall pay a transit rate equal to the rate set in Paragraph 8.02.1.c. when GTE uses a Pac-West switch to originate a call to a third party LEC, another CLC, a wireless service provider or another access tandem. 3. Compensation for Local Interconnection Facilities ------------------------------------------------- The local interconnection facilities connecting the Pac-West routing points to the POI mutually agreed upon by both parties as set forth on the table in Paragraph 3.02 above will be established by Pac West. The cost of these facilities will be paid for solely by Pac-West. 17 ARTICLE 9 TERM AND TERMINATION OF THE AGREEMENT 9.01 This Agreement shall become effective upon the most recent date of signature of the Parties (the "Effective Date"). 9.02 The initial term of this Agreement shall be one year from the Effective Date. This Agreement, at all times shall be subject to such changes or modifications by the Commission as the Commission may, from time to time, require in the exercise of its jurisdiction. If any such modification renders the Agreement inoperable or creates any ambiguity or requirement for future amendment to the Agreement, the Parties will negotiate in good faith to agree upon any necessary amendments to the Agreement. Either Party may terminate this Agreement at the end of the initial term or at any time thereafter following 60 days' prior written notice; provided that, the other party at any time during such 60 day period, may request negotiation of a new interconnection agreement, in which case interconnection shall continue between the Parties in full accordance with all of the terms of this Agreement pending execution of a replacement interconnection agreement within 125 days from the date the agreement terminates. If parties are unable to come to agreement within 125 days, both parties agree to seek resolution from the CPUC. 9.03 Notwithstanding anything to the contrary contained herein, a Party may terminate this Agreement to a specific exchange area of such Party in the event that such Party sells or otherwise transfers the exchange area or does not provide service in the exchange area. provided that, the transferee of such exchange area must first, as condition precedent to such transfer, agree, for the express benefit of the non-transferring Party, to continue to interconnect with the non-transferring Party in full accordance with terms of this Agreement pending execution of a replacement interconnection agreement between the transferee and the non-transferring Party. Notwithstanding termination of this Agreement to a specific exchange area, this Agreement shall remain in full force and effective in remaining exchange areas until the Termination Date. ARTICLE 10 RESPONSIBILITIES OF THE PARTIES 10.01 Pac-West and GTE agree to exchange such reports 18 and/or to facilitate the proper billing of traffic. Either Party may request an audit of such usage reports on no fewer than 10 business days' written notice and any audit shall be accomplished during normal business hours at the office of the Party being audited. Such audit must be performed by mutually agree-to independent auditor paid for by the Party requesting the audit. Such audits shall be requested within six months of having received the PLU factor and usage reports from the other party. 10.02 Pac-West and GTE will review engineering requirements on a annual basis and establish forecasts for trunk and facilities utilization provided under this Agreement. New trunk groups will be implemented as dictated by engineering requirements for either GTE or Pac-West. 10.03 Pac-West and GTE shall share responsibility for all Control Office functions for local interconnection trunks and trunk groups and both Parties shall share the overall coordination, installation, and maintenance responsibilities for these trunks and trunk groups 10.04 Pac-West and GTE shall share responsibility for all Control Office functions for the meet point trunking arrangement trunks and trunk groups, and shall be responsible for the overall coordination, installation, and maintenance responsibilities for these trunks and trunk groups. 10.05 Pac-West and GTE shall: 1. Provide trained personnel with adequate and compatible test equipment to work with each other's technicians. 2. Notify each other when there is any change affecting the service requested including the due date. 3. Coordinate and schedule testing activities of their own personnel, and other as applicable, to ensure its interconnections trunk/trunk groups are installed per the interconnection order, meet agreed-upon acceptance test requirements, and are placed in service by the due date. 4. Perform sectionalization to determine if a trouble is located in its facility or its portion of the interconnection trunks prior to referring the trouble to each other. 5. Advise each other if there is an equipment failure 19 which may affect the interconnection trunks 6. Provide each other with a trouble reporting number that is readily accessible and available 24 hour/7 days a week. 7. Provide each other test line numbers and access to the test lines. ARTICLE 11 CONFIDENTIAL INFORMATION 11.01 All information, including but not limited to specifications, photocopies, magnetic disks, magnetic tapes, drawings, sketches, models, samples, tools, technical information, data, employee records, maps, financial reports, and market data, (1) furnished by one Party to the other Party dealing with customer specific, facility specific, or usage specific information, other than customer information communicated for the purpose of publication of directory database inclusion, or (ii) in written, graphic electromagnetic, or other tangible forum and marked at the time of deliver as "Confidential" or "Proprietary", or (iii) by written notice give to the receiving Party within ten (10) days after delivery, to be "Confidential" or "Proprietary" (collectively referred to as "Proprietary Information"), shall remain the property of the disclosing Party. Upon request by the disclosing Party, the receiving Party shall return all tangible copies of Proprietary Information, whether written, graphic or otherwise, except that the receiving Party may retain one copy for archival purposes. 11.02 The obligation of confidentiality and use with respect to Confidential Information disclosed by one Party to the other Party shall survive any termination of this Agreement for a period of three (3) years from the date of initial disclosure of the Confidential Information. 11.03 Each Party shall use the same degree of care to protect the originating Party's Confidential information from disclosure that it uses to protect its own confidential information. The receiving Party shall only disclose the Confidential information of the originating Party to those employees, contractors, or agents of the receiving Party who have a need for it in order to provide telecommunication services and facilities in 20 accordance with the terms of this Agreement and shall only use the information in connection with providing such services. 11.04 If either Party is served with legal process or receives from a regulatory agency, a request to disclose confidential or proprietary information belonging to the originating Party, that Party shall immediately notify the originating Party prior to disclosing such information and will cooperate with it to maintain the confidentiality of the information until there has been either a legal ruling on the originating Party's objections to such disclosure or the originating Party has reached an agreement with the requesting party regarding the terms and conditions of disclosure. Each Party agrees not to disclose Confidential or Proprietary Information of the other Party to any third Party, except as noted above, without written consent of the originating Party. ARTICLE 12 INDEMNIFICATION AND LIMITATION OF LIABILITY 12.01 Each Party agrees to release indemnify, defend and hold harmless the other Party from all losses, claims, demands, damages, expenses, suits or other actions, or any liability whatsoever, including but not limited to, cost and attorney's fees, whether suffered, made, instituted or asserted by any other party or person for invasion of privacy, personal injury to, or death of, any person or persons, or for losses damages or destruction of property, whether or not owned by others, proximately caused by the indemnifying Party's negligence or willful misconduct, regardless of the form of action. 12.02 DISCLAIMER. EXCEPT AS SPECIFICALLY PROVIDED TO THE CONTRARY IN THIS ----------- AGREEMENT, NEITHER PARTY MAKES REPRESENTATIONS OR WARRANTIES TO THE OTHER PARTY CONCERNING THE SPECIFIC QUALITY OF ANY SERVICES PROVIDED UNDER THIS AGREEMENT. THE PROVIDING PARTIES DISCLAIM, WITHOUT LIMITATION, ANY WARRANTY OR GUARANTEE OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ARISING FROM THE COURSE OF PERFORMANCE, COURSE OF DEALING, OR FROM USAGES OF TRADE. 12.03 A willful breach of this Agreement which means an intentional act or an intentional failure to act, actual or constructive knowledge of the consequences thereof, and a conscious failure to act to avert such consequences. Except in the case of willful breach of this Agreement that either prevents the interchange of 21 traffic in the manner contemplated by this Agreement, or prevents a Party from properly billing for interchanged traffic each Party providing services shall have its liability, whether in contract, tort or otherwise, limited to direct damages, which shall not exceed the pro rata portion of the charges for services provided pursuant to this Agreement for the period during which the services are inoperative, not to exceed in total the providing Party's monthly charges for services provided. Except in the case of a willful breach of this Agreement, Under no circumstance shall providing Party be responsible or liable for indirect, incidental or consequential damages, including, but not limited to, damages arising from the use or performance of equipment, software or the loss of use of equipment or software or accessories attached thereto, delay, error or loss of data. In connection with this limitation of liability, the Parties recognize that the providing Party may, from time to time, provide advice, make recommendations or supply other analysis related to the equipment or services described in this Agreement and while the providing Party shall use diligent efforts in this regard, receiving Party acknowledges and agrees that this limitation of liability shall apply to provision of such advice, recommendation and analysis. ARTICLE 13 DISPUTE RESOLUTION The Parties agree that in the event of a default or violation hereunder, or for any dispute arising under this Agreement or related agreements, the Parties may have in connection with this Agreement, the Parties shall first confer to discuss in good faith the dispute and seek resolution prior to taking any action before any court or regulator, or before authorizing any public statement about or authorizing disclosure of the nature of the dispute to any third party. Such conference shall occur at least at the Vice President level for each Party. In the case of GTE, its Vice President, or equivalent officer, shall participate in the meet and confer meeting, and Pac West Vice President, or equivalent officer, shall participate. Thereafter, for any matter that either Party wishes to bring before the CPUC for resolution, the Parties will employ the Dispute Resolution procedures set forth in pp. 36-39 of the Order, recognizing that the Parties have already escalated the dispute to the executive level as provided in the Dispute Resolution procedures. ARTICLE 14 DEFAULT 22 If either Party believes the other is in breach of the agreement or otherwise in violation of law, it shall first give sixty (60) days' notice of such breach or violation and an opportunity for allegedly defaulting Party to cure. Thereafter, the Parties shall employ the Dispute Resolution procedures set forth at pp. 36-39 of the Order. ARTICLE 15 FORCE MAJEURE In the event performance of this Agreement or any obligation hereunder is prevented, restricted or interfered with by reason of acts of God, war, revolution, civil commotion, acts of the public enemy, embargo, acts of the government in its sovereign capacity, labor difficulties, unavailability of equipment or software from vendors, changes made at the request of one Party to the other Party or any other circumstance beyond reasonable control of the Party affected, the Party affected upon giving prompt notice to the other Party, shall be excused from such performance on a day-to-day basis to the extent of such prevention, restriction or interference (and the other Party shall likewise be excused from performance of its obligations on a day-to-day basis until the delay restriction or interference has ceased; provided, however, that the Party so affected shall use diligent efforts to avoid or remove such cause of nonperformance and both Parties shall proceed whenever such causes or removed or cease. ARTICLE 16 AMENDMENTS Any amendment, modification or supplement to this Agreement must be in writing and signed by an authorized representative of each Party. The term "this Agreement" shall include all future amendments, modifications and supplements. ARTICLE 17 ENTIRE AGREEMENT This Agreement constitutes the entire agreement of the Parties pertaining the subject matter of this Agreement and supersedes any and all prior agreements of any kind whether oral or written. ARTICLE 18 GOVERNING LAW 23 This Agreement shall be governed by the construed in accordance with the laws of the State of California. ARTICLE 19 NOTICES Any notice to a Party required or permitted under this Agreement shall be given in writing and shall be deemed given on the date of service if notice is served personally, or on the following business day when served through electronic mail or facsimile, or on the date received if notice is served through certified or registered mail, or on the date receipt is acknowledged in writing by the receiving Party if served through regular mail. Business days are Monday's through Fridays, excepting those days which are holidays of either or both GTE and Pac-West. Notice shall be given as follows: To Ms. Jenny M. Wong GTE California Incorporated One GTE Place Thousand Oaks, CA Mailcode CA500GC EMail: Facsimile:(805)372-7321 Copy to: Susan D. Rossi GTE California Incorporated One GTE Place Thousand Oaks, CA Mailcode Ca500LB Facsimile: 805-373-7515 To PAC-WEST TELECOMM, Inc. John K. La Rue 4210 Coronado Avenue Stockton, CA 95204 ARTICLE 20 ASSIGNMENT Any assignment by either Party of any right, obligation or duty, in whole or in part, or of any interest, without the express written consent of the other Party, shall be void, except that either Party may assign all of its rights, obligations and duties to any legal entity that is a subsidiary or affiliate of that Party without consent but with required written modification of this Agreement. The effectiveness of assignment shall be conditioned upon the assignee's assumption of the rights, obligations and duties of the assigning 24 Party. ARTICLE 21 CONSTRUCTION This Agreement shall not be construed for or against either Party because such party prepared or caused its legal representative to prepare this Agreement or any portion thereof. ARTICLE 22 PUBLICITY AND USE OF TRADE NAMES Any news release, public announcement, advertising or any other form of publicity pertaining to this Agreement or the services provided under and as a result of this Agreement shall be subject to prior written approval of both GTE and Pac-West. Furthermore, notwithstanding the foregoing sentence, nothing in this Agreement shall be deemed to grant, suggest or imply any authority for one Party to use the name, trademark(s), service marks or trade names of the other Party for any purpose whatsoever. ARTICLE 23 INDEPENDENT CONTRACTOR RELATIONSHIP Persons provided by each Party in the performance of this Agreement shall be solely that Party's employees and shall be under the sole and exclusive direction and control of that Party. They shall not be considered employees of the other Party for any purpose. Each Party shall remain an independent contractor with respect to the other Party and shall be responsible for compliance with all laws, rules and regulations involving but not limited to, employment of labor, hours of labor, health and safety, working conditions and payment of wages. Each Party shall also be responsible for the payment of taxes, including federal, state and municipal taxes, chargeable or assessed with respect to its employees such as Social Security, unemployment worker's compensation, disability insurance and federal and state withholding. Each Party shall indemnify the other Party for any loss, damage, liability, claim, demand or penalty that may be sustained by reason of its failure to comply with this provision. ARTICLE 24 USE OF SUBCONTRACTORS Either Party may enter into subcontracts with third 25 parties or affiliates for the performance of that Party's obligations or duties under this Agreement. IN WITNESS WHEREOF, each Party has executed this Agreement to be effective as of the most recent date set forth below by the signature of its duly authorized representative. For: GTE California Incorporated For: PAC-WEST Telecomm Inc. By /s/ Timothy J. McCallion By: /s/ John K. LaRue ---------------------------------- ------------------------------------ Name: Timothy J. McCallion Name: John K. LaRue ------------------------------- ---------------------------------- Regulatory & Governmental Title: Affairs Vice President-West Title: President ------------------------------ --------------------------------- Date: June 21, 1996 Date: June 19, 1996 ------------------------------- ---------------------------------- 26 parties or affiliates for the performance of that Party's obligations or duties under this Agreement. ARTICLE 25 SIGNATURE OF THE PARTIES IN WITNESS WHEREOF, each Party has executed this Agreement to be effective as of the most recent date set forth below by the signature of its duly authorized representative. For: GTE California Incorporated For: PAC-WEST Telecomm Inc. By__________________________________ By: ___________________________________ Name:_______________________________ Name:__________________________________ Title:______________________________ Title:_________________________________ Date:_______________________________ Date:__________________________________ FORM APPROVED [SIGNATURE ILLEGIBLE] ---------------------------------- Attorney Date 6-20-96 ------------------------------ 26 EX-10.26 5 SPRINT INTERCONNECTION AGREEMENT [LOGO OF SPRINT APPEARS HERE] MASTER INTERCONNECTION AND RESALE AGREEMENT FOR THE STATE OF NEVADA January 15, 1999 Pac-West Telecomm. Inc and The Nevada Division of Central Telephone Company d/b/a Sprint of Nevada THIS DOCUMENT REPRESENTS THE CURRENT POSITIONS OF THE SPRINT OPERATING TELEPHONE COMPANIES WITH RESPECT TO INTERCONNECTION AND RESALE. SPRINT RESERVES THE RIGHT TO MODIFY THESE POSITIONS. THIS DOCUMENT IS NOT AN OFFER. TABLE OF CONTENTS Page No. -------- PART A - DEFINITIONS 1. DEFINED TERMS........................................................ 2 PART B - GENERAL TERMS AND CONDITIONS 1. SCOPE OF THIS AGREEMENT............................................. 13 2. REGULATORY APPROVALS................................................ 13 3. TERM AND TERMINATION................................................ 14 4. POST TERMINATION INTERIM SERVICE ARRANGEMENTS....................... 15 5. CHARGES AND PAYMENT................................................. 16 6. AUDITS AND EXAMINATIONS............................................. 17 7. INTELLECTUAL PROPERTY RIGHTS........................................ 18 8. LIMITATION OF LIABILITY............................................. 19 9. INDEMNIFICATION..................................................... 19 10. BRANDING............................................................ 20 11. CONFIDENTIALITY AND PUBLICITY....................................... 21 12. DISCLAIMER OF WARRANTIES............................................ 22 13. ASSIGNMENT AND SUBCONTRACT.......................................... 22 14. GOVERNING LAW....................................................... 23 15. RELATIONSHIP OF PARTIES............................................. 23 16. NO THIRD PARTY BENEFICIARIES........................................ 23 17. NOTICES............................................................. 23 18. WAIVERS............................................................. 24 19. SURVIVAL............................................................ 24 20. FORCE MAJEURE....................................................... 24 21. DISPUTE RESOLUTION.................................................. 25 22. COOPERATION ON FRAUD................................................ 26 23. TAXES............................................................... 26 ii 24. AMENDMENTS AND MODIFICATIONS........................................... 26 25. SEVERABILITY........................................................... 27 26. HEADINGS NOT CONTROLLING............................................... 27 27. ENTIRE AGREEMENT....................................................... 27 28. COUNTERPARTS........................................................... 27 29. SUCCESSORS AND ASSIGNS................................................. 27 30. IMPLEMENTATION PLAN.................................................... 27 31. FEDERAL JURISDICTIONAL AREAS........................................... 29 ATTACHMENT I - GENERAL PRINCIPLES 1. PRICE SCHEDULE......................................................... 31 2. LOCAL SERVICE RESALE................................................... 31 3. INTERCONNECTION AND RECIPROCAL COMPENSATION............................ 31 4. UNBUNDLED NETWORK ELEMENTS............................................. 32 ATTACHMENT II - LOCAL RESALE 1. TELECOMMUNICATIONS SERVICES PROVIDED FOR RESALE........................ 33 2. GENERAL TERMS AND CONDITIONS........................................... 33 ATTACHMENT III - NETWORK ELEMENTS 1. GENERAL................................................................ 36 2. UNBUNDLED NETWORK ELEMENTS............................................. 36 3. BONA FIDE REQUEST PROCESS FOR FURTHER UNBUNDLING....................... 37 4. NETWORK INTERFACE DEVICE............................................... 38 5. LOOP................................................................... 39 6. LOCAL SWITCHING........................................................ 40 7. TANDEM SWITCHING....................................................... 42 8. TRANSPORT.............................................................. 43 9. SIGNALING SYSTEMS AND DATABASES........................................ 44 10. OPERATOR SERVICES...................................................... 48 11. DIRECTORY ASSISTANCE SERVICE........................................... 49
iii ATTACHMENT IV - INTERCONNECTION 1. LOCAL INTERCONNECTION TRUNK ARRANGEMENT............................... 50 2. INTERCONNECTION COMPENSATION MECHANISMS............................... 51 3. SIGNALING............................................................. 53 4. NETWORK SERVICING..................................................... 53 5. NETWORK MANAGEMENT.................................................... 55 6. USAGE MEASUREMENT..................................................... 55 7. TRANSIT TRAFFIC....................................................... 56 8. RESPONSIBILITIES OF THE PARTIES....................................... 57 ATTACHMENT V - INTERIM NUMBER PORTABILITY 1. SPRINT PROVISION OF INTERIM NUMBER PORTABILITY........................ 59 2. INTERIM NUMBER PORTABILITY............................................ 59 3. REQUIREMENTS FOR INP.................................................. 60 ATTACHMENT VI - LOCAL NUMBER PORTABILITY 1. INTRODUCTION ......................................................... 63 2. TRANSITION FROM INP TO LNP............................................ 64 3. TESTING............................................................... 64 4. ENGINEERING AND MAINTENANCE........................................... 64 5. E911/911.............................................................. 65 6. BILLING............................................................... 65 ATTACHMENT VII - GENERAL BUSINESS REQUIREMENTS 1. PROCEDURES............................................................ 66 2. ORDERING AND PROVISIONING............................................. 67 3. BILLING............................................................... 74 4. PROVISION OF SUBSCRIBER USAGE DATA.................................... 75 5. GENERAL NETWORK REQUIREMENTS.......................................... 81 6. MISCELLANEOUS SERVICES AND FUNCTIONS.................................. 82 ATTACHMENT VIII - REPORTING STANDARDS 1. GENERAL............................................................... 99 2. PARITY AND QUALITY MEASUREMENTS....................................... 99 iv INTERCONNECTION AND RESALE AGREEMENT This Interconnection and Resale Agreement (the "Agreement"), entered into this day of , 199 , is entered into by and between ----- ------------ -- Pac-West Telecomm. Inc. ("CLEC"), a California corporation, and the Nevada division of Central Telephone Company, a Delaware corporation, d/b/a Sprint of Nevada ("Sprint"), to establish the rates, terms and conditions for local interconnection, local resale, and purchase of unbundled network elements (individually referred to as the "service" or collectively as the "services"). WHEREAS, the Parties wish to interconnect their local exchange networks for the purposes of transmission and termination of calls, so that customers of each can receive calls that originate on the other's network and place calls that terminate on the other's network, and for CLEC's use in the provision of exchange access ("Local Interconnection"); and WHEREAS, CLEC wishes to purchase Telecommunications Services for resale to others, and Sprint is willing to provide such service; and WHEREAS, CLEC wishes to purchase unbundled network elements, ancillary services and functions and additional features ("Network Elements"), and to use such services for itself or for the provision of its Telecommunications Services to others, and Sprint is willing to provide such services; and WHEREAS, the Parties intend the rates, terms and conditions of this Agreement, and their performance of obligations thereunder, to comply with the Communications Act of 1934,as amended (the "Act"), the Rules and Regulations of the Federal Communications Commission ("FCC"), and the orders, rules and regulations of the Public Utilities Commission of Nevada (the "Commission"); and WHEREAS, the parties wish to replace any and all other prior agreements, written and oral,applicable to the state of Nevada. Now, therefore, in consideration of the terms and conditions contained herein, CLEC and Sprint hereby mutually agree as follows: 1 PART A - DEFINITIONS 1. DEFINED TERMS 1.1. Certain terms used in this Agreement shall have the meanings as otherwise defined throughout this Agreement. Other terms used but not defined herein will have the meaning ascribed to them in the Act or in the Rules and Regulations of the FCC or the Commission. The Parties acknowledge that other terms appear in this Agreement which are not defined or ascribed as stated above. The parties agree that any such terms shall be construed in accordance with their customary usage in the telecommunications industry as of the effective date of this Agreement. 1.2. "911 Site Administrator" is a person assigned by CLEC to establish and maintain E911 service location information for its subscribers. 1.3. "911 Service" means a universal telephone number which give the public direct access to the Public Safety Answering Point (PSAP). Basic 911 service collects 911 calls from one or more local exchange switches that serve a geographic area. The calls are then sent to the correct authority designated to receive such calls. 1.4. "Access Service Request (ASR)" means the industry standard forms and supporting documentation used for ordering Access Services. The ASR may be used to order trunking and facilities between CLEC and Sprint for Local Interconnection. 1.5. "Access Services" refers to interstate and intrastate switched access and private line transport services. 1.6. "Act" means the Communications Act of 1934, as amended. 1.7. "Affiliate" is as defined in the Act. 1.8. "Ancillary Traffic" means all traffic destined for ancillary services, or that may have special billing requirements, including, but not limited to the following: 1.8.1. Directory Assistance: 1.8.2. 911/E911: 1.8.3. Operator call termination (busy line interrupt and verify); and Information services requiring special billing (e.g., 900 and 950). 1.9. "Automated Message Accounting (AMA)" is the structure inherent in switch technology that initially records telecommunication message information. AMA format is contained in the Automated Message Accounting document, published by Bellcore at GR-1100-CORE which defines the industry standard for message recording. 2 1.10. "Automatic Location Identification (ALI)" is a feature developed for E911 systems that provides for a visual display of the caller's telephone number, address and the names of the emergency response agencies that are responsible for that address. 1.11. "Automatic Location Identification/Data Management System (ALI/DMS)" means the emergency service (E911/911) database containing subscriber location information (including name, address, telephone number, and sometimes special information from the local service provider) used to determine to which Public Safety Answering Point (PSAP) to route the call. 1.12. "ALI Gateway" is a telephone company computer facility that interfaces with CLEC's 911 administrative site to receive Automatic Location Identification data from CLEC. 1.13. "Automatic Number Identification (ANI)" is a feature that identifies and displays the number of a telephone line that originates a call. 1.14. "Automatic Route Selection (ARS)" is a service feature associated with a specific grouping of lines that provides for automatic selection of the least expensive or most appropriate transmission facility for each call based on criteria programmed into the system. 1.15. "ATU - C" refers to an ADSL Transmission Unit - Central Office. 1.16. "ATU - R" refers to an ADSL Transmission Unit - Remote. 1.17. "Busy Line Verify/Busy Line Verify Interrupt (BLV/BLVI)" means an operator call in which the caller inquires as to the busy status of, or request an interruption of a call on another subscriber's telephone line. 1.18. "Business Day(s)" means the days of the week excluding Saturdays, Sundays, and all Sprint holidays. 1.19. "Carrier Access Billing System (CABS)" is the system which is defined in a document prepared under the direction of the Billing Committee of the OBF. The CABS document is published by Bellcore in Volumes 1, 1A, 2, 3, 3A, 4 and 5 as Special Reports SR-OPT-001868, SR-OPT- 0011869, SR-OPT-001871, SR-OPT-001872, SR-OPT-001873, SR-OPT-001874, and SR-OPT-001875, respectively, and contains the recommended guidelines for the billing of access and other connectivity services. Sprint's carrier access billing system is its Carrier Access Support System (CASS). CASS mirrors the requirements of CABS. 1.20. "Common Channel Signaling (CCS)" is a method of digitally transmitting call set-up and network control data over a digital signaling network fully separate from the public switched telephone network that carries the actual call. 1.21. "Calling Party Number (CPN)" is CCS parameter which refers to the number 3 transmitted through the network identifying the calling party. 1.22. "Central Office Switch" ("Central Office", or "CO"), "End Office" or "Tandem", or Remote Switch are switching facilities within the public switched telecommunications network, including, but not limited to: 1.22.1. "End Office Switch" is a switch from which end user Telephone Exchange Services are directly connected and offered. 1.22.2. "Tandem Switch" is a switch which is used to connect and switch trunk circuits between and among Central Office Switches. 1.22.3. "Remote Switch" is a switch that is away from the host or control office. All or most of the central control equipment for the remote switch is located at the host or control office. 1.23. "Centrex" means a Telecommunications Service associated with a specific grouping of lines that uses central office switching equipment for call routing to handle direct dialing of calls, and to provide numerous private branch exchange-like features. 1.24. "Charge Number" is a CCS parameter which refers to the number transmitted through the network identifying the billing number of the calling party. 1.25. "CLASS/LASS" (Bellcore Service Mark) refers to service features that utilize the capability to forward a calling party's number between end offices as part of call setup. Feature include Automatic Callback, Automatic Recall, Caller ID, Call Trace, and Distinctive Ringing. 1.26. "Competitive Local Exchange Carrier (CLEC) or Alternative Local Exchange Carrier (ALEC)" means any entity or person authorized to provide local exchange services in competition with an ILEC. 1.27. "CLEC 911 Database Records" are the CLEC subscriber records to be provided by CLEC to Sprint for inclusion in Sprint's E911 database. 1.28. "Commission" means the Public Utilities Commission of Nevada. 1.29. "Common Transport" provides a local interoffice transmission path between the Sprint Tandem Switch and a Sprint or CLEC end office switch. Common Transport is shared between multiple customers and is required to be switched at the Tandem. 1.30. "Confidential and or Proprietary Information" has the meaning set forth in Article 11 of Part A -- General Terms and Conditions. 