<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1998
REGISTRATION NO. 333-38875
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MGC COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
---------------------
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<S> <C> <C>
NEVADA 4813 88-0360042
(State or other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
incorporation or Classification Code Number)
organization)
3301 N. BUFFALO DRIVE KENT F. HEYMAN, ESQ.
LAS VEGAS, NEVADA 89129 3301 N. BUFFALO DRIVE
(702) 310-1000 LAS VEGAS, NEVADA 89129
(Address, including zip (702) 310-1000
code, and (Address, including zip
telephone number including code, and
area code, telephone number including
of registrant's principal area code,
executive offices) of agent for service)
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COPIES TO:
ROBERT B. GOLDBERG, ESQ.
ELLIS, FUNK, GOLDBERG, LABOVITZ & DOKSON, P.C.
3490 PIEDMONT ROAD, N.E., SUITE 400
ATLANTA, GEORGIA 30305
(404) 233-2800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: 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, check the following box: [ ]
---------------------
CALCULATION OF REGISTRATION FEE
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===================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE FEE
- -------------------------------------------------------------------------------------------------------------------
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13% Senior Secured Notes due
2004........................... $160,000,000 100% $160,000,000 $48,484.84(2)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
MGC COMMUNICATIONS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K, SHOWING THE LOCATION IN THE
PROSPECTUS
OF THE INFORMATION REQUIRED BY PART I OF FORM S-4.
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ITEM NUMBER AND CAPTION IN FORM S-4 LOCATION OR CAPTION IN PROSPECTUS
----------------------------------- ---------------------------------
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A. INFORMATION ABOUT THE TRANSACTION.
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus....... Cover Page of Registration Statement; Cross
Reference Sheet; Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus................................... Inside Front Cover Page; Outside Back Cover
Page
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information................ Prospectus Summary; Risk Factors; Business;
Selected Historical Financial Data
4. Terms of the Transaction....................... Prospectus Summary; The Exchange Offer;
Description of the Exchange Notes; United
States Federal Income Tax Consequences of the
Exchange of Notes
5. Pro Forma Financial Information................ Prospectus Summary; Selected Historical
Financial Data
6. Material Contacts with the Company being
Acquired..................................... Not Applicable
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to be
Underwriters................................. Not Applicable
8. Interests of Named Experts and Counsel......... Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................. Not Applicable
B. INFORMATION ABOUT THE REGISTRANT.
10. Information With Respect to S-3 Registrants.... Not Applicable
11. Incorporation of Certain Information by
Reference.................................... Not Applicable
12. Information With Respect to S-2 or S-3
Registrants.................................. Not Applicable
13. Incorporation of Certain Information by
Reference.................................... Not Applicable
14. Information With Respect to Registrants Other
Than S-2 or S-3 Registrants.................. Prospectus Summary; Risk Factors;
Capitalization; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Selected Historical Financial
Data; Business; Management; Principal
Stockholders; Description of the Exchange
Notes; Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED.
15. Information With Respect to S-3 Companies...... Not Applicable
16. Information With Respect to S-2 or S-3
Companies.................................... Not Applicable
17. Information With Respect to Companies Other
Than S-2 or S-3 Companies.................... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION.
18. Information if Proxies, Consents or Other
Authorizations are to be Solicited........... Not Applicable
19. Information if Proxies, Consents or Other
Authorizations are not to be Solicited or in
an Exchange Offer............................ Management
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<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 16, 1998
PROSPECTUS
[LOGO] MGC COMMUNICATIONS, INC.
OFFER TO EXCHANGE
13% SERIES B SENIOR SECURED NOTES DUE 2004
FOR
ALL OUTSTANDING 13% SENIOR SECURED NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME
ON , 1998, UNLESS EXTENDED.
---------------------
MGC Communications, Inc., a Nevada corporation (the "Company"), hereby
offers, upon the terms and subject to conditions set forth in this Prospectus
(the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"; together with the Prospectus, the "Exchange Offer"), to exchange
up to an aggregate principal amount of $160,000,000 of its registered 13% Series
B Senior Secured Notes Due 2004 (the "Exchange Notes") for up to an aggregate
principal amount of $160,000,000 of its outstanding unregistered 13% Senior
Secured Notes Due 2004 (the "Outstanding Notes"). The terms of the Exchange
Notes are identical in all material respects to those of the Outstanding Notes,
except for certain transfer restrictions and registration rights relating to the
Outstanding Notes. The Exchange Notes will be issued pursuant to, and entitled
to the benefits of, the Indenture (as defined herein) governing the Outstanding
Notes. The Exchange Notes and the Outstanding Notes are sometimes referred to
collectively as the "Notes."
Interest on the Notes will be payable semi-annually in arrears on April 1
and October 1 of each year, commencing April 1, 1998. At the closing of the sale
of the Notes, the Company used a portion of the net proceeds (approximately
$56.8 million) to purchase a portfolio of Government Securities (as defined)(the
"Pledged Securities") representing funds sufficient to provide for payment in
full of interest on the Notes through October 1, 2000. The Pledged Securities
are pledged as security for repayment of principal of and interest on the Notes.
In addition, the Notes are and will be secured by a security interest in certain
Telecommunications Equipment (as defined) currently owned by the Company and by
a first priority security interest in certain Telecommunications Equipment
acquired by the Company after the Issue Date (as defined). See "Description of
the Exchange Notes--Security."
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after October 1, 2001, at the redemption prices set
forth herein plus accrued and unpaid interest and Liquidated Damages (as
defined), if any, to the date of redemption. In the event of a Change of
Control, holders of the Exchange Notes will have the right to require the
Company to purchase their Notes, in whole or in part, at a price equal to 101%
of the aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase.
The Exchange Notes will be senior secured obligations of the Company, will
rank pari passu in right of payment with all existing and future senior
Indebtedness (as defined) of the Company, except with respect to the
Telecommunications Equipment securing the Notes, and will rank senior in right
of payment to any future subordinated Indebtedness of the Company. Holders of
other secured Indebtedness of the Company will, however, have claims prior to
the claims of the holders of the Notes with respect to the assets securing such
other Indebtedness. As of September 30, 1997, the Company had approximately
$156.7 million of debt outstanding, including the Notes. The Notes have been
recorded at $156.0 million to recognize that a portion of the proceeds from the
issuance of the Notes has been allocated to the value of the warrants issued to
the purchasers of the Notes. The indenture pursuant to which the Exchange Notes
will be issued limits the ability of the Company and its Restricted Subsidiaries
(as defined) to incur additional Indebtedness. The Company does not currently
have any subsidiaries.
The Issuer will accept for exchange any and all Outstanding Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York time, on
, 1998, unless extended by the Company in its sole discretion (the
"Expiration Date"). The Exchange Offer will not in any event be extended to a
date beyond , 1998. Tenders of Outstanding Notes may be withdrawn at
any time prior to 5:00 p.m., New York time, on the Expiration Date. If the
Company terminates the Exchange Offer and does not accept for exchange any
Outstanding Notes with respect to the Exchange Offer, the Company will promptly
return the Outstanding Notes to the holders thereof. The Exchange Offer is not
conditioned upon any minimum principal amount of Outstanding Notes being
tendered for exchange, but is otherwise subject to certain customary conditions.
The Outstanding Notes may be tendered only in integral multiples of $1,000.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is , 1998.
<PAGE> 4
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement dated
September 29, 1997 (the "Registration Rights Agreement") by and among the
Company and Bear, Stearns & Co. Inc. and Furman Selz LLC, as the initial
purchasers (the "Initial Purchasers") with respect to the initial sale of the
Outstanding Notes. Based on positions taken by the staff of the Securities and
Exchange Commission (the "Commission") that have been enunciated in no-action
letters issued in Exxon Capital Holdings Corp. (available April 13, 1989) and
Morgan Stanley & Co. Inc. (available June 5, 1991), among others, the Exchange
Notes issued pursuant to the Exchange Offer in exchange for Outstanding Notes
may be offered for resale, resold and otherwise transferred by the respective
holders thereof (other than any such holder which is an "affiliate" of the
Issuer within the meaning of Rule 405 under the Securities Act of 1933, as
amended (the "Securities Act") or a broker dealer who acquired Outstanding Notes
directly from the Company to resell pursuant to Rule 144 or any other available
exemption under the Securities Act), without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that the
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement with any person to participate in the
distribution of such Exchange Notes and is not engaged in and does not intend to
engage in a distribution of the Exchange Notes. Holders who wish to accept the
Exchange Offer must represent to the Company that they acquired the Notes in the
ordinary course of business, that they have no arrangement with any other person
to participate in the distribution of the Exchange Notes and that they are not
engaged, nor do they intend to engage in a distribution of the Exchange Notes.
Holders who tender Outstanding Notes in the Exchange Offer with the intention to
participate in a distribution of the Exchange Notes may not rely upon the Morgan
Stanley or similar no-action letters. Each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of the Exchange Notes received in
exchange for Outstanding Notes if such Exchange Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 365 days after the
effective date of the Registration Statement of which this Prospectus is a part,
it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the
Exchange Notes. There can be no assurance as to the liquidity of any markets
that may develop for the Exchange Notes, the ability of holders to sell the
Exchange Notes or the price at which holders would be able to sell the Exchange
Notes. The Issuer does not intend to list the Exchange Notes for trading on any
national securities exchange or over-the-counter market system. Future trading
prices of the Exchange Notes will depend on many factors, including among other
things, prevailing interest rates, the Company's operating results and the
market for similar securities. Historically, the market for securities similar
to the Exchange Notes, including non-investment grade debt, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the Exchange Notes, if
such market develops, will not be subject to similar disruptions. The Initial
Purchasers have advised the Company that it currently intends to make a market
in the Exchange Notes offered hereby. However, the Initial Purchasers are not
obligated to do so and any market making may be discontinued at any time without
notice.
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay certain expenses incident to the Exchange Offer.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER, OR A SOLICITATION
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
(i)
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TABLE OF CONTENTS
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Available Information....................................... (ii)
Summary of Prospectus....................................... 1
Risk Factors................................................ 12
Use of Proceeds............................................. 18
Capitalization.............................................. 19
The Exchange Offer.......................................... 20
Selected Historical Financial Data.......................... 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Business.................................................... 33
Management.................................................. 47
Principal Stockholders...................................... 52
Certain Transactions........................................ 54
Description of the Exchange Notes........................... 55
United States Federal Income Tax Consequences of the
Exchange of Notes......................................... 85
Plan of Distribution........................................ 85
Legal Matters............................................... 86
Experts..................................................... 86
Financial Statements........................................ F-1
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Registration
Statement", which term shall include all amendments, exhibits, annexes and
schedules thereto) pursuant to the Securities Act, and the rules and regulations
promulgated thereunder, covering the Exchange Notes being offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Copies of such material can be obtained from the
Company upon request.
