Mpower Shares the Wealth

Posted: 2/2004

Mpower Shares the Wealth
By Tara Seals

The boom might not quite be back, but the bust just might be fading into memory. In a move reminiscent of the high-flying 90s, Mpower Communications Corp. has launched a new equity program for its agents  based on stock warrants.

The program, which launched in December, offers Mpower agents options to buy shares in the CLEC in exchange for increasing monthly recurring revenue. Agents receive warrants when they increase their monthly billing by $10,000.

This program is creative, unique and certainly brand new, says Jim Ferguson, president of sales and marketing at Mpower.

Agents must beat their monthly revenue numbers by $10,000 to qualify for warrants. Thus, if a master agency billed $50,000 in recurring revenue in September (the programs baseline month), it must grow to $60,000 to receive 10,000 warrants. If it grows revenue by $15,000, 15,000 warrants are awarded, and so on. Once a distribution is made, the agents baseline is reset to the new level. So if they billed $50,000 in September and $67,000 in October, they receive 17,000 warrants, explains Ferguson. But they have to beat that $67,000 by $10,000 next time to gain more warrants.

The program, which is additional to regular compensation and bonuses, is limited to master agents with a revenue commitment and a signed agreement with Mpower, and they must register to participate. New agents also are eligible and start off with a baseline of zero, but Ferguson says this does not give them an unfair advantage. In both cases, the respective agent has to bring us an additional $10,000 in revenue, he says. There are different types of agents, and they have different ways of growing their revenue streams.

Stock warrants are worth the price of Mpower Holding Corp. shares (the parent companys stock) for the day they are issued. Agents are vested immediately once they receive the warrants and can exercise them at any point until they expire three years later.

A warrant program assumes a companys stock appreciates in value. For instance: If a warrant is issued when the stock is trading at $1.50, the agent could wait and exercise the warrant later, when the stock price is, say, $3.75. The value of that warrant is then $2.25, so 10,000 warrants would have a value of $22,500.

So far, it looks like facilities-based Mpower is on the track to grow in value. In late September, it issued 13 million shares in a private placement and scored $17.5 million in equity from its investors. CEO Rolla Huff says Mpower emerged from bankruptcy in July 2002 with $50 million in debt that it has since taken out. We are creating a new risk profile. There is no big revenue concentration with our wholesale customers, and we own our own facilities, he says.

In the third quarter of 2003 Mpower posted a net loss of $1.2 million on $36.8 million in operating revenue, a 75 percent improvement over the previous quarter and 96 percent improvement over the quarter the year before, excluding reorganization expenses and the gain on the discharge of debt reported in 2002. The stock appreciated steadily during 2003 and at press time in late December was trading at $1.38 per share. We trade 700,000 shares a day, so there is liquidity, Huff says.

Master agent and program participant Vince Bradley, president and CEO at World Telecom Group, is bullish. They have shed some unprofitable markets and are even being called a good stock buy  pretty rare in telecom these days, he says, adding it much easier to sell them than some other companies. We also want to help them however we can since we now own a piece of the rock.

Meanwhile, the CLEC, which offers service in California, Illinois and Nevada, plans to use the program as an acquisition strategy. It is designed to grow our largest existing master agents, and its a vehicle for us to go out into what is a very competitive environment and bring [new master agents] on board, says Ferguson, and the relationship becomes a lot more strategic and more of a partnership than when they sign for the flavor of the month.