1.31. "Contract Year" means a twelve- (12) month period during the term of the contract commencing on the Effective Date and each anniversary thereof. 1.32. "Control Office" is an exchange carrier center or office designated as the party's 4 single point of contact for the provisioning and maintenance of its portion of local interconnection arrangements. 1.33. "Custom Calling Features" means a set of Telecommunications Service features available to residential and single-line business customers including call-waiting, call-forwarding and three-party calling. 1.34. "Customer Proprietary Network Information (CPNI)" means: 1.34.1. information that relates to the quantity, technical configuration, type, destination, and amount of use of a Telecommunications Service subscribed to by any customer of a Telecommunications carrier, and that is made available to the carrier by the customer solely by virtue of the carrier customer relationship; and 1.34.2 information contained in the bills pertaining to telephone exchange service or telephone toll service received by a customer of a carrier. 1.35. "Database Management System (DBMS)" is a computer process used to store, sort, manipulate and update the data required to provide selective routing and ALI. 1.36. "Dedicated Transport" provides a local interoffice transmission path between sprint and/or CLEC central offices. Dedicated Transport is limited to the use of a single customer and does not require switching at a Tandem. 1.37. "Directory Assistance Database" refers to any subscriber record used by Sprint in its provision of live or automated operator-assisted directory assistance including but not limited to 411. 555-1212, NPA-555-1212. 1.38. "Directory Assistance Services" provides listings to callers. Directory Assistance Services may include the option to complete the call at the caller's direction. 1.39. "Discloser" means that Party to this Agreement which has disclosed Confidential Information to the other Party. 1.40. "DSLAM" refers to a Digital Subscriber Line Access Multiplexer. 1.41. "Duct" is a single enclosed path to house facilities to provide telecommunications services. 1.42. "Enhanced 911 Service (E911)" means a telephone communication service which will automatically route a call dialed "9-1-1" to a designated public safety answering point (PSAP) attendant and will provide to the attendant the calling party's telephone number and, when possible, the address from which the call is being placed and the emergency response agencies responsible for the location from which the call was dialed. 1.43. "E911 Message Trunk" is a dedicated line, trunk or channel between two central 5 offices or switching devices which provides a voice and signaling path for E911 calls. 1.44. "Effective Date" is either thirty (30) days after the date referenced in the opening paragraph of the Agreement, the filing date of this Agreement with the Commission if the Commission has defined the Effective Date as such, or as otherwise required by the Commission. Absent specific Commission rules to the contrary, the Effective Date shall be no earlier than proof of CLEC certification in the jurisdiction. 1.45. "Electronic Interfaces" means access to operations support systems consisting of preordering, ordering, provisioning, maintenance and repair and billing functions. 1.46. "Emergency Response Agency" is a governmental entity authorized to respond to requests from the public to meet emergencies. 1.47. "Environmental Hazard" means any substance the presence, use, transport, abandonment or disposal of which: 1.47.1. requires investigation, remediation, compensation, fine or penalty under any Applicable Law (including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act, Superfund Amendment and Reauthorization Act, Resource Conservation Recovery Act, the Occupational Safety and Health Act and provisions with similar purposes in applicable foreign, state and local jurisdiction); or 1.47.2 poses risks to human health, safety or the environment (including, without limitation, indoor, outdoor or orbital space environments) and is regulated under any Applicable Law. 1.48. "Emergency Service number (ESN)" is a number assigned to the ALI and selective routing databases for all subscriber telephone numbers. The ESN designates a unique combination of fire, police and emergency medical service response agencies that serve the address location of each in-service telephone number. 1.49. "Exchange Message record system (EMR)" refers to the exchanging telecommunications message information for billable, non-billable, sample, settlement and study data. EMR format is contained in BR- 010-200-010 CRIS Exchange Message Record, published by Bellcore and which defines the industry standard for exchange message records. 1.50. "Enhanced Directory Assistance" refers to directory Assistance services, including but not limited to reverse search, talking yellow pages, and locator services. 1.51. "Expanded Interconnection Service (EIS)" is the collocation arrangement which Sprint provides in its designated wire centers. 6 1.52. "Grandfather Service" means service which is no longer available for new customers and is limited to the current customer at their current locations with certain provisioning limitations, including but not limited to upgrade denials, feature adds/changes and responsible/billing party. 1.53. "FCC" means the Federal Communications Commission. 1.54. "Incumbent Local Exchange Carrier (ILEC)" means any local exchange carrier that was, as of February 8, 1996, deemed to be a member of the Exchange Carrier Association as set forth for the in 47 CFR (S) 69.601 (b) of the FCC's regulations. 1.55. "Interexchange Carrier (IXC)" means a provider of interexchange telecommunications services. 1.56. "Interim Number Portability (INP)" is a service arrangement whereby subscribers who change local service providers may retain existing telephone numbers without impairment of quality, reliability, or convenience when remaining at their current location or changing their location within the geographic area served by the initial carrier's serving central office. Upon implementation of Local Number Portability, defined herein, INP services will be discontinued. 1.57. "Line Information Data Base (LIDB)" means a Service Control Point (SCP) database that provides for such functions as calling card validation for telephone line number cards issued by Sprint and other entities and validation fo collect and billed-to-third services. 1.58. "Local Loop" refers to a transmission path between the main distribution frame [cross-connect], or its equivalent, in a Sprint Central Office or wire center, and up to the Network Interface Device at a customer's premises, to which CLEC is granted exclusive use. This includes, but is not limited to, two-wire and four-wire cooper analog voice-grade loops, two-wire and four-wire loops that are conditioned to transmit the digital signals needed to provide services such as ISDN and DS1-level signals. 1.59. "Local Number Portability (LNP)" means the ability of users of Telecommunications Services to retain, at the same Sprint served rate center, existing telecommunications numbers without impairment of quality, reliability, or convenience when switching from one telecommunications carrier to another. 1.60. "Local Service Request (LSR)" means an industry standard form or a mutually agreed upon change thereof, used by the Parties to add, establish, change or disconnect local services. 1.61. "Local Traffic" means traffic (excluding CMRS traffic) that is originated and terminated within Sprint's local calling area, or mandatory expanded area service (EAS) area, as defined by State commissions or, if not defined by State commissions then as defined in existing Sprint tariffs. 1.62 "Master Street Address Guide (MSAG)" is a database defining the geographic area of an E911 service. It includes an alphabetical list of the street names, high-low house number ranges, community names, and emergency service numbers provided by the countries or their agents to Sprint. 1.63 "Multiple Exchange Carrier Access Billing (MECAB)" refers to the document prepared by the Billing Committee of the Alliance for Telecommunications Industry Solutions (ATIS) Ordering and Billing Forum (OBF). The MECAB document contains the recommended guidelines for the billing of an access service provided to a customer by two or more providers or by one provider in two or more states within a single LATA. 1.64 "Multiple Exchange Carrier Ordering and Design (MECOD) Guidelines for Access Services - Industry Support Interface" refers to a document developed by the Ordering/Provisioning Committee of ATIS OBF. The MECOD document contains the recommended guidelines for processing orders for access service which is to be provided by two or more telecommunications carriers. 1.65 "North American Numbering Plan (NANP)" means the system or method of telephone numbering employed in the United States, Canada, and certain Caribbean countries. It denotes the three-digit Numbering Plan Area code and a seven digit telephone number made up of a three-digit Central Office code plus a four-digit station number. 1.66 "National Emergency Number Association (NENA)" is an association with a mission to foster the technological advancement, availability and implementation of 911 nationwide. 1.67 "Network Element" as defined in the Act. 1.68 "Numbering Plan Area (NPA)" (sometimes referred to as an area code) is the three-digit indicator which is designated by the first three digits of each 10-digit telephone number within the NANP. Each NPA contains 800 possible NXX Codes. There are two general categories of NPA. "Geographic NPAs" and "Non-Geographic NPAs." A Geographic NPA" is associated with a defined geographic area, and all telephone numbers bearing such NPA are associated with services provided within that geographic area. A "Non-Geographic NPA," also known as a "Service Access Code (SAC Code)" is typically associated with a specialized telecommunications service which may be provided across multiple geographic NPA areas: 500, 800, 900, 700, and 888 are examples of Non- Geographic NPAs. 1.69 "NXX," "NXX Code,"NNX," "COC," "Central Office Code," or "CO Code" is the three-digit switch entity indicator which is defined by the fourth, fifth and sixth digits of a 10-digit telephone number within NANP. 1.70 "OBF" means the Ordering and Billing Forum, which functions under the auspices of the Carrier Liaison Committee (CLC) of the Alliance for 8 Telecommunications Industry Solutions (ATIS) 1.71. "Operator Systems" is the Network Element that provides operator and automated call handling with billing, special services, subscriber telephone listings, and optional call completion services. 1.72. "Operator Services" provides for: 1.72.1. operator handling for call completion (e.g., collect calls); 1.72.2. operator or automated assistance for billing after the subscriber has dialed the called number (e.g., credit card calls); and 1.72.3. special services (e.g., BLV/BLI, Emergency Agency call). 1.73. "Parity" means, subject to the availability, development and implementation of necessary industry standard Electronic Interfaces, the provision by Sprint of services. Network Elements, functionality or telephone numbering resources under this Agreement to CLEC, including provisioning and repair, at least equal in quality to those offered to Sprint, its Affiliates or any other entity that obtains such services. Network Elements, functionality or telephone numbering resources. Until the implementation of necessary Electronic Interfaces, Sprint shall provide such services. Network Elements, functionality or telephone numbering resources on a non- discriminatory basis to CLEC as it provides to its Affiliates or any other entity that obtains such services. Network Elements, functionality or telephone numbering resources. 1.74 "P.01 Transmission Grade Of Service (GOS)" means a trunk facility provisioning standard with the statistical probability of no more than one call in 100 blocked on initial attempt during the average busy hour. 1.75 "Parties" means, jointly, Pac-West Telecomm. Inc. and the Nevada division of Central Telephone Company d/b/a Sprint of Nevada, and no other entity, affiliate, subsidiary or assign. 1.76. "Party" means either Pac-West Telecomm. Inc. or the Nevada division of Central Telephone Company d/b/a Sprint of Nevada, and no other entity, affiliate, subsidiary or assign. 1.77. "Percent Local Usage (PLU)" is a calculation which represents the ratio of the local minutes to the sum of local and intraLATA toll minutes between exchange carriers sent over Local Interconnection Trunks, Directory assistance, BLV/BLVI, 900, and 976 transiting calls from other exchange carriers and switched access calls are not included in the calculation of PLU. 1.78. "Point Of Interconnection (POI)" is a mutually agreed upon point of demarcation where the networks of Sprint and CLEC interconnect for the exchange of traffic. 1.79. "Point of Presence (POP)" means an IXC's point of presence. 9 1.80. "Proprietary Information" shall have the same meaning as Confidential Information. 1.81. "Public Safety Answering Point (PSAP)" is the public safety communications center where 911 calls placed by the public for a specific geographic area will be answered. 1.82. "Rate Center" means the geographic point and corresponding geographic area which are associated with one or more particular NPA-NXX codes which have been assigned to Sprint or CLEC for its provision of Basic Exchange Telecommunications Services. The "rate center point" is the finite geographic point identified by a specific V&H coordinate, which is used to measure distance-sensitive end user traffic to/from the particular NPA-NXX designations associated with the specific Rate Center. The "rate center area" is the exclusive geographic area identified as the area within which Sprint or CLEC will provide Basic Exchange Telecommunications Services bearing the particular NPA-NXX designations associated with the specific Rate Center. The Rate Center point must be located within the Rate Center area. 1.83. "Recipient" means that party to this Agreement (a) to which Confidential Information has been disclosed by the other party or (b) who has obtained Confidential Information in the course of providing services under this Agreement. 1.84. "Rebranding" occurs when CLEC purchases a wholesale service from Sprint when CLEC'c brand is substituted for the Sprint brand. 1.85. "Reseller" is a category of Local Exchange service providers who obtain dial tone and associated Telecommunications Services from another provider for resale to their end user subscribers. 1.86 "Routing Point" means a location which Sprint or CLEC has designated on its own network as the homing (routing) point for traffic inbound to Basic Exchange Services provided by Sprint or CLEC which bear a certain NPA-NXX designation. The Routing Point is employed to calculate mileage measurements for the distance-sensitive transport element charges of Switched Access Services. Pursuant to Bellcore Practice BR 795-100-100, the Routing Point may be an "End Office" location, or a "LEC Consortium Point of Interconnection." Pursuant to that same Bellcore Practice, examples of the latter shall be designated by a common language location identifier (CLLI) code with (x)KD in positions 9.10.11. where (x) may by any alphanumeric A-Z OR 0-9. The above referenced Bellcore document refers to the Routing Point as the Rating Point. The Rating Point/Routing Point need not be the same as the Rate Center Point, nor must it be located within the Rate Center Area, but must be in the same LATA as the NPA-NXX. 1.87. "Small Exchange Carrier Access Billing (SECAB)" means the document prepared 10 by the Billing Committee of the OBF. The SECAB document, published by ATIS as Special Report SR OPT-001856, contains the recommended guidelines for the billing of access and other connectivity services. 1.88. "Selective Routing" is a service which automatically routes an E911 call to the PSAP that has jurisdictional responsibility for the service address of the telephone that dailed 911, irrespective of telephone company exchange or wire center boundaries. 1.89. "Signaling Transfer Point(STP)" means a signaling point that performs message routing functions and provides information for the routing of messages between signaling points within or between CCIS networks. A STP transmits, receives and processes CCIS messages. 1.90. "Switch" means a Central Office Switch as defined in this Part A. 1.91. "Switched Access Detail Usage Data" means a category 1101XX record as defined in the EMR Bellcore Practice BR 010-200-010. 1.92. "Switched Exchange Access Service" means the offering of transmission or switching services to Telecommunications Carriers for the purpose of the origination or termination of Telephone Toll Service. Switched Exchange Access Services include: Feature Group A, Feature Group B, Feature Group D,800/888 access and 900 access and their successor or similar Switched Exchange Access Services. 1.93. "Synchronous Optical Network (SONET)" is an optical interface standard that allows interworking of transmission products from multiple vendors (i.e. midspan meets). The base rate is 51.84 MHps (OC-1/STS-1 and higher rates are direct multiples of the base rate up to 1.22 GHps). 1.94. "Tandem Office Switches", "Tandem", and "Tandem Switching" describe Class 4 switches which are used to connect and switch trunk circuits between and among end office switches and other tandems. 1.95. "Tariff" means a filing made at the state or federal level for the provision of a telecommunications service by a telecommunications carrier that provides for the terms, conditions and pricing of that service. Such filing may be required or voluntary and may or may not be specifically approved by the Commission or FCC. 1.96. "Technically Feasible" refers solely to technical or operational concerns rather than economic, space, or site considerations. 1.97. "Telecommunications" as defined in the Act. 1.98. "Telecommunications Carrier" as defined in the Act. 1.99. "Telecommunication Services" means the offering of telecommunications for a 11 fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used. 1.100. "Thousands Block of Numbers" shall mean 1000 or more consecutive numbers beginning and ending on a digit boundary, e.g., 949-1000 to 949-1999. 1.101. "Transit Service" means the delivery of Local or non-Local Traffic by Sprint or CLEC, that originated on one Party's network, transited through the other Party's network, and terminated to a third party Telecommunications Carrier's network. 1.102. "Transit Traffic" means Local or non-Local traffic that originated on one Party's network, and terminated to a third party Telecommunications Carrier's network. 1.103. "Trunk-Side" refers to a Central Office Switch connection that is capable of, and has been programmed to treat the circuit as, connecting to another switching entity or another central office switch. Trunk side connections offer those transmission and signaling features appropriate for the connection of switching entities, and cannot be used for the direct connection of ordinary telephone station sets. 1.104. "Voluntary Federal Subscriber Financial Assistance Programs" are government programs that subsidize the provision of Telecommunications Services to low-income subscribers, pursuant to requirements established by the appropriate state regulatory body. 1.105. "Wholesale Service" as defined in the Act. 1.106. "Wire Center" denotes a building or space within a building which serves as an aggregation point on a given carrier's network, where transmission facilities and circuits are connected or switched. Wire center can also denote a building in which one or more central offices, used for the provision of Basic Exchange Services and access services, are located. However, for purposes of EIC service. Wire Center shall mean those points eligible for such connections as specified in the FCC Docker No. 91-141, and rules adopted pursuant thereto. 1.107. "xDSL" refers to a generic term for a new series of high speed transmission protocols, equipment, and services designed to operate over copper wire. This series includes but is not limited to ADSL, VDSL, SDSL, and others. 12 PART B - GENERAL TERMS AND CONDITIONS 1. SCOPE OF THIS AGREEMENT 1.1. This Agreement, including Parts A, B, and Attachments I through VIII, specifies the rights and obligations of each party with respect to the establishment, purchase, and sale of Local Interconnection, resale of Telecommunications Services and Unbundled Network Elements. Certain terms used in this Agreement shall have the meanings defined in PART A -- DEFINITIONS, or as otherwise elsewhere defined throughout this Agreement. Other terms used but not defined herein will have the meanings ascribed to them in the Act, in the FCC's and in the Commission's Rules and Regulations. PART B sets forth the general terms and conditions governing this Agreement. The attachments set forth, among other things, descriptions of the services, pricing, technical and business requirements, and physical and network security requirements. LIST OF ATTACHMENTS: ---------------------------------------------------- I. Price Schedule ---------------------------------------------------- II. Local Resale ---------------------------------------------------- III. Network Elements ---------------------------------------------------- IV. Interconnection ---------------------------------------------------- V. Interim Number Portability ---------------------------------------------------- VI. Local Number Portability ---------------------------------------------------- VII. General Business Requirements ---------------------------------------------------- VIII. Reporting Standards ---------------------------------------------------- 1.2. Sprint shall provide notice of network changes and upgrades in accordance with (SS) 51.325 through 51.335 of Title 47 of the Code of Federal Regulations. 1.3. The services and facilities to be provided to CLEC by Sprint in satisfaction of this Agreement may be provided pursuant to Sprint tariffs and then current practices. 2. REGULATORY APPROVALS 2.1. This Agreement, and any amendment or modification hereof, will be submitted to the Commission for approval in accordance with (S) 252 of the Act within thirty (30) days after obtaining the last required Agreement signature. Sprint and CLEC shall use their best efforts to obtain approval of this Agreement by any regulatory body having jurisdiction over this Agreement. In the event any governmental authority or agency rejects any provision hereof, the Parties shall negotiate promptly and in good faith such revisions as may reasonably be required to achieve approval. 13 2.2. The Parties acknowledge that the respective rights and obligations of each party as set forth in this Agreement are based on the texts of the Act and the rules and regulations promulgated thereunder by the FCC and the Commission as of the Effective Date ("Applicable Rules"). In the event of any amendment of the Act, any effective legislative action or any effective regulatory or judicial order, rule, regulation, arbitration aware, dispute resolution procedures under this Agreement or other legal action purporting to apply the provisions of the Act to the Parties or in which the FCC or the Commission makes a generic determination that is generally applicable which revises, modifies or reverses the Applicable Rules (individually and collectively, Amended Rules), either Party may, by providing written notice to the other Party, require that the affected provisions of this Agreement be renegotiated in good faith and this Agreement shall be amended accordingly to reflect the pricing, terms and conditions of each such Amended Rules relating to any of the provisions in this Agreement. 2.3. Notwithstanding any other provision of this Agreement to the contrary (S)2.2 hereof shall control. Any rates, term or conditions thus developed or modified shall be substituted in place of those previously in effect and shall be deemed to have been effective under this Agreement as of the effective date established by the amended rules, whether such action was commenced before or after the Effective Date of this Agreement. Should the Parties be unable to reach agreement with respect to the applicability of such order or the resulting appropriate modifications to this Agreement, either party may invoke the Dispute Resolution provisions of this Agreement, it being the intent of the parties that this Agreement shall be brought into conformity with the then current obligations under the Act as determined by the amended rules. 2.4. Additional services, beyond those specified herein, requested by either party relating to the subject matter of this Agreement will be incorporated into this Agreement by written amendment hereto. 3. TERMS AND TERMINATION 3.1. This Agreement shall be deemed effective upon the Effective Date, provided however that if CLEC has any outstanding past due obligations to Sprint, this Agreement will not be effective until such time as any past due obligations with Sprint are paid in full. No order or request for services under this Agreement shall be processed before the Effective Date, except as may otherwise be agreed in writing between the Parties, provided CLEC has established a customer account with Sprint and has completed the Implementation Plan described in Article 30 hereof. 3.2. Except as provided herein, Sprint and CLEC agree to provide service to each other on the terms defined in this Agreement for a period of two year(s) ending January 14, 2001 ("End Date"). 14 3.3. In the event that CLEC desires uninterrupted service under this Agreement during negotiations. CLEC shall provide to Sprint written notification appropriate under the Act, and if the Parties are actually in arbitration before the appropriate Commission or FCC prior to the End Date, this Agreement will continue in effect only until the issuance of an order approving the new Agreement, whether a final non- appealable order or not, by the Commission or FCC resolving the issues set forth in such arbitration request. 3.4. In the event of default, the non-defaulting Party may immediately terminate this Agreement in whole or in part, as set forth herein: 3.4.1. Either Party's insolvency or initiation of bankruptcy or receivership proceedings by or against the Party: or 3.4.2. Either Party's material breach of any of the terms or conditions hereof, including the failure to make any undisputed payment when due provided that the non-defaulting Party so advises the defaulting Party in writing of the event of the alleged default and the defaulting Party does not remedy the alleged default within sixty (60) days after written notice thereof: and provided further that any such termination shall be limited to terminating only those obligations of the non-defaulting Party under this agreement that are reasonable effected by the default. 3.5. Termination of this Agreement for any cause shall not release either Party from any liability which at the time of termination has already accrued to the other Party or which thereafter may accrue in respect to any act or omission prior to termination or from any obligation which is expressly stated herein to survive termination. 3.6. In the event this agreement is terminated under (S) 3.4 Sprint may immediately discontinue processing orders for new service from CLEC and file with the Commission to terminate this agreement and reassign CLEC's customers pursuant to the Commission's guidelines for CLEC's that abandon service. 3.7. Notwithstanding the above, should Sprint sell or trade substantially all the assets in an exchange or group of exchanges that Sprint uses to provide Telecommunications Services then Sprint may terminate this Agreement in whole or in part as to that particular exchange or group of exchanges upon sixty (60) days prior written notice. Sprint agrees to provide Carrier with notice of the proposed sale or trade within five (5) days of the public announcement of execution of an agreement, memorandum of understanding or letter of intent relating to the proposed sale or transfer of Sprint's assets in an exchange or group of exchanges. Sprint shall provide Carrier notice for the purpose of enabling Carrier to initiate negotiations for a successor agreement with the proposed buyer. 4. POST TERMINATION INTERIM SERVICE ARRANGEMENTS 15 4.1. In the event that this Agreement expires under (S) 3.2. it is the intent of the Parties to provide in this Article for interim service arrangements between the Parties at the time of expiration so that service to end users will not be interrupted should a new agreement not be consummated prior to the End Date. Therefore, except in the case of termination as a result of either Party's default under (S) 3.4. or for termination upon sale under (S) 3.7. for service made available under this Agreement and existing as of the End Date, the Parties agree that those services may continue uninterrupted at the request of either Party provided that: 4.1.1. a new agreement is voluntarily entered into by the Parties; or 4.1.2. service is provided under such standard terms and conditions or tariffs approved by and made generally available by the Commission, if they exist at the time of termination; or 4.1.3. CLEC elects to take service pursuant to the entire terms and conditions of an existing agreement between Sprint and another CLEC for the remaining term of that agreement. If neither (S) 4.1.1 or (S) 4.1.2 ar in effect, and CLEC does not designate an agreement under this subsection, Sprint may designate such agreement. 5. CHARGES AND PAYMENT 5.1. In consideration of the services provided by Sprint under this Agreement, CLEC shall pay the charges set forth in Attachment I subject to the provisions of (S)(S) 2.2 and 2.3 hereof. The billing and payment procedures for charges incurred by CLEC hereunder are set forth in Attachment VIII. 5.2 In addition to any other applicable charges under this Article 5 and Attachment I, if CLEC purchases unbundled Local Switching elements, CLEC shall pay Sprint for intrastate toll minutes of use traversing such unbundled Local Switching elements, intrastate carrier common line and interconnection charges as outlined on Attachment I hereto and any explicit intrastate universal service mechanism based on access charges. 5.3. Subject to the terms of this Agreement, the Parties shall pay invoices by the due date shown on the invoice. For invoices not paid when due, late payment charges will be assessed under (S) 5.5. If the payment due date is a Saturday, Sunday or a designated bank holiday, payment shall be made the next business day. 5.4 Billed amounts for which written, itemized disputes or claims have been filed are not due for payment until such disputes or claims have been resolved in accordance with the provisions governing dispute resolution of this Agreement, Itemized, written disputes must be filed with Sprint's National Exchange Access Center ("NEAC") no later than the due date of the related invoice. A copy of the dispute must be sent with the remittance of the remainder of the invoice. 16 5.5. Sprint will assess late payment charges to CLEC equal to the lesser of one and one-half percent (1.5%) per month or the maximum rate allowed by law for commercial transactions, of the balance due, until the amount due is paid in full. 5.6. In addition to late payment charges, Sprint will use the following collection procedures in connection with CLEC's past due amounts. 5.6.1. First, the late payment charge described in (S) 5.5 above will be added to accounts that are not paid within a thirty (30) day period. 5.6.2. Second, a notice will be sent to CLEC on day 31 stating that unless full payment is received within the next thirty (30) days Sprint will suspend processing new orders. 5.6.3. Third, if the CLEC account remains delinquent on day 61 Sprint will send a second notice to CLEC stating that Sprint has suspended processing new orders and unless payment is received by day 90, service for all CLEC end user customers will be suspended. 5.6.4. Fourth, should the CLEC account remain outstanding on day 91 Sprint will deny service and send a letter to CLEC stating that their service has been suspended for non-payment. 5.7. Sprint reserves the right to periodically revise its collection procedure to conform to then current business practices and regulations. Sprint will provide timely notification to CLEC of changes to its collection practice in a manner consistent with its own customer notification. 6. AUDITS AND EXAMINATIONS 6.1. As used herein "Audit" shall mean a comprehensive review of services performed under this Agreement: "Examination" shall mean an inquiry into a specific element of or process related to services performed under this Agreement billed amounts. Either party (the "Requesting Party") may perform one (1) Audit per twelve (12) month period commencing with the Effective Date. The Audit period will include no more than the preceding twelve (12) month period as of the date of the Audit request. The Requesting Party may perform Examinations, as it deems necessary, with the assistance of the other Party, which will not be unreasonably withheld. 6.2. Upon thirty (30) days written notice by the Requesting Party to Audited Party, Requesting Party shall have the right through its authorized representative to make an Audit or Examination, during normal business hours, of any records, accounts and processes which contain information bearing upon the provision of the services provided and performance standards agreed to under this Agreement. Within the above-described thirty (30) day period, the Parties shall reasonably agree upon the scope of the Audit or Examination, the documents and processes to 17 be reviewed, and the time, place and manner in which the Audit or Examination shall be performed. Audited Party agrees to provide Audit or Examination support, including appropriate access to and use of Audited Party's facilities (e.g. conference rooms, telephones, copying machines). 