The Company has agreed to file with the Commission, to the extent
permitted, and distribute to holders of the Exchange Notes reports, information
and documents specified in Section 13 and 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), so long as the Exchange Notes are
outstanding, whether or not the Company is subject to such informational
requirements of the Exchange Act. Periodic reports, proxy statements and other
information filed by the Company with the Commission may be inspected at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices located at the
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, 13th Floor, New York, New York 10007. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Such Web site is located at http://www.sec.gov. While any Exchange
Notes remain outstanding, the Company will make available, upon request, to any
holder of the Exchange Notes, the information required pursuant to Rule
144A(d)(4) under the Securities Act during any period in which the Company is
not subject to Section 13 or 15(d) of the Exchange Act. Any such request should
be directed to the Vice President -- General Counsel of the Company at 3301 N.
Buffalo Drive, Las Vegas, Nevada, 89129, telephone number (702) 310-1000.
(ii)
<PAGE> 6
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by, and should be read
in conjunction with, the information and financial statements (including the
notes thereto) included elsewhere in this Prospectus. Prospective investors
should carefully consider the factors set forth in "Risk Factors." References in
this Prospectus to the "Company" mean MGC Communications, Inc. Certain terms
used herein are defined in the Glossary attached hereto as Annex A. This
Prospectus contains certain "forward-looking statements" concerning the
Company's operations, economic performance and financial condition, which are
subject to inherent uncertainties and risks, including those identified under
"Risk Factors." Actual results could differ materially from those anticipated in
this Prospectus. When used in this Prospectus, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe" and similar expressions are intended
to identify forward-looking statements. The safe harbor for forward-looking
statements provided in the Private Securities Litigation Reform Act of 1995 does
not apply to initial public offerings.
THE COMPANY
MGC Communications, Inc. ("MGC" or the "Company") is a rapidly growing,
switched-based provider of telecommunications services, offering competitive
local exchange ("CLEC") services to small business and residential users. The
Company focuses primarily on offering switched local dialtone and enhanced
calling features such as voice mail, call waiting and call forwarding ("basic
telephone services"). These services are required by virtually all users of
telecommunications. The Company does not currently offer long distance services,
but intends to integrate long distance services with its local service offerings
in Las Vegas during January 1998. The Company provides its basic telephone
services through the leasing of unbundled network elements provided by incumbent
local exchange carriers ("ILECs") and through the leasing of dedicated transport
to the Company's combined local and long distance Nortel DMS 500 switches. ILEC
refers to the incumbent monopoly provider of local exchange service prior to the
opening of local exchange services to competition. The ILEC may be a regional
Bell operating company (RBOC) or a non-RBOC incumbent (such as Sprint Central
Telephone of Nevada). The Company began its operations in Las Vegas in December
1996 and became operational in suburban Atlanta and Los Angeles in December
1997. The Company expects to commence offering long distance services to
customers in Atlanta and Los Angeles in first quarter 1998. At September 30,
1997, the Company had 12,482 access lines in service. Of the lines in service,
7,564 were business and 4,918 were residential. During September 1997, the
Company sold 2,851 access lines and placed 684 net lines in service. The Company
has used the results of its experience in Las Vegas to refine its strategy,
products and customer service procedures and to develop a sophisticated back
office operation.
The Company intends to continue expanding its markets by targeting
residential and small business users in suburban areas of large metropolitan
markets. After the initiation of service in Atlanta and Los Angeles, the Company
intends to expand its operations to an additional seven markets in 1998 and an
additional seven markets in 1999. As of September 30, 1997, the Company has
obtained CLEC certification in four states (with one application pending), has
completed interconnection agreements with five ILECs (with an additional four in
negotiation) and has negotiated transport arrangements with a long distance
carrier.
The Company believes the implementation of its network architecture
represents a low risk, demand driven approach requiring less capital deployment
than that required for the buildout of a fiber optic infrastructure. The
Company's network is comprised of leased, unbundled elements of the ILEC's
network coupled with the collocation of Company owned equipment in the ILEC's
central offices ("COs"). The Company adds transport capacity on an incremental
basis with the addition of new customers, and utilizes compression technology to
reduce its transport costs. Management believes the Company's network
architecture and equipment installation plans will enable it to (i) increase the
size of its addressable market to reach a significant number of potential
customers, and (ii) achieve efficient network operations and economies of scale
in sales and marketing.
Management believes offering superior customer service is critical to
achieving its goal of capturing market share. The Company is continually
enhancing its service approach which utilizes a well-trained team of customer
sales and service representatives to coordinate customer installation, billing
and service. A
1
<PAGE> 7
comprehensive back office support system is also a critical component of the
Company's service goal. The Company has installed a fully automated, proprietary
management information system which is designed to provide comprehensive,
integrated features addressing all aspects of its business, including customer
care and billing, general ledger, payroll, fixed asset management, purchasing
and personnel. The Company believes this system is readily adaptable to changing
circumstances and is scalable to support the Company's operations throughout its
expected growth.
Key components of the Company's operating strategy are described below.
BUSINESS STRATEGY
Early in Addressing Tier II Sectors of Tier I Markets. In order to gain
and sustain a competitive advantage, the Company intends to move quickly to
implement its switch-based, unbundled transport networks. MGC believes it is
currently the only CLEC utilizing as its exclusive network strategy the
employment of combined local and long distance switches and unbundled transport
and local loops to target small business and residential customers in suburban
areas of Tier I markets. The Company is targeting these suburban areas because
they have concentrated numbers of basic telephone service users, such as small
businesses (3-50 lines), pay phone operators, multiple dwelling unit customers
and single family residences. The Company believes its only significant
switch-based competition is the ILEC in its target market segments.
Success Based Capital Deployment. Virtually all of the Company's planned
capital expenditures are related to switching and incremental infrastructure
resulting from additions of new revenue generating customers. Management
believes this provides for a low risk profile to the Company's planned capital
deployment and will provide an attractive return on invested capital.
Provide Simplified Product Offerings. MGC's target market segment is
comprised of basic telephone service users. While requiring sophistication for
their delivery, the Company's products and services are perceived as simple,
basic solutions. The Company has consciously narrowed its offerings, choosing
not to sell more complex telephone or data solutions or resell other complex
products at this time. Currently, the Company believes most CLECs which are
bundling such services are focused on larger businesses that require a wider
range of telecommunications products for their more sophisticated needs.
Provide Superior Customer Service. The Company believes superior customer
service will be critical to the success of its expansion plan. The Company's
proprietary customer-focused management information system allows immediate
access to the Company's customer data, enabling quick and effective responses to
customer requests and needs at any time. This system permits the Company to
present its customers with one fully integrated monthly billing statement for
all basic telephone services. In addition, by having a centralized call center
in Las Vegas, which will handle all inquiries and orders for new service, the
Company should be able to control personnel and related training to a greater
degree than if call centers were maintained in each market.
Targeted Sales and Marketing Effort. The Company's sales programs include
direct sales efforts, vendor and affinity programs, direct mail and
telemarketing. The Company has both local and national sales personnel. The
Company's national sales group concentrates on large basic telephone service
users such as multi-tenant buildings, pay phone operators and wholesale
customers. The local sales group coordinates activities with equipment vendors
and affinity groups and also assists with the national sales efforts. They also
make selective calls on business customers who have large basic telephone
service requirements which may not be solicited by the Company's national group.
Leverage Sophisticated Information System and Centralized Call Center. The
Company's proprietary management information system enables the user to record,
maintain and retrieve all customer information in one environment, including
such customer's services, equipment and billing.
Capitalize on Management Expertise. The Company has recruited a team of
experienced business executives with entrepreneurial backgrounds. Maurice J.
Gallagher, Jr., the Chairman, has been a founder of a number of start-up
businesses, including ValuJet and BankServ. Nield J. Montgomery, CEO and
President, has over 34 years of telephone experience, most recently with ICG
Communications, Inc. ("ICG"). Other
2
<PAGE> 8
executives have held senior management positions at major telecommunications
companies, including, among others, Sprint, Centel, NYNEX, Contel and GTE.
NETWORK STRATEGY
Accelerate Provision of Local Exchange Services. To accelerate
provisioning of local exchange service, the Company selects larger markets with
a relatively cooperative ILEC and a pro-competitive regulatory environment. The
Telecommunications Act of 1996 (the "Act") significantly improved the
opportunity for competition in the local exchange market by mandating ILECs to
enter into agreements with competitors such as the Company for central office
collocation and unbundling of local services. The Company believes
implementation of such pro-competitive policies creates favorable opportunities
to more aggressively pursue the provisioning of local exchange services. The
Company has interconnection agreements in place with BellSouth
Telecommunications, Inc. ("BellSouth"), GTE, Pacific Bell ("PacBell"), Sprint
Central Telephone of Nevada, and Ameritech Information Industry Services
("Ameritech") and expects to have agreements with New England Telephone &
Telegraph Company ("NYNEX") in Massachusetts, Southwestern Bell Telephone
Company ("Southwestern Bell") in Texas, Bell Atlantic in Pennsylvania and
Central Telephone Company of Illinois. The Company believes it is
well-positioned to add switches and associated services with minimal increases
in support infrastructure.
Low Cost Network Architecture. One of the most critical elements of
creating a low cost structure is a service provider's decision as to the type of
network to build. MGC has chosen to exclusively build a switch-based network and
to lease the necessary transport and local loops on an incremental basis, as
demand dictates, from ILECs and CAP/CLECs. As a result, the Company will not be
burdened by the carrying cost of a constructed transport network. MGC believes
this low-cost approach will allow the Company to precisely target its capital
expenditures to the specifics of each market and developing conditions.
The Company believes it will be able to lease the necessary transport at
reasonable prices. Prior to the Act, the ILEC's fiber transport was subject to
tariffs and usually priced substantially higher than a competing CAP/CLEC. With
the passage of the Act and subsequent state initiatives and introduction of
facilities-based competition, management believes network elements have become
available at cost-based prices and basic transport services have become
available at competitive prices. Most of MGC's targeted markets have numerous
competing transport suppliers with attractive unbundled transport prices.
Control Customer Elements of the Networks. Connection to customers
represents an important component of MGC's network strategy. Network control
issues of the Company's architecture are different from those of other CLECs.
MGC does not have to contend with local governments or landlords to obtain
permits or consents to construct its network, but rather with the ILEC to
acquire local loops. While this interface can be challenging, it has proven to
be a manageable process to date. Once a line has been leased from an ILEC, MGC
achieves control of its network similar to other CLECs. Specifically, all
changes to features, additions and billing are under the direct control of the
Company with the exception of repairs which are infrequent and may require the
participation of the ILEC's network maintenance staff.
Create a Uniform Technological Platform. A critical component of the
Company's low cost formula is the ability to standardize its switch
configuration. Unlike a traditional long distance or local switch, the Nortel
DMS 500 switch enables the Company to provide local and long distance services
from a single platform. The Company believes having a standardized switch
platform will enable it to (i) deploy features and functions quickly in all of
its networks, (ii) expand switch capacity in a cost effective manner, (iii)
lower maintenance costs through reduced training and spare parts requirements
and (iv) pursue a "switch in the box" rapid network deployment solution (under
development with Nortel) which should allow the Company to rapidly enter new
markets. In addition, the scalability and capacity of its switches will allow
the Company to switch calls from more than one market, which enhances the
Company's ability to benefit from a clustered approach to the building of its
networks.
3
<PAGE> 9
RECENT REGULATORY DEVELOPMENTS
The Act and the issuance by the Federal Communications Commission ("FCC")
of rules governing local competition, particularly those requiring the
interconnection of all networks and the exchange of traffic among the ILECs and
CLECs, as well as pro-competitive policies already developed by state regulatory
commissions, have caused fundamental changes in the structure of the local
exchange markets. On July 18, 1997, the U.S. Court of Appeals for the Eighth
Circuit issued a final decision vacating the FCC's interconnection pricing rules
and "most favored nation" rules as well as certain other FCC interconnection
rules. See "Business -- Regulation." Despite this action, the Company's analysis
shows interconnection arrangements that have been approved or mandated by state
regulatory commissions have been consistent with the intent of the Act and the
Company's business plan. On October 14, 1997, the U.S. Court of Appeals for the
Eighth Circuit ruled that ILECs are under no obligation to provide AT&T or
anyone else with a rebundled package of individual network elements. The Company
believes that the impact of this ruling is neutral to the Company in light of
the Company's switch-based network strategy employing unbundled network elements
and may be beneficial in the short-term by delaying entrance into the local
service market by IXC's such as AT&T.
On May 16, 1997, the FCC released an order that fundamentally restructured
the "access charges" ILECs and CLECs charge to interexchange carriers and end
user customers. The Company believes the FCC's new access charge rules do not
adversely affect the Company's business plan, and they in fact present
significant opportunities for new entrants, including the Company. Aspects of
the access charge order may be changed in the future. At least ten parties have
filed appeals with federal courts, and numerous parties have asked the FCC to
reconsider portions of its new rules.
On December 31, 1997, a federal judge in Dallas ruled key sections of the
Act unconstitutional on the grounds that RBOCs were unfairly denied access to
the long distance segment of the industry. The provisions held unconstitutional
require RBOCs to show sufficient cooperation in allowing access to their
networks before being approved to offer long distance services. This decision
was immediately appealed by numerous IXCs.
FINANCING STRATEGY
The Company commenced operations in Las Vegas in December 1996 and became
operational in its targeted Atlanta and Los Angeles markets in December 1997.
The Company intends to expand its operations to an additional seven markets in
1998 and an additional seven markets in 1999. MGC expects the available net
proceeds of the sale of the Notes and the Preferred Stock Offering (as defined),
together with cash on hand, will be sufficient to finance this expansion, but it
will need to secure additional financing to enter new markets thereafter. The
Company's actual cash requirement for its expansion through 1999 will vary based
upon the timing and success of MGC's roll out of services in its targeted
markets. If demand for the Company's services is less than expected, the Company
may require additional financing at an earlier date although the Company should
be able to reduce certain costs that are, to a large extent, demand driven or
delay its entry into various of its targeted markets. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
THE EXCHANGE OFFER
THE EXCHANGE NOTES......... The form and terms of the Exchange Notes are
identical in all material respects to the terms of
the Outstanding Notes for which they may be
exchanged pursuant to the Exchange Offer, except
for certain transfer restrictions and registration
rights relating to the Outstanding Notes and except
for certain interest provisions relating to such
registration rights described below under
"Description of the Exchange Notes."
THE EXCHANGE OFFER......... The Company is offering to exchange up to
$160,000,000 aggregate principal amount of
registered 13% Series B Senior Secured Notes due
2004 (the "Exchange Notes") for up to $160,000,000
aggregate principal amount of its outstanding
unregistered 13% Senior Secured Notes
4
<PAGE> 10
due 2004 (the "Outstanding Notes"). Outstanding
Notes may be exchanged only in integral multiples
of $1,000.
EXPIRATION DATE; WITHDRAWAL
OF TENDER................ The Exchange Offer will expire at 5:00 p.m., New
York time, on 1998, or such later date
and time to which it is extended by the Company.
The Exchange Offer will not in any event be
extended to a date beyond , 1998. The
tender of Outstanding Notes pursuant to the
Exchange Offer may be withdrawn at any time prior
to the Expiration Date. Any Outstanding Notes not
accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
CERTAIN CONDITIONS TO THE
EXCHANGE OFFER........... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer -- Certain Conditions to the
Exchange Offer."
PROCEDURES FOR TENDERING
OUTSTANDING NOTES........ Each holder of Outstanding Notes wishing to accept
the Exchange Offer must either: (i) complete, sign
and date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with such Outstanding Notes and
any other required documentation to the Exchange
Agent (as defined) at the address set forth herein,
or (ii) if such Outstanding Notes are tendered
pursuant to the procedures for book-entry transfer
set forth herein, a holder tendering Outstanding
Notes may transmit an Agent's Message (as defined)
to the Exchange Agent in lieu of the Letter of
Transmittal, in either case on or prior to the
Expiration Date. By executing the Letter of
Transmittal (or by having been deemed to have
executed the Letter of Transmittal, in the event of
delivery of an Agent's Message), each holder will
represent to the Company that, among other things,
(i) any Exchange Notes to be received by it will be
acquired in the ordinary course of its business,
(ii) it has no arrangement with any person to
participate in the distribution of the Exchange
Notes and (iii) it is not an "affiliate," as
defined in Rule 405 of the Securities Act, of the
Company or, if it is an affiliate, it will comply
with the registration and prospectus delivery
requirements of the Securities Act to the extent
applicable.
INTEREST ON THE EXCHANGE
NOTES.................... The Exchange Notes will bear interest at the rate
of 13% per annum, payable semi-annually on April 1
and October 1, commencing April 1, 1998, to holders
of record on the immediately preceding March 15 and
September 15, respectively. Holders of the Exchange
Notes will receive interest on April 1, 1998 from
the later of the date of initial issuance of the
Outstanding Notes or the most recent date to which
interest has been paid thereon.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........ Any beneficial owner whose Outstanding Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Outstanding Notes in the
Exchange Offer should contact such registered
holder to tender on such
5
<PAGE> 11
beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the
Letter of Transmittal and delivering its
Outstanding Notes, either make appropriate
arrangements to register ownership of the
Outstanding Notes in such owner's name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time and may not be able to be
completed prior to the Expiration Date.
GUARANTEED DELIVERY
PROCEDURES............... Holders of Notes who wish to tender their
Outstanding Notes and whose Outstanding Notes are
not immediately available or who cannot deliver
their Outstanding Notes, the Letter of Transmittal
or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date, must tender their Outstanding
Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
REGISTRATION
REQUIREMENTS............. The Company has agreed to use its best efforts to
consummate the Exchange Offer to offer holders of
the Outstanding Notes an opportunity to exchange
their Outstanding Notes for the Exchange Notes
which will be issued without legends restricting
the transfer thereof. If the Company is not
permitted to effect the Exchange Offer under
certain previously enunciated positions of the
staff of the Commission, or in certain other
circumstances, the Company has agreed to file a
shelf registration statement (the "Shelf
Registration Statement") covering resales of the
Outstanding Notes and to use its best efforts to
cause the Shelf Registration Statement to be
declared effective under the Securities Act and,
subject to certain exceptions, keep the Shelf
Registration Statement effective until 365 days
after the effective date thereof.
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS........... For a discussion of certain federal income tax
considerations relating to the exchange of Notes,
see "United States Federal Income Tax Consequences
of the Exchange of Notes."
USE OF PROCEEDS............ There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
EXCHANGE AGENT............. Marine Midland Bank is the Exchange Agent. The
address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer -- Exchange
Agent."
THE EXCHANGE NOTES
MATURITY................... October 1, 2004.
INTEREST................... The Exchange Notes will bear interest at the rate
of 13% per annum, payable semi-annually in arrears
on April 1 and October 1, commencing April 1, 1998.
RANKING.................... The Exchange Notes will be senior secured
obligations of the Company, will rank pari passu in
right of payment with all existing and future
senior Indebtedness of the Company, except with
respect to the Telecommunications Equipment
securing the Notes, and will rank senior in right
of payment to any future subordinated Indebtedness
of the Com-
6
<PAGE> 12
pany. Holders of secured Indebtedness of the
Company will, however, have claims prior to the
claims of the holders of the Notes with respect to
the assets securing such other Indebtedness. As of
September 30, 1997, the total amount of debt
outstanding of the Company was approximately $156.7
million. The Notes have been recorded at $156.0
million to recognize that a portion of the proceeds
from the issuance of the Notes has been allocated
to the value of the warrants issued to the
purchasers of the Notes.
SECURITY................... At the closing of the sale of the Notes, the
Company used a portion of the net proceeds thereof
(approximately $56.8 million) to purchase Pledged
Securities representing funds sufficient to provide
for payment in full of interest on the Notes
through October 1, 2000 and as security for
repayment of principal of and interest on the
Notes. Proceeds from the Pledged Securities may be
used by the Company to make interest payments on
the Notes through October 1, 2000. The actual
amount of the net proceeds used to purchase Pledged
Securities may vary depending upon the interest
rates on Government Securities prevailing at the
time of the purchase of the Pledged Securities. The
Pledged Securities will be held by the Trustee (as
defined) under the Pledge Agreement (as defined)
pending disbursement. In addition, the Exchange
Notes will be secured by a security interest in
certain Telecommunications Equipment currently
owned by the Company and by a first priority
security interest in certain Telecommunications
Equipment acquired by the Company after the Issue
Date and prior to such time as the aggregate dollar
value of the Company's purchases of
Telecommunications Equipment subsequent to the
Issue Date securing the Notes equals $100.0
million. See "Description of the Exchange
Notes--Security."
OPTIONAL REDEMPTION........ The Notes may be redeemed at the option of the
Company, in whole or in part, on or after October
1, 2001, at a premium declining to par in 2003,
plus accrued and unpaid interest and Liquidated
Damages, if any, through the redemption date.
In the event of a sale by the Company prior to
October 1, 2000 of its capital stock (other than
Disqualified Stock (as defined)) in one or more
Equity Offerings (as defined), up to a maximum of
35% of the aggregate principal amount of the Notes
originally issued will, at the option of the
Company, be redeemable from the net cash proceeds
thereof (but only to the extent such proceeds
consist of cash or readily marketable cash
equivalents) at a redemption price equal to 113% of
the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
thereon to the redemption date, provided at least
65% of the aggregate principal amount of Notes
originally issued remain outstanding immediately
after the occurrence of such redemption.