6.3. Each party shall bear its own expenses in connection with the conduct of the Audit or Examination. The reasonable cost of special data extraction required by the Requesting Party to conduct the Audit or Examination will be paid for by the Requesting Party. For purposes of this (S) 6.3, a "Special Data Extraction" shall mean the creation of an output record or informational report (from existing data files) that is not created in the normal course of business. If any program is developed to Requesting Party's specifications and at Requesting Party's expense, Requesting Party shall specify at the time of request whether the program is to be retained by Audited party for reuse for any subsequent Audit or Examination. 6.4. Adjustments based on the audit findings may be applied to the twelve (12) month period included in the audit. Adjustments, credits or payments shall be made and any corrective action shall commence within thirty (30) days from receipt of requesting Party's receipt of the final audit report to compensate for any errors or omissions which are disclosed by such Audit or Examination and are agreed to by the Parties. Interest shall be calculated in accordance with (S) 5.5 herein. 6.5. Neither such right to examine and audit nor the right to receive an adjustment shall be affected by any statement to the contrary appearing on checks or otherwise, unless such statement expressly waiving such right appears in writing, is signed by the authorized representative of the party having such right and is delivered to the other party in a manner sanctioned by this Agreement. 6.6. This Article 6 shall survive expiration or termination of this Agreement for a period of one (1) year after expiration or termination of this Agreement. 7. INTELLECTUAL PROPERTY RIGHTS 7.1. Any intellectual property which originates from or is developed by a Party shall remain in the exclusive ownership of that Party. Except for a limited license to use patents or copyrights to the extent necessary for the Parties to use any facilities or equipment (including software) or to receive any service solely as provided under this Agreement, no license in patent, copyright, trademark or trade secret, or other proprietary or intellectual property right now or hereafter owned, controlled or licensable by a Party, is granted to the other Party or shall be implied or arise by estoppel. 7.2. Neither Party shall have any obligation to defend, indemnify or hold harmless, or acquire any license or right for the benefit of, or owe any other obligation or any liability to, the other Party based on or arising from any claim, demand, or proceeding by any third party alleging or asserting that the use of any circuit, apparatus or system, or the use of any software, or the performance of any service 18 or method or the provision or use of any facilities by either party under this Agreement, constitutes direct or contributory infringement, or misuse or misappropriation of any patent, copyright, trademark, trade secret, or any other proprietary or intellectual property right of any third party. 7.3. Following notice of an infringement claim against Sprint based on the use by CLEC of a service or facility, CLEC shall at CLEC's expense procure from the appropriate third parties the right to continue to use the alleged infringing intellectual property or if CLEC fails to do so. Sprint may charge CLEC for such costs as permitted under a Commission order. 8. LIMITATION OF LIABILITY 8.1. Except as otherwise set forth in this Agreement, neither Party shall be responsible to the other for any indirect, special, consequential or punitive damages, including (without limitation) damages for loss of anticipated profits or revenue or other economic loss in connection with or arising from anything said, omitted, or done hereunder (collectively "Consequential Damages"), whether arising in contract or tort, provided that the foregoing shall not limit a Party's obligation under Article 9 to indemnify, defend, and hold the other party harmless against amounts payable to third parties. Notwithstanding the foregoing, in no event shall Sprint's liability to CLEC for a service outage exceed an amount equal to the proportionate charge for the service(s) or unbundled element(s) provided for the period during which the service was affected. 9. INDEMNIFICATION 9.1. Each Party agrees to indemnify and hold harmless the other Party from and against claims for damage to tangible personal or real property and/or personal injuries arising out of the negligence or willful act or omission of the indemnifying Party or its agents, servants, employees, contractors or representatives. To the extent not prohibited by law, each Party shall defend, indemnify, and hold the other Party harmless against any loss to a third party arising out of the negligence or willful misconduct by such indemnifying Party, its agents, or contractors in connection with its provision of service or functions under this Agreement. Notwithstanding the above, in the case of any loss alleged or damage claim made by a Customer of either Party in connection with the service provided by that Party, and which allegation or claim relates in some way to a service provided under this Agreement, the Party whose customer alleged such loss shall indemnify the other Party and hold it harmless against any or all of such loss alleged by each and every Customer which arises out of the negligence or willful misconduct of the indemnifying Party. The indemnifying Party under this Article agrees to defend any suit brought against the other Party either individually or jointly with the indemnified Party for any such loss, injury, liability, claim or demand. The indemnified Party agrees to notify the other Party promptly, in writing, of any written claims, lawsuits or demands for which it is 19 claimed that the indemnifying Party is responsible under this Article and to cooperate in every reasonable way to facilitate defense or settlement of claims. The indemnifying Party shall have complete control over defense of the case and over the terms of any proposed settlement or compromise thereof. The indemnifying Party shall not be liable under this Article for settlement by the indemnified Party of any claim, lawsuit, or demand, if the indemnifying Party has not approved the settlement in advance, unless the indemnifying Party has had the defense of the claim, lawsuit, or demand tendered to it in writing and has failed to assume such defense. In the event of such failure to assume defense, the indemnifying Party shall be liable for any reasonable settlement made by the indemnified Party without approval of the indemnifying Party. 9.2. Each Party agrees to indemnify and hold harmless the other Party from all claims and damages arising from the Indemnifying Party's discontinuance of service to one of the Indemnifying Party's subscribers for nonpayment. 9.3 When the lines or services of other companies and Carriers are used in establishing connections to and/or from points not reached by a Party's lines, neither Party shall be liable for any act or omission of the other companies or Carriers. 9.4. In addition to its indemnity obligations hereunder, each Party shall, to the extent allowed by law or Commission Order, provide, in its tariffs and contracts with its subscribers that relate to any Telecommunications Services or Network Element provided or contemplated under this Agreement, that in no case shall such Party or any of its agents, contractors or others retained by such Party be liable to any subscriber or third party for (i) any loss relating to or arising out of this Agreement, whether in contract or tort, that exceeds the amount such Party would have charged the applicable subscriber for the service(s) or function(s) that gave rise to such loss, and (ii) Consequential Damages (as defined in Article 8 above). 10. BRANDING 10.1. CLEC shall provide the exclusive interface to CLEC subscribers, except as CLEC shall otherwise specify for the reporting of trouble or other matters identified by CLEC for which Sprint may directly communicate with CLEC subscribers. In those instances where CLEC requests that Sprint personnel interface with CLEC subscribers, such Sprint personnel shall inform the CLEC subscribers that they are representing CLEC, or such brand as CLEC may specify. 10.2. Other business materials furnished by Sprint to CLEC subscribers shall bear no corporate name, logo, trademark or tradename. 10.3. Except as specifically permitted by a Party, in no event shall either Party provide information to the other Party's subscribers about the other Party or the other Party's products or services. 20 10.4. Sprint shall share pertinent details of Sprint's training approaches related to branding with CLEC to be used by Sprint to assure that Sprint meets the branding requirements agreed to by the Parties. 10.5. This Article 10 shall not confer on either Party any rights to the service marks, trademarks and/or trade names owned by or used in connection with services by the other Party, except as expressly permitted in writing by the other Party. 11. CONFIDENTIALITY AND PUBLICITY 11.1. All information which is disclosed by one party ("Disclosing Party") to the other ("Recipient") in connection with this Agreement, or acquired in the course of performance of this Agreement, shall be deemed confidential and proprietary to the Disclosing Party and subject to this Agreement, such information including but not limited to, orders for services, usage information in any form, and CPNI as that term is defined by the Act and the rules and regulations of the FCC ("Confidential and/or Proprietary Information"). 11.2. During the term of this Agreement, and for a period of one (1) year thereafter, Recipient shall (i) use it only for the purpose of performing under this Agreement, (ii) hold it in confidence and disclose it only to employees or agents who have a need to know it in order to perform under this Agreement, and (iii) safeguard it from unauthorized use or Disclosure using no less than the degree of care with which Recipient safeguards its own Confidential Information. 11.3. Recipient shall have no obligation to safeguard Confidential Information (i) which was in the Recipient's possession free of restriction prior to its receipt from Disclosing Party, (ii) which becomes publicly known or available through no breach of this Agreement by Recipient, (iii) which is rightly acquired by Recipient free of restrictions on its Disclosure or, (iv) which is independently developed by personnel of Recipient to whom the Disclosing Party's Confidential Information had not been previously disclosed. Recipient may disclose Confidential Information if required by law, a court, or governmental agency, provided that Disclosing Party has been notified of the requirement promptly after Recipient becomes aware of the requirement, and provided that Recipient undertakes all lawful measures to avoid disclosing such information until Disclosing Party has had reasonable time to obtain a protective order. Recipient agrees to comply with any protective order that covers the Confidential Information to be disclosed. 11.4. Each Party agrees that Disclosing Party would be irreparably injured by a breach of this Article 11 by Recipient or its representatives and that Disclosing Party shall be entitled to seek equitable relief, including injunctive relief and specific performance, in the event of any breach of this Article 11. Such remedies shall not be exclusive, but shall be in addition to all other remedies available at law or in equity. 21 11.5. Unless otherwise agreed, neither Party shall publish or use the other Party's logo, trademark, service mark, name, language, pictures, symbols or words from which the other Party's name may reasonably be inferred or implied in any product, service, advertisement, promotion, or any other publicity matter, except that nothing in this paragraph shall prohibit a Party from engaging in valid comparative advertising. This (S) 11.5 shall confer no rights on a Party to the service marks, trademarks and trade names owned or used in connection with services by the other Party or its Affiliates, except as expressly permitted by the other Party. 11.6. Neither Party shall produce, publish, or distribute any press release nor other publicity referring to the other Party or its Affiliates, or referring to this Agreement, without the prior written approval of the other Party. Each party shall obtain the other Party's prior approval before discussing this Agreement in any press or media interviews. In no event shall either Party mischaracterize the contents of this Agreement in any public statement or in any representation to a governmental entity or member thereof. 11.7. Except as otherwise expressly provided in this Article 11, nothing herein shall be construed as limiting the rights of either Party with respect to its customer information under any applicable law, including without limitations (S) 222 of the Act. 12. DISCLAIMER OF WARRANTIES 12.1. EXCEPT AS SPECIFICALLY PROVIDED ELSEWHERE IN THIS AGREEMENT TO THE CONTRARY, NEITHER PARTY MAKES ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED WITH RESPECT TO QUALITY, FUNCTIONALITY OR CHARACTERISTICS OF THE SERVICES PROVIDED PURSUANT TO THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE. NO REPRESENTATION OR STATEMENT MADE BY EITHER PARTY OR ANY OF ITS AGENTS OR EMPLOYEES, ORAL OR WRITTEN, INCLUDING, BUT NOT LIMITED TO, ANY SPECIFICATIONS, DESCRIPTIONS OR STATEMENTS PROVIDED OR MADE SHALL BE BINDING UPON EITHER PARTY AS A WARRANTY. 13. ASSIGNMENT AND SUBCONTRACT 13.1. If any Affiliate of either Party succeeds to that portion of the business of such Party that is responsible for, or entitled to, any rights, obligations, duties, or other interests under this Agreement, such Affiliate may succeed to those rights, obligations, duties, and interest of such Party under this Agreement. In the event of any such succession hereunder, the successor shall expressly undertake in writing to the other Party the performance and liability for those obligations and 22 duties as to which it is succeeding a Party to this Agreement. Thereafter, the successor Party shall be deemed Carrier or Sprint and the original Party shall be relieved of such obligations and duties, except for matters arising out of events occurring prior to the date of such undertaking. 13.2. Except as herein before provide, and except for an assignment confined solely to moneys due or to become due, any assignment of this Agreement or of the work to be performed, in whole or in part, or of any other interest of a Party hereunder, without the other Party's written consent, which consent shall not be unreasonably withheld or delayed, shall be void. It is expressly agreed that any assignment of monies shall be void to the extent that it attempts to impose additional obligations other than the payment of such moneys on the other Party or the assignee additional to the payment of such moneys. 14. GOVERNING LAW 14.1. This Agreement shall be governed by and construed in accordance with the Act, orders of the Commission, and the FCC's Rules and Regulations, except insofar as state law may control any aspect of this Agreement, in which case the domestic laws of the State of Nevada, without regard to its conflicts of laws principles, shall govern. In all other respects, in the event of a conflict between the provisions of this Agreement and the Act, the provisions of the Act shall govern. 15. RELATIONSHIP OF PARTIES 15.1. It is the intention of the Parties that each Party shall be an independent contractor and nothing contained herein shall constitute the Parties as joint ventures, partners, employees or agents of one another, and neither Party shall have the right or power to bind or obligate the other. 16. NO THIRD PARTY BENEFICIARIES 16.1. The provisions of this Agreement are for the benefit of the Parties hereto and not for any other person, and this Agreement shall not provide any person not a party hereto with any remedy, claim, liability, reimbursement, right of action, or other right in excess of those existing without reference hereto. This shall not be construed to prevent Carrier from providing its Telecommunications Services to other carriers. 17. NOTICES 171.1 Except as otherwise provided herein, all notices or other communication hereunder shall be deemed to have been duly given when made in writing and delivered in person or deposited in the United States mail, certified mail, postage prepaid, return receipt requested and addresses as follows: 23 If to Sprint: If to Director CLEC: Jeff Webster Local Carner Markets VP Regulatory Affairs Sprint Pac-West Telecomm, Inc 2330 Shawnee Mission Pkwy 4210 Coronado Avenue Mailstop KSFR WB0301 Stockton CA 95204 Fairway, KS 66205 with a Brian Theis With a John Clark, Esq (Regulatory Counsel) copy to: Regional Director Goodin, MacBride, Squen. Sprint of Nevada Copy to: Schlotz & Ritchie 330 S. Valley View Blvd. 505 Sansome Street, Suite 900 Las Vegas NV 89152 San Francisco, CA 94111 17.2. If personal delivery is selected to give notice, a receipt of such delivery shall be obtained. The address to which notices or communications may be given to either party may be changed by written notice given by such Party to the other pursuant to this Article 17. 18. WAIVERS. 18.1. No waiver of any provisions of this Agreement and no consent to any default under this Agreement shall be effective unless the same shall be in writing and properly executed by or on behalf of the Party against whom such waiver or consent is claimed. 18.2. No course of dealing or failure of any Party to strictly enforce any term, right, or condition of this Agreement in any instance shall be construed as a general waiver or relinquishment of such term, right or condition. 18.3. Waiver by either party of any default by the other Party shall not be deemed a waiver of any other default. 19. SURVIVAL 19.1. Termination of this Agreement, or any part hereof, for any cause shall not release either Party from any liability which at the same time of termination had already accrued to the other Party or which thereafter accrues in any respect to any act or omission occurring prior to the termination or from an obligation which is expressly stated in this Agreement to survive termination including but not limited to (S)(S) 5.6.7.8.11.16.18.21. 20. FORCE MAJEURE 20.1. Neither Party shall be held liable for any delay or failure in performance of any 24 part of this Agreement from any cause beyond its control and without its fault or negligence, such as acts of God, acts of civil or military authority, embargoes, epidemics, war, terrorist acts, riots, insurrections, fires, explosions, earthquakes, nuclear accidents, floods, power blackouts, strikes, work stoppage affecting a supplier or unusually severe weather. No delay or other failure to perform shall be excused pursuant to this Article 20 unless delay or failure and consequences thereof are beyond the control and without the fault or negligence of the Party claiming excusable delay or other failure to perform. In the event of any such excused delay in the performance of a Party's obligation(s) under this Agreement, the due date for the performance of the original obligation(s) shall be extended by a term equal to the time lost by reason of the delay. In the event of such delay, the delaying Party shall perform its obligations at a performance level no less than that which it uses for its own operations. In the event of such performance delay or failure by Sprint, Sprint agrees to resume performance in a nondiscriminatory manner and not favor its own provision of Telecommunications Services above that of CLEC. 21. DISPUTE RESOLUTION 21.1. The Parties recognize and agree that the Commission has continuing jurisdiction to implement and enforce all terms and conditions of this Agreement. Accordingly, the Parties agree that any dispute arising out of or relating to this Agreement that the Parties themselves cannot resolve may be submitted to the Commission for resolution. The Parties agree to seek expedited resolution by the Commission, and shall request that resolution occur in no event later than sixty (60) days from the date of submission of such dispute. If the Commission appoints an expert(s) or other facilitator(s) to assist in its decision making, each party shall pay half of the fees and expenses so incurred. During the Commission proceeding each Party shall continue to perform its obligations under this Agreement provided, however, that neither Party shall be required to act in any unlawful fashion. This provision shall not preclude the Parties from seeking relief available in any other forum. 21.2. If any portion of an amount due to a Party ("the Billing Party") under this Agreement is subject to a bona fide dispute between the ---- ---- Parties, the Party billed (the "Non-Paying Party") shall within thirty (30) days of its receipt of the invoice containing such disputed amount give written notice to the Billing Party at the address(es) indicated in Article 17 herein of the amounts it disputes ("Disputed Amounts") and include in such notice the specific details and reason for disputing each item. The Non-Paying Party shall pay when due all undisputed amounts to the Billing Party, and shall include a copy of the dispute with the payment of the undisputed amounts. The balance of the Disputed Amount, after the necessary adjustments have been made for the disputed amounts found in CLEC's favor, shall be paid with late charges, if appropriate, upon final determination of such dispute. 25 21.3. If the Parties are unable to resolve the issues related to the Disputed Amounts in the normal course of business within thirty (30) days after delivery to the Billing Party of notice of the Disputed Amounts, each of the Parties shall appoint a designated representative that has authority to settle the dispute and that is at a higher level of management than the persons with direct responsibility for administration of this Agreement. The designated representatives shall meet as often as they reasonably deem necessary in order to discuss the dispute and negotiate in good faith in an effort to resolve such dispute. The specific format for such discussions will be left to the discretion of the designated representatives, however all reasonable requests for relevant information made by one Party to the other Party shall be honored. 21.4. If the Parties are unable to resolve issues related to the Disputed Amounts within thirty (30) days after the Parties' appointment of designated representatives pursuant to (S) 21.3, then either Party may file a complaint with the Commission to resolve such issues or proceed with any other remedy pursuant to law or equity. The Commission may direct payment of any or all funds plus applicable late charges to be paid to either Party. 22. COOPERATION ON FRAUD 22.1. The Parties agree that they shall cooperate with one another to investigate, minimize and take corrective action in cases of fraud. The Parties' fraud minimization procedures are to be cost effective and implemented so as not to unduly burden or harm one party as compared to the other. 23. TAXES 23.1 Any Federal, state or local excise, license, sales, use, or other taxes or tax-like charges (excluding any taxes levied on income) resulting from the performance of this Agreement shall be borne by the Party upon which the obligation for payment is imposed under applicable law, even if the obligation to collect and remit such taxes is placed upon the other Party. Any such taxes shall be shown as separate items on applicable billing documents between the Parties. The Party obligated to collect and remit taxes shall do so unless the other Party provides such Party with the required evidence of exemption. The Party so obligated to pay any such taxes may contest the same in good faith at its own expense, and shall be entitled to the benefit of any refund or recovery, provided that such party shall not permit any lien to exist on any asset of the other party by reason of the contest. The Party obligated to collect and remit taxes shall cooperate fully in any such contest by the other Party by providing records, testimony and such additional information or assistance as may reasonably be necessary to pursue the contest. 24. AMENDMENTS AND MODIFICATIONS 24.1 No provision of this Agreement shall be deemed waived, amended or modified by 26 either party unless such a waiver, amendment or modification is in writing, dated, and signed by both Parties. 25. SEVERABILITY 25.1 Subject to Part B, Article 2, if any part of this Agreement is held to be invalid for any reason, such invalidity will affect only the portion of this Agreement which is invalid. In all other respects this Agreement will stand as if such invalid provision had not been a part thereof, and the remainder of the Agreement shall remain in full force and effect. 26. HEADINGS NOT CONTROLLING 26.1 The headings and numbering of Articles, Sections, Parts and Attachments in this Agreement are for convenience only and shall not be construed to define or limit any of the terms herein or affect the meaning or interpretation of this Agreement. 27. ENTIRE AGREEMENT 27.1 This Agreement, including all Parts and Attachments and subordinate documents attached hereto or referenced herein, all of which are hereby incorporated by reference herein, constitute the entire matter thereof, and supersede all prior oral or written agreements, representations, statements, negotiations, understandings, proposals, undertakings with respect to the subject matter thereof. 28. COUNTERPARTS 28.1 This Agreement may be executed in counterparts. Each counterpart shall be considered an original and such counterparts shall together constitute one and the same instrument. 29. SUCCESSORS AND ASSIGNS 29.1 This Agreement shall be binding upon, and inure to the benefit of,the Parties hereto and their respective successors and permitted assigns. 30. IMPLEMENTATION PLAN 30.1 This Agreement sets forth the overall standards of performance for services, processes, and systems capabilities that the Parties will provide to each other, and the intervals at which those services, processes and capabilities will be provided. The Parties understand that the arrangements and provision of services described in this Agreement shall require technical and operational coordination between the Parties. Accordingly, the Parties agree to form a team (the "Implementation Team") that shall develop and identify those processes, guidelines, specifications, standards and additional terms and conditions necessary to support the terms of this Agreement. Each Party shall designate, in writing, no more than (4) 27 persons to be permanent members of the Implementation Team;provided that either Party may include in meetings or activities such technical specialists or other individuals as may be reasonably required to address a specific task, matter or subject. Each Party may replace its representatives by delivering written notice thereof to the other Party. 30.2. The agreements reached by the Implementation Team shall be documented in an operations manual (the "Implementation Plan") within one hundred-twenty (120) days of both Parties having designated members of the Implementation Team. The Implementation Plan shall address the following matters, and may include any other matters agreed upon by the Implementation Team; 30.2.1. the respective duties and responsibilities of the Parties with respect to the administration and maintenance of the interconnections (including signaling) specified in Attachment 3 and the trunk groups specified in Attachment 4 and including standards and procedures for notification and discoveries of trunk disconnects; 30.2.2. disaster recovery and escalation provisions, 30.2.3. access to Operations Support Systems functions provided hereunder including gateways and interfaces; 30.2.4. escalation procedures for ordering, provisioning, billing,and maintenance; 30.2.5. single points of contact for ordering, provisioning, billing, and maintenance; 30.2.6. service ordering and provisioning procedures, including provision of the trunks and facilities; 30.2.7. provisioning and maintenance support; 30.2.8. conditioning and provisioning of collocation space and maintenance of Virtually Collocated equipment; 30.2.9. procedures and processes for Directories and Directory Listings; 30.2.10. billing processes and procedures; 30.2.11. network planning components including time intervals; 30.2.12. joint systems readiness and operational readiness plans; 30.2.13. appropriate testing of services, equipment, facilities and Network Elements; 30.2.14. monitoring of inter-company operational processes; 30.2.15. procedures for coordination of local PIC changes and processing; 28 30.2.16. physical and network security concerns; and 30.2.17. such other matters specifically referenced in this Agreement that are to be agreed upon by the Implementation Team and/or contained in the Implementation Plan. 30.3. The Implementation Plan may be amended from time to time by the Implementation Team, as the team deems appropriate. Unanimous written consent of the permanent members of the Implementation Team shall be required for any action of the Implementation Team. If the Implementation Team is unable to act, the existing provisions of the Implementation Plan shall remain in full force and effect. 31. FEDERAL JURISDICTIONAL AREAS 31.1. CLEC understands and agrees that this agreement serves as actual notice that Sprint and its Affiliates have entered into a binding contract to provide exclusive telecommunications services for the Army and Air Force Exchange Service ("AAFES") during the term of this agreement. The AAFES contract specifies among other things, that Sprint shall provide all telecommunications services to officer and enlisted temporary living facilities (commonly named Bachelor Officer Quarters and Bachelor Enlisted Quarters) and to all unaccompanied enlisted personnel barracks on United States Army bases. CLEC agrees it will not market to or attempt to secure any customer located in an area governed by this exclusive telecommunications service provider contract. 29 IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed by its duly authorized representatives. "Sprint" "CLEC" THE NEVADA DIVISION PAC-WEST TELECOMM.INC. OF CENTRAL TELEPHONE COMPANY, D/B/A SPRINT OF NEVADA By: /s/ Brian Theis By: /s/ Jeff Webster ---------------- ------------------------ Name /s/ Brian T.Theis Name (typed): ----------------- (typed): /s/ Jeff Webster ------------------------ Title: Regional Director Title: Vice President Business ----------------- Operations ------------------------ Date: _________________ Date: 01/15/99 ------------------------ 30 ATTACHMENT I GENERAL PRINCIPLES 1. PRICE SCHEDULE 1.1. Subject to the provisions of Part B, Article 2 of this Agreement, all rates provided under this Agreement shall remain in effect for the term of this Agreement. 2. LOCAL SERVICE RESALE 2.1. The rates that CLEC shall pay to Sprint for Local Resale are as set forth in Table 1 of this Attachment and shall be applied consistent with the provisions of Attachment II of this Agreement. 3. INTERCONNECTION AND RECIPROCAL COMPENSATION 3.1. The rates to be charged for the exchange of Local Traffic are set forth in Table 1 of this Attachment and shall be applied consistent with the provisions of Attachment IV of this Agreement. 3.2. Compensation for the termination of toll traffic and the origination of 800 traffic between the interconnecting parties shall be based on the applicable access charges in accordance with FCC and Commission Rules and Regulations and consistent with the provisions of Attachment IV of this Agreement. 3.3 INP is available in all Sprint service areas where LNP is not available. Once LNP is available, all INP arrangements will be converted to LNP. Where INP is available and a toll call is completed through Sprint's INP arrangement (e.g., remote call forwarding) to CLEC's subscriber. CLEC shall be entitled to applicable access charges in accordance with the FCC and Commission Rules and Regulations. If a national standard billing method has not been developed for a CLEC to directly bill a carrier access for a toll call that has been completed using interim number portability, then the blended rate per line method described in (S) 3.3.1 herein will be used. 3.3.1. The Parties will jointly determine the amount of traffic that will be considered INP'ed traffic for compensation purposes. The ported party shall charge the porting party on a per line basis using an average of Sprint's per line minutes of use and Sprint's access rates in lieu of any other compensation charges for terminating such traffic. The traffic that is not identified as INP'ed will be compensated as local interconnection as set forth in (S) 3.1. 3.3.2. For compensation of the INP Local Traffic, the Parties shall jointly develop a process which will allow compensation for INP'ed traffic to be based on the initial origination point and final terminated point of the 31 INP'ed call. The full reciprocal compensation rate, as listed in the Pricing Schedule, shall apply for Local Traffic, and full switched access charges, as listed in applicable tariffs, shall apply for intraLATA and interLATA. All three sets of rates will be weighted together based on the agreed minutes of use patterns to establish a single rate per INP line. 3.3.3. CLEC shall pay a transit rate, comprised of the transport and tandem rate elements, as set forth in Table 1 of this Attachement when CLEC uses a Sprint access tandem to terminate a local call to a third party LEC or another CLEC. Sprint shall pay CLEC a transit rate equal to the Sprint rate referenced above when Sprint uses a CLEC switch to terminate a local call to a third party LEC or another CLEC. 3.4 To receive reciprocal compensation for local calls, the call must originate and terminate within Sprint's tariffed local calling area. In order to treat a call terminating to CLEC as local, CLEC will established a point of interconnection (POI) as defined in Attachment IV, (S)1.2.1 herin, within Sprint's local serving area (or at Sprint's option, at the tandem/host office). Should CLEC not establish a POI, as noted above, each Party will compensate the other via the intraLATA toil settlement arrangement currently in existence between Sprint and CLEC, which is based on the rates and elements included in the Parties access tariffs. In addition, Sprint will bill toll charges to Sprint's end users that originate calls to CLEC's NXXs. 4. UNBUNDLED NETWORK ELEMENTS 4.1. The charges that CLEC shall pay to Sprint for Unbundled Network Elements are set forth in Table 1 of this Attachment I. 32 TABLE 1 NETWORK ELEMENT PRICE LIST-SPRINT NEVADA - ------------------------------------------------------------ RESALE DISCOUNTS: - ------------------------------------------------------------ Other than Operator/DA 21.00% Op Assist/DA 21.00% - ------------------------------------------------------------ USAGE FILE CHARGES: - ------------------------------------------------------------ Message Provisioning, per message $0.005 Data Transmission, per message $0.002 Tape Charge, per tape $50.00
- ------------------------------------------------------------------------------------------------------ RATE ELEMENT SOURCE RECURRING RATE NRC - ------------------------------------------------------------------------------------------------------ TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------ Service Order NRC $25.15 - ------------------------------------------------------------------------------------------------------ Service Order Listing Only $20.82 - ------------------------------------------------------------------------------------------------------ Service Order via IRES $ 3.66 - ------------------------------------------------------------------------------------------------------ Central Office interconnection Charge $ 4.90 - ------------------------------------------------------------------------------------------------------ Trip Charge $17.00 - ------------------------------------------------------------------------------------------------------ Outside Plant interconnection (2-W) $30.76 - ------------------------------------------------------------------------------------------------------ Outside Plant interconnection (4-W) $51.52 - ------------------------------------------------------------------------------------------------------ Testing $ 1.31 - ------------------------------------------------------------------------------------------------------ Loop Rework Charge (2-W) $ 9.55 - ------------------------------------------------------------------------------------------------------ Loop Rework Charge (4-W) $13.70 - ------------------------------------------------------------------------------------------------------ Trouble Isolation and Testing $68.36 - ------------------------------------------------------------------------------------------------------ NID TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------ Network Interface Device w/1 Line $ 1.55 - ------------------------------------------------------------------------------------------------------ Network Interface Device w/2 Lines $ 1.77 - ------------------------------------------------------------------------------------------------------ Network Interface Device w/6 Lines $ 3.10 - ------------------------------------------------------------------------------------------------------ LOOP TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------ Analog 2-wire Band 1 $ 9.51 - ------------------------------------------------------------------------------------------------------ Band 2 $12.59 - ------------------------------------------------------------------------------------------------------ Band 3 $15.71 - ------------------------------------------------------------------------------------------------------ Band 4 $22.45 - ------------------------------------------------------------------------------------------------------ Band 5 $53.36 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ Analog 4-wire Band 1 $15.12 - ------------------------------------------------------------------------------------------------------ Band 2 $20.02 - ------------------------------------------------------------------------------------------------------ Band 3 $24.99 - ------------------------------------------------------------------------------------------------------ Band 4 $35.70 - ------------------------------------------------------------------------------------------------------ Band 5 $84.84 - ------------------------------------------------------------------------------------------------------ LOCAL SWITCHING TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------ Band 1 $ 6.17 - ------------------------------------------------------------------------------------------------------ Band 2 $ 7.21 - ------------------------------------------------------------------------------------------------------ Band 3 $10.42 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ Intrastate CCL Ong* Intrastate Access Tariff N/A - ------------------------------------------------------------------------------------------------------ Intrastate CCL Term* N/A - ------------------------------------------------------------------------------------------------------ RIC* Current tariff rate - ------------------------------------------------------------------------------------------------------ LOOP & PORT COMB. Discount TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------ (1 Line NID. 2 Wire Loop & Basic Port) $ 1.68 N/A - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ FEATURES TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------ CCL Package* $ 0.35 $ 2.55 - ------------------------------------------------------------------------------------------------------ 3 Way Calling - Usage Sens. $ 0.01 N/A - ------------------------------------------------------------------------------------------------------ CLASS Package $ 4.31 $ 4.90 - ------------------------------------------------------------------------------------------------------
Page 1 of 9 TABLE 1 NETWORK ELEMENT PRICELIST - SPRINT NEVADA - ------------------------------------------------------------------------------------------------------------------------------------ . Automatic Recall - Usage Per Call $ 0.003 N/A - ------------------------------------------------------------------------------------------------------------------------------------ . Customer Originated Trace - Per Trace $ 0.17 $ 0.47 - ------------------------------------------------------------------------------------------------------------------------------------ . Automatic Callback - Usage-per Trace $ 0.01 N/A - ------------------------------------------------------------------------------------------------------------------------------------ CENTREX Package $ 10.95 $ 23.06 - ------------------------------------------------------------------------------------------------------------------------------------ . 3 Way Conf/Consult/Hold Transfer $ 2.95 $ 13.20 - ------------------------------------------------------------------------------------------------------------------------------------ . Conf Calling - 6 Way Station Control $ 4.69 $ 13.20 - ------------------------------------------------------------------------------------------------------------------------------------ . Dial Transfer to Tandem Tie Line $ 0.11 $ 88.02 - ------------------------------------------------------------------------------------------------------------------------------------ . Direct Connect $ 0.01 $ 13.20 - ------------------------------------------------------------------------------------------------------------------------------------ . Meet Me Conference $ 31.03 $ 22.24 - ------------------------------------------------------------------------------------------------------------------------------------ . Multi-Hunt Service $ 0.05 $ 13.20 - ------------------------------------------------------------------------------------------------------------------------------------ INTERIM NUMBER PORTABILITY TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------------------------------------ RCF Residential $ 0.07 $ 0.47 - ------------------------------------------------------------------------------------------------------------------------------------ RCF Business $ 0.29 $ 0.47 - ------------------------------------------------------------------------------------------------------------------------------------ Call Path Residential $ 0.01 $ 0.42 - ------------------------------------------------------------------------------------------------------------------------------------ Call Path Business $ 0.05 $ 0.42 - ------------------------------------------------------------------------------------------------------------------------------------ TANDEM SWITCHING TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------------------------------------ $ 0.001341 $ 93.40 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ TRANSPORT TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------------------------------------ Dedicated DS 1 1 Zone - 1 Ring $ 64.51 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone - 1 Ring $ 93.79 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 2 Rings $ 126.34 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 3 Rings $ 197.46 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 2 Rings $ 97.06 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone 2 Rings $ 156.57 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 2 Rings, 1 Zone 3 Rings $ 227.68 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 2 Rings, 1 Zone 3 Rings $ 256.96 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 3 Rings $ 168.17 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone, 3 Rings $ 295.28 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Dedicated DS 3 1 Zone - 1 Ring $ 819.93 $ 207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone - 1 Ring $ 1,639.86 $ 207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 2 Rings $ 2,486.11 $ 207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 3 Rings $ 4,379.10 $ 207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone - 2 Rings $ 1,666.18 $ 207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone - 2 Rings $ 3,332.36 $ 207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 2 Rings, 1 Zone 3 Rings $ 5,225.34 $ 207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 2 Rings, 1 Zone 3 Rings $ 6,045.28 $ 207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone - 3 Rings $ 3,559.17 $ 207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone - 3 Rings $ 7,118.33 $ 207.09 - ------------------------------------------------------------------------------------------------------------------------------------ Common - ------------------------------------------------------------------------------------------------------------------------------------ State Wide Average $ 0.000493 N/A - ------------------------------------------------------------------------------------------------------------------------------------ RECIPROCAL COMPENSATION TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------------------------------------ (End Office/TDM Switching/Transport) - ------------------------------------------------------------------------------------------------------------------------------------ END OFFICE $ 0.002532 $ 93.40 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ TANDEM SWITCHING $ 0.001341 $ 93.40 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ TRANSPORT - ------------------------------------------------------------------------------------------------------------------------------------ Dedicated DS 1 1 Zone - 1 Ring $ 64.51 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone - 1 Ring $ 696.79 $ 102.53 - ------------------------------------------------------------------------------------------------------------------------------------
Page 2 of 9 TABLE 1 NETWORK ELEMENT PRICE LIST-SPRINT NEVADA - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 2 Rings $ 126.34 $102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 3 Rings $ 197.46 $102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 2 Rings $ 97.06 $102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone 2 Rings $ 156.57 $102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 2 Rings, 1 Zone 3 Rings $ 227.66 $102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 2 Rings 1 Zone 3 Rings $ 256.96 $102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 3 Rings $ 168.17 $102.53 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone, 3 Rings $ 295.28 $102.53 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Dedicated DS 3 1 Zone - 1 Ring $ 819.93 $207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone - 1 Ring $1,639.86 $207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 2 Rings $2,486.11 $207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 3 Rings $4.379.10 $207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 2 Rings $1,666.18 $207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone 2 Rings $3,332.36 $207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 2 Rings, 1 Zone 3 Rings $5,225.34 $207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 1 Ring, 1 Zone 2 Rings 1 Zone 3 Rings $6,045.28 $207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Zone 3 Rings $3,559.17 $207.09 - ------------------------------------------------------------------------------------------------------------------------------------ 2 Zone, 3 Rings $7,118.33 - ------------------------------------------------------------------------------------------------------------------------------------ Common (MOU) - ------------------------------------------------------------------------------------------------------------------------------------ State Wide Average $0.000493 N/A - ------------------------------------------------------------------------------------------------------------------------------------ INTERCONNECTION Interstate Access Tariff - ------------------------------------------------------------------------------------------------------------------------------------ CROSS CONNECTION - ------------------------------------------------------------------------------------------------------------------------------------ DS0 Elec X-Conn $ 0.96 - ------------------------------------------------------------------------------------------------------------------------------------ DS1 Elec X-Conn $ 2.99 - ------------------------------------------------------------------------------------------------------------------------------------ DS3 Elec X-Conn $ 26.47 - ------------------------------------------------------------------------------------------------------------------------------------ COMMON CHANNEL SIGNALING - ------------------------------------------------------------------------------------------------------------------------------------ INTERCONNECTION SERVICE TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------------------------------------ STP Port $ 491.55 $244.28 - ------------------------------------------------------------------------------------------------------------------------------------ STP Switching $ 0.9841 N/A - ------------------------------------------------------------------------------------------------------------------------------------ 56.0 Kbps Channel Termination $ 65.00 $160.65 - ------------------------------------------------------------------------------------------------------------------------------------ 56.0 Kbps SS7 Link Fixed $ 75.00 N/A - ------------------------------------------------------------------------------------------------------------------------------------ 56.0 Kbps SS7 Link Per Mile $ 3.00 N/A - ------------------------------------------------------------------------------------------------------------------------------------ 1.544 MPBS Channel Termination $ 115.00 $350.00 - ------------------------------------------------------------------------------------------------------------------------------------ 1.544 MBPS SS7 Link Fixed $ 70.00 N/A - ------------------------------------------------------------------------------------------------------------------------------------ 1.544 MBPS SS7 Link Per Mile $ 5.00 N/A - ------------------------------------------------------------------------------------------------------------------------------------ Multiplexing DS1 to DS0 (required w/1.544 Mbps) $ 200.00 $108.73 - ------------------------------------------------------------------------------------------------------------------------------------ Global Title Translation per service add/cng Interstate Access Tariff $ 10.90 - ------------------------------------------------------------------------------------------------------------------------------------ Originating Point Code per OPC per service add/cng Interstate Access Tariff $ 21.80 - ------------------------------------------------------------------------------------------------------------------------------------ LINE INFORMATION DATABASE TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------------------------------------ LIDB Administration Service (effective 5/11/98, on longer offering) N/A - ------------------------------------------------------------------------------------------------------------------------------------ LIDB Database Transport per query Current tariff rate - ------------------------------------------------------------------------------------------------------------------------------------ LIDB Database per query Current tariff rate - ------------------------------------------------------------------------------------------------------------------------------------ Toll Free Code Access Service query Current tariff rate - ------------------------------------------------------------------------------------------------------------------------------------ Toll Free Code Optional Service query Current tariff rate - ------------------------------------------------------------------------------------------------------------------------------------ DIRECTORY ASSISTANCE SERVICES TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------------------------------------ Sprint Nevada Tariff - ------------------------------------------------------------------------------------------------------------------------------------ DA Database Listing & Update per listing or update $ 0.06 - ------------------------------------------------------------------------------------------------------------------------------------ DA Data Base Query Service per query $ 0.0140 - ------------------------------------------------------------------------------------------------------------------------------------
Pages 3 of 9 TABLE 1 NETWORK ELEMENT PRICE LIST - SPRINT NEVADA - ------------------------------------------------------------------------------------------------------------------------- TOLL AND LOCAL OPERATOR SERVICES - ------------------------------------------------------------------------------------------------------------------------- Toll and Local Assistance Service (Live) per attempt $0.877 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- DA OPERATOR SERVICE TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------------------------- Sprint Nevada Tariff - ------------------------------------------------------------------------------------------------------------------------- DA Operator Service (Live) per attempt $0.351 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- 911. TANDEM PORT TELRIC COST STUDY - ------------------------------------------------------------------------------------------------------------------------- Sprint Nevada Tariff - ------------------------------------------------------------------------------------------------------------------------- Per DSO Equivalent Port $21.38 $133.18 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- OPERATIONAL SUPPORT SYSTEMS - ------------------------------------------------------------------------------------------------------------------------- OSS Interfaces* ICB ICB - ------------------------------------------------------------------------------------------------------------------------- * Sprint is working on OSS and rates will be added - ------------------------------------------------------------------------------------------------------------------------- as they are developed. =========================================================================================================================
Page 4 of 9 Table 1 LOCAL LOOPS-SPRINT NEVADA 2 Wire Voice 4 Wire Voice EXCHANGE CLLI Band Grade Rate Grade Rate - -------------------------------------------------------------------------------- Las Vegas XBH LSVGNVXBH BAND1 $ 9.51 $15.12 Las Vegas XGH LSVGNVXGH BAND1 $ 9.51 $15.12 Las Vegas XHH LSVGNVXHH BAND2 $12.59 $20.02 Las Vegas XKH LSVGNVXKH BAND2 $12.59 $20.02 Las Vegas XLH LSVGNVXLH BAND2 $12.59 $20.02 Las Vegas XMH LSVGNVXMH BAND2 $12.59 $20.02 North Las Vegas XFH NLVGNVXFH BAND2 $12.59 $20.02 Las Vegas XIH LSVGNVXIH BAND3 $15.71 $24.99 Las Vegas XRH LSVGNVXRH BAND3 $15.71 $24.99 Las Vegas XTH LSVGNVXTH BAND3 $15.71 $24.99 Las Vegas XWH LSVGNVXWH BAND3 $15.71 $24.99 Boulder City BLCYNVXFH BAND4 $22.45 $35.70 Henderson HNSNNVXFH BAND4 $22.45 $35.70 Las Vegas XUH LSVGNVXUH BAND4 $22.45 $35.70 Las Vegas XVH LSVGNVXVH BAND4 $22.45 $35.70 North Las Vegas XGH NLVGNVXGH BAND4 $22.45 $35.70 Blue Diamond/Jeans BDMDMNVXSR/JEANNVXF BAND5 $53.36 $84.84 Laughlin LGLNNVXFH BAND5 $53.36 $84.84 Mount Charieston MTCHNVXFR BAND5 $53.36 $84.84 Searchlight/Nelson SRCHNVXFR/NLSNNVXBR BAND5 $53.36 $84.84 Page 5 of 9 TABLE 1 LOCAL SWITCHING-SPRINT NEVADA Rate Band Rate - -------------------------------------------------------------- LAS VEGAS (EAST-1), NV 1 $ 6.17 LAS VEGAS (EAST-2), NV 1 $ 6.17 LAS VEGAS (MAIN-2), NV 1 $ 6.17 LAS VEGAS (NORTH-5), NV 1 $ 6.17 LAS VEGAS (NORTH-8), NV 1 $ 6.17 LAS VEGAS (SOUTH-5 #1), NV 1 $ 6.17 LAS VEGAS (SOUTH-5 #2), NV 1 $ 6.17 LAS VEGAS (WEST), NV 1 $ 6.17 LAS VEGAS (WEST-8), NV 1 $ 6.17 NORTH LAS VEGAS (NORTH-2), NV 1 $ 6.17 HENDERSON (564/5/6), NV 2 $ 7.21 LAS VEGAS (EAST-7), NV 2 $ 7.21 LAS VEGAS (MAIN-1), NV 2 $ 7.21 LAS VEGAS (SOUTH-6), NV 2 $ 7.21 LAS VEGAS (SOUTH 897/6.361*), NV 2 $ 7.21 LAS VEGAS (WEST-6), NV 2 $ 7.21 NORTH LAS VEGAS (NORTH-3), NV 2 $ 7.21 BLUE DIAMOND. NV 3 $ 10.42 BOULDER CITY (293/4), NV 3 $ 10.42 JEAN (874), NV 3 $ 10.42 LAUGHLIN (298/9*), NV 3 $ 10.42 MT. CHARLESTON. NV 3 $ 10.42 Page 6 of 9 TABLE 1 RECIPROCAL COMPENSATION-END OFFICE SPRINT-NEVADA BLUE DIAMOND, NV $0.002532 BOULDER CITY (293/4), NV $0.002532 HENDERSON (564/5/6), NV $0.002532 JEAN (874), NV $0,002532 LAS VEGAS (EAST-1), NV $0.002532 LAS VEGAS (EAST-2), NV $0.002532 LAS VEGAS (EAST-7), NV $0.002532 LAS VEGAS (MAIN-1), NV $0.002532 LAS VEGAS (MAIN-2), NV $0.002532 LAS VEGAS (NORTH-5), NV $0.002532 LAS VEGAS (NORTH-8), NV $0.002532 LAS VEGAS (SOUTH-5#1), NV $0.002532 LAS VEGAS (SOUTH-5#2), NV $0.002532 LAS VEGAS (SOUTH-6), NV $0.002532 LAS VEGAS (SOUTH 897/6.361*), NV $0.002532 LAS VEGAS (WEST), NV $0.002532 LAS VEGAS (WEST-6), NV $0.002532 LAS VEGAS (WEST-8), NV $0.002532 LAUGHLIN (298/9*), NV $0.002532 MT.CHARLESTON, NV $0.002532 NORTH LAS VEGAS (NORTH-2), NV $0.002532 NORTH LAS VEGAS (NORTH-3), NV $0.002532 Page 7 of 9 TABLE 1 DEDICATED TRANSPORT - DSI SPRINT - NEVADA
BLCYNVXF LSVGNVXR LSVGNVXI LSVGNVXM HNSNNVXF LSVGNVXB NLVGNVXF NLVGNVXG BLCYNVXF $168.17 $227.68 $197.46 $295.28 $168.17 $227.68 $227.68 LSVGNVXR $168.17 $126.34 $ 93.79 $168.17 $ 64.51 $126.34 $126.34 LSVGNVXI $227.68 $126.34 $126.34 $227.68 $ 97.06 $ 97.06 $ 97.06 LSVGNVXM $197.46 $ 93.79 $126.34 $197.46 $ 64.51 $126.34 $126.34 HNSNNVXF $295.28 $168.17 $227.68 $197.46 $168.17 $227.68 $227.68 LSVGNVXB $168.17 $ 64.51 $ 97.06 $ 64.51 $168.17 $ 97.06 $ 97.06 NLVGNVXF $227.68 $126.34 $ 97.06 $126.34 $227.68 $ 97.06 $ 97.06 NLVGNVXG $227.68 $126.34 $ 97.06 $126.34 $227.68 $ 97.06 $ 97.06 LSVGNVXU $227.68 $126.34 $156.57 $126.34 $227.68 $ 97.06 $156.57 $156.57 LSVGNVXT $227.68 $126.34 $ 97.06 $126.34 $227.68 $ 97.06 $ 97.06 $ 97.06 LSVGNVXG $197.46 $ 64.51 $126.34 $ 64.51 $197.46 $ 64.51 $126.34 $126.34 LSVGNVXL $197.46 $ 64.51 $126.34 $ 93.79 $197.46 $ 64.51 $126.34 $126.34 LSVGNVXV $227.68 $126.34 $156.57 $126.34 $227.68 $ 97.06 $156.57 $156.57 LSVGNVXK $197.46 $ 93.79 $126.34 $ 93.79 $197.46 $ 64.51 $126.34 $126.34 LSVGNVXH $227.68 $126.34 $156.57 $126.34 $227.68 $ 97.06 $156.57 $156.57 LSVGNVXW $227.68 $126.34 $156.57 $126.34 $227.68 $ 97.06 $156.57 $156.57 LSVGNVXU LSVGNVXT LSVGNVXG LSVGNVXL LSVGNVXV LSVGNVXK LSVGNVXH LSVGNVXW BLCYNVXF $227.68 $227.68 $197.46 $197.46 $227.68 $197.46 $227.68 $227.68 LSVGNVXR $126.34 $126.34 $ 64.51 $ 64.51 $126.34 $ 93.79 $126.34 $126.34 LSVGNVXI $156.57 $ 97.06 $126.34 $126.34 $156.57 $126.34 $156.57 $156.57 LSVGNVXM $126.34 $126.34 $ 64.51 $ 93.79 $126.34 $ 93.79 $126.34 $126.34 HNSNNVXF $227.68 $227.68 $197.46 $197.46 $227.68 $197.46 $227.68 $227.68 LSVGNVXB $ 97.06 $ 97.06 $ 64.51 $ 64.51 $ 97.06 $ 64.51 $ 97.06 $ 97.06 NLVGNVXF $156.57 $ 97.06 $126.34 $126.34 $156.57 $126.34 $156.57 $156.57 NLVGNVXG $156.57 $ 97.06 $126.34 $126.34 $156.57 $126.34 $156.57 $157.57 LSVGNVXU $ 97.06 $126.34 $126.34 $156.57 $126.34 $156.57 $ 97.06 LSVGNVXT $ 97.06 $126.34 $126.34 $156.57 $126.34 $156.57 $ 97.06 LSVGNVXG $126.34 $126.34 $ 64.51 $126.34 $ 64.51 $126.34 $126.34 LSVGNVXL $126.34 $126.34 $ 64.51 $ 97.06 $ 93.79 $126.34 $126.34 LSVGNVXV $156.57 $156.57 $126.34 $ 97.06 $126.34 $156.57 $156.57 LSVGNVXK $126.34 $126.34 $ 64.51 $ 93.79 $126.34 $ 97.06 $ 97.06 LSVGNVXH $156.57 $156.57 $126.34 $126.34 $156.57 $ 97.06 $ 97.06 LSVGNVXW $ 97.06 $ 97.06 $126.34 $126.34 $156.57 $ 97.06 $ 97.06
Page 8 of 9 TABLE 1 DEDICATED TRANSPORT - DS3 SPRINT - NEVADA
BLCYNVXF LSVGNVXR LSVGNVXI LSVGNVXM HSNNVXF LSVGNVXB NLVGNVXF NLVGNVXG BLCYNVXF $3,559.17 $5,225.34 $4,379.10 $7,118.33 $3,559.17 $5,225.34 $5,225.34 LSVGNVXR $3,559.17 $2,486.11 $1,639.86 $3,559.17 $ 819.93 $2,486.11 $2,486.11 LSVGNVXI $5,225.34 $2,486.11 $2,486.11 $5,225.34 $1,666.18 $1,666.18 $1,666.18 LSVGNVXM $4,379.10 $1,639,86 $2,486.11 $4,379.10 $ 819.93 $2,486.11 $2,486.11 HSNNVXF $7,118.33 $3,559.17 $5,225.34 $4,379.10 $3,559.17 $5,225.34 $5,225.34 LSVGNVXB $3,559.17 $ 819.93 $1,666.18 $ 819.93 $3,559.17 $1,666.18 $1,666.18 NLVGNVXF $5,225.34 $2,486.11 $1,666.18 $2,486.11 $5,225.34 $1,666.18 $1,666.18 NLVGNVXG $5,225.34 $2,486.11 $1,666.18 $2,486.11 $5,225.34 $1,666.18 $1,666.18 LSVGNVXU $5,225.34 $2,486.11 $3,332.36 $2,486.11 $5,225.34 $1,666.18 $3,332.36 $3,332.36 LSVGNVXT $5,225.34 $2,486.11 $1,666.18 $2,486.11 $5,225.34 $1,666.18 $1,666.18 $1,666.18 LSVGNVXG $4,379.10 $ 819.93 $2,486.11 $ 819.93 $4,379.10 $ 819.93 $2,486.11 $2,486.11 LSVGNVXL $4,379.10 $ 819.93 $2,486.11 $1,639.86 $4,379.10 $ 819.93 $2,486.11 $2,486.11 LSVGNVXV $5,225.34 $2,486.11 $3,332.36 $2,486.11 $5,225.34 $1,666.18 $3,332.36 $3,332.36 LSVGNVXK $4,379.10 $1,639,86 $2,486.11 $1,639.86 $4,379.10 $ 819.93 $2,486.11 $2,486.11 LSVGNVXH $5,225.34 $2,486.11 $3,332.36 $2,486.11 $5,225.34 $1,666.18 $3,332.36 $3,332.36 LSVGNVXW $5,225.34 $2,486.11 $3,332.36 $2,486.11 $5,225.34 $1,666.18 $3,332.36 $3,332.36 LSVGNVXU LSVGNVXT LSVGNVXG LSVGNVXL LSVGNVXV LSVGNVXK LSVGNVXH LSVGNVXW BLCYNVXF29A $5,225.34 $5,225.34 $4,379.10 $4,379.10 $5,225.34 $4,379.10 $5,225.34 $5,225.34 LSVGNVXR45A $2,486.11 $2,486.11 $ 819.93 $ 819.93 $2,486.11 $1,639.86 $2,486.11 $2,486.11 LSVGNVXI45E $3,332.36 $1,666.18 $2,486.11 $2,486.11 $3,332.36 $2,486.11 $3,332.36 $3,332.36 LSVGNVXM45H $2,486.11 $2,486.11 $ 819.93 $ 819.93 $2,486.11 $1,639.86 $2,486.11 $2,486.11 HSNNVXF56A $5,225.34 $5,225.34 $4,379.10 $4,379.10 $5,225.34 $4,379.10 $5,225.34 $5,225.34 LSVGNVXB41T $1,666.18 $1,666.18 $ 819.93 $ 819.93 $1,666.18 $ 819.93 $1,666.18 $1,666.18 NLVGNVXF64A $3,332.36 $1,666.18 $2,486.11 $2,486.11 $3,332.36 $2,486.11 $3,332.36 $3,332.36 NLVGNVXG64E $3,332.36 $1,666.18 $2,486.11 $2,486.11 $3,332.36 $2,486.11 $3,332.36 $3,332.36 LSVGNVXU645 $1,666.18 $2,486.11 $2,486.11 $3,332.36 $2,486.11 $3,332.36 $1,666.18 LSVGNVXT64C $1,666.18 $2,486.11 $2,486.11 $3,332.36 $2,486.11 $3,332.36 $1,666.18 LSVGNVXG73C $2,486.11 $2,486.11 $ 819.93 $2,486.11 $ 819.93 $2,486.11 $2,486.11 LSVGNVXL73H $2,486.11 $2,486.11 $ 819.93 $1,666.18 $1,639.86 $2,486.11 $2,486.11 LSVGNVXV361 $3,332.36 $3,332.36 $2,486.11 $1,666.18 $2,486.11 $3,332.36 $3,332.36 LSVGNVXK36E $2,486.11 $2,486.11 $ 819.93 $1,639.86 $2,486.11 $1,666.18 $1,666.18 LSVGNVXH87K $3,332.36 $3,332.36 $2,486.11 $2,486.11 $3,332.36 $1,666.18 $1,666.18 LSVGNVXW36A $1,666.18 $1,666.18 $2,486.11 $2,486.11 $3,332.36 $1,666.18 $1,666.18