CHANGE OF CONTROL.......... In the event of a Change of Control, the holders of
the Notes will have the right to require the
Company to purchase the Notes at a price equal to
101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase. A Change
of Control may occur upon the sale of all or
substantially all of the assets of the Company, the
adoption of a plan of liquidation or dissolution of
the Company or certain significant changes in the
ownership or the Board of Directors of the Company.
See "Description of the Exchange Notes -- Certain
Definitions." This provision will not protect the
holders of the Notes in the event the Company
becomes highly
7
<PAGE> 13
leveraged or engages in a transaction resulting in
the assumption of a substantial amount of
indebtedness. The Company does not currently have
outstanding any other indebtedness or any preferred
stock that would be subject to acceleration or
redemption upon a Change of Control.
COVENANTS.................. The indenture pursuant to which the Exchange Notes
will be issued (the "Indenture") contains certain
covenants that, among other things, limit the
ability of the Company and its Restricted
Subsidiaries to make certain restricted payments,
incur additional indebtedness and issue preferred
stock, pay dividends or make other distributions,
repurchase equity interests or subordinated
indebtedness, acquire an aggregate of more than 20
switches until Consolidated EBITDA (as defined) is
positive for each of two consecutive quarters (with
certain exceptions), engage in sale and leaseback
transactions, create certain liens, enter into
certain transactions with affiliates, sell assets
of the Company or its Restricted Subsidiaries,
conduct certain lines of business, issue or sell
equity interests of the Company's Restricted
Subsidiaries or enter into certain mergers and
consolidations. In addition, under certain
circumstances, the Company will be required to
offer to purchase the Notes at a price equal to
100% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any,
to the date of purchase, with the proceeds of
certain asset sales. See "Description of the
Exchange Notes--Certain Covenants."
EXCHANGE OFFER;
REGISTRATION RIGHTS;
LIQUIDATED
DAMAGES.................. Pursuant to a Registration Rights Agreement (the
"Registration Rights Agreement") between the
Company and the Initial Purchasers, the Company has
agreed to file a registration statement (the
"Exchange Offer Registration Statement") with
respect to an offer to exchange (the "Exchange
Offer") the Notes for Exchange Notes (as defined).
If (1) the Exchange Offer is not permitted by
applicable law or (2) any holder of Transfer
Restricted Securities (as defined) notifies the
Company that (A) it is prohibited by law or
Commission policy from participating in the
Exchange Offer, (B) it may not resell the Exchange
Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the
prospectus contained in the Exchange Offer
Registration Statement is not appropriate or
available for such resales or (C) it is a
broker-dealer and holds Notes acquired directly
from the Company or an affiliate of the Company,
the Company will be required to provide a shelf
registration statement (the "Shelf Registration
Statement") to cover resales of such Transfer
Restricted Securities by the holders thereof. The
Registration Statement of which this Prospectus is
a part has been filed to satisfy the Company's
obligation to file the Exchange Offer Registration
Statement. If the Company fails to satisfy these
registration obligations, it will be required to
pay liquidated damages ("Liquidated Damages") to
the affected holders of Notes under certain
circumstances. See "Description of the Exchange
Notes--Registration Rights; Liquidated Damages."
8
<PAGE> 14
For additional information concerning the Notes and the definitions of
certain capitalized terms used above, see "Description of the Exchange Notes"
and "United States Federal Income Tax Consequences of the Exchange of Notes."
RISK FACTORS
See "Risk Factors" on page 12 for a discussion of certain factors that
should be considered by holders of Outstanding Notes prior to tendering
outstanding Notes in the Exchange Offer.
9
<PAGE> 15
SUMMARY FINANCIAL DATA
The following summary financial data of the Company as of and for the year
ended December 31, 1996, under the captions "Statement of Operations Data,"
"Other Financial Data" and "Balance Sheet Data" are derived from the financial
statements of the Company, which financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The financial
statements as of and for the year ended December 31, 1996 are included elsewhere
in this Prospectus. The following summary financial data of the Company as of
and for the nine months ended September 30, 1997 and 1996 under the captions
"Statement of Operations Data," "Other Financial Data," and "Balance Sheet Data"
are derived from the unaudited financial statements of the Company included
elsewhere in this Prospectus. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended September 30, 1997 and 1996 are not necessarily indicative of the results
that may be expected for the entire year. The information presented below under
the caption "Operating Data" is unaudited. The data should be read in
conjunction with the financial statements, related notes and other financial
information included elsewhere in this Prospectus, as well as "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED -------------------
DECEMBER 31, 1996 1996 1997
----------------- ------- --------
(IN THOUSANDS EXCEPT OPERATING DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Operating revenues..................................... $ 1 $ -- $ 1,924
Cost of operating revenues (excluding depreciation
shown below)......................................... 305 44 2,512
Selling, general and administrative expenses........... 841 359 3,954
Depreciation and amortization expense.................. 54 -- 818
Write-off of purchased software........................ 355 -- --
------- ------- --------
Loss from operations................................... (1,554) (403) (5,360)
Interest income........................................ 63 31 338
Interest expense....................................... -- -- (117)
------- ------- --------
Net loss............................................... $(1,491) $ (372) $ (5,139)
======= ======= ========
Net loss per share of common stock(2).................. $ (1.27) $ (0.40) $ (.37)
======= ======= ========
OTHER FINANCIAL DATA:
EBITDA(3).............................................. $(1,145) $ (403) $ (4,542)
Summary Cash Flow Information:
Net cash used in operating activities................ (942) (2,772) (4,339)
Net cash used in investing activities................ (2,287) (308) (68,180)
Net cash provided by financing activities............ 11,126 3,080 160,012
Capital expenditures................................... 3,659 308 15,907
Ratio of earnings to fixed charges(4).................. -- -- --
Deficiency of earnings to fixed charges(4)............. (1,491) (372) (5,139)
OPERATING DATA (END OF PERIOD):
Total access lines..................................... 50 -- 12,482
Business............................................. -- -- 7,564
Residential.......................................... 50 -- 4,918
Central office collocation sites....................... 9 -- 16
</TABLE>
10
<PAGE> 16
<TABLE>
<CAPTION>
AS OF AS OF AS OF SEPTEMBER 30, 1997
DECEMBER 31, DECEMBER 31, -------------------------
1995 1996 ACTUAL AS ADJUSTED(5)
------------ ------------ -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents (excluding restricted
investments)................................. $ -- $ 7,897 $ 95,390 $112,042
Restricted investments(6)...................... -- -- 56,767 56,767
Property and equipment, net.................... -- 3,250 18,339 18,339
Total assets................................... 1 12,339 178,026 194,678
Long-term debt, including current maturities... -- -- 156,589 156,589
Redeemable Series A Convertible Preferred
Stock........................................ -- -- -- 16,652
Stockholders' equity........................... 1 10,792 14,808 14,808
</TABLE>
- ---------------
(1) Statement of operations data for the year ended December 31, 1995 has been
omitted as no revenues or expenses were recognized and no cash transactions
occurred between October 16, 1995 (inception) to December 31, 1995.
(2) Net loss per common share outstanding is calculated based on weighted
average shares outstanding of 1,178,932 for the year ended December 31, 1996
and 13,917,204 and 936,264 for the nine months ended September 30, 1997 and
1996, respectively.
(3) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. For the year ended December 31, 1996, EBITDA excludes a charge
of $355,000 related to the one-time write-off of purchased software. While
EBITDA is not an alternative indicator of operating performance to operating
income or an alternative to cash flows from operating activities as a
measure of liquidity as defined by generally accepted accounting principles
and EBITDA may not be comparable to other similarly titled measures of other
companies, management believes that EBITDA is a measure commonly used in the
telecommunications industry to analyze and compare telecommunications
companies on the basis of operating performance, leverage and liquidity. See
the Statements of Cash Flows included in the Company's financial statements
and the notes thereto appearing elsewhere in this Prospectus. EBITDA as
defined in this footnote is not equivalent to Consolidated EBITDA as defined
in the "Description of the Exchange Notes."
(4) The ratio of earnings to fixed charges is calculated by dividing earnings
(loss) before income taxes, plus fixed charges excluding capitalized
interest by fixed charges. For the year ended December 31, 1996 and for the
nine months ended September 30, 1996, the Company incurred net losses and
had no fixed charges. For the nine months ended September 30, 1997, the
Company had net losses of approximately $5.1 million and had fixed charges
of approximately $.1 million. On a pro forma basis, if the Notes had been
issued as of the beginning of the respective periods, the Company would have
had a deficit of earnings to fixed charges of $22.3 million and $20.7
million for the year ended December 31, 1996 and the nine month period ended
September 30, 1997, respectively.
(5) Gives effect to the issuance in November 1997 of 5,148,570 shares of Series
A Convertible Preferred Stock (the "Preferred Stock") resulting in net
proceeds to the Company of $16,652,000 (the "Preferred Stock Offering").
Commencing at any time on or after October 2, 2004, at the option and
written election of the holders of a majority of the outstanding shares of
the Preferred Stock, the Company shall, subject to applicable law, redeem
all of the outstanding shares of Preferred Stock at the price equal to the
greater of: (i) $3.50, plus an amount equal to any unpaid dividends thereon,
or (ii) the market value of the Preferred Stock, on an as converted basis,
determined by an independent appraiser. Dividends on the Preferred Stock
accumulate whether or not the Company has earnings or profits, whether or
not there are funds available for the payment of dividends and whether or
not dividends are declared.
(6) A portion of the proceeds of the sale of the Notes has been used to purchase
Government Securities representing funds sufficient to provide for payment
in full of the first six interest payments on the Notes and which will be
pledged as security for repayment of the principal of and interest on the
Notes. See "Description of the Exchange Notes--Security."
11
<PAGE> 17
RISK FACTORS
Prior to tendering Outstanding Notes in the Exchange Offer, holders of
Outstanding Notes should consider carefully the following factors, in addition
to other information set forth elsewhere in this Prospectus.
Substantial Indebtedness; Insufficiency of Earnings to Cover Fixed
Charges. Following the sale of the Notes and the Preferred Stock Offering, the
Company is highly leveraged. At September 30, 1997, the Company had
approximately $156.7 million in aggregate principal amount of indebtedness
outstanding. The Notes have been recorded at $156.0 million to recognize that a
portion of the proceeds from the issuance of the Notes has been allocated to the
value of the warrants issued to the purchasers of the Notes. The degree to which
the Company is leveraged could have important consequences to holders of the
Notes, including the following: (i) a substantial portion of the Company's cash
flow from operations will be dedicated to payment of the principal and interest
on its indebtedness, thereby reducing funds available for other purposes; (ii)
the Company's significant degree of leverage could increase its vulnerability to
changes in general economic conditions or increases in prevailing interest
rates; (iii) the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes could be impaired; and (iv) the Company may be more leveraged than
certain of its competitors, which may be a competitive disadvantage.