Page 9 of 9 ATTACHMENT II LOCAL RESALE 1. TELECOMMUNICATIONS SERVICES PROVIDED FOR RESALE 1.1. At the request of CLEC, and pursuant to the requirements of the Act and FCC and Commission Rules and Regulations, Sprint shall make available to CLEC for resale Telecommunications Services that Sprint currently provides or may provide hereafter at retail to subscribers who are not telecommunications carriers. Such resale may be as allowed by the FCC and Commission. The Telecommunications Services provided by Sprint to CLEC pursuant to this Attachment II are collectively referred to as "Local Resale." 1.2. To the extent that this Attachment describes services which Sprint shall make available to CLEC for resale pursuant to this Agreement, this list of services is neither all inclusive nor exclusive. 2. GENERAL TERMS AND CONDITIONS 2.1. Pricing. The prices charged to CLEC for Local Resale are set forth in Attachment I of this Agreement. 2.1.1.CENTREX Requirements 2.1.1.1. At CLEC's option, CLEC may purchase the entire set of CENTREX features or a subset of any such features. 2.1.1.2. All features and functions of CENTREX Service, including CENTREX Management System (CMS), whether offered under tariff or otherwise, shall be available to CLEC for resale. 2.1.1.3. Sprint shall make information required for an "as is" transfer of CENTREX subscriber service, features, functionalities and CMS capabilities available to CLEC. 2.1.1.4. Consistent with Sprint's tariffs, CLEC, at its expense, may collect all data and aggregate the CENTREX local exchange, and IntraLATA traffic usage of CLEC subscribers to qualify for volume discounts on the basis of such aggregated usage. 2.1.1.5. CLEC may request that Sprint suppress the need for CLEC subscribers to dial "9" when placing calls outside the CENTREX System. Should CLEC request this capability for its subscriber, the subscriber will not be able to use 4-digit dialing. 2.1.1.6. CLEC may resell call forwarding in conjunction with CENTREX Service. 33 2.1.1.7. CLEC may purchase any CENTREX Service for resale subject to the requirements of Sprint's tariff. 2.1.1.8. Sprint shall make available to CLEC for resale intercom calling within the same CENTREX system. To the extent that Sprint offers its own subscribers intercom calling between different CENTREX systems. Sprint shall make such capability available to CLEC for resale. 2.1.1.9. CLEC may resell Automatic Route Selection ("ARS"), CLEC may aggregate multiple CLEC subscribers on dedicated access facilities where such aggregation is allowed by law, rule or regulation. 2.1.2. Voluntary Federal and State Subscriber Financial Assistance Programs 2.1.2.1. Subsidized local Telecommunications Services are provided to low-income subscribers pursuant to requirements established by the appropriate state regulatory body, and include programs such as Voluntary Federal Subscriber Financial Assistance Program and Link-up America. Voluntary Federal and State Subscriber Financial Assistance Programs are not Telecommunications Services that are available for resale under this Agreement. However, when a Sprint subscriber who is eligible for such a federal program or other similar state program chooses to obtain Local Resale from CLEC and CLEC serves such subscriber via Local Resale, Sprint shall identify such subscriber's eligibility to participate in such programs to CLEC in accordance with the procedures set forth herein. 2.1.3. Grandfathered Services. Sprint shall offer for resale to CLEC all Grandfathered Services solely for the existing grandfathered base on a customer specific basis. Sprint shall make reasonable efforts to provide CLEC with advance copy of any request for the termination of service and/or grandfathering to be filed by Sprint with the Commission. 2.1.4. Contract Service Arrangements, Special Arrangements, and Promotions. Sprint shall offer for resale all of its Telecommunications Services available at retail to subscribers who are not Telecommunications Carriers, including but not limited to Contract Service Arrangements (or ICB), Special Arrangements (or ICB), and Promotions in excess of ninety (90) days, all in accordance with FCC and Commission Rules and Regulations. 2.1.5. Voice Mail Service is not a Telecommunications Service available for resale under this Agreement. However, where available, Sprint shall make available for Local Resale the SMDI-E (Station Message Desk Interface- 34 Enhanced), or SMDI, Station Message Desk Interface where SMDI-E is not available, feature capability allowing for Voice Mail Services. Sprint shall make available the MWI (Message Waiting Indicator) interrupted dial tone and message waiting light feature capabilities where technically available. Sprint shall make available CF-B/DA (Call Forward on Busy/Don't Answer), CF/B (Call Forward on Busy), and CF/DA (Call Forward Don't Answer) feature capabilities allowing for Voice Mail services. 2.1.6. Hospitality Service, Sprint shall provide all blocking, screening and all other applicable functions available for hospitality lines under tariff. 2.1.7. LIDB Administration 2.1.7.1. Sprint shall maintain customer information for CLEC customers who subscribe to resold Sprint local service dial tone lines, in Sprint's LIDB in the same manner that it maintains information in LIDB for its own similarly situated end-user subscribers. Sprint shall update and maintain the CLEC information in LIDB on the same schedule that it uses for its own similarly situated end-user subscribers. 2.1.7.2. Until such time as Sprint's LIDB has the software capability to recognize a resold number as CLEC's. Sprint shall store the resold number in its LIDB at no charge and shall retain revenue for LIDB look-ups to the resold number. 35 ATTACHMENT III NETWORK ELEMENTS 1. GENERAL 1.1. Pursuant to the following terms, Sprint will unbundle and separately price and offer Unbundled Network Elements, ("UNEs") such that CLEC will be able to subscribe to and interconnect to whichever of these unbundled elements CLEC requires for the purpose of providing local telephone service to its end users. CLEC shall pay Sprint each month for the UNEs provisioned, and shall pay the non-recurring charges listed in Attachment I or agreed to by the Parties. It is CLEC's obligation to combine Sprint-provided UNEs with any facilities and services that CLEC may itself provide. 2. UNBUNDLED NETWORK ELEMENTS 2.1. Sprint shall offer UNEs to CLEC for the purpose of offering Telecommunication Services to CLEC subscribers. Sprint shall offer UNEs to CLEC on an unbundled basis on rates, terms and conditions that are just, reasonable, and non-discriminatory in accordance with the terms and conditions of this Agreement. The initial set of UNEs include: 2.1.1. Network Interface Device ("NID") 2.1.2. Local Loop 2.1.3. Switching Capability 2.1.3.1. Local Switching 2.1.3.2. Tandem Switching 2.1.4. Interoffice Transport Facilities 2.1.4.1. Common 2.1.4.2. Dedicated 2.1.5. Signaling Networks & Call Related Databases 2.1.6. Operations Support Systems 2.1.7. Operator Services & Directory Assistance 2.2. CLEC may use one or more UNEs to provide any feature, function, capability, or service option that such UNE(s) is (are) technically capable of providing. It is CLEC's obligation to combine Sprint- provided UNEs with any and all facilities and services whether provided by Sprint, CLEC, or any other party. 36 2.3. Each UNE provided by Sprint to CLEC shall be at Parity with the quality of design, performance, features, functions, capabilities and other characteristics, including but not limited to levels and types of redundant equipment and facilities for power, diversity and security, that Sprint provides to itself, Sprint's own subscribers, to a Sprint Affiliate or to any other entity. 3. BONA FIDE REQUEST PROCESS FOR FURTHER UNBUNDLING 3.1. Each Party shall promptly consider and analyze access to categories of UNE not covered in this Agreement with the submission of a Network Element Bona Fide Request hereunder. The UNE Bona Fide Request process set forth herein does not apply to those services requested pursuant to FCC Rule (S) 51.319 adopted in First Report & Order. CC Docket No. 96-98, (rel. Aug. 8, 1996). 3.2. A UNE Bona Fide Request shall be submitted in writing and shall include a technical description of each requested UNE. 3.3. The requesting Party may cancel a UNE Bona Fide Request at any time, but shall pay the other Party's reasonable and demonstrable costs of processing and/or implementing the UNE Bona Fide Request up to the date of cancellation. 3.4. Within ten (10) business days of its receipt, the receiving Party shall acknowledge receipt of the UNE Bona Fide Request. 3.5. Except under extraordinary circumstances, within thirty (30) days of its receipt of a UNE Bona Fide Request, the receiving Party shall provide to the requesting Party a preliminary analysis of such UNE Bona Fide Request. The preliminary analysis shall confirm that the receiving Party will offer access to the UNE or will provide a detailed explanation that access to the UNE does not qualify as a UNE that is required to be provided under the Act. 3.6. Upon receipt of the preliminary analysis, the requesting Party shall, within thirty (30) days, notify the receiving Party of its intent to proceed or not to proceed. 3.7. The receiving Party shall promptly proceed with the UNE Bona Fide Request upon receipt of written authorization from the requesting Party. When it receives such authorization, the receiving Party shall promptly develop the requested services, determine their availability, calculate the applicable prices and establish installation intervals. 3.8. As soon as feasible, but not more than ninety (90) days after its receipt of authorization to proceed with developing the UNE Bona Fide Request, the receiving Party shall provide to the requesting Party a UNE Bona Fide Request quote which will include, at a minimum, a description of each UNE, the availability, the applicable rates and the installation intervals. 3.9. Within thirty (30) days of its receipt of the UNE Bona Fide Request quote, the requesting Party must either confirm its order for the UNE Bona Fide Request 37 pursuant to the UNE Bona Fide Request quote or seek arbitration by the Commission pursuant to (S) 252 of the Act. 3.10. If a Party to a UNE Bona Fide Request believes that the other Party is not requesting, negotiating or processing the UNE Bona Fide Request in good faith, or disputes a determination, or price or cost quote, such Party may seek mediation or arbitration by the Commission pursuant to (S) 252 of the Act. 4. NETWORK INTERFACE DEVICE 4.1. The NID is a single-line termination device or that portion of a multiple-line termination device required to terminate a single line or circuit. The function of the NID is to establish the network demarcation point between a CLEC and its subscriber. The NID features two independent chambers or divisions which separate the service provider's network from the subscriber's inside wiring. Each chamber or division contains the appropriate connection points or posts to which the service provider and the subscriber each make their connections. The NID contains a protector which provides a protective ground connection, protection against lightning and other high voltage surges and is capable of terminating cables such as twisted pair cable. 4.2. CLEC may connect its NID to Sprint's NID; may connect an unbundled loop to its NID; or may connect its own Loop to Sprint's NID. Sprint will provide one NID termination for each loop. If additional NID terminations are required, CLEC may request them pursuant to process detailed in Article 4 herein. 4.3. With respect to multiple-line termination devices. CLEC shall specify the quantity of NIDs it requires within such device. Figure 1 shows a schematic of a NID [DIAGRAM APPEARS HERE] Figure 1 - Network Interface Device 4.4. Technical Requirements 4.4.1. The Sprint NID shall provide a clean, accessible point of connection for 38 the inside wiring and for the Distribution Media and/or cross connect to CLEC's NID and shall maintain a connection to ground that meets the requirements set forth below. Each party shall ground its NID independently of the other party's NID. 4.4.2 The NID shall be the interface to subscriber's premises wiring for all loop technologies. 5. LOOP 5.1. A Loop is a transmission path between the main distribution frame [cross-connect], or its equivalent, in a Sprint Central Office or wire center, and up to the demarcation point at a customer's premises. This includes, but not limited to, two-wire and four-wire copper analog voice-grade loops, two-wire and four-wire loops that are conditioned to transmit the digital signals needed to provide services such as ISDN and DSI-level signals. Sprint will also provide conditioned loops for Telecommunications Services requiring loops unfettered by any intervening equipment (e.g., filters, load coils, range extenders, bridge taps, etc.), so that CLEC can use these loops for a variety of Telecommunications Services that can be supported by use of copper by attaching appropriate terminal equipment at the ends. Where CLEC requests that a loop or a portion of a loop is dedicated to their exclusive use, it will be done at CLEC's expense. 5.2. Loop Capabilities 5.2.1. Voice grade loops are analog loops that facilitate the transmission of analog voice grade signals in the 300-3000 Hz range and terminates in a 2-wire or 4-wire electrical interface at the CLEC's customer premises. CLEC shall not install equipment on analog loops that exceeds the specified bandwidth. 5.2.2. Sprint will provide non-voice grade loops on the basis of the service that will be provisioned over the loop. Sprint requires CLEC to provide in writing (via the service order) the grade of service desired in a particular loop (e.g., ISDN-BRI, PRI, ADSL, HDSL, DS1, etc.) so that the loop may be engineered to meet the appropriate spectrum compatibility requirements. If CLEC requires a change in the grade of service of a particular loop, (e.g., changing from ISDN service to ADSL), CLEC shall notify Sprint in writing of the requested change in grade of service (via a service order). If Sprint finds that it is not technically feasible to provide the new level of service to CLEC, Sprint will notify CLEC that it is unable to meet the request. If a particular grade of service is installed but CLEC uses the loop to provide a service that exceeds the engineered capacity of a medium (i.e., interferes with other services) or if the service provided by CLEC causes interference to other services Sprint will suspend that particular service then notify CLEC and work with CLEC to develop an 39 agreeable resolution. 5.2.3. CLEC will submit a BFR for non-voice grade loops that are not currently price-listed. 5.2.4. Reverse ADSL Loops. All DSL ATU-C units in Sprint's network, including those integrated into DSLAMs, should either reside within a Sprint host or remote central office. If an ADSL copper loop should start at an outside location, and is looped through a host or remote, and then to the subscriber, the copper plant from the outside location to the Sprint central office must be a facility dedicated to ADSL transmission only and not part of Sprint's regular feeder or distribution plant. 5.2.5. CLEC shall meet the power spectral density requirement given in the respective technical references listed below: 5.2.6. For Basic Rate ISDN: Bellcore TR-NWT-000393 Generic Requirements for ISDN Basic Access Digital Subscriber Lines. 5.2.7. For HDSL installations: Bellcore TA-NWT-001210 Generic Requirements for High-Bit-Rate Digital Subscriber Lines. Some fractional T1 derived products operating at 768 kbps may use the same standard. 5.2.8. For ADSL: ANSI T1, 413-1995 (Issue 1) Asymmetrical Digital Subscriber Line (ADSL) Metallic Interface. Note: Issue 2 of the standard will be balloted soon. It will drop an option that was in Issue 1 called Power Boost. Sprint does not permit the Power Boost option used in its local network. 5.2.9. As an alternative to (S)(S) 5.2.6, 5.2.7 and 5.2.8. CLEC may meet the requirements given in ANSI document T1E1.4/97-180R1. "Normative Text for Spectral Compatibility Evaluations" dated June 30, 1997. 5.3. If Sprint uses Integrated Digital Loop Carrier or other similar remote concentration devices, Sprint will make alternative arrangements at CLEC's request, to provide an unbundled local loop. Alternative arrangements may include copper facilities, dedicated transmission equipment or the deployment of newer devices providing for multiple hosting. The cost of modifications will be recovered from the requesting CLEC. 6. LOCAL SWITCHING 6.1. Local Switching is the Network Element that provides the functionality required to connect the appropriate lines or trunks wired to the Main Distributing Frame (MDF) or Digital Cross Connect (DSX) panel to a desired line or trunk. Such functionality shall include all of the features, functions, and capabilities that the underlying Sprint switch providing such Local Switching function provides for Sprint's own services. Functionality may include, but is not limited to: line 40 signaling and signaling software, digit reception, dialed number translations, call screening, routing, recording, call supervision, dial tone, switching, telephone number provisioning, announcements, calling features and capabilities (including call processing), Centrex, or Centrex like services, Automatic Call Distributor (ACD), CLEC pre- subscription (e.g., long distance Carrier, intraLATA toil), Carrier Identification Code (CIC) portability capabilities, testing and other operational features inherent to the switch and switch software. 6.2. Technical Requirements 6.2.1. Sprint shall provide its standard recorded announcements (as designated by CLEC) and call progress tones to alert callers of call progress and disposition. CLEC will use the BFR process for unique announcements. 6.2.2. Sprint shall change a subscriber from Sprint's Telecommunications Services to CLEC's Telecommunications Services without loss of feature functionality unless expressly agreed otherwise by CLEC. 6.2.3. Sprint shall control congestion points such as mass calling events, and network routing abnormalities, using capabilities such as Automatic Call Gapping, Automatic Congestion Control, and Network Routing Overflow. Application of such control shall be competitively neutral and not favor any user of unbundled switching or Sprint. 6.2.4. Sprint shall offer all Local Switching features that are technically feasible and provide feature offerings at Parity with those provided by Sprint to itself or any other party. 6.3. Interface Requirements. Sprint shall provide the following interfaces: 6.3.1. Standard Tip/Ring interface including loopstart or groundstart, on-hook signaling (e.g.: for calling number, calling name and message waiting lamp); 6.3.2. Coin phone signaling; 6.3.3. Basic and Primary Rate Interface ISDN adhering to ANSI standards Q.931. Q.932 and appropriate Bellcore Technical Requirements: 6.3.4. Two-wire analog interface to PBX to include reverse battery, E&M, wink start and DID: 6.3.5. Four-wire analog interface to PBX to include reverse battery, E&M, wink start and DID: and 6.3.6. Four-wire DS1 interface to PBX or subscriber provided equipment (e.g., computers and voice response systems). 6.4. Sprint shall provide access to interfaces, including but not limited to: 41 6.4.1. SS7 Signaling Network, Dial Pulse or Multi-Frequency trunking if requested by CLEC: 6.4.2. Interface to CLEC operator services systems or Operator Services through appropriate trunk interconnections for the system: and 6.4.3. Interface to CLEC directory assistance services through the CLEC switched network or to Directory Services through the appropriate trunk interconnections for the system: and 950 access or other CLEC required access to interexchange carriers as requested through appropriate trunk interfaces. 7. TANDEM SWITCHING 7.1. Tandem Switching is the function that establishes a communications path between two switching offices (connecting trunks to trunks) through a third switching office (the tandem switch) including but not limited to CLEC. Sprint, independent telephone companies, IXCs and wireless Carriers. A host/remote end office configuration is not a Tandem Switching arrangement. 7.2. Technical Requirements 7.2.1. The requirements for Tandem Switching include, but are not limited to, the following: 7.2.1.1. Interconnection to Sprint tandem(s) will provide CLEC local interconnection for local and toll access service purposes to the Sprint end offices and NXXs which interconnect with that tandem(s) either directly or through other Sprint facilities for local and toll service purposes, and to other companies which are likewise connected to that tandem(s). 7.2.1.2. Interconnection to a Sprint tandem for transit purposes will provide CLEC interexchange access to Sprint LXCs, other local carriers, ILECs, and CMRS providers which are connected to that tandem. 7.2.1.3. Where a Sprint Tandem Switch also provides End-Office Switch functions, interconnection to a Sprint tandem serving that exchange will also provide CLEC access to Sprint's end offices. 7.2.2. Tandem Switching shall preserve CLASS/LASS features and Caller ID as traffic is processed. 7.2.3. To the extent technically feasible, Tandem Switching shall record billable events for distribution to the billing center designated by CLEC. 7.2.4. Tandem Switching shall control congestion using capabilities such as Automatic Congestion Control and Network Routing Overflow. 42 Congestion control provided or imposed on CLEC traffic shall be Parity with controis being provided or imposed on Sprint traffic (e.g., Sprint shall not block CLEC traffic and leave its traffic unaffected or less affected). 7.2.5. The Local Switching and Tandem Switching functions may be combined in an office. If this is done, both Local Switching and Tandem Switching shall provide all of the functionally required of each of those. Network Elements in this Agreement. 7.2.6. Tandem Switching shall provide interconnection to the E911 PSAP where the underlying Tandem is acting as the E911 Tandem. 7.3. Interface Requirements 7.3.1. Direct trunks will be utilized for interconnection to Sprint Tandems, excluding transit traffic via common trunks as may be required under the Act. 7.3.2. Sprint shall provide all signaling necessary to provide Tandem Switching with no loss of feature functionality. 8. TRANSPORT 8.1. Common Transport 8.1.1. Common Transport provides a local interoffice transmission path between the Sprint tandem switch and a Sprint or CLEC end office switch, or between a host in one rate center and a remote in another rate center. Common transport is shared between multiple carriers and is required to be switched at the tandem. 8.1.2. Sprint may provide Common Transport at DS-0, DS-1, DS-3. STS-1 or higher transmission bit rate circuits. 8.1.3. Sprint shall be responsible for engineering, provisioning, and maintenance of the underlying Sprint equipment and facilities that are used to provide Common Transport. 8.2. Dedicated Transport 8.2.1. Dedicated Transport provides a local interoffice transmission path between Sprint and/or CLEC central offices. Dedicated transport is limited to the use of a single carrier and does not require switching at a tandem. 8.2.2. Technical Requirements Where technologically feasible and available, Sprint shall offer Dedicated Transport consistent with the underlying technology as follows: 43 8.2.2.2. When Sprint provides Dedicated Transport, the entire designated transmission circuit (e.g.:DS-1, DS-3, STS-1) shall be dedicated to CLEC designated traffic. 8.2.2.3. Where Sprint has technology available, Sprint shall offer Dedicated Transport using currently available technologies including, but not limited to, DS1 and DS3 transport systems. SONET (or SDH) Bi-directional Line Switched Rings, SONET (or SDH) Unidirectional Path Switched Rings, and SONET (or SDH) point-to-point transport systems (including linear add-drop systems), at all available transmission bit rates. 9. SIGNALING SYSTEMS AND DATABASES 9.1. Signaling Systems 9.1.1. Signaling Link Transport 9.1.1.1. Signaling Link Transport is a set of two or four dedicated 56 Kbps transmission paths between CLEC- designated Signaling Points of Interconnection (SPOI) that provides appropriate physical diversity and a cross connect at a Sprint STP site. 9.1.1.2. Technical Requirements, Signaling Link Transport shall consist of full duplex mode 56 Kbps transmission paths. 9.1.2. Signaling Transfer Points(STPs) 9.1.2.1. Signaling Transfer Points (STPs) provide functionality that enable the exchange of SS7 messages among and between switching elements, database elements and signaling transfer points. 9.1.2.2. Figure 2 depicts Signaling Transfer Points. 44 Signaling Transfer Points. [GRAPH APPEARS HERE] Figure 2 9.1.2.3. Technical Requirements. STPs shall provide access to and fully suport the functions of all other Network Elements connected to the Sprint SS7 network. These include: 9.1.2.3.1 Sprint Local Switching or Tandem Switching; 9.1.2.3.2. Sprint Service Control Points/Databases; 9.1.2.3.3. Third-party local or Tandem Switching systems; and 9.1.2.3.4. Third-party provided STPs. 9.1.2.4 Interfaces Requirements: Sprint shall provide the following STP options to connect CLEC or CLEC-designated local switching systems or STPs to the Sprint SS7 network: 9.1.2.4.1. An A-link interface from CLEC local switching systems; and 45 9.1.2.4.2 B or D-link interface from CLEC STPs. 9.1.2.4.3. Each type of interface shall be provided by one or more sets (layers) of signaling links, as follows: 9.1.2.4.4. An A-link layer shall consist of two links, as depicted in Figure 3. [GRAPH APPEARS HERE] Figure 3. A-Link Interface 9.1.2.4.5 AB or D-link layer shall consist of four links, as depicted in Figure 4. [GRAPH APPEARS HERE] Figure 4. D-Link Interface 9.1.2.4.6. Signaling Point of Interconnection (SPOI) for each link shall be located at a cross-connect element, such as a DSX-1, in the Central Office (CO) where the Sprint STPs is located. There shall be a DS-1 or higher rate transport 46 interface at each of the SPOIs. Each signaling link shall appear as a DS-0 channel within the DS-1 or higher rate interface. 9.2. Line Information Database (LIDB) 9.2.1. The LIDB is a transaction-oriented database accessible CCS networks. It contains records associated with subscribers Line Numbers and Special Billing Numbers. LIDB accepts queries from other Network Elements, or CLEC's network, and provides appropriate responses. The query originator need not be the owner of LIDB date. LIDB queries include functions such as screening billed numbers that provides the ability to accept Collect or Third Number Billing calls and validation of Telephone Lines Number based non-proprietary calling cards. The interface for the LIDB functionality is the interface between the Sprint CCS network and other CCS networks. LIDB also interfaces to administrative systems. The administrative system interface provides Work Centers with an interface to LIDB for functions such as provisioning, auditing of data, access to LIDB measurements and reports. 9.2.2. Technical Requirements 9.2.2.1. Prior to the availability of Local Number Portability, Sprint shall enable CLEC to store in Sprint's LIDB any subscriber Line Number or Special Billing Number record, whether ported or not, for which the NPA-NXX or NXX-0/1XX Group is supported by that LIDB, and NPA-NXX and NXX-0/1XX Group Records, belonging to an NPA-NXX or NXX-0/1XX owned by CLEC. 9.2.2.2. Subsequent to the availability of a long-term solution for Number Portability, Sprint, under the terms of a separate agreement with CLEC, shall enable CLEC to store in Sprint's LIDB any subscriber Line Number or Special Billing Number record, whether ported or not, regardless of the number's NPA-NXX or NXX-0/1XX. 9.2.2.3. Print shall perform the following LIDB functions for CLEC's subscriber records in LIDB: Billed Number Screening (provides information such as whether the Billed Number may accept Collect or Third Number Billing calls); and Calling Card Validation. 9.2.2.4. Sprint shall process CLEC's subscriber records in LIDB at Parity with Sprint subscriber records, with respect to other LIDB functions Sprint shall indicate to CLEC with additional functions (if any) are performed by LIDB in their network. 9.2.2.5. Sprint shall perform backup and recovery of all of CLEC's data in LIDB at Parity with backup and recovery of all other records in 47 the LIDB, including sending to LIDB all changes made since the date of the most recent backup copy. 9.3. Toil Free Number Database 9.3.1. The Toil Free Number Database provides functionality necessary for toil free (e.g.: 800 and 888) number services by providing routing information and additional vertical features during call set-up in response to queries from STPs. Sprint, under the terms of a separate agreement with CLEC, shall provide the Toll Free Number Database in accordance with the following: 9.3.2. Technical Requirements 9.3.2.1. Sprint shall make the Sprint Toll Free Number Database available for CLEC to query, from CLEC's designated switch including Sprint unbundled local switching with a toll-free number and originating information. 9.3.2.2. The Toll Free Number Database shall return CLEC identification and, where applicable, the queried toll free number, translated numbers and instructions as it would in response to a query from a Sprint switch. 9.3.3. Interface Requirements. The Signaling interface between the CLEC or other local switch and the Toll-Free Number database shall use the TCAP protocol, together with the signaling network interface. 10. OPERATOR SERVICES 10.1. Sprint shall provide for the routing of local Operator Services calls (including but not limited to 0+.0-) dialed by CLEC subscribers directly to either the CLEC Operator Service platform to the extent Sprint's switch can perform this customized routing, or Sprint Operator Service to the extent there is a Sprint provided Operator Service platform for that serving area. 10.1.1. Sprint shall provide Operator Service to CLEC as described below until, at CLEC's discretion. Sprint routes calls to the CLEC Local Operator Services platform. 10.1.1.1. Sprint agrees to provide CLEC subscribers the same Operator Services available to Sprint subscribers to the extent there is a Sprint provided Operator Services platform for the serving area. Sprint shall make available its service enhancements on a non-discriminatory basis. 10.1.1.2. Operator Services provided to CLEC subscribers shall be branded in accordance with Part B. Article 10 of this Agreement. 48 10.1.1.3. Sprint shall exercise the same level of fraud control in providing Operator Service to CLEC that Sprint provides for its own Operator Service. 11. DIRECTORY ASSISTANCE SERVICE 11.1. Sprint shall provide for the routing of directory assistance calls (including but not limited to 411. 555-1212. NPA-555-1212) dialed by CLEC's option, either (a) the CLEC DA service platform to the extent Sprint's switch can perform this customized routing, or (b) Sprint's DA service platform to the extent there is a Sprint provided DA service platform that servicing area. 11.1.1. Sprint shall provide CLEC with the same level of support for the provisioning of Directory Assistance as Sprint provides itself. Quality of service standards shall be measured at the aggregate level in accordance with standards and performance measurements that are at Parity with the standards and/or performance measurements that Sprint uses and/or which are required by law or regulatory agency rules or orders. 11.1.2 Directory Assistance services provided by Sprint to CLEC subscribers shall be branded in accordance with Part B, Article 10 of this Agreement. 49 ATTACHMENT IV INTERCONNECTION 1. LOCAL INTERCONNECTION TRUNK ARRANGEMENT 1.1. The Parties agree to initially use two-way trunks (one-way directionalized) for an interim period. The Parties shall transition from directionalized two-way trunks upon mutual agreement, absent engineering or billing issues. The Parties shall transition all one- way trunks established under this Agreement. 1.1.1. The Parties shall initially reciprocally terminate Local Traffic and IntraLATA InterLATA toll calls originating on the other Party's network as follows: 1.1.1.1. The Parties shall make available to each other two- way trunks for the reciprocal exchange of combined Local Traffic, and non-equal access IntraLATA toll traffic. 1.1.1.2. Separate two-way trunks will be made available for the exchange of equal-access InterLATA or IntraLATA interchange traffic that transits Sprint's network. 1.1.1.3. Separate trunks will be utilized for connecting CLEC's switch to each 911/E911 tandem. 1.1.1.4. Separate trunk groups will be utilized for connecting CLEC's Operator Service Center to Sprint's Operator Service center for operator-assisted busy line interrupt/verify. 1.1.1.5. Separate trunk groups will be utilized for connecting CLEC's switch to Sprint's Directory Assistance center in instances where CLEC is purchasing Sprint's unbundled Directory Assistance service. 1.2. Point of Interconnection 1.2.1. Point of Interconnection (POI) means the physical point that establishes the technical interface, the test point, and the operational responsibility hand-off between CLEC and Sprint for the local interconnection of their networks. CLEC is limited to constructing one POI in each Sprint LATA. 1.2.2. CLEC will be responsible for engineering and maintaining its network on its side of the POI. Sprint will be responsible for engineering and maintaining its network on its side of the POI. 1.2.3 For construction of new facilities when the parties choose to interconnect at a mid-span meet. CLEC and Sprint will jointly provision the facilities that connect the two networks. Sprint will be the "controlling carrier" for 50 purposes of MECOD guidelines, as described in the joint implementation plan. Sprint will provide fifty percent (50%) of the facilities or to its exchange boundary, whichever is less. 1.2.4. Should CLEC prefer new interconnection facilities may be provisioned via third party facilities or CLEC lease of tariffed services from Sprint. Special construction charges, if applicable, will be charged in accordance with Sprint's access service tariff. 1.2.4.1. If third party leased facilities are used for interconnection, or if leased facilities are provided under a meet-point arrangement between Sprint and a third-party, the POI will be defined as the Sprint office in which the leased circuit terminates. CLEC is responsible to terminate the leased facility in a collocation space if unbundled loops or switched ports will be purchased in the central office) or a set of Sprint-provided DSX jacks to clearly establish the POI. 1.2.4.2. If Sprint-provided-leased facilities are used, the POI will be defined as the demarcation point between Sprint's facility and CLEC's equipment as long as the end point is within Sprint's exchange area. 2. INTERCONNECTION COMPENSATION MECHANISMS 2.1. Each party is responsible for bringing their facilities to POI. 2.2. Interconnection Compensation 2.2.1 If Sprint provides one-hundred percent (100%) of the facility. Sprint will charge CLEC one-hundred percent (100%) of the lease rates for the facility. CLEC may charge Sprint a proportionate amount of Sprint's dedicated transport rate based on the use of the facility as described above. 2.2.2 If a meet-point is established via construction of new facilities or re-arrangement of existing physical facilities between Sprint and CLEC, the relative use factor will be reduced by the proportionate length of haul provided by each party. Sprint shall be responsible for network provisioning as described in (S) 1.2.3. herein. 2.2.3. If CLEC provides one-hundred percent (100%) of the interconnection facility via lease of meet-point circuits between Sprint and a third-party, lease of third party facilities: or construction of its own facilities: CLEC may charge Sprint for proportionate amount based on relative usage using the lesser of: 2.2.3.1 Sprint's dedicated interconnection rate: 51 2.2.3.2. Its own costs if filed and approved by a commission of appropriate jurisdiction: and 2.2.3.3. The actual lease cost of the interconnecting facility. 2.3 Compensation for Local Traffic Transport and Termination 2.3.1. The POI determines the point at which the originating carrier shall pay the terminating carrier for the completion of that traffic. The following compensation elements shall apply: 2.3.1.1. "Transport." which includes dedicated and common transport and any necessary Tandem Switching of Local Traffic from the interconnection point between the two carriers to the terminating carrier's end-office switch that directly serves the called end-user: and 2.3.1.2. "Termination." which includes the switching of Local Traffic at the terminating carrier's end office switch. 2.4 When a CLEC subscriber places a call to Sprint's subscriber, CLEC will hand off that call to Sprint at the POI. Conversely, when Sprint hands off Local Traffic to CLEC for CLEC to transport and terminate, Sprint may use the established POI or Sprint designate its own POI. 2.4.1 CLEC and Sprint may each designate a POI at any technically feasible point including but not limited to any electronic or manual cross-connect points, collocations, entrance facilities, and mid-span meets. The transport and termination charges for Local Traffic flowing through a POI shall be as follows: 2.4.1.1 When calls from CLEC are terminating on Sprint's network through the Sprint Tandem Switch, CLEC will pay Sprint for transport charges from the POI to the Tandem for dedicated transport. CLEC shall also pay a charge for Tandem Switching, common transport to the end office, and end-office termination. 2.4.1.2. When Sprint terminates calls to CLEC's subscribers using CLEC's switch, Sprint shall pay CLEC for transport charges from the POI to the CLEC switching center for dedicated transport. Sprint shall also pay to CLEC a charge symmetrical to its own charges for the functionality actually provided by CLEC for call termination. 2.4.1.3. CLEC may choose to establish direct trunking to any given end office. If CLEC leases trunks from Sprint, it shall pay charges for dedicated transport. For calls terminating from CLEC to subscribers served by these directly-linked end offices, CLEC 52 shall also pay an end-office termination. For Sprint traffic terminating to CLEC over the direct end office trunking, compensation payable by Sprint shall be the same as that detailed in (S) 2.4.1.2 above. 3. SIGNALING 3.1 Signaling protocol. The parties will interconnect their networks using SS7 signaling where technically feasible and available as defined in FR 905 Bellcore Standards including ISDN user part (ISUP) for trunk signaling and TCAP for CCS-based features in the interconnection of their networks. All Network Operations Forum (NOF) adopted standards shall be adhered to. 3.2. Refer to Attachment III, Article 9 for detailed terms of SS7 Network Interconnection. 