For the nine months ended September 30, 1997, the Company had net losses of
$5,139,000 and incurred fixed charges of $117,000. The Company anticipates
earnings will be insufficient to cover fixed charges through 1999. In order for
the Company to meet its debt service obligations, the Company will need to
substantially improve its operating results. There can be no assurance the
Company's operating results will be of sufficient magnitude to enable the
Company to meet its debt service obligations. In the absence of such operating
results, the Company could face substantial liquidity problems and might be
required to seek additional financing through the issuance of debt or equity
securities; however, there can be no assurance the Company would be successful
in raising such financing, or the terms or timing thereof. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Limited Operations; Net Losses. The Company began providing local exchange
services in December 1996. Substantially all of the Company's revenues to date
have been derived from local exchange services. The Company is expecting to add
long distance services and substantially increase the size of its operations in
the near future. Prospective investors, therefore, have limited historical
financial information about the Company upon which to base an evaluation of the
Company's performance. Given the Company's limited operating history, there is
no assurance that it will be able to compete successfully in the
telecommunications business.
The development and expansion of the Company's business require significant
capital, operational and administrative expenditures, a substantial portion of
which are incurred before the realization of revenues. These capital
expenditures will result in negative cash flow until an adequate customer base
is established. Although its revenues have increased since its inception, the
Company has incurred significant increases in expenses associated with the
installation of switches and expansion of its services and customer base. The
Company anticipates recording a significant net loss through 1999. There can be
no assurance the Company will achieve or sustain profitability or positive
EBITDA thereafter.
Although many of the Company's managerial and supervisory personnel have
had substantial telecommunications industry experience, the Company has a very
limited operating history. Accordingly, there is no firm basis, other than
Management's judgment, on which to estimate the number of customers or the
amount of revenues the Company's planned operations will generate.
Risks of Implementation, Sites, Equipment and Suitable Interconnect
Arrangements. The Company intends to develop and expand the Company's business
and enter new markets as described elsewhere in this Prospectus. There can be no
assurance the Company will be able to develop and expand its business or enter
new markets as currently planned. The development and expansion of the Company's
business and its entry into new markets will be dependent, among other things,
on its ability to lease or purchase suitable sites, obtain equipment on a timely
basis, negotiate suitable interconnection arrangements with ILECs on
satisfactory terms and conditions and finance such expansion. These factors and
others could adversely affect
12
<PAGE> 18
the expansion of the Company's customer base and commencement of operations in
new markets. If the Company is not able to expand or enter new markets in
accordance with its plans, the growth of its business would be materially
adversely affected.
Significant Capital Requirements and Need for Additional
Financing. Expansion and development of the Company's business and services and
the development of new markets require significant capital expenditures. The
Company expects to fund its capital requirements through existing resources,
debt or equity financing and internally generated funds, including capital
raised through the sale of the Notes and the Preferred Stock Offering. The
Company expects that to continue to expand its business will require raising
substantial additional equity and/or debt capital. There can be no assurance,
however, the Company will be successful in raising sufficient debt or equity
capital on terms it will consider acceptable. In addition, the Company's future
capital requirements will depend upon a number of factors, including marketing
expenses, staffing levels and customer growth, as well as other factors that are
not within the Company's control, such as competitive conditions, government
regulation and capital costs. Failure to generate sufficient funds may require
the Company to delay or abandon some of its future expansion or expenditures,
which would have a material adverse effect on its growth and its ability to
compete in the telecommunications industry.
Expansion Risk. The Company expects to expand rapidly. This growth will
increase the operating complexity of the Company as well as the level of
responsibility for both existing and new management personnel. The Company's
ability to manage its expansion effectively will require it to continue to
implement and improve its operational and financial systems and to expand, train
and manage its employee base. The Company's inability to effectively manage its
expansion could have a material adverse effect on its business.
Effect of Substantial Additional Indebtedness on the Company's Ability to
Repay the Notes. The Company may incur substantial additional indebtedness in
the future to finance the entry into new markets, the purchase of equipment and
increases in capacity. Additional indebtedness of the Company may rank pari
passu with the Notes in certain circumstances. See "Description of the Exchange
Notes." The debt service requirements of any additional indebtedness could make
it more difficult for the Company to make principal and interest payments on the
Notes.
Reliance on Others. Because the Company has elected to lease transport
capacity, it is dependent upon the cooperation of ILECs and/or CAP/CLECs whose
fiber optic networks and local loops are being leased by the Company. The risks
inherent in this approach include, but are not limited to, negotiating and
renewing favorable interconnection agreements; timeliness of the ILEC or
CAP/CLECs in processing the Company's orders for customers who seek to utilize
the Company's service; and maintenance of the unbundled network elements (UNEs).
The ILECs have had little experience in providing UNEs and there can be no
assurance the ILECs will provide and maintain the UNEs in a prompt and efficient
manner. The Company's interconnection agreements currently provide the Company's
connection and maintenance orders will receive attention at parity with the
ILECs or other CAP/CLECs customers and the ILEC will provide adequate trunking
capacity to keep blockage within industry standards. Accordingly, the Company
and its customers are dependent on the ILEC and/or CAP/CLEC to assure
uninterrupted service. In Las Vegas, the Company has experienced excessive
blockage, from time to time, in the delivery of calls from the ILEC to the
Company due to inadequate trunk provisioning by the ILEC. Blocked calls result
in customer dissatisfaction and risk the loss of Company business. There can be
no assurance ILECs will comply with their network provisioning requirements.
Furthermore, there can be no assurance the rates to be charged to the Company
under the interconnection agreements will allow the Company to offer low enough
usage rates to attract a sufficient number of customers and to also operate the
business profitably.
Dependence on Key Personnel. The Company's business is managed by a small
number of key management and operating personnel, the loss of certain of whom
could have a material adverse impact on the Company's business. The Company
believes that its future success will depend in large part on its continued
ability to attract and retain highly skilled and qualified personnel. None of
the Company's key executives is a party to a long-term employment agreement with
the Company. The Company does not maintain key man insurance on its officers.
13
<PAGE> 19
Control of the Company; Conflicts of Interest. As of November 30, 1997,
Maurice J. Gallagher, Jr., Nield J. Montgomery, Timothy P. Flynn and Robert L.
and Carol A. Priddy owned, directly or indirectly, in the aggregate
approximately 47% of the outstanding Common Stock and voting power of the
Company (assuming the conversion of the outstanding Preferred Stock for Common
Stock). Accordingly, such stockholders collectively are able to control the
management policy of the Company and all fundamental corporate actions,
including mergers, substantial acquisitions and dispositions, and election of
the Board of Directors of the Company.
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the Company's stockholders and
the holders of the Notes. For example, if the Company encounters financial
difficulties or is unable to pay its debts as they mature, the interests of the
Company's stockholders might conflict with those of the holders of the Notes. In
addition, the Company's stockholders may have an interest in pursuing
acquisitions, divestitures, financings or other transactions that, in their
judgment, could enhance their equity investment, even though such transactions
might involve risk to the holders of the Notes. Because certain significant
stockholders of the Company are able to control the management policy of the
Company and all fundamental corporate actions, any such conflict of interest may
be resolved in favor of the Company's stockholders to the detriment of the
holders of the Notes.
Automation. The Company employs a proprietary management information
system which is expected to be an important factor in its success. If the
proprietary management information system fails or is unable to perform as
represented, it would have a substantial adverse effect on the Company.
Furthermore, problems may be encountered with higher volumes or with additional
automation features, in which case, the Company might experience system
breakdowns, delays and additional, unbudgeted expense to remedy the defect or to
replace the defective system with an alternative system.
Nortel Contract. The Company is obligated to purchase 20 Nortel DMS 500
switches (two of which have already been delivered) by the end of 1999. There
can be no assurance the Company will have adequate funds to complete the
purchase of all 20 switches or be able to utilize all of these switches in its
business.
Dependence upon Network Infrastructure; Risk of System Failure; Security
Risks. The Company's success in marketing its services to business and
residential users requires the Company to provide reliable service. The
Company's networks are subject to physical damage, power loss, capacity
limitations, software defects, breaches of security (by computer virus,
break-ins or otherwise) and other factors which may cause interruptions in
service or reduced capacity for the Company's customers. Interruptions in
service, capacity limitations or security breaches could have a material adverse
effect on customer acceptance and, therefore, on the Company's business,
financial condition and results of operations. Certain aspects of the Company's
network architecture involve new applications of equipment which may result in
technical issues that may not be easily resolved.
Lack of New Service Acceptance by Customers. The Company is entering new
markets which have historically been serviced by existing ILECs. The success of
the Company will be dependent upon, among other things, the willingness of
customers to accept the Company as an alternative provider of local and long
distance service. No assurance can be given that such acceptance will occur and
the lack of such acceptance could have a material adverse effect on the Company.
Rapid Technological Changes. The telecommunications industry is subject to
rapid and significant changes in technology. While the Company believes that for
the foreseeable future these changes will not materially affect or hinder the
Company's ability to acquire necessary technologies, the effect of technological
changes on the business of the Company cannot be predicted. Thus, there can be
no assurance technological developments will not have a material adverse effect
on the Company.
Competition. In its existing market and the markets into which it intends
to expand, the Company faces significant competition for its local telephone
services, including local exchange services, from ILECs, which currently
dominate their local telecommunications markets, and others. ILECs have
long-standing relationships with their customers which relationships may create
competitive barriers. Furthermore, ILECs may have the potential to subsidize
competitive service from monopoly service revenues. In addition, a continuing
14
<PAGE> 20
trend toward business combinations and alliances in the telecommunications
industry may create significant new competitors to the Company. The Company also
faces and will face competition in the market in which it operates and in
markets into which it intends to expand from one or more CAP/CLECs operating
fiber optic networks. Many of the Company's existing and potential competitors
have financial, personnel and other resources significantly greater than those
of the Company.
The Company believes various legislative initiatives, including the Act,
have removed remaining legislative barriers to local exchange competition.
Nevertheless, in light of the passage of the Act, regulators are also likely to
provide ILECs with increased pricing flexibility as competition increases. If
ILECs are permitted to lower their rates substantially or engage in excessive
volume or term discount pricing practices, the net income or cash flow of the
Company could be materially adversely affected.
When the Company enters the long distance market, it will compete with
AT&T, MCI and others in the long distance services market. Additionally, recent
federal legislation permits the RBOCs to provide long distance services once
certain criteria are met. Once the RBOCs begin to provide such services, they
will be in a position to offer single source service similar to the service the
Company intends to offer. In addition, AT&T and MCI have entered, and other
interexchange carriers have announced their intent to enter, the local exchange
services market, which is facilitated by the Act's resale and unbundled network
element provisions. The Company cannot predict the number of competitors that
will emerge as a result of existing or new federal and state regulatory or
legislative actions. Competition from the RBOCs with respect to long distance
services or from AT&T, MCI or others with respect to local exchange services
could have a material adverse effect on the Company's business.
Competitive Reaction. Although the Company plans to offer rates for its
services which are below those currently charged by ILECs, ILECs or new
competitors with greater capital and resources than the Company may meet or
undercut the Company's price structure and prevent the Company from attaining
the share of the local telecommunications market necessary to achieve profitable
operations. The Company's ability to meet price competition may depend on its
ability to operate at costs equal to or lower than its competitors or potential
competitors. There is a risk that competitors, perceiving the Company to lack
capital resources, may undercut the Company's rates or increase their services
in an effort to force the Company out of business. In addition, the success of
the Company will ultimately depend on Management's ability to react
expeditiously and effectively to exigencies that have not been taken into
account in the Company's plan.
Risks Regarding the Collateral. Although the Notes will be secured by
certain Telecommunications Equipment, the value of the collateral will be
substantially less than the principal amount of the Notes. As of September 30,
1997, the Company has accepted delivery of approximately $7.1 million of
Telecommunications Equipment (other than Telecommunications Equipment located in
the Las Vegas area) and has purchase commitments for an additional $40.5 million
of Telecommunications Equipment (the majority of which will be located outside
of the Las Vegas area). In addition, the purchase price of the
Telecommunications Equipment may not represent the value that a secured party
would be able to receive upon enforcement of its security interest in such
Telecommunications Equipment. Furthermore, it is likely that the value of such
Telecommunications Equipment will decrease over time as such Telecommunications
Equipment is deployed in the business and equipment manufacturers develop
improved products or similar products at reduced prices. Liens on certain of the
Telecommunications Equipment will also be required to be released if such
Telecommunications Equipment is transferred to ILECs for nominal consideration
in connection with the establishment of virtual collocation arrangements with
such ILECs. The Company is not required to reduce the outstanding amount of the
Notes based on the value of the collateral. Therefore, it is likely that, if the
Notes were in default and the Trustee attempted to foreclose on the collateral,
the value of the collateral would be substantially less than the amount of the
indebtedness under the Notes.
The security interest in Telecommunications Equipment to be acquired by the
Company will not arise until the Company actually acquires such
Telecommunications Equipment, which will be substantially after the issuance of
the Notes. As a result, the security interest arising in connection with the
later acquired Telecommunications Equipment may be subject to challenge, in a
bankruptcy or reorganization of the Company, as a preferential transfer insofar
as such security interest secures an antecedent debt. In such event,
15
<PAGE> 21
if the Company became subject to a bankruptcy or similar proceeding during the
preference period (generally 90 days) following the acquisition of any
Telecommunications Equipment, the security interest in such Telecommunications
Equipment could be set aside in such proceeding for the benefit of other
creditors (if any) of the Company. See "Description of the Exchange Notes."
Failure to Maintain Perfected Security Interest. Under the Indenture, the
Company is required to secure the Notes by granting liens on certain
Telecommunications Equipment. The Company will file UCC-1 financing statements
naming the Company as debtor and the Trustee (as defined) as the secured party
acting as collateral agent for holders of Notes with the Secretary of State or
other appropriate office in each state in which the Company currently has (or
proposes to locate) Telecommunications Equipment. The Company has agreed to
maintain the effectiveness of such filings under the relevant provisions of the
Uniform Commercial Code. However, the liens will be perfected only to the extent
that such filings are sufficient to perfect liens on the Telecommunications
Equipment. Generally, filings will not be made in local filing offices, in real
estate records, with any federal office or agency or in respect of any
certificate of title. Failure to make additional filings or to maintain the
contemplated filings may allow other creditors of the Company, if any, to obtain
rights to the Telecommunications Equipment equal or superior to those of the
holders of the Notes. Owners or mortgagees of property on which items of
Telecommunications Equipment are installed may also obtain such rights. This
could result in all or some of the value of the Telecommunications Equipment
acquired by the Company not being available to the holders of the Notes to
satisfy the outstanding indebtedness of the Notes upon the occurrence of an
Event of Default (as defined). Such failure could arise, among other reasons,
because of the failure to file continuation statements prior to the expiration
of each five-year period after the initial filing or because of the failure to
make the additional filings discussed above. Accordingly, investors should not
rely on the perfection of any specific lien in making an investment decision to
tender Outstanding Notes in the Exchange Offer.
Bankruptcy Risks Related to Escrow Account. The right of the Trustee under
the Indenture and the Collateral Pledge Agreement (as defined) to foreclose upon
and sell Collateral (as defined) upon the occurrence of an Event of Default is
likely to be significantly impaired by applicable bankruptcy law if a bankruptcy
or reorganization case were to be commenced by or against the Company. Under
applicable bankruptcy law, secured creditors such as the holders of the Notes
are prohibited from foreclosing upon or disposing of a debtor's property without
prior bankruptcy court approval. See "Description of the Exchange Notes."
Effective Subordination of the Notes. The Indenture permits certain
Indebtedness of the Company to be secured. Holders of secured indebtedness of
the Company will have claims that are prior to the claims of the holders of the
Notes to the extent of the assets securing such other indebtedness. While the
Company currently has no subsidiaries, the Notes would be effectively
subordinated to the debt of any subsidiaries created in the future.
Regulation. The Company is subject to varying degrees of federal, state
and local regulation. The Company is not currently subject to price cap or rate
of return regulation, nor is it currently required to obtain FCC authorization
for the installation, acquisition or operation of its network facilities.
Further, the FCC has issued an order holding that non-dominant carriers, such as
the Company, are not required to file interstate tariffs for domestic long
distance service on an ongoing basis. That order was stayed by a federal appeals
court and the FCC recently has issued a further decision in the matter
addressing the court's concerns and providing for detariffing, subject to
further court review. The Company is or will be generally subject to
certification and tariff or price list filing requirements for intrastate
services by state regulators. Although passage of the Act should result in
increased opportunities for companies competing with the ILECs, no assurance can
be given changes in current or future regulations adopted by the FCC or state
regulators or other legislative or judicial initiatives relating to the
telecommunications industry would not have a material adverse effect on the
Company. Furthermore, while the Act reduces regulations to which non-dominant
local exchange carriers are subject, it also reduces the level of regulation
that applies to the ILECs and increases their ability to respond quickly to
competition from the Company and others. In addition, although the Act provides
incentives to ILECs to negotiate interconnection agreements with local
competitors, there can be no assurance these
16
<PAGE> 22
ILECs will negotiate quickly with competitors such as the Company for the
required interconnection of the competitor's networks with those of the ILECs.
On December 31, 1997, a federal judge in Dallas ruled key sections of the
Act unconstitutional on the grounds that RBOCs were unfairly denied access to
the long distance segment of the industry. This decision was immediately
appealed by numerous IXCs. There can be no assurance that these provisions of
the Act, which are favorable to the Company, will ultimately be determined to be
constitutional.
It is anticipated the FCC will issue an order in 1998 that may permit
significant new pricing flexibility to ILECs. To the extent such increased
pricing flexibility is afforded to the ILECs, the ability of the Company to
compete with ILECs for certain services may be adversely affected. On May 8,
1997, the FCC issued an order establishing new Universal Service support funds.
The new Universal Service support fund rules will be administered jointly by the
FCC and state regulatory authorities, many of which rules are still in the
process of being formulated. The net revenue effect on the Company of these
rules is incalculable at this time.
In certain locations, the Company may be required to obtain local
franchises, licenses or other operating rights and street opening and
construction permits to install its switches. In some of the areas where the
Company provides facilities based services, the Company may be required to pay
license or franchise fees based on a percentage of gross revenues or on a per
linear foot basis. There is no assurance certain cities that do not impose fees
will not seek to impose fees, nor is there any assurance, following the
expiration of existing franchises, fees will remain at their current levels.
Forward Looking Statements. The statements contained in this Prospectus
that are not historical facts are "forward-looking statements", which can be
identified by the use of forward-looking terminology such as "estimates,"
"projects," "anticipates," "expects," "intends," "believes," or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. Management wishes to caution
the reader these forward-looking statements (cautionary statements), such as the
Company's plans to expand its existing network or to commence service in new
areas, the market opportunity presented by the Company's target markets, the
Company's anticipation of installation of switches or the provision of local
exchange and long distance services, and statements regarding development of the
Company's businesses, the estimate of market sizes and addressable markets for
the Company's services and products, the Company's anticipated capital
expenditures, the effect of regulatory reform and other statements contained in
this Prospectus regarding matters that are not historical facts, are only
estimates or predictions. No assurance can be given future results will be
achieved; actual events or results may differ materially as a result of risks
facing the Company or actual results differing from the assumptions underlying
such statements. Such risks and assumptions include, but are not limited to, the
Company's ability to successfully market its services to current and new
customers, generate customer demand for its services in the particular markets
where it plans to market services, access markets, install switches and obtain
suitable locations for its switches, negotiate suitable interconnect agreements
with the ILECs, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions, as well as regulatory, legislative and judicial
developments that could cause actual results to vary materially from the future
results indicated, expressed or implied in such forward-looking statements. All
written and oral forward-looking statements made in connection with this
Prospectus which are attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by these cautionary statements. The
safe harbor for forward-looking statements provided in the Private Securities
Litigation Reform Act of 1995 does not apply to initial public offerings.
Absence of a Public Market for the Notes. The Exchange Notes are new
issues of securities for which there is currently no public market. The Company
does not intend to apply for listing of the Exchange Notes on any securities
exchange or on the Nasdaq National Market. Although the Initial Purchasers have
informed the Company they currently intend to make a market in the Notes, they
are not obligated to do so and any such market-making may be discontinued at any
time without notice. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes. If a market for the Notes
were to develop, the Notes may trade at prices that may be higher or lower than
their initial offering price depending upon many factors, including prevailing
interest rates, the Company's operating results and the markets for similar
securities. Historically, the market for securities such as those offered hereby
has been subject to disruptions that have caused substantial volatility in the
prices of similar securities. There can be no assurance, if a market
17
<PAGE> 23
for the Notes were to develop, such a market would not be subject to similar
disruptions. Any such disruptions may have an adverse effect on the holders of
the Notes.