3.3. Standard interconnection facilities shall be extended superframe (ESF) with B8ZS line code. Where ESF/B8ZS is not available, CLEC will agree to using other interconnection protocols on an interim basis until the standard ESF/B8ZS is available. Sprint will provide anticipated dates of availability for those areas not currently ESF/B8ZS compatible. 3.3.1. Where CLEC is unwilling to utilize an alternate interconnection protocol, CLEC will provide Sprint an initial forecast of 64 Kbps clear channel capability ("64K CCC") trunk quantities within thirty (30) days of the Effective Date consistent with the forecasting agreements between the parties. Upon receipt of this forecast, the parties will begin joint planning for the engineering, procurement, and installation of the segregated 64K CCC Local Interconnection Trunk Groups, and the associated ESF facilities, for the sole purpose of transmitting 64K CCC data calls between CLEC and Sprint. Where additional equipment is required, such equipment would be obtained, engineered, and installed on the same basis and with the same intervals as any similar growth job for LXC, CLEC, or Sprint internal customer demand for 64K CCC trunks. 4. NETWORK SERVICING 4.1 Trunk Forecasting 4.1.1. The Parties shall work towards the development of joint forecasting responsibilities for traffic utilization over trunk groups. Orders for trunks that exceed forecasted quantities for forecasted locations will be accommodated as facilities and or equipment are available. The Parties shall make all reasonable efforts and cooperate in good faith to develop alternative solutions to accommodate orders when facilities are not available. Intercompany forecast information must be provided by the Parties to each other twice a year. The initial trunk forecasting meeting 53 should take place soon after the first implementation meeting. A forecast should be provided at or prior to the first implementation meeting. The semi-annual forecasts shall project trunk gain/loss on a monthly basis for the forecast period, and shall include: 4.1.1.1. Semi-annual forecasted trunk quantities (which include baseline data that reflect actual Tandem and end office Local Interconnection and meet point trunks and Tandem-subtending Local Interconnection end office equivalent trunk requirements) for no more than two years (current plus one year): 4.1.1.2. The use of Common Language Location Identifier (CLLI-MSG), which are described in Bellcore documents BR 795-100-100 and BR 795-400-100: 4.1.1.3. Description of major network projects that affect the other Party will be provided in the semi-annual forecast. Major network projects include but are not limited to trunking or network rearrangements, shifts in anticipated traffic patterns, or other activities by either party that are reflected by a significant increase or decrease in trunking demand for the following forecasting period. 4.1.2. Parties shall meet to review and reconcile their forecasts if forecasts vary significantly. 4.1.3. Each Party shall provide a specified point of contact for planning forecasting and trunk servicing purposes. 4.1.4. Trunking can be established to Tandems or end offices or a combination of both via either one-way or two-way trunks. Trunking will be at the DS-0, DS-1, DS-3/OC-3 level, or higher, as agreed upon by CLEC and Sprint. 4.1.5. The parties agree to abide by the following if a forecast cannot be agreed to: local interconnection trunk groups will be provisioned to the higher forecast. A blocking standard of one percent (1%) during the average busy hour shall be maintained. Should the Parties not agree upon the forecast, and the Parties engineer facilities at the higher forecast, the Parties agree to abide by the following: 4.1.5.1. In the event that one Party over-forecasts its trunking requirements by twenty percent (20%) or more, and the other Party acts upon this forecast to its detriment, the other Party may recoup any actual and reasonable expense it incurs. 4.1.5.2. The calculation of the twenty percent (20%) over- forecast will be based on the number of DS-1 equivalents for the total traffic volume to Sprint. 54 4.1.5.3. Expenses will only be recouped for non-recoverable facilities that cannot otherwise be used at any time within twelve (12) months after the initial installation for another purpose including but not limited to: other traffic growth between the Parties, internal use, or use with another party. 4.2. Grade of Service. A blocking standard of one percent (1%) during the average busy hour, as defined by each Party's standards, for final trunk groups between a CLEC end office and a Sprint access Tandem carrying meet point traffic shall be maintained. All other final trunk groups are to be engineered with a blocking standard of one percent (1%). Direct end office trunk groups are to be engineered with a blocking standard of one percent (1%). 4.3. Trunk Servicing. Orders between the Parties to establish, add, change or disconnect trunks shall be processed by use of an ASR, or another industry standard eventually adopted to replace the ASR for trunk ordering. 5. NETWORK MANAGEMENT 5.1. Protective Protocols. Either Party may use protective network traffic management controls such as 7-digit and 10-digit code gaps on traffic toward each other's network, when required to protect the public switched network from congestion due to facility failures, switch congestion or failure or focused overload. CLEC and Sprint will immediately notify each other of any protective control action planned or executed. 5.2. Expansive Protocols. Where the capability exists, originating or terminating traffic reroutes may be implemented by either party to temporarily relieve network congestion due to facility failures or abnormal calling patterns. Reroutes will not be used to circumvent normal trunk servicing. Expansive controls will only be used when mutually agreed to by the parties. 5.3. Mass Calling. CLEC and Sprint shall cooperate and share pre-planning information, where available, regarding cross-network call-ins expected to generate large or focused temporary increases in call volumes, to prevent or mitigate the impact of these events on the public switched network. Mass calling numbers are not cannot be used in conjunction with INP. 6. USAGE MEASUREMENT 6.1. Each Party shall calculate terminating interconnection minutes of use based on standard AMA recordings made within each Party's network, these recordings being necessary for each Party to generate bills to the other Party. In the event either Party cannot measure minutes terminating on its network where technically feasible, the other Party shall provide the measuring mechanism or the Parties shall otherwise agree on an alternate arrangement. 55 6.2. Measurement of minutes of use over Local Interconnection trunk groups shall be in actual conversation seconds. The total conversation seconds over each individual Local Interconnection trunk group will be totaled for the entire monthly bill period and then rounded to the next whole minute. 6.3. Prior to the commencement of billing for interconnection, each Party shall provide to the other, the PLU of the traffic terminated to each other over the Local Interconnection trunk groups. 6.3.1. The Parties agree to review the accuracy of the PLU on a regular basis. If the initial PLU is determined to be inaccurate by more than twenty percent (20%), the Parties agree to implement the new PLU retroactively to the Effective Date of the contract. 7. TRANSIT TRAFFIC 7.1. Transit Trafifc means the delivery of local traffic by CLEC or Sprint originated by the end user of one Party and terminated to a third party LEC, ILEC, or CMRS provider over the local/intraLATA interconnection trunks. The following traffic types will be delivered by either Party: local traffic and intraLATA toll and switched traffic originated from CLEC or Sprint and delivered to such third party LEC, ILEC, or CMRS: and intraLATA 800 traffic. 7.2. Terms and conditions 7.2.1. Each Party acknowledges that it is the originating Party's responsibility to enter into arrangements with each third party LEC, ILEC, OR CMRS provider for the exchange of transit traffic to that third party, unless the Parties agree otherwise in writing. 7.2.2. Each Party acknowledges that the transiting Party does not have any responsibility to pay any third party LEC, ILEC, or CMRS provider charges for termination or any identifiable transit traffic from the originating Party. Both Parties reserve the right not to pay such charges on behalf of the originating Party. 7.3. Payment Terms and Conditions 7.3.1. In addition to the payment terms and conditions contained in other sections of this Agreement, the Parties shall compensate each other for transit service as follows: 7.3.1.1. The originating Party shall pay to the transiting Party a transit service charge as set forth in the Pricing Schedule; and 7.3.1.2. If the terminating Party requests, and the transiting Party does not provide, the terminating Party with the originating record in order for the terminating Party to bill the originating Party, the 56 terminating Party shall default bill the transiting Party for transited traffic which does not identify the originating Party. 7.4. Billing Records and Exchange of Data 7.4.1 Parties will use the best efforts to convert all networks transporting transit traffic to deliver each call to the other Party's network with SS7 Common Channel Interoffice Signalling (CCIS) and other appropriate TCAP messages in order to facilitate full interoperability and billing functions. The Parties agree to send all message indicators, including originating telephone number, local routing number and CIC. 7.4.2. The transiting Party agrees to provide the terminating Party information on traffic originated by a third party CLEC, ILEC, or CMRS provider. To the extent Sprint incurs additional cost in providing this billing information. CLEC agrees to reimburse Sprint for its direct costs of providing this information. 7.4.3. To the extent that the industry adopts a standard record format for recording originating and/or terminating transit calls, both Parties agree to comply with the industry- adopted format to exchange records. 8. RESPONSIBILITIES OF THE PARTIES 8.1. Sprint and CLEC will review engineering requirements consistent with the Implementation Plan describe in Part B, Article 30 and Part C. Attachment IV, Article 4 and otherwise as set forth in this Agreement. 8.2. CLEC and Sprint shall share responsibility for all Control Office functions for Local Interconnection Trunks and Trunk Groups, and both parties shall share the overall coordination, installation, and maintenance responsibilities for these trunks and trunk groups. 8.3 CLEC and Sprint shall: 8.3.1 Provide trained personnel with adequate and compatible test equipment to work with each other's technicians. 8.3.2 Notify each other when there is any change affecting the service requested, including the due date. 8.3.3 Coordinate and schedule testing activities of their own personnel, and others as applicable, to ensure its interconnection trunks/trunk groups are installed per the interconnection order, meet agreed-upon acceptance test requirements, and are placed in service by the due date. 8.3.4. Perform sectionalization to determine if a trouble is located in its facility of its portion of the interconnection trunks prior to referring the trouble to 57 each other. 8.3.5. Advise each other's Control Office if there is an equipment failure which may affect the interconnection trunks. 8.3.6. Provide each other with a trouble reporting/repair contact number that is readily accessible and available twenty-four (24) hours/seven (7) days a week. Any changes to this contact arrangement must be immediately provided to the other party. 8.3.7. Provide to each other test-line numbers and access to test lines. 8.3.8. Cooperatively plan and implement coordinated repair procedures for the meet point and Local Interconnection trunks and facilities to ensure trouble reports are resolved in a timely and appropriate manner. 58 ATTACHMENT V INTERIM NUMBER PORTABILITY 1. SPRINT PROVISION OF INTERIM NUMBER PORTABILITY 1.1 Sprint shall provide INP in accordance with requirements of the Act and FCC Rules and Regulations. INP shall be provided with minimum impairment of functionality, quality, reliability and convenience to subscribers of CLEC services until such time as LNP service is offered in the Sprint rate center, in which case INP will be discontinued. Beginning on the date LNP is available in an area, INP orders will no longer be processed, and the Parties will work together to convert the existing INP lines to LNP. 2. INTERIM NUMBER PORTABILITY 2.1. Interim Number Portability (INP) shall be provided to the extent technical capabilities allow, by a Sprint directed Remote Call Forwarding (RCF). In the event RCF is a purchased feature of the CLEC end user, there is no relationship between RCF and INP. Once LNP is generally available in Sprint's serving area, RCF will be provided only as a retail service offering by Sprint. 2.2. Remote Call Forwarding (RCF) is an INP method to provide subscribers with service-provider portability by redirecting calls within the telephone network. When RCF is used to provide interim number portability, calls to the ported number will first route to the Sprint switch to which the ported number was previously assigned. The Sprint switch will then forward the call to a number associated with the CLEC designated switch to which the number is ported. CLEC may order any additional paths to handle multiple simultaneous calls to the same ported telephone number. 2.3 The trunking requirements will be agreed upon by Sprint and CLEC resultant from application of sound engineering principles. These trunking options may include SS7 signaling, in-band signaling, and may be one-way or two-way. The trunks used may be the same as those used for exchange of other Local Traffic and toll traffic between Sprint and CLEC. 2.4. Local Exchange Routing Guide (LERG) Reassignment, Portability for an entire NXX shall be provided by utilizing reassignment of the block to CLEC through the LERG. Updates to translations in the Sprint switching office from which the telephone number is ported will be made by Sprint prior to the date on which LERG changes become effective, in order to redirect calls to the CLEC switch via route indexing. 2.5 Other Currently Available Number Portability Provisions: 2.5.1 Where SS7 is available, Sprint shall exchange with CLEC, SS7 TCAP 59 messages as required for the implementation CLASS or other features available in the Sprint network, if technically feasible. 2.5.2. Upon notification that CLEC will be initiating INP, Sprint shall disclose to CLEC any technical or capacity limitations that would prevent use of the requested INP in the affected switching office. Sprint and CLEC shall cooperate in the process of porting numbers to minimize subscriber out-of- service time, including promptly updating switch translations, where necessary, after notification that physical cut-over has been completed (or initiated), as CLEC may designate. 2.5.3 For INP, CLEC shall have the right to use the existing Sprint 911 infrastructure for all 911 capabilities. When RCF is used for CLEC subscribers, both the ported numbers and shadow numbers shall be stored in ALI databases. CLEC shall have the right to verify the accuracy of the information in the ALI databases. 2.5.3.1. When any INP method is used to port a subscriber, the donor provider must maintain the LIDB record for that number to reflect appropriate conditions as reported to it by the porting service provider. The donor must outclear call records to CLEC for billing and collection from the subscriber. Until such time as Sprint's LIDB has the software capability to recognize a ported number as CLEC's, Sprint shall store the ported number in its LIDB at no charge and shall retain revenue for LIDB look-ups to the ported number. At such time as Sprint's LIDB has the software capability to recognize that the ported number is CLEC's then, if CLEC desires to store numbers on Sprint's LIDB, the parties shall negotiate a separate LIDB database storage and look-up agreement. 2.5.4. Sprint will send a CARE transaction 2231 to notify LXC that access is now provided by a new CLEC for that number. 3. REQUIREMENTS FOR INP 3.1 Cut-Over Process 3.1.1. Sprint and CLEC shall cooperate in the process of porting numbers from one carrier to another so as to limit service outage for the ported subscriber. 3.1.1.1. For a Coordinated Cutover Environment, Sprint and CLEC will coordinate the disconnect and switch translations as close to the requested time as possible. The coordination shall be pre-specified by CLEC and agreed to by both parties and in no case shall begin more than thirty (30) minutes after the agreed upon time. 60 3.1.1.2. For a Non-Coordinated Cutover Environment, the Parties will agree to a mutually satisfactory cutover time and Sprint shall schedule an update of disconnect and switch transiations at the agreed upon cutover time. Such updates will be available to CLEC at Parity with Sprint's own availability for such activity. Sprint and CLEC shall each provide an appropriate operations contact with whom the Parties can contact in the event manual intervention is needed to complete the cutover. In the event of manual intervention, and if Sprint is unable to resolve the issue within sixty (60) minutes, Sprint shall notify CLEC of the issue and CLEC and Sprint shall determine the plan to resolve it. 3.2. Testing Sprint and CLEC shall cooperate in conducting CLEC's testing to ensure interconnectivity between systems. Sprint shall inform CLEC of any system updates that may affect the CLEC network and Sprint shall, at CLEC's request, perform tests to validate the operation of the network. Additional testing requirements may apply as specified by this Agreement. 3.3 Installation Timeframes 3.3.1. Installation Time Frames for RCF INP, where no other work is required, will be completed using Sprint's standard interval for service installation of complex services. 3.3.2. If a subscriber elects to move its Telephone Exchange Service back to Sprint while on an INP arrangement, Sprint shall notify CLEC of the Subscriber's termination of service with CLEC and the Subscriber's instructions regarding its telephone number(s) at Parity with what is offered to other Sprint customers. 3.4. Call Referral Announcements. Should CLEC direct Sprint to terminate INP measures, Sprint shall allow CLEC to order a referral announcement available in that switch. 3.5. Engineering and Maintenance. Sprint and CLEC will cooperate to ensure that performance of trunking and signaling capacity is engineered and managed at levels which are at Parity with that provided by Sprint to its subscribers and to ensure effective maintenance testing through activities such as routine testing practices, network trouble isolation processes and review of operational elements for translations, routing and network fault isolation. 3.6. Operator Services and Directory Assistance 3.6.1 With respect to operator services and directory assistance associated with INP for CLEC subscribers, Sprint shall provide the following; 3.6.1.1 While INP is deployed; 61 3.6.1.1.1. Sprint shall allow CLEC to order provisioning of Telephone Line Number (TLN) calling cards and Billed Number Screening (BNS), in its LIDB, for ported numbers, as specified by CLEC. Sprint shall continue to allow CLEC access to its LIDB. Other LIDB provisions are specified in this Agreement. 3.6.1.1.2. Where Sprint has control of directory listings for NXX codes containing ported numbers, Sprint shall maintain entries for ported numbers as specified by CLEC. 3.6.2. Sprint OSS shall meet all requirements specified in "Generic Operator Services Switching Requirements for Number Portability." Issue 1.00. Final Draft, April 12, 1996, Editor - Nortel. 3.7. Number Reservation. When a subscriber ports to another service provider and has previously secured, via a tariffed offering, a reservation of line numbers from the donor provider for possible activation at some future point, these reserved but inactive numbers shall "port" along with the active numbers being ported by the subscriber in order to ensure that the end user subscriber will be permitted to expand its service using the same number range it could use if it remained with the donor provider. However, Sprint will not port vacant numbers. 62 ATTACHMENT VI LOCAL NUMBER PORTABILITY 1. INTRODUCTION 1.1. Upon implementation of LNP, both Parties agree to conform and provide such LNP pursuant to FCC regulations and compliance with the Industry Forum. To the extent consistent with the FCC and Industry rules as amended from time to time, the requirements for LNP shall include the following: 1.1.1. Subscribers must be able to change local service providers and retain the same telephone number(s) within the serving wire center utilizing the portability method in effect within the porting MSA, as offered by the porting carrier, and within the area of portability as defined by the FCC or state commission having jurisdiction over this Agreement. 1.1.2. The LNP network architecture shall not subject Parties to any degradation of service in any relevant measure, including transmission quality, switching and transport costs, increased call set-up time and post-dial delay. 1.1.3. Parties agree that when an NXX is defined as portable, it shall also be defined as portable in all LNP capable offices which have direct trunks to the given switch. 1.1.4. When a subscriber ports to another service provider and has previously secured a reservation of line numbers from the donor provider for possible activation at some future point, these reserved but inactive numbers shall port along with the active numbers being ported by the subscriber only in states where appropriate charges from Sprint tariffs are executed for reserved numbers. 1.1.5. NXX Availability. Not all NXXs in each CO may be available for porting. 1.1.6. LERG Reassignment. Portability for an entire NXX shall be provided by utilizing reassignment of the NXX to CLEC through the LERG. 1.1.7. Coordination of service order work outside normal business hours (8:00AM to 5:00PM) shall be at requesting Party's expense. Premium rates will apply for service order work performed outside normal business hours, weekends, and holidays. 1.1.8. Mass Calling Events. Parties will notify each other at least seven (7) days in advance where ported numbers are utilized. Parties will only port mass calling numbers using switch translations and a choke network for call routing. Porting on mass calling numbers will be handled outside the 63 normal porting process and comply with any applicable state or federal regulatory requirements developed for mass calling numbers. 2. TRANSITION FROM INP TO LNP 2.1 Existing INP Arrangements. As Sprint provision LNP according to the industry schedule in a Wire Center/Central Office, there will be a maximum of a ninety (90) day transition from INP to LNP. At the time, the CLEC will be required to fully implement LNP according to industry standards. 2.2 Once LNP is available in an area, all new portability will be LNP and INP will no longer be offered. 3. TESTING 3.1 An Interconnection Agreement (or Memorandum of Understanding, or Porting Agreement) detailing conditions for LNP must be in effect between the Parties prior to testing. 3.2 Testing and operational issues will be addressed in the implementation plans as described in Part A. Section 30 of the agreement. 3.3 CLEC must be NPAC certified and have met Sprint testing parameters prior to activating LNP. If LNP implementation by a CLEC/CMRS provider occurs past the FCC activation date, testing and porting will be done at CLEC's expense. 3.4 Parties will cooperate to ensure effective maintenance testing through activities such as routine testing practices, network trouble isolation processes and review of operational elements for translation routing and network fault isolation. 3.5 Parties shall cooperate in testing performed to ensure interconnectivity between systems. All LNP providers shall notify each connected provider of any system updates that may affect the CLEC or Sprint network. Each LNP provider shall, at each other's request, jointly perform tests to validate the operation of the network. Additional testing requirements may apply as specified by this Agreement or in the Implementation Plan. 4. ENGINEERING AND MAINTENANCE 4.1 Each LNP provider will monitor and perform effective maintenance through testing and the performance of proactive maintenance activities such as routine testing, development of and adherence to appropriate network trouble isolation processes and periodic review of operational elements for translations, routing and network faults. 4.2 It will be the responsibility of the Parties to ensure that the network is stable and maintenance and performance levels are maintained in accordance with state commission requirements. It will be the responsibility of the Parties to perform 64 fault isolation in their network before involving other providers. 4.3. Additional engineering and maintenance requirements shall apply as specified in this Agreement or the Implementation Plan. 5. E911/911 5.1. When a subscriber ports to another service provider, the donor provider shall use information provided by the porting provider to update the 911 tandem switch routing tables and 911/ALI database to correctly route, and provide accurate information to PSAP call centers. 5.2. Prior to implementation of LNP, the Parties agree to develop, implement, and maintain efficient methods to maintain 911 database integrity when a subscriber ports to another service provider. The Parties agree that the customer shall not be dropped from the 911 database during the transition. 6. BILLING 6.1. When an IXC terminates an InterLATA or IntraLATA toll call to either party's local exchange customer whose telephone number has been ported from one party to the other, the parties agree that the party to whom the number has been ported shall receive revenues from those IXC access charges associated with end office switching, local transport, RIC, and CCL, as appropriate, and such other applicable charges. The party from whom the number has been ported shall be entitled only to receive any entrance facility fees, access tandem fees and appropriate local transport charges as set forth in this Agreement. Such access charge payments will be adjusted to the extent that the paying party has already paid Reciprocal Compensation for the same minutes of use. When a call for which access charges are not applicable is terminated to a party's local exchange customer whose telephone number has been ported from the other party, the parties agree that the Reciprocal compensation arrangements described in this Agreement shall apply. 6.2. Non-Payment. Customers lose the right to the ported telephone number upon non-payment of charges. Sprint will not port telephone numbers of customers who have bills in default. 65 ATTACHMENT VII GENERAL BUSINESS REQUIREMENTS 1. PROCEDURES 1.1. Contact with Subscribers 1.1.1. Each Party at all times shall be the primary contact and account control for all interactions with its subscribers, except as specified by that Party. Subscribers include active subscribers as well as those for whom service orders are pending. 1.1.2. Each Party shall ensure that any of its personnel who may receive subscriber inquiries, or otherwise have opportunity for subscriber contact from the other Party's subscribers regarding the other Party's services; (i) provide appropriate referrals to subscribers who inquire about the other Party's services or products; (ii) do not in any way disparage or discriminate against the other Party, or its products or services; and (iii) do not provide information about its products or services during that same, inquiry or subscriber contact. 1.1.3. Sprint shall not use CLEC's request for subscriber information, order submission, or any other aspect of CLEC's processes or services to aid Sprint's marketing or sales efforts. 1.2. Expedite and Escalation Procedures 1.2.1 Sprint and CLEC shall develop mutually acceptable escalation and expedite procedures which may be invoked at any point in the Service Ordering, Provisioning, Maintenance, and Subscriber Usage Data transfer processes to facilitate rapid and timely resolution of disputes. In addition Sprint and CLEC will establish intercompany contacts lists for purposes of handling subscriber and other matters which require attention/resolution outside of normal business procedures within thirty (30) days after CLEC's request. Each party shall notify the other party of any changes to its escalation contact list as soon as practicable before such changes are effective. 1.2.2. No later than thirty (30) days after CLEC's request Sprint shall provide CLEC with contingency plans for those cases in which normal Service Ordering, Provisioning, Maintenance. Billing, and other procedures for Sprint's unbundled Network Elements, features, functions, and resale services are inoperable. 1.3 Subscriber of Record. Sprint shall recognize CLEC as the Subscriber of Record for all Network Elements or services for resale ordered by CLEC and shall send all notices, invoices, and information, which pertain to such ordered services 66 directly to CLEC, CLEC will provide Sprint with addresses to which Sprint shall send all such notices, invoices, and information. 1.4. Services Offerings 1.4.1. Sprint shall provide CLEC with access to new services, features and functions concurrent with Sprint's notice to CLEC of such changes, if such service, feature or function is installed and available in the network or as soon thereafter as it is installed and available in the network, so that CLEC may conduct market testing. 1.4.2. Essential Services. For purposes of service restoral, Sprint shall designate a CLEC access line as an Essential Service Line (ESL) at Parity with Sprint's treatment of its own subscribers and applicable state law or regulation, if any. 1.4.3. Blocking Services. Upon request from CLEC, employing Sprint- approved LSR documentation, Sprint shall provide blocking of 700, 900, and 976 services, or other services of similar type as may now exist or be developed in the future, and shall provide Billed Number Screening (BNS), including required LIDB updates, or equivalent service for blocking completion of bill-to-third party and collect calls, on a line, PBX, or individual service basis. Blocking shall be provided the extent (a) it is an available option for the Telecommunications Service resold by CLEC, or (b) it is technically feasible when requested by CLEC as a function of unbundled Network Elements. 1.4.4. Training Support. Sprint shall provide training, on a non- discriminatory basis, for all Sprint employees who may communicate, either by telephone or face-to-face, with CLEC subscribers. Such training shall include compliance with the branding requirements of this Agreement including without limitation provisions of forms, and unbranded 'Not at Home" notices. 2. ORDERING AND PROVISIONING 2.1. Ordering and Provisioning Parity. Sprint shall provide necessary ordering and provisioning business process support as well as those technical and systems interfaces as may be required to enable CLEC to provide the same level and quality of service for all resale services, functions, features, capabilities and unbundled Network Elements at Parity. 2.2. National Exchange Access Center (NEAC) 2.2.1. Sprint shall provide a NEAC or equivalent which shall serve as CLEC's point of contact for all activities involved in the ordering and provisioning of Sprint's unbundled Network Elements, features, function, and resale 67 services. 2.2.2 The NEAC shall provide to CLEC a nationwide telephone number (available from 6:00 a.m. to 8:00 p.m. Eastern Standard Time, Monday through Friday, and 8:00 am through 5:00 P.M. Eastern Standard Time on Saturday) answered by competent, knowledgeable personnel and trained to answer questions and resolve problems in connection with the ordering and provisioning of unbundled Network Elements (except those associated with local trunking inter- connection), features, functions, capabilities, and resale services. 2.2.3. Sprint shall provide, as requested by CLEC, through the NEAC, provisioning and premises visit installation support in the form of coordinated scheduling, status, and dispatch capabilities during Sprint's standard business hours and at other times as agreed upon by the parties to meet subsciber demand. 2.3. Street Address Guide (SAG). Within thirty (30) days of CLEC's written request. Sprint shall provide to CLEC the SAG data, or its equivalent, in an electronic format mutually agreeable to the parties. All changes and updates to the SAG shall be provided to in a mutually agreed format and timeframe. 2.4. CLASS and Custom Features. Where generally available in Sprints serving area. CLEC, at the tariff rate, may order the entire set of CLASS,CENTREX and Custom feautres and functions, or a subset of any one of such features. 2.5. Number Administration/Number Reservation 2.5.1. Sprint shall provide testing and loading of CLEC's NXX on the same basis as Sprint provides itself or its affiliates. Further, Sprint shall provide CLEC with access to abbreviated dialing codes, and the ability to obtain telephone numbers, including vanity numbers, while a subscriber is on the phone with CLEC. When CLEC uses numbers from a Sprint NXX, Sprint shall provide the same range of number choices to CLEC, including choice of exchange number, as Sprint provides its own subscribers. Reservation and aging of Sprint NXX's shall remain Sprint's responsibility. 