Consequences of Failure to Exchange; Possible Adverse Effect on Trading
Market for Outstanding Notes. Holders of Outstanding Notes who do not exchange
their Outstanding Notes for Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Notes as set
forth in the legend thereon as a consequence of the issuance of the Outstanding
Notes pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Outstanding Notes may not be offered or sold unless
registered under the Securities Act and applicable state laws, or pursuant to an
exemption therefrom. Subject to the obligation by the Company to file a Shelf
Registration Statement covering resales of Outstanding Notes in certain
circumstances, the Company does not intend to register the Outstanding Notes
under the Securities Act and, after consummation of the Exchange Offer, will not
be obligated to do so. In addition, any holders of Outstanding Notes who tender
in the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Additionally, as a result of the Exchange Offer, it is expected that a
substantial decrease in the aggregate principal amount of Outstanding Notes
outstanding will occur. As a result, it is unlikely that a liquid trading market
will exist for the Outstanding Notes at any time. This lack of liquidity will
make transactions more difficult and may reduce the trading price of the
Outstanding Notes. See "The Exchange Offer" and "Description of the Exchange
Notes -- Registration Rights; Liquidated Damages."
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive, in exchange, Outstanding Notes in like principal
amount. The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Outstanding Notes, except as otherwise
described herein under "The Exchange Offer -- Terms of the Exchange Offer." The
Outstanding Notes surrendered in exchange for the Exchange Notes will be retired
and canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes
will not result in any increase in the outstanding debt of the Company.
The net proceeds from the issuance of the Outstanding Notes and the
Preferred Stock Offering, after underwriting discounts, commissions and
expenses, were approximately $171.1 million. At the Closing of the issuance of
the Notes, the Company used approximately $56.8 million of the net proceeds to
purchase U.S. Government Securities, in an amount sufficient to pay the first
six interest payments on the Notes, which U.S. Government Securities are pledged
as security for the payment of the principal of and interest on the Notes.
Approximately $100.0 million of the net proceeds of the issuance of the Notes
are expected to be used to fund the cost of acquiring and installing
telecommunications switches and related equipment. The balance of the net
proceeds from the issuance of the Notes and the proceeds of the Preferred Stock
Offering will be used for working capital and general corporate purposes,
including to fund operating losses, the cost of purchasing and improving
facilities to house the Company's telecommunications and related equipment, and
the cost of tenant improvements in facilities which the Company leases to house
its telecommunications and related equipment. See "Description of the Exchange
Notes -- Certain Covenants -- Use of Proceeds."
Prior to the application of the net proceeds of the issuance of the Notes
and the Preferred Stock Offering, as described above, such funds will be
invested in short-term investment grade securities.
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<PAGE> 24
CAPITALIZATION
The following table shows the Total capitalization, Cash and cash
equivalents and Restricted investments of the Company as of September 30, 1997
and as adjusted to give effect to the receipt of the net proceeds of the
Preferred Stock Offering. This table should be read in conjunction with the
financial statements and related notes appearing elsewhere herein.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents (excluding restricted
investments).............................................. $ 95,390 $112,042
Restricted investments(2)................................... 56,767 56,767
-------- --------
Total cash and restricted investments..................... $152,157 $168,809
======== ========
13% Senior Secured Notes due 2004(3)........................ $155,974 $155,974
Other long-term debt, including current maturities.......... 615 615
Redeemable Series A Convertible Preferred Stock(1).......... -- 16,652
-------- --------
Stockholders' equity
Common Stock -- par value................................. 15 15
Common Stock -- Additional paid in capital................ 22,111 22,111
Notes receivable from stockholders for issuance of Common
Stock.................................................. (688) (688)
Accumulated deficit....................................... (6,630) (6,630)
-------- --------
Total stockholders' equity............................. 14,808 14,808
-------- --------
Total capitalization.............................. $171,397 $188,049
======== ========
</TABLE>
- ---------------
(1) Gives effect to the issuance in November 1997 of 5,148,570 shares of Series
A Convertible Preferred Stock (the "Preferred Stock") resulting in net
proceeds to the Company of approximately $16,652,000 (the "Preferred Stock
Offering"). Commencing at any time on or after October 2, 2004, at the
option and written election of the holders of a majority of the outstanding
shares of the Preferred Stock, the Company shall, subject to applicable law,
redeem all of the outstanding shares of Preferred Stock at the price equal
to the greater of: (i) $3.50, plus an amount equal to any unpaid dividends
thereon, or (ii) the market value of the Preferred Stock, on an as converted
basis, determined by an independent appraiser. Dividends on the Preferred
Stock accumulate whether or not the Company has earnings or profits, whether
or not there are funds available for the payment of dividends and whether or
not dividends are declared.
(2) A portion of the proceeds of the sale of the Notes has been used to purchase
Government Securities representing funds sufficient to provide for payment
in full of the first six interest payments on the Notes and which will be
pledged as security for repayment of the principal of and interest on the
Notes. See "Description of the Exchange Notes--Security."
(3) A portion of the proceeds of the sale of the Notes (approximately
$4,026,000) has been allocated to Common Stock -- Additional paid in capital
to reflect the value of warrants issued to the purchasers of the Notes.
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<PAGE> 25
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on September 29, 1997 to the
Initial Purchasers, who sold the Outstanding Notes to certain institutional
investors in reliance on Rule 144A and Regulation D promulgated by the
Commission under the Securities Act and certain foreign investors in reliance on
Regulation S promulgated by the Commission under the Securities Act. In
connection with the sale of the Outstanding Notes, the Company and the Initial
Purchasers entered into the Registration Rights Agreement, pursuant to which the
Company agreed (i) to file a registration statement with respect to an offer to
exchange the Outstanding Notes for senior secured debt securities of the Company
with terms substantially identical to the Outstanding Notes (except that the
Exchange Notes will not contain terms with respect to transfer restrictions)
within 30 days after the date of original issuance of the Outstanding Notes and
(ii) to use best efforts to cause such registration statement to become
effective under the Securities Act within 120 days after such issue date. If
applicable law or the positions taken by the staff of the Commission that have
been enunciated in the no-action letters issued in Exxon Capital Holdings Corp.
(available April 13, 1989) and Morgan Stanley & Co. Inc. (available June 5,
1991), among others, do not permit the Company to cause the registration
statement containing this Prospectus to become effective or to effect the
Exchange Offer, or under certain other circumstances, the Company will use its
best efforts to cause to become effective the Shelf Registration Statement with
respect to the resale of the Outstanding Notes and to keep the Shelf
Registration Statement effective until 365 days after the effective date
thereof. The Company is obligated to pay certain liquidated damages under
certain circumstances if the Company is not in compliance with its obligations
under the Registration Rights Agreement. See "Description of the Exchange
Notes -- Registration Rights; Liquidated Damages." Unless the context requires
otherwise, the term "holder" with respect to the Exchange Offer means the
registered holder of the Outstanding Notes or any other person who has obtained
a properly completed bond power from the registered holder.
Each holder of the Outstanding Notes who wishes to exchange such
Outstanding Notes for Exchange Notes in the Exchange Offer will be required to
make certain representations, including representations that (i) the Outstanding
Notes tendered were, and any Exchange Notes to be received by it will be,
acquired in the ordinary course of its business, (ii) at the time of the
commencement of the Exchange Offer, it had no arrangement with any person to
participate in the distribution of the Exchange Notes, (iii) it is not engaged
in nor does it intend to engage in a distribution of the Exchange Notes, and
(iv) it is not an "affiliate," as defined in Rule 405 of the Securities Act, of
the Company or, if it is an affiliate, it will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable.
See "Description of the Exchange Notes -- Registration Rights; Liquidated
Damages." Holders who tender Outstanding Notes in the Exchange Offer with the
intention to participate in a distribution of the Exchange Notes may not rely
upon the Morgan Stanley or similar no-action letters.
RESALE OF EXCHANGE NOTES
Based on positions taken by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that, except as
described below, Exchange Notes issued pursuant to the Exchange Offer in
exchange for Outstanding Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than a holder which is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act or a
broker dealer who acquired Outstanding Notes from the Company to resell pursuant
to Rule 144 or any other available exemption under the Securities Act) without
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder does not intend to participate
and has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
Offer with the intention or for the purpose of participating in a distribution
of the Exchange Notes cannot rely on such positions taken by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Unless an exemption from registration is otherwise available, any
such resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K under the Securities Act.
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<PAGE> 26
This Prospectus may be used for an offer to resell, resale or other
retransfer of Exchange Notes only as specifically set forth herein. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Outstanding Notes, where such Outstanding Notes were acquired by such
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 such Exchange Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Outstanding Notes properly tendered and not withdrawn prior to 5:00 p.m.,
New York time, on the Expiration Date. The Company will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
Outstanding Notes surrendered pursuant to the Exchange Offer. Outstanding Notes
may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Outstanding Notes, except that the Exchange Notes will be
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof. The Exchange Notes will evidence the same debt as the
Outstanding Notes. The Exchange Notes will be issued under and entitled to the
benefits of the Indenture, which also authorized the issuance of the Outstanding
Notes, such that both series will be treated as a single class of debt
securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Outstanding Notes being tendered for exchange. Holders of Outstanding
Notes do not have any appraisal or dissenters' rights in connection with the
Exchange Offer.
As of the date of this Prospectus, $160,000,000 aggregate principal amount
of the Outstanding Notes are outstanding. This Prospectus, together with the
Letter of Transmittal, is being sent to all registered holders of Outstanding
Notes. There will be no fixed record date for determining registered holders of
Outstanding Notes entitled to participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder.
Outstanding Notes which are not tendered for exchange in the Exchange Offer will
remain outstanding and continue to accrue interest and will be entitled to the
rights and benefits such holders have under the Indenture and the Registration
Rights Agreement.
The Company shall be deemed to have accepted for exchange properly tendered
Notes when, as and if the Company shall have given oral or written notice
thereof to the Exchange Agent and complied with the applicable provisions of the
Registration Rights Agreement. The Exchange Agent will act as agent for the
tendering holders for the purposes of receiving the Exchange Notes from the
Company. The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Outstanding Notes not
theretofore accepted for exchange, upon the occurrence of any of the conditions
specified below under "-- Certain Conditions to the Exchange Offer."
Holders who tender Outstanding Notes in the 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
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than certain applicable taxes described below, in
connection with the Exchange Offer. See "The Exchange Offer -- Fees and
Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York time on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. The Exchange Offer will
not in any event be extended beyond , 1998.