2.5.2. In conjunction with an order for service, Sprint shall accept CLEC orders for vanity numbers and blocks of numbers for use with complex services including, but not limited to, DID, CENTREX, and Hunting arrangements, as requested by CLEC. 2.5.3. For simple services number reservations and aging of Sprint's numbers, Sprint shall provide real-time confirmation of the number reservation when the Electronic Interface has been implemented. For number reservations associated with complex services. Sprint shall provide confirmation of the number reservation within twenty-four (24) hours of 68 CLEC's request. Consistent with the manner in which Sprint provides numbers to its own subscribers, no telephone number assignment is guaranteed until service has been installed. 2.6 Service Order Process Requirements 2.6.1. Service Migrations and New Subsciber Additions 2.6.1.1. For resale services, other than for a CLEC order to convert "as is" a CLEC subscriber. Sprint shall not disconnect any subsciber service or existing features at any time during the migration of that subscriber to CLEC service without prior CLEC agreement. 2.6.1.2. For services provided through UNEs, Sprint shall recognize CLEC as an agent, in accordance with OBF developed processes, for the subscriber in coordinating the disconnection of services provided by another CLEC or Sprint. In addition, Sprint and CLEC will work cooperatively to minimize service interruptions during the conversion. 2.6.1.3. Unless otherwise directed by CLEC and when technically capable, when CLEC orders resale Telecommunications Services or UNEs all trunk or telephone numbers currently associated with existing services shall be retained without loss of feature capability and without loss of associated ancillary services including, but not limited to, Directory Assistance and 911/E911 capability. 2.6.1.4. For subscriber conversions requiring coordinated cut- over activities, on a per order basis, Sprint, to the extent resources are readily available, and CLEC will agree on a scheduled conversion time, which will be a designated time period within a designated date. 2.6.1.4.1. Any request made by CLEC to coordinate conversions after normal working hours, or on Saturday's or Sunday's or Sprint holidays shall be performed at CLEC's expense. 2.6.1.5. A general Letter of Agency (LOA) initiated by CLEC or Sprint will be required to process a PLC or PIC change order. Providing the LOA, or a copy of the LOA, signed by the end user will not be required to process a PLC or PIC change ordered by CLEC or Sprint. CLEC and Sprint agree that PLC or PIC change orders will be supported with appropriate documentation and verification as required by FCC and Commission rules. In the event of a subsciber complaint of an unauthorized PLC record change where the Party that ordered such change is unable to produce appropriate 69 documentation and verification as required by FCC and Commission rules (or, if there are no rules applicable to PLC record changes, then such rules as are applicable to changes in long distance carriers of record), such Party shall be liable to pay and shall pay all nonrecurring and/or other charges associated with reestablishing the subscriber's local service with the original local carrier. 2.6.2. Intercept Treatment and Transfer Service Announcements. Sprint shall provide unbranded intercept treatment and transfer of service announcements to CLEC's subscribers. Sprint shall provide such treatment and transfer of service announcement in accordance with local tariffs and as provided to similarly situated Sprint subscribers for all service disconnects, suspensions, or transfers. 2.6.3. Due Date 2.6.3.1. Sprint shall supply CLEC with due date intervals to be used by CLEC personnel to determine service installation dates. 2.6.3.2. Sprint shall use best efforts to complete orders by the CLEC requested DDD within agreed upon intervals. 2.6.4. Subscriber Premises Inspections and Installations 2.6.4.1. CLEC shall perform or contract for all CLEC's needs assessments, including equipment and installation requirements required beyond the Demarcation/NID, located at the subscriber premises. 2.6.4.2. Sprint shall provide CLEC with the ability to schedule subscriber premises installations at the same morning and evening commitment level of service offered Sprint's own customers. The parties shall mutually agree on an interim process to provide this functionality during the implementation planning process. 2.6.5. Firm Order Confirmation (FOC) 2.6.5.1. Sprint shall provide to CLEC, a Firm Order Confirmation (FOC) for each CLEC order. The FOC shall contain the appropriate data elements as defined by the OBF standards. 2.6.5.2. For a revised FOC, Sprint shall provide standard detail as defined by the OBF standards. 2.6.5.3. Sprint shall provide to CLEC the date that service is scheduled to be installed. 2.6.6. Order Rejections 70 2.6.6.1. Sprint shall reject and return to CLEC any order that Sprint cannot provision, due to technical reasons, missing information, or jeopardy conditions resulting from CLEC ordering service at less than the standard order interval. When an order is rejected, Sprint shall, in its reject notification, specifically describe all the reasons for which the order was rejected. Sprint shall reject any orders on account of the customer Desired Due Date conflicts with published Sprint order provisioning interval requirements . 2.6.7. Service Order Changes 2.6.7.1. In no event will Sprint change a CLEC initiated service order without a new service order directing said change. If an installation or other CLEC ordered work requires a change from original CLEC service order in any manner, CLEC shall initiate a revised service order. If requested by CLEC, Sprint shall then provide CLEC an estimate of additional labor hours and/or materials. 2.6.7.1.1. When a service order is completed, the cost of the work performed will be reported promptly to CLEC. 2.6.7.2. If a CLEC subscriber requests a service change at the time of installation or other work being performed by Sprint on behalf of CLEC. Sprint, while at the subscriber premises, shall direct the CLEC subscriber to contact CLEC, and CLEC will initiate a new service order. 2.7. Network Testing. Sprint shall perform all its standard pre-service testing prior to the completion of the service order. 2.8. Service Suspensions/Restorations. Upon CLEC's request through an Industry Standard, OBF, Suspend/Restore Order, or mutually agreed upon interim procedure, Sprint shall suspend or restore the functionality of any Network Element, feature, function, or resale service to which suspend/restore is applicable. Sprint shall provide restoration priority on a per network element basis in a manner that conforms with any applicable regulatory Rules and Regulations or government requirements. 2.9. Order Completion Notification. Upon completion of the requests submitted by CLEC, Sprint shall provide to CLEC a completion notification in an industry standard, OBF, or in a mutually agreed format. The completion notification shall include detail of the work performed, to the extent this is defined within OBF guidelines, and in an interim method such standards are defined. 2.10.Specific Unbundling Requirements. CLEC may order and Sprint shall provision unbundled Network Elements. However, it is CLEC's responsibility to combine 71 the individual network elements should it desire to do so. 2.11. Systems Interfaces and Information Exchanges 2.11.1. General Requirements 2.11.1.1. Sprint shall provide to CLEC Electronic Interface(s) for transferring and receiving information and executing transactions for all business functions directly or indirectly related to Service Ordering and Provisioning of Network Elements, features, functions and Telecommunications Services. The Interface(s) shall be developed/designed for the transmission of data from CLEC to Sprint, and from Sprint to CLEC 2.11.1.2. Interim interfaces or processes may be modified, if so agreed by CLEC and Sprint during the interim period 2.11.1.3. Until the Electronic Interface is available, Sprint agrees that the NEAC or similar function will accept CLEC orders. Orders will be transmitted to the NEAC via an interface or method agreed upon by CLEC and Sprint. 2.11.2. For any CLEC subscriber Sprint shall provide, subject to applicable rules, orders, and decisions. CLEC with access CPNI without requiring CLEC to produce a signed LOA, based on CLEC's blanket representation that subscriber has authorized CLEC to obtain such CPNI. 2.11.2.1. The preordering Electronic Interface includes the provisioning of CPNI from Sprint to CLEC. The Parties agree to execute a LOA agreement with the Sprint end user prior to requesting CPNI for that Sprint end user CPNI only when the end user has specifically given permission to receive CPNI. The Parties agree that they will conform to FCC and/or state regulations regarding the provisioning of CPNI between the parties, and regarding the use of that information by the requesting party. 2.11.2.2 The requesting Party will document end user permission obtained to receive CPNI, whether or not the end user has agreed to change local service providers. For end users changing service from one party to the other, specific end user LOAs may be requested by the Party receiving CPNI requests to investigate possible slamming incidents, and for other reasons agreed to by the Parties. 2.11.2.3. The receiving Party may also request documentation of an LOA if CPNI is requested and a subsequent service order for the change of local service is not received. On a schedule to be 72 determined by Sprint will perform a comparison of requests for CPNI to service orders received for the change of Local Service to CLEC. Sprint will produce a report of unmatched requests for CPNI, and may require an LOA from CLEC for each unmatched request. CLEC agrees to provide evidence of end user permission for receipt of CPNI for all end users in the request by Sprint within three (3) business days or receipt of a request from Sprint. Should Sprint determine that there has been a substantial percentage of unmatched LOA requests. Sprint reserves the right to immediately disconnect the preordering Electronic Interface. 2.11.2.4. If CLEC is not able to provide the LOA for ninety- five percent (95%) of the end users requested by Sprint, or if Sprint determines that an LOA is inadequate, CLEC will be considered in breach of the agreement, CLEC can cure the breach by submitting to Sprint evidence of an LOA for each inadequate or omitted LOA within three (3) business days of notification of the breach. 2.11.2.5. Should CLEC not be able to cure the breach in the timeframe noted above Sprint will discontinue processing new service orders until, in Sprint's determination. CLEC has corrected the problem that caused the breach. 2.11.2.6. Sprint will resume processing new service orders upon Sprint's timely review and acceptance of evidence provided by CLEC to correct the problem that caused the breach. 2.11.2.7 If CLEC and Sprint do not agree that CLEC requested CPNI for a specific end user, or that Sprint has erred in not accepting proof of an LOA, the Parties may immediately request dispute resolution in accordance with Part B. Sprint will not disconnect the preordering Electronic Interface during the Alternate Dispute Resolution process. 2.11.2.8. When available per Electronic Interface Implementation Sprint shall provide to CLEC Electronic Interface to Sprint information systems to allow CLEC to assign telephone number(s) (if the subscriber does not already have a telephone number or requests a change of telephone number) at Party. 2.11.2.9. When available per Electronic Interface Implementation Plan, Sprint shall provide to CLEC an Electronic Interface to schedule dispatch and installation appointments at Party. 2.11.2.10. When a available per Electronic Interface Implementation Plan, Sprint shall provide to CLEC an electronic Interface to Sprint subscriber information systems which will allow CLEC to 73 determine if a service call is needed to install the line or service at Parity. 2.11.2.11. When available per Electronic Interface Implementation Plan, Sprint shall provide to CLEC an Electronic Interface to Sprint information systems which will allow CLEC to provide service availability dates at Parity. 2.11.2.12. When available per Electronic Interface Implementation Plan, Sprint shall provide to CLEC an Electronic Interface which transmits status information on service orders at Parity. Until an Electronic Interface is available, Sprint agrees that Sprint will provide proactive status on service orders at the following critical intervals: acknowledgement, firm order confirmation, and completion according to interim procedures to be mutually developed. 2.12. Standards 2.12.1. General Requirements. CLEC and Sprint shall agree upon the appropriate ordering and provisioning codes to be used for UNEs. These codes shall apply to all aspects of the unbundling of that element and shall be known as data elements as defined by the Telecommunications Industry Forum Electronic Data Interchange Service Order Subcommittee (TCIF-EDI-SOSC). 3. BILLING 3.1. Sprint shall comply with various industry, OBF, and other standards referred to throughout this Agreement. Sprint and CLEC will review any changes to industry standards, and Sprint's interpretation of these standards before they are implemented by Sprint. Until industry standards are adopted and implemented, Sprint shall utilize an interim process as determined by Sprint and reviewed by CLEC as part of the Implementation Plan. 3.2. Sprint shall bill CLEC for each service supplied by Sprint to CLEC pursuant to this Agreement at the rates set forth in this Agreement. 3.3. Sprint shall provide to CLEC a single point of contact for interconnection at the National Access Service Center (NASC), and Network Elements and resale at Sprint's NEAC, to handle any Connectivity Billing questions or problems that may arise during the implementation and performance of the terms and conditions of this Agreement. 3.4. Sprint shall provide a single point of contact for handling of any data exchange questions or problems that may arise during the implementation and performance of the terms and conditions of this Agreement. 74 3.5. Subject to the terms of this Agreement, CLEC shall pay Sprint within thirty (30) days from the Bill Date. If the payment due date is a Saturday, Sunday or has been designated a bank holiday payment shall be made the next business day. 3.6. Billed amounts for which written, itemized disputes or claims have been filed shall be handled in accordance with the procedures set forth in Part B, Article 21 of this Agreement. 3.7. Sprint will assess late payment charges to CLEC in accordance with Part B.(S) 5.5 of this Agreement. 3.8. Sprint shall credit CLEC for incorrect Connectivity Billing charges including without limitation; overcharges, services ordered or requested but not delivered, interrupted services, services of poor quality and installation problems if caused by Sprint. Such reimbursements shall be set forth in the appropriate section of the Connectivity Bill pursuant to CABS, or SECAB standards. 3.9. Where Parties have established interconnection, Sprint and the CLEC agree to conform to MECAB and MECOD guidelines. They will exchange Billing Account Reference and Bill Account Cross Reference information and will coordinate Initial Billing Company/Subsequent Billing Company billing cycles, Sprint and CLEC will exchange the appropriate records to bill exchange access charges to the IXC, Sprint and CLEC agree to capture EMR records for inward terminating and outward originating calls and send them to the other, as appropriate, in daily or other agreed upon interval, via and agreed upon media (e.g., Connect Direct, cartridge or magnetic tape). 3.10. Revenue Protection, Sprint shall make available to CLEC, at Parity with what Sprint provides to itself, its Affiliates and other local telecommunications CLECs, all present and future fraud prevention or revenue protection features, including prevention, detection, or control functionality embedded within any of the Network Elements. These features include, but are not limited to screening codes, information digits assigned such as information digits `29' and `70' which indicate prison and COCOT pay phone originating line types respectively, call blocking of domestic, international, 800, 888, 900, NPA-976, 700, 500 and specific line numbers, and the capability to require end-user entry of an authorization code for dial tone, Sprint shall, when technically capable and consistent with the implementation schedule for Operations Support Systems (OSS), additionally provide partitioned access to fraud prevention, detection and control functionality within pertinent OSS. 4. PROVISION OF SUBSCRIBER USAGE DATA 4.1. This Article 4 sets forth the terms and conditions for Sprint's provision of Recorded Usage Data (as defined in this Attachment VIII) to CLEC and for information exchange regarding long distance billing. The parties agree to record call information for interconnection in accordance with this Article 4. To the 75 extent technically feasible, each party shall record all call detail information associated with completed calls originated by or terminated to the other Party's local exchange subscriber. Sprint shall record for CLEC the messages that Sprint records for and bills to its end users. These records shall be provided at a party's request and shall be formatted pursuant to Bellcore's EMR standards and the terms and conditions of this Agreement. These records shall be transmitted to the other party on non-holiday business days in EMR format via CDN, or provided on a cartridge or magnetic tape. Sprint and CLEC agree that they shall retain, at each party's sole expense, copies of all EMR records transmitted to the other party for at least forty-five (45) calendar days after transmission to the other party. 4.2. General Procedures 4.2.1. Sprint shall comply with various industry and OBF standards referred to throughout this Agreement. 4.2.2. Sprint shall comply with OBF standards when recording and transmitting Usage Data. 4.2.3. Sprint shall record all usage originating from CLEC subscribers using resold services ordered by CLEC, where Sprint records those same services for Sprint subscribers. Recorded Usage Data includes, but is not limited to, the following categories of information: 4.2.3.1. Use of CLASS/LASS/Custom Features that Sprint records and bills for its subscribers on a per usage basis. 4.2.3.2. Calls to Information Providers (IP) reached via Sprint facilities will be provided in accordance with (S)4.2.7. 4.2.3.3. Calls to Directory Assistance where Sprint provides such service to a CLEC subscriber. 4.2.3.4. Calls completed via Sprint-provided Operator Services where Sprint provides such service to CLEC's local service subscriber and where Sprint records such usage for its subscribers using Industry Standard Bellcore EMR billing records. 4.2.3.5. For Sprint-provided Centrex Service,station level detail. 4.2.4. Retention of Records. Sprint shall maintain a machine readable back-up copy of the message detail provided to CLEC for a minimum of forty-five (45) calendar days. During the forty-five (45) day period, Sprint shall provide any data back-up to CLEC upon the request of CLEC. If the forty-five (45) day has expired, Sprint may provide the data back-up at CLEC's expense. 4.2.5. Sprint shall provide to CLEC Recorded Usage Data for CLEC subscribers. Sprint shall not submit other CLEC local usage data as part of the CLEC 76 Recorded Usage Data. 4.2.6. Sprint shall not bill directly to CLEC subscribers any recurring or non-recurring charges for CLEC's services to the subscriber except where explicitly permitted to do so within a written agreement between Sprint and CLEC. 4.2.7. Sprint will record 976/N11 calls and transmit them to the IP for billing. Sprint will not bill these calls to either the CLEC or the CLEC's end user. 4.2.8. Sprint shall provide Recorded Usage Data to CLEC billing locations as agreed to by the Parties. 4.2.9. Sprint shall provide a single point of contact to respond to CLEC call usage, data error, and record transmission inquires. 4.2.10. Sprint shall provide CLEC with a single point of contact and remote identifiers (IDs) for each sending location. 4.2.11. CLEC shall provide a single point of contact responsible for receiving usage transmitted by Sprint and receiving usage tapes from a courier service in the event of a facility outage. 4.2.12. Sprint shall bill and CLEC shall pay the charges for Recorded Usage Data. Billing and payment shall be in accordance with the applicable terms and conditions set forth herein. 4.3. Charges 4.3.1. Access services, including revenues associated therewith, provided in connection with the resale of services hereunder shall be the responsibility of Sprint and Sprint shall directly bill and receive payment on its own behalf from an LXC for access related to interexchange calls generated by resold or rebranded customers. 4.3.2. Sprint will be responsible for returning EMI/EMR records to LXCs with the proper EMR Return Code along with the Operating Company Number (OCN) of the associated ANI, (i.e., Billing Number). 4.3.3. Sprint will deliver a monthly statement for wholesale services in the medium (e.g.: NDM, paper, diskette, cartridge, magnetic tape, or CD-ROM) requested by CLEC as follows: 4.3.3.1. Invoices will be provided in a standard Carrier Access Billing format or other such format as Sprint may determine: 4.3.3.2. Where local usage charges apply and message detail is created to support available services, the originating local usage at the call detail level in standard EMR industry format will be exchanged 77 daily or at other mutually agreed upon intervals, and CLEC will pay Sprint for providing such call detail; 4.3.3.3. The Parties will work cooperatively to exchange information to facilitate the billing of in and out collect and inter/intra-region alternately billed messages; 4.3.3.4. Sprint agrees to provide information on the end-user's selection of special features where Sprint maintains such information (e.g.; billing method, special language) when CLEC places the order for service; 4.3.3.5. Monthly recurring charges for Telecommunications Services sold pursuant to this Agreement shall be billed monthly in advance. 4.3.3.6. Sprint shall bill for message provisioning and, if applicable data tape charges, related to the provision of usage records. Sprint shall also bill CLEC for additional copies of the monthly invoice. 4.3.4. For billing purposes, and except as otherwise specifically agreed to in writing, the Telecommunications Services provided hereunder are furnished for a minimum term of one month. Each month is presumed to have thirty (30) days. 4.4. Central Clearinghouse & Settlement 4.4.1. Sprint and CLEC shall agree upon Clearinghouse and Incollect/Outcollect procedures. 4.4.2 Sprint shall settle with CLEC for both intra-region and inter-region billing exchanges of calling card, bill-to- third party, and collect calls under separately negotiated settlement arrangements. 4.5. Lost Data 4.5.1. Loss of Recorded Usage Data. CLEC Recorded Usage Data determined to have been lost, damaged or destroyed as a result of an error or omission by Sprint in its performance of the recording function shall be recovered by Sprint at no charge to CLEC. In the event the data cannot be recovered by Sprint, Sprint shall estimate the messages and associated revenue, with assistance from CLEC, based upon the method described below. This method shall be applied on a consistent basis, subject to modifications agreed to by Sprint and CLEC. This estimate shall be used to adjust amounts CLEC owes Sprint for services Sprint provides in conjunction with the provision of Recorded Usage Data. 4.5.2. Partial Loss. Sprint shall review its daily controls to determine if data has been lost. When there has been a partial loss, actual message and minute 78 volumes shall be reported, if possible through recovery as discussed in 4.1.4.1 above. Where actual data are not available, a full day shall be estimated for the recording entity, as outlined in the following paragraphs. The amount of the partial loss is then determined by subtracting the data actually recorded for such day from the estimated total for such day. 4.5.3. Complete Loss. When Sprint is unable to recover data as discussed in 4.1.4.1 above estimated message and minute volumes for each loss consisting of an entire AMA tape or entire data volume due to its loss prior to or during processing, lost after receipt, degaussed before processing, receipt of a blank or unreadable tape, or lost for other causes, shall be reported. 4.5.4. Estimated Volumes. From message and minute volume reports for the entity experiencing the loss, Sprint shall secure message/minute counts for the four (4) corresponding days of the weeks preceding that in which the loss occurred and compute an average of these volumes. Sprint shall apply the appropriate average revenue per message ("arpm") agreed to by CLEC and Sprint to the estimated message volume for messages for which usage charges apply to the subscriber to arrive at the estimated lost revenue. 4.5.5. If the day of loss is not a holiday but one (1) (or more) of the preceding corresponding days is a holiday, use additional preceding weeks in order to procure volumes for two (2) non- holidays in the previous two (2) weeks that correspond to the day of the week that is the day of the loss 4.5.6. If the loss occurs on a weekday that is a holiday (except Christmas and Mother's day), Sprint shall use volumes from the two (2) preceding Sundays. 4.5.7. If the loss occurs on Mother's day or Christmas day, Sprint shall use volumes from that day in the preceding year multiplied by a growth factor derived from an average of CLEC's most recent three (3) month message volume growth. If a previous year's message volumes are not available, a settlement shall be negotiated. 4.6 Testing, Changes and Controls 4.6.1. The Recorded Usage Data, EMR format, content, and transmission process shall be tested as agreed upon by CLEC and Sprint. 4.6.2. Control procedures for all usage transferred between Sprint and CLEC shall be available for periodic review. This review may be included as part of an Audit of Sprint by CLEC or as part of the normal production interface management function. Breakdowns which impact the flow of usage between Sprint and CLEC must be identified and jointly resolved as they occur. The resolution may include changes to control procedures, so 79 similar problems would be avoided in the future. Any changes to control procedures would need to be mutually agreed upon by CLEC and Sprint. 4.6.3. Sprint Software Changes 4.6.3.1. When Sprint plans to introduce any software changes which impact the format or content structure of the usage data feed to CLEC, designated Sprint personnel shall notify CLEC, no less than ninety (90) calendar days before such changes are implemented. 4.6.3.2. Sprint shall communicate the projected changes to CLEC's single point of contact so that potential impacts on CLEC processing can be determined. 4.6.3.3. CLEC personnel shall review the impact of the change on the entire control structure. CLEC shall negotiate any perceived problems with Sprint and shall arrange to have the data tested utilizing the modified software if required. 4.6.3.4. If it is necessary for Sprint to request changes in the schedule, content or format of usage data transmitted to CLEC, Sprint shall notify CLEC. 4.6.4. CLEC Requested Changes: 4.6.4.1. CLEC may submit a purchase order to negotiate and pay for changes in the content and format of the usage data transmitted by Sprint. 4.6.4.2. When the negotiated changes are to be implemented, CLEC and/or Sprint shall arrange for testing of the modified data. 4.7. Information Exchange and Interfaces 4.7.1. Product/Service Specific, Sprint shall provide a Bellcore standard 42-50-01 miscellaneous charge record to support the Special Features Star Services if these features are part of Sprint's offering and are provided for Sprint's subscribers on a per usage basis. 4.7.2. Rejected Recorded Usage Data 4.7.2.1. Upon agreement between CLEC and Sprint, messages that cannot be rated and/or billed by CLEC may be returned to Sprint via CDN or other medium as agreed by the Parties. Returned messages shall be sent directly to Sprint in their original EMR format utilizing standard EMR return codes. 4.7.2.2. Sprint may correct and resubmit to CLEC any messages returned to Sprint. Sprint will not be liable for any records 80 determined by Sprint to be billable to a CLEC end user. CLEC will not return a message that has been corrected and resubmitted by Sprint. Sprint will only assume liability for errors and unguideables caused by Sprint. 5. GENERAL NETWORK REQUIREMENTS 5.1. Sprint shall provide repair, maintenance and testing for all resold Telecommunications Services and such UNEs that Sprint is able to test, in accordance with the terms and conditions of this Agreement. 5.2. During the term of this Agreement, Sprint shall provide necessary maintenance business process support as well as those technical and systems interfaces at Parity. Sprint shall provide CLEC with maintenance support at Parity. 5.3. Sprint shall provide on a regional basis, a point of contact for CLEC to report vital telephone maintenance issues and trouble reports twenty four (24) hours and seven (7) days a week. 5.4. Sprint shall provide CLEC maintenance dispatch personnel on the same schedule that it provides its own subscribers. 5.5. Sprint shall cooperate with CLEC to meet maintenance standards for all Telecommunications Services and unbundled network elements ordered under this Agreement. Such maintenance standards shall include, without limitation, standards for testing, network management, call gapping, and notification of upgrades as they become available. 5.6. All Sprint employees or contractors who perform repair service for CLEC subscribers shall follow Sprint standard procedures in all their communications with CLEC subscribers. These procedures and protocols shall ensure that: 5.6.1. Sprint employees or contractors shall perform repair service that is equal in quality to that provided to Sprint subscribers: and 5.6.2. Trouble calls from CLEC shall receive response time priority that is equal to that of Sprint subscribers and shall be handled on a "first come first served" basis regardless of whether the subscriber is a CLEC subscriber or a Sprint subscriber. 5.7. Sprint shall provide CLEC with scheduled maintenance for resold lines, including, without limitation, required and recommended maintenance intervals and procedures, for all Telecommunications Services and network elements provided to CLEC under this Agreement equal in quality to that currently provided by Sprint in the maintenance of its own network. CLEC shall perform its own testing for UNEs. 5.8. Sprint shall give maximum advance notice to CLEC of all non-scheduled 81 maintenance or other planned network activities to be performed by Sprint on any network element, including any hardware, equipment, software, or system providing service functionality of which CLEC has advised Sprint may potentially impact CLEC subscribers. 5.9. Notice of Network Event. Each party has the duty to alert the other to any network events that can result or have resulted in service interruption, blocked calls, or negative changes in network performance as follows: 5.9.1. Any cable or electronics outage that affects fifty percent (50%) or more of the in-service lines of a central office or one-thousand (1000) access lines, whichever is less with a duration of two (2) minutes or more. 5.9.2. Toll or EAS isolation of an entire exchange with duration of two (2) minutes or more. 5.9.3. Any digital cross-connect or fiber optic complete system failure lasting two (2) minutes or more. 5.10. On all misdirected calls from CLEC subscribers requesting repair, Sprint shall provide such CLEC subscriber with the correct CLEC repair telephone number as such number is provided to Sprint by CLEC. Once the Electronic Interface is established between Sprint and CLEC, Sprint agrees that CLEC may report troubles directly to a single Sprint repair/maintenance center for both residential and small business subscribers, unless otherwise agreed to by CLEC. 5.11. Upon establishment of an Electronic Interface, Sprint shall notify CLEC via such electronic interface upon completion of trouble report. The report shall not be considered closed until such notification is made. CLEC will contract its subscriber to determine if repairs were completed and confirm the trouble no longer exists. 5.12. Sprint shall perform all testing for resold Telecommunications Services. 5.13. Sprint shall provide test results to CLEC, if appropriate, for trouble clearance. In all instances, Sprint shall provide CLEC with the disposition of the trouble. 5.14. If Sprint initiates trouble handling procedures, it will bear all costs associated with that activity. If CLEC requests the trouble dispatch and either there is not trouble found, or the trouble is determined to be beyond the end user demarcation point, then CLEC will bear the cost. 6. MISCELLANEOUS SERVICES AND FUNCTIONS 6.1. General 6.1.1. To the extent that Sprint does not provide the services described in this Article 12 to itself, Sprint will use reasonable efforts to facilitate the 82 acquisition of such services for or by CLEC through the existing service provider, CLEC must contract directly with the service provider for such services. 6.1.2. Basic 911 and E911 General Requirements 6.1.2.1. Basic 911 and E911 provides a caller access to the appropriate emergency service bureau by dialing a 3-digit universal telephone number (911). Basic 911 and E911 access from Local Switching shall be provided to CLEC in accordance with the following: 6.1.2.2. E911 shall provide additional routing flexibility for 911 calls. E911 shall use subscriber data, contained in the ALI/DMS, to determine to which PSAP to route the call. 6.1.2.3. Basic 911 and E911 functions provided to CLEC shall be at Parity with the support and services that Sprint provides to its subscribers for such familiar functionality. 6.1.2.4. Basic 911 and E911 access when CLEC purchases Local Switching shall be provided to CLEC in accordance with the following: 6.1.2.4.1. Sprint shall conform to all state regulations concerning emergency services. 6.1.2.4.2. For E911, Sprint shall use its service order process to update and maintain subscriber information in the ALI/DMS. Through this process, Sprint shall provide and validate CLEC subscriber information resident or entered into the ALI/DMS. 6.1.2.4.3. Sprint shall provide for overflow 911 traffic to be routed to Sprint Operator Services or, at CLEC's discretion, directly to CLEC operator services. 6.1.3. Basic 911 and E911 access from the CLEC local switch shall be provided to CLEC in accordance with the following: 6.1.3.1. If required by CLEC, Sprint, at CLEC's sole expense, shall interconnect direct trunks from the CLEC network to the E911 PSAP, or the E911 Tandems as designated by CLEC. Such trunks may alternatively be provided by CLEC. 6.1.3.2. In government jurisdictions where Sprint has obligations under existing agreements as the primary provider of the 911 System to the county (Host SPRINT), CLEC shall participate in the provision 83 of the 911 System as follows: 6.1.3.2.1. Each party shall be responsible for those portions of the 911 System for which it has control, including any necessary maintenance to each party's portion of the 911 System. 6.1.3.2.2. Host SPRINT shall be responsible for maintaining the E-911 database. Sprint shall be responsible for maintaining the E-911 routing database. 6.1.4. If a third party is the primary service provider to a government agency, CLEC shall negotiate separately with such third party with regard to the provision of 911 service to the agency. All relations between such third party and CLEC are totally separate from this Agreement and Sprint makes no representations on behalf of the third party. 6.1.5. If CLEC or its Affiliate is the primary service provider to a government agency, CLEC and Sprint shall negotiate the specific provisions necessary for providing 911 service to the agency and shall include such provisions in an amendment to this Agreement. 6.1.6. Interconnection and database access shall be priced as specified in Attachment I. 6.1.7. Sprint shall comply with established, competitively neutral intervals for installation of facilities, including any collocation facilities, diversity requirements, etc. 6.1.8. In a resale situation, where it may be appropriate for Sprint to update the ALI database, Sprint shall update such database with CLEC data in an interval at Parity with that experienced by Sprint subscribers. 6.1.9. Sprint shall transmit to CLEC daily all changes, alterations, modifications, and updates to the emergency public agency telephone numbers linked to all NPA NXX's. This Transmission shall be electronic and be a separate feed from the subscriber listing feed. 6.1.10. Sprint shall provide to CLEC the necessary UNEs for CLEC to provide E911/911 services to government agencies. If such elements are not available from Sprint, Sprint shall offer E911/911 service for resale by CLEC to government agencies. 6.1.11. The following are Basic 911 and E911 Database Requirements 6.1.11.1. The ALI database shall be managed by Sprint, but is the property of Sprint and CLEC for those records provided by CLEC. 84 6.1.11.2. To the extent allowed by the governmental agency, and where available, copies of the MSAG shall be provided within three business days from the time requested and provided on diskette, magnetic tape, or in a format suitable for use with desktop computers. 6.1.11.3. CLEC shall be solely responsible for providing CLEC database records to Sprint for inclusion in Sprint's ALI database on a timely basis. 6.1.11.4. Sprint and CLEC shall arrange for the automated input and periodic updating of the E911 database information related to CLEC end users. Sprint shall work cooperatively with CLEC to ensure the accuracy of the data transfer by verifying it against the MSAG. Sprint shall accept electronically transmitted files or magnetic tape that conform to NENA Version #2 format. 6.1.11.5. CLEC shall assign an E911 database coordinator charged with the responsibility of forwarding CLEC end user. ALI record information to Sprint or via a third-party entity, charged with the responsibility of ALI record transfer. CLEC assumes all responsibility for the accuracy of the data that CLEC provides to Sprint. 6.1.11.6. CLEC shall provide information on new subscribers to Sprint within one (1) business day of the order completion. Sprint shall update the database within two (2) business days of receiving the data from CLEC. If Sprint detects an error in the CLEC provided data, the data shall be returned to CLEC within two (2) business days from when it was provided to Sprint. CLEC shall respond to requests from Sprint to make corrections to database record errors by uploading corrected records within two (2) business days. Manual entry shall be allowed only in the event that the system is not functioning properly. 6.1.11.7. Sprint agrees to treat all data on CLEC subscribers provided under this Agreement as confidential and to use data on CLEC subscribers only for the purpose of providing E911 services. 6.1.11.8. Sprint shall adopt use of a CLEC Code (NENA standard five-character field) on all ALI records received from CLEC. The CLEC Code will be used to identify the CLEC of record in LNP/INP configurations. 6.1.11.9. Sprint shall identify which ALI databases cover which states, counties or parts thereof, and identify and communicate a Point of Contact for each. 85 6.1.12. The following are basic 911 and E911 Network Requirements 6.1.12.1. Sprint at CLEC's option, shall provide a minimum of two (2) E911 trunks per 911 switching entity, or that quantity which will maintain P.01 transmission grade of service, whichever is the higher grade of service. Where applicable these trunks will be dedicated to routing 911 calls from CLEC's switch to a Sprint selective router. 6.1.12.2. Sprint shall provide the selective routing of E911 calls received from CLEC's switching office. This includes the ability to receive the ANI of CLEC's subscriber, selectively route the call to the appropriate PSAP, and forward the subscriber's ANI to the PSAP. Sprint shall provide CLEC with the appropriate CLLI codes and specifications regarding the Tandem serving area associated addresses and meet-points in the network. 6.1.12.3. CLEC shall ensure that its switch provides an eight-digit ANI consisting of an information digit and the seven-digit exchange code. CLEC shall also ensure that its switch provides the line number of the calling station. Where applicable, CLEC shall send a ten-digit ANI to Sprint when there is an ANI failure the CLEC shall send the Central Office Trunk Group number in the Emergency Service Central Office (ESCO) format. 6.1.12.4. Each ALI discrepancy report shall be jointly researched by Sprint and CLEC. Corrective action shall be taken immediately by the responsible party. 6.1.12.5. Where Sprint controls the 911 network, Sprint should provide CLEC with a detailed written description of, but not limited to, the following information: 6.1.12.5.1. Geographic boundaries of the government entities, PSAPs, and exchanges as necessary. 6.1.12.5.2. LECs rate centers/exchanges, where "Rate Center" is defined as a geographically specified area used for determining mileage dependent rates in the Public Switched Telephone Network. 6.1.12.5.3. Technical specifications for network interface. Technical specifications for database loading and maintenance. 6.1.12.5.4. Sprint shall identify special routing arrangements to 86 complete overflow. 6.1.12.5.5. Sprint shall begin restoration of E911 and/or E911 trunking facilities immediately upon notification of failure or outage. Sprint must provide priority restoration of trunks or networks outages on the same terms/conditions it provides itself and without the imposition of Telecommunications Service Priority (TSP). 6.1.12.5.6. Repair service shall begin immediately upon receipt of a report of a malfunction. Repair service includes testing and diagnostic service from a remote location, dispatch of or in-person visit(s) of personnel. Technicians will be dispatched without delay. 6.1.12.6. Sprint shall identify any special operator-assisted calling requirements to support 911. 6.1.12.7. Trunking shall be arranged to minimize the likelihood of central office isolation due to cable cuts or other equipment failures. There will be an alternate means of transmitting a 911 call to a PSAP in the event of failures. 6.1.12.8. Circuits shall have interoffice, loop and CLEC system diversity when such diversity can be achieved using existing facilities. Circuits will be divided as equally as possible across available CLEC systems. Diversity will be maintained or upgraded to utilize the highest level of diversity available in the network. 6.1.12.9. All 911 trunks must be capable of transmitting and receiving Baudot code or ASII necessary to support the use of Telecommunications Devices for the Deaf (TTY/TDDS). 6.1.13. Basic 911 and E911 Additional Requirements 6.1.13.1. All CLEC lines that have been ported via INP shall reach the correct PSAP when 911 is dialed. Sprint shall send both the ported number and the CLEC number (if both are received from CLEC). The PSAP attendant shall see both numbers where the PSAP is using a standard ALI display screen and the PSAP extracts both numbers from the data that is sent. 6.1.13.2. Sprint shall work with the appropriate government agency to provide CLEC the ten-digit POTS number of each PSAP which sub- tends each Sprint selective router/911 Tandem to which CLEC is interconnected. 87 6.1.13.3. Sprint shall notify CLEC 48 hours in advance of any scheduled testing or maintenance affecting CLEC 911 service, and provide notification as soon as possible of any unscheduled outage affecting CLEC 911 service. 6.1.13.4. CLEC shall be responsible for reporting all errors, defects and malfunctions to Sprint. Sprint shall provide CLEC with the point of contact for reporting errors, defects, and malfunctions in the service and shall also provide escalation contacts. 6.1.13.5. CLEC may enter into subcontracts with third parties, including CLEC Affiliates, for the performance of any of CLEC's duties and obligations stated herein. 6.1.13.6. Sprint shall provide Sufficient planning information regarding anticipated moves to SS7 signaling, for 911 services, for the next twelve (12) months. 6.1.13.7. Sprint shall provide notification of any impacts to the 911 services provided by Sprint to CLEC resulting from of any pending Tandem moves, NPA splits, or scheduled maintenance outages, with enough time to react. 6.1.13.8. Sprint shall identify process for handling of "reverse ALI" inquiries by public safety entities. 6.1.13.9. Sprint shall establish a process for the management of NPA splits by populating the ALI database with the appropriate new NPA codes. 6.2. Directory Assistance Service 6.2.1. Sprint shall provide for the routing of directory assistance calls (including but not limited to 411, 555-1212, NPA-555-1212) dialed by CLEC subscribers directly to, at CLEC's option, either (a) the CLEC DA service platform to the extent Sprint's switch can perform this customized routing, or (b) Sprint DA service platform to the extent there is a DA service platform for that servicing area. 6.2.2. CLEC subscribers shall be provided the capability by Sprint to dial the same telephone numbers for access to CLEC Directory Assistance that Sprint subscribers dial to access Sprint Directory Assistance. 6.2.3. Should CLEC elect to resell Sprint Directory Assistance, Sprint shall provide Directory Assistance functions and Services to CLEC for its subscribers as described below. 6.2.3.1. Sprint agrees to provide CLEC subscribers with the same 88 Directory Assistance service available to Sprint subscribers. 6.2.3.2. Sprint shall notify CLEC in advance of any changes or enhancements to its DA service, and shall make available such service enhancements on a non-discriminatory basis to CLEC. 6.2.3.3. Sprint shall provide Directory Assistance to CLEC subscribers in accordance with Sprint's internal local operator procedures and standards. 6.2.3.4. Sprint shall provide CLEC with the same level of support for the provisioning of Directory Assistance as Sprint provides itself. Quality of service standards shall be measured at the aggregate level in accordance with the standards and performance measurements that are at Parity with the standards and/or performance measurements that Sprint uses and/or which are required by law, regulatory agency, or by Sprint's own internal procedures, whichever are the most rigorous. 6.2.3.5. Service levels shall comply, at a minimum, with State Regulatory Commission requirements for number of rings to answer, and disaster recovery options. 6.2.3.6. CLEC or its designated representatives may inspect any Sprint owned or sub-contracted office, which provides DA services, upon five (5) business days notice to Sprint. 6.2.3.7. Directory Assistance services provided by Sprint to CLEC subscribers shall be branded in accordance with Part B. Article 10 of this Agreement. 6.2.3.8. Sprint shall provide the following minimum Directory Assistance capabilities to CLEC's subscribers: 6.2.3.8.1. A maximum of two subscriber listings and/or addresses or Sprint Parity per CLEC subscriber request. 6.2.3.8.2. Telephone number and address to CLEC subscribers upon request, except for non-published/ unlisted numbers, in the same states where such information is provided to Sprint subscribers. 6.2.3.8.3. Upon CLEC's request, call completion to the requested number for local and intraLATA toll calls shall be sent to the network specified by CLEC where such call completion routing is technically feasible. If fulfillment of such routing receive is not technically feasible. Sprint shall promptly notify CLEC if and when such routing becomes feasible. Rating and billing responsibility shall be agreed to by CLEC and Sprint. 6.2.3.8.4. Populate the Directory Assistance database in the same manner and in the same time frame as for Sprint subscribers. 6.2.3.8.5. Any information provided by a Directory Assistance Automatic Response Unit (ARU) shall be repeated the same number of times for CLEC subscribers as for Sprint's subscribers. 6.2.3.9. Sprint shall provide CLEC call detail records in a mutually agreed format and manner. 6.3. Operator Services 6.3.1. Sprint shall provide for the routing of local operator services calls (including but not limited to 0+, 0-) dialed by CLEC subscribers directly to either the CLEC operator service platform or Sprint operator service platform to the extent Sprint's switch can perform this customized routing, as specified by CLEC. 6.3.2. CLEC subscribers shall be provided the capability by Sprint to dial the same telephone numbers to access CLEC operator service that Sprint subscribers dial to access Sprint operator service. 6.3.3. Should CLEC elect to resell Sprint Operator Services, Sprint shall provide Operator Services to as described below. 6.3.3.1. Sprint agrees to provide CLEC subscribers the same Operator Services available to Sprint subscribers. Sprint shall make available its service enhancements on a non-discriminatory basis. 6.3.3.2. Operator Services provided to CLEC subscribers shall be branded in accordance with Part B. Article 10 of this Agreement. 6.3.3.3. Sprint shall provide the following minimum Operator Service capabilities to CLEC subscribers: 6.3.3.3.1. Sprint shall complete 0- and 0- dialed local calls. 6.3.3.3.2. Sprint shall complete 0- intraLATA toll calls. 6.3.3.3.3. Sprint shall complete calls that are billed to a 0- access calling card. 90 6.3.3.3.4. Sprint shall complete person-to-person calls. 6.3.3.3.5. Sprint shall complete collect calls. 6.3.3.3.6. Sprint shall provide the capability for callers to bill to a third party and complete such calls. 6.3.3.3.7. Sprint shall complete station-to-station calls. 6.3.3.3.8. Sprint shall process emergency calls. 6.3.3.3.9. Sprint shall process Busy Line Verify and Busy Line Verify and Interrupt requests. 6.3.3.3.10. To the extent not prohibited by law or regulation, Sprint shall process emergency call trace. 6.3.3.3.11. Sprint shall process operator-assisted directory assistance calls. 6.3.3.3.12. Sprint shall provide basis rate quotes, subject to Sprint's operator systems being capable to perform unique rating for CLEC. 6.3.3.3.13. Sprint shall process time-and-charges requests, at Parity with Sprint's own service offerings. 6.3.3.3.14. Sprint shall route 0-traffic directly to a "live" operator team. 6.3.3.3.15. When requested by CLEC, Sprint shall provide instant credit on operator services calls as provided to Sprint subscribers or shall inform CLEC subscribers to call an 800 number for CLEC subscriber service to request a credit. Sprint shall provide one 800 number for business subscribers and another for residential subscribers. 6.3.3.3.16. Caller assistance for the disabled shall be provided in the same manner as provided to Sprint subscribers. 6.3.3.3.17. When available, Sprint shall provide operator- assisted conference calling. 6.3.4. Operator Service shall provide CLEC's local usage rates when providing 91 rate quote and time-and-charges services, and subject to the provisions described herein. 6.3.5. Operator Service shall adhere to equal access requirements. 6.3.6. Sprint shall exercise the same level of fraud control in providing Operator Service to CLEC that Sprint provides for its own operator service. 6.3.7. Sprint shall query for Billed Number Screening restrictions when handling Collect. Third Party, and Calling Card Calls, both for station to station and person to person call types. 6.3.8. Sprint shall provide at an aggregate level for the operator service center, service measurements and accounting reports to CLEC at Parity with the service measurements and accounting reports Sprint provides itself. 6.3.9. CLEC or its designated representatives may inspect any Sprint owned or sub-contracted office, which provides Operator Services, upon five (5) business days notice to Sprint. 6.3.10. Sprint shall direct CLEC subscriber account and other similar inquiries to the subscriber service center designated by CLEC. 6.3.11. Sprint shall provide call records in accordance with Article 4 of this Attachment VIII. 6.3.12. Sprint shall accept and process overflow 911 traffic routed from CLEC to the underlying platform used to provide Operator Service where such overflow is performed by Sprint for its subscribers. 6.3.13. Sprint shall engineer its BLV/BLVI facilities to accommodate the anticipated volume of BLV/BLVI requests during the Busy Hour. CLEC may, from time to time, provide its anticipated volume of BLV/BLVI requests to Sprint. In those instances when the BLV/BLVI systems and databases become unavailable, Sprint shall promptly inform CLEC. 6.4. Directory Assistance and Listings Service Requests 6.4.1. These requirements pertain to Sprint's DA and Listings Service Request process that enables CLEC to (a) submit CLEC subscriber information for inclusion in Sprint Directory Assistance and Directory Listings databases: (b) submit CLEC subscriber information for inclusion in published directories: and (c) provide CLEC subscriber delivery address information to enable Sprint to fulfill directory distribution obligations. 6.4.2. When implemented by the Parties, Sprint shall accept orders on a real-time basis via electronic interface in accordance with OBF Directory Service Request standards within three (3) months of the effective date of this Agreement. In the interim Sprint shall create a standard format and order 92 process by which CLEC can place an order with a single point of contact within Sprint. 6.4.3. Sprint will provide to CLEC the following Directory Listing Migration Options valid under all access methods including but not limited to Resale. UNEs and Facilities-Based: 6.4.3.1. Migrate with no Changes. Retain all white page listings for the subscriber in both DA and DL. Transfer ownership and billing for white page listings to CLEC. 6.4.3.2. Migrate with Additions. Retain all white page listings for the subscriber in both DA and DL. Incorporate the specified additional listings order. Transfer ownership and billing for the white page listings to CLEC. 6.4.3.3. Migrate with Deletions. Retain all white page listings for the subscriber in both DA and DL. Delete the specified listings from the listing order. Transfer ownership and billing for the white page listings to CLEC. 6.4.3.4. To ensure accurate order processing, Sprint or its directory publisher shall provide to CLEC the following information, with updates promptly upon changes: 6.4.3.4.1. A matrix of NXX to centlral office: 6.4.3.4.2. Geographical maps if available of Sprint service area: 6.4.3.4.3. A description of calling areas covered by each directory, including but not limited to maps of calling areas and matrices depicting calling privileges within and between calling areas: 6.4.3.4.4. Listing format rules: 6.4.3.4.5. Standard abbreviations acceptable for use in listings and addresses: 6.4.3.4.6. Titles and designations: and 6.4.3.4.7. A list of all available directories and their Business Office close dates 6.4.4. Based on changes submitted by CLEC Sprint shall update and maintain 93 directory assistance and directory listings data for CLEC subscribers who: 6.4.4.1. Disconnect Service: 6.4.4.2. Change CLEC: 6.4.4.3. Install Service: 6.4.4.4. Change any service which affects DA information: 6.4.4.5. Specify Non-Solicitation: and 6.4.4.6. Are Non-Published, Non-Listed, or Listed. 6.4.5. Sprint shall not charge for storage of CLEC subscriber information in the DA and DL systems. 6.4.6. CLEC shall not charge for storage of Sprint subscriber information in the DA and DL systems. 6.5 Directory Listings General Requirements. CLEC acknowledges that many directory functions including but not limited to yellow page listings, enhanced white page listings, information pages, directory proofing, and directory distribution are not performed by Sprint but rather are performed by and are under the control of the directory publisher. CLEC acknowledges that for a CLEC subscriber's name to appear in a directory, CLEC must submit a Directory Service Request (DSR). Sprint shall use reasonable efforts to assist CLEC in obtaining an agreement with the directory publisher that treats CLEC at Parity with the publisher's treatment of Sprint. 6.5.1. This (S) 6.5.1 pertains to listings requirements published in the traditional white pages. 6.5.2. Sprint shall include in its master subscriber system database all white pages listing information for CLEC subscribers in Sprint territories where CLEC is providing local telephone exchange services and has submitted a DSR. 6.5.3. Sprint agrees to include one basic White pages listing for each CLEC customer located within the geographic scope of its White Page directories, at no additional charge to CLEC. A basic White Pages listing is defined as a customer name, address and either the CLEC assigned number for a customer or the number for which number portability is provided, but not both numbers. Basic White Pages listings of CLEC customers will be interfiled with listings of Sprint and other LEC customers. 6.5.4. CLEC agrees to provide CLEC customer listing information, including without limitation directory distribution information, to Sprint, at no 94 charge. Sprint will provide CLEC with the appropriate format for provision of CLEC customer listing information to Sprint. The parties agree to adopt a mutually acceptable electronic format for the provision of such information as soon as practicable. In the event OBF adopts an industry-standard format for the provision of such information, the parties agree to adopt such format. 6.5.5. Sprint agrees to provide White Pages database maintenance services to CLEC. CLEC will be charged a Service Order entry fee upon submission of Service Orders into Sprint's Service Order Entry (SOE) System, which will include compensation for such database maintenance services. Service Order entry fees apply when Service Orders containing directory records are entered into Sprint's SOE System initially, and when Service Orders are entered in order to process a requested change to directory records. 6.5.6. CLEC customer listing information will be used solely for the provision of directory services, including the sale of directory advertising to CLEC customers. 6.5.7. In addition to a basic White Pages listing, Sprint will provide, at the rates set forth in Attachment I of this Agreement, tariffed White Pages listings (e.g.: additional, alternate, foreign and non-published listings) for CLEC to offer for resale to CLEC's customers. 6.5.8. Sprint, or its directory publisher, agree to provide White Pages distribution services to CLEC customers within Sprint's service territory at no additional charge to CLEC. Sprint represents that the quality, timeliness, and manner of such distribution services will be at Parity with those provided to Sprint and to other CLEC customers. 6.5.9. Sprint agrees to include critical contact information pertaining to CLEC in the "Information Pages" of those of its White Pages directories containing information pages, provided that CLEC meets criteria established by its directory publisher. Critical contact information includes CLEC's business office number, repair number, billing information number, and any other information required to comply with applicable regulations, but not advertising or purely promotional material. CLEC will not be charged for inclusion of its critical contact information. The format, content and appearance of CLEC's critical contact information will conform to applicable Sprint directory publisher's guidelines and will be consistent with the format, content and appearance of critical contact information pertaining to all CLECs in a directory. 6.5.10. Sprint will accord CLEC customer listing information the same level of confidentiality that Sprint accords its own proprietary customer listing information. Sprint shall ensure that access to CLEC customer proprietary 95 listing information will be limited solely to those of Sprint and Sprint's directory publisher's employees, agents and contractors that are directly involved in the preparation of listings, the production and distribution of directories, and the sale of directory advertising. Sprint will advise its own employees, agents and contractors and its directory publisher of the existence of this confidentiality obligation and will take appropriate measures to ensure their compliance with this obligation. Notwithstanding any provision herein to the contrary, the furnishing of White Pages proofs to a CLEC that contains customer listings of both Sprint and CLEC will not be deemed a violation of this confidentially provision. 6.5.11 Sprint will sell or license CLEC's customer listing information to any third parties unless CLEC submits written requests that Sprint refrain from doing so. Sprint and CLEC will work cooperatively to share any payments for the sale or license of CLEC customer listing information to third parties. Any payments due to CLEC for its customer listing information will be net of administrative expenses incurred by Sprint in providing such information to third parties. The parties acknowledge that the release of CLEC's customer listing to Sprint's directory publisher will not constitute the sale or license of CLEC's customer listing information causing any payment obligation to arise pursuant to this (S) 6.5.11. 6.6 Other Directory Services. Sprint will exercise reasonable efforts to cause its directory publisher to enter into a separate agreement with CLEC which will address other directory services desired by CLEC as described in this (S) 6.6. Both parties acknowledge that Sprint's directory publisher is not a party to this Agreement and that the provisions contained in this (S) 6.6 are not binding upon Sprint's directory publisher. 6.6.1. Sprint's directory publisher will negotiate with CLEC concerning the provision of a basic Yellow Pages listings to CLEC customers located within the geographic scope of publisher's Yellow Pages directories and distribution of Yellow Pages directories to CLEC customers. 6.6.2. Directory advertising will be offered to CLEC customers on a nondiscriminatory basis and subject to the same terms and conditions that such advertising is offered to Sprint and other CLEC customers. Directory advertising will be billed to CLEC customers by directory publisher. 6.6.3. Directory publisher will use commercially reasonable efforts to ensure that directory advertising purchased by customers who switch their service to CLEC is maintained without interruption. 6.6.4. Information pages, in addition to any information page or portion of an information page containing critical contact information as described above in (S) 6.5.9 may be purchased from Sprint's directory publisher, subject to applicable directory publisher guidelines, criteria, and regulatory 96 requirements. 6.6.5. Directory publisher maintains full authority as publisher over its publishing policies, standards and practices, including decisions regarding directory coverage area, directory issue period, compilation, headings, covers, design, content or format of directories, and directory advertising sales. 6.7 Directory Assistance Data. This section refers to the residential, business, and government subscriber records used by Sprint to create and maintain databases for the provision of live or automated operator assisted Directory Assistance. Directory Assistance Data is information that enables telephone exchange CLECs to swiftly and accurately respond to requests for directory information, including, but not limited to name, address and phone numbers. Under the provisions of the Act and the FCC's Interconnection order, Sprint shall provide unbundled and non-dis- criminatory access to the residential, business and government subscriber records used by Sprint to create and maintain databases for the provision of live or automated operator assisted Directory Assistance. This access shall be provided under separate contract. 6.8 Systems Interfaces and Exchanges 6.8.1. Directory Assistance Data Information Exchanges and Interfaces 6.8.1.1. Subscriber List Information 6.8.1.1.1 Sprint shall provide to CLEC, within sixty (60) days after the Approval Date of this Agreement, or at CLEC's request, all published Subscriber List Information (including such information that resides in Sprint's master subscriber system/accounts master file for the purpose of publishing directories in any format as specified by the Act) via an electronic data transfer medium and in a mutually agreed to format, on the same terms and conditions and at the same rates that the Sprint provides Subscriber List Information to itself or to other third parties. All changes to the Subscriber List Information shall be provided to CLEC pursuant to a mutually agreed format and schedule. Both the initial List and all subsequent Lists shall indicate for each subscriber whether the subscriber is classified as residence or business class of service. 6.8.1.1.2. Clec shall provide directory listings to Sprint pursuant to the directory listing and delivery requirements in the approved OBF format, at a mutually agreed upon timeframe. Other formats and requirements shall not be 97 used unless mutually agreed to by the parties. 6.9 Listing Types LISTED The listing information is available for all directory requirements. NON-LISTED The listing information is available to all directory requirements, but the information does not appear in the published street directory. NON-PUBLISHED A directory service may confirm, by name and address, the presence of a listing, but the telephone number is not available. The listing information is not available in either the published directory or directory assistance. 98 ATTACHMENT VIII REPORTING STANDARDS 1. GENERAL 1.1. Sprint shall satisfy all service standards, intervals, measurements, specifications, performance requirements, technical requirements, and performance standards (Performance Standards) that are specified in this agreement or are required by law or regulation. In addition, Sprint's performance under this Agreement shall be provided to CLEC will be at Parity with the performance Sprint provides itself for like service(s). 1.2. Sprint and CLEC agree that all financial remedies available to end- user and access customers for same or like services will be offered to CLEC. At such time that state or federal commission-approved credits/financial remedies are put in place between Sprint and any of its CLEC customers. Sprint would renegotiate this arrangement where such arrangements exist. 2. PARITY AND QUALITY MEASUREMENTS 2.1. Sprint will develop self-reporting capabilities comparing Sprint results with CLEC results for the following measures of service parity within six (6) months, but no later than December 31, 1998, of the Effective Date: 2.1.1. Percentage of Commitment Times Met - Service Order. 2.1.2. Percentage of Commitment Times Met - Trouble Report. 2.1.3. Trouble Reports per 100 Access Lines (Resale only) 2.1.4. Recent Repeated Trouble Reports 2.1.5. Average Receive to Clear 2.1.6. Percentage of Installed Orders without Repair in the first five (5) days 2.2. In the event CLEC chooses to utilize the Sprint operator service platform the following measures will be implemented within six (6) months of the date of first use by CLEC: 2.2.1. Average Toll Answer Time; and 2.2.2. Average Directory Assistance Answer Time. 2.3. All above measures will be implemented in a manner that is consistent with the current measures Sprint makes of its own performance 99 EX-23.1 6 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP San Francisco, California July 28, 1999 -----END PRIVACY-ENHANCED MESSAGE-----