21
<PAGE> 27
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders of Outstanding Notes an announcement thereof, each prior to 9:00 a.m.,
New York time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Notes, to extend the Exchange Offer or to terminate
the Exchange Offer if any of the conditions set forth below under "-- Certain
Conditions to the Exchange Offer" shall not have been satisfied, by giving oral
or written notice of such delay, extension or termination to the Exchange Agent
or (ii) to amend the terms of the 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 of
Outstanding Notes. If the Exchange Offer is amended in a manner determined by
the Company to constitute a material change, the Company will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered holders, and the Company will extend the Exchange Offer,
depending upon the significance of the amendment and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during such
period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate of 13% per annum, payable
semi-annually, on each April 1 and October 1, commencing April 1, 1998. Holders
of Exchange Notes will receive interest on April 1, 1998 from the later of the
date of initial issuance of the Outstanding Notes, or the most recent date as of
which interest has been paid on the Outstanding Notes. All obligations under the
Outstanding Notes accepted for exchange will cease to exist upon issuance of the
Exchange Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any Exchange Notes for, any
Outstanding Notes, and may terminate the Exchange Offer as provided herein
before the acceptance of any Outstanding Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the Company's reasonable judgment, might materially impair the
ability of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission, which, in the Company's reasonable judgment,
might materially impair the ability of the Company to proceed with the
Exchange Offer; or
(c) any governmental approval has not been obtained, which approval
the Company shall reasonably deem necessary for the consummation of the
Exchange Offer as contemplated hereby.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Outstanding Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified above. The Company will give oral or written notice of
any extension, amendment, non-acceptance or termination to the holders of the
Outstanding Notes as promptly as practicable, such notice in the case of any
extension to be issued no later than 9:00 a.m., New York time, on the next
business day after the previously scheduled Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable judgment. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right, and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Outstanding Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Outstanding Notes, if at such time any stop order
22
<PAGE> 28
shall be threatened or in effect with respect to the Registration Statement of
which this Prospectus constitutes a part or the qualification of the Indenture
under the Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
Only a holder of Outstanding Notes may tender such Outstanding Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must either: (i)
complete, sign and date the Letter of Transmittal, or facsimile thereof, have
the signature thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or such facsimile to the
Exchange Agent, or (ii) if such Outstanding Notes are tendered pursuant to the
procedures for book-entry transfer set forth below, a holder tendering
Outstanding Notes may transmit an Agent's Message (defined herein) to the
Exchange Agent in lieu of the Letter of Transmittal, in either case on or prior
to the Expiration Date. In addition, either (i) Outstanding Notes must be
received by the Exchange Agent along with the Letter of Transmittal, or (ii) a
timely confirmation of book-entry transfer (a "Book-Entry Confirmation") of such
Outstanding Notes, if such procedure is available, into the Exchange Agent's
account at the Depository Trust Company (the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, along with
the Letter of Transmittal or an Agent's Message, as the case may be, must be
received by the Exchange Agent prior to the Expiration Date, or (iii) the holder
must comply with the guaranteed delivery procedures described below. The term
"Agent's Message" means a message, transmitted to the Book-Entry Transfer
Facility and received by the Exchange Agent and forming a part of the Book-Entry
Confirmation, which states that the Book-Entry Transfer Facility has received an
express acknowledgment from the tendering participant in the Book-Entry Transfer
Facility that such participant has received and agrees to be bound by the Letter
of Transmittal and that the Company may enforce the Letter of Transmittal
against such participant. To be tendered effectively, the Letter of Transmittal
and other required documents or, in the case of a Book-Entry Confirmation, an
Agent's Message in lieu thereof, must be received by the Exchange Agent at the
address set forth below under "The Exchange Offer -- Exchange Agent" prior to
5:00 p.m., New York time, on the Expiration Date.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN 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 OUTSTANDING NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Outstanding 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 of Outstanding Notes to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender on such owner's own behalf,
such owner must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Outstanding Notes, either make appropriate arrangements
to register ownership of the Outstanding Notes in such owner's name or obtain a
properly completed bond power from the registered holder of Outstanding Notes.
The transfer of registered ownership may take considerable time and may not be
able to be completed prior to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case may be, must be guaranteed by an Eligible Institution (as
defined below) unless the Outstanding Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. If signatures
on a Letter of Transmittal or a notice of withdrawal, as the case may be, are
23
<PAGE> 29
required to be guaranteed, such guarantor must be a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Outstanding Notes listed therein, such Outstanding
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
Outstanding Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Outstanding Notes and withdrawal of tendered
Outstanding Notes will be determined by the Company in its sole discretion,
which determination will be final and binding. The Company reserves the absolute
right to reject any and all Outstanding Notes not properly tendered or any
Outstanding Notes the Company's acceptance of which would, in the opinion of
counsel for the Company, be unlawful. The Company also reserves the right to
waive any defects, irregularities or conditions of tender as to particular
Outstanding Notes. The Company's interpretation of the terms and conditions of
the 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 Outstanding Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify holders of defects or irregularities with respect to tenders of
Outstanding Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Outstanding Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Outstanding 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.
In all cases, issuance of Exchange Notes for Outstanding Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of Outstanding Notes or a timely Book-Entry
Confirmation of such Outstanding Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents, or, in the case of a Book-Entry
Confirmation, an Agent's Message in lieu thereof. If any tendered Outstanding
Notes are not accepted for exchange for any reason set forth in the terms and
conditions of the Exchange Offer or if Outstanding Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Outstanding Notes will be returned without expense to the
tendering holder thereof (or, in the case of Outstanding Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described below, such
non-exchanged Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Outstanding Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Outstanding Notes by causing
the Book-Entry Transfer Facility to transfer such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of
24
<PAGE> 30
Notes may be effected through book-entry transfer at the Book-Entry Transfer
Facility, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees, or an Agent's Message in lieu of a Letter of Transmittal,
and any other required documents, must, in any case, be transmitted to and
received by the Exchange Agent at the address set forth below under "The
Exchange Offer -- Exchange Agent" on or prior to the Expiration Date or, if the
guaranteed delivery procedures described below are to be complied with, within
the time period provided under such procedures. Delivery of documents to the
Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available or (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal or any other required documents to
the Exchange Agent prior to the Expiration Date, 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
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Outstanding Notes and the principal amount of Outstanding Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three (3) New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof) together
with the Outstanding Notes or a Book-Entry Confirmation, as the case may
be, 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 all tendered Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three (3) 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 Outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the Outstanding Notes to be withdrawn, identify the Outstanding Notes
to be withdrawn (including the principal amount of such Outstanding Notes), and
(where certificates for Outstanding Notes have been transmitted) specify the
name in which such Outstanding Notes were registered, if different from that of
the withdrawing holder. If certificates for Outstanding Notes have been
delivered or otherwise identified to the Exchange Agent, then, prior to the
release of such certificates, the withdrawing holder must also submit the serial
numbers of the particular certificates to be withdrawn and a signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Outstanding Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Outstanding Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Outstanding Notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any
Outstanding Notes which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost to
such holder (or, in the case of Outstanding Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described above, such Outstanding
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility for the Outstanding Notes) as soon as practicable after withdrawal,
rejection of tender or termination of the
25
<PAGE> 31
Exchange Offer. Properly withdrawn Outstanding Notes may be retendered by
following one of the procedures described under "-- Procedures for Tendering"
above at any time on or prior to the Expiration Date.
EXCHANGE AGENT
Marine Midland Bank has been appointed as Exchange Agent of the 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:
Marine Midland Bank
140 Broadway
New York, New York 10005-1180
Attn: Corporate Trust Operations
By Facsimile:
(212) 658-6425
(For Eligible Institutions Only)
Confirm by Telephone: (212) 658-6433
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$110,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees, printing costs and
related fees and expenses.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates representing
Outstanding Notes for principal amounts not tendered or accepted for exchange
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of Notes tendered, or if tendered Notes are
registered in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Notes pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Outstanding Notes, as set forth in the
legend thereon, as a consequence of the issuance of the Outstanding Notes
pursuant to the exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Outstanding Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register the
Outstanding Notes under the Securities Act.
26
<PAGE> 32
SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data of the Company as of and for the year
ended December 31, 1996, under the captions "Statement of Operations Data,"
"Other Financial Data" and " Balance Sheet Data" are derived from the financial
statements of the Company which financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The financial
statements as of and for the year ended December 31, 1996 are included elsewhere
in this Prospectus. The following selected financial data of the Company as of
and for the nine months ended September 30, 1997 and 1996, under the captions
"Statement of Operations Data," "Balance Sheet Data" and "Other Financial Data"
are derived from the unaudited financial statements of the Company included
elsewhere in this Prospectus. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended September 30, 1997 and 1996 are not necessarily indicative of the results
that may be expected for the entire year. The information presented below under
the caption "Operating Data" is unaudited. The data should be read in
conjunction with the financial statements, related notes and other financial
information included elsewhere in this Prospectus as well as "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED ------------------------
DECEMBER 31, 1996 1996 1997
------------------ -------- --------
(DOLLARS IN THOUSANDS EXCEPT OPERATING DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Operating revenues........................................ $ 1 $ -- $ 1,924
Cost of operating revenues (exluding depreciation shown
below).................................................. 305 44 2,512
Selling, general and administrative expenses.............. 841 359 3,954
Depreciation and amortization expense..................... 54 -- 818
Write-off of purchased software........................... 355 -- --
-------- ------- -------
Loss from operations...................................... (1,554) (403) (5,360)
Interest income........................................... 63 31 338
Interest expense.......................................... -- -- (117)
-------- ------- -------
Net loss.................................................. $(1,491) $ (372) $(5,139)
======== ======= =======
Net loss per share of common stock(2)..................... $ (1.27) $ (0.40) $ (0.37)
======== ======= =======
OTHER FINANCIAL DATA:
EBITDA(3)................................................. $(1,145) $ (403) $(4,542)
Summary Cash Flow Information:
Net cash used in operating activities................... (942) (2,772) (4,339)
Net cash used in investing activities................... (2,287) (308) (68,180)
Net cash provided by financing activities............... 11,126 3,080 160,012
Capital expenditures...................................... 3,659 308 15,907
Ratio of earnings to fixed charges(4)..................... -- -- --
Deficiency of earnings to fixed charges(4)................ (1,491) (372) (5,139)
OPERATING DATA (END OF PERIOD):
Total access lines........................................ 50 -- 12,482
Business................................................ -- -- 7,564
Residential............................................. 50 -- 4,918
Central office collocation sites.......................... 9 -- 16
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1995 DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents (excluding restricted
investments).................................... $ -- $ 7,897 $ 95,390
Restricted investments............................ -- -- 56,767
Property and equipment, net....................... -- 3,250 18,339
Total assets...................................... 1 12,339 178,026
Long-term debt, including current maturities...... -- -- 156,589
Stockholders' equity.............................. 1 10,792 14,808
</TABLE>
27
<PAGE> 33
- ---------------
(1) Statement of Operations data for the year ended December 31, 1995 has been
omitted, as no revenues or expenses were recognized and no cash transactions
occurred between October 16, 1995 (inception) and December 31, 1995.
(2) Net loss per common share outstanding is calculated based on weighted
average shares outstanding of 1,178,932 for the year ended December 31, 1996
and 13,917,204 and 936,264 for the nine months ended September 30, 1997 and
1996, respectively.
(3) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. For the year ended December 31, 1996, EBITDA excludes a charge
of $355,000 related to the one-time write-off of purchased software. While
EBITDA is not an alternative indicator of operating performance to operating
income or an alternative to cash flows from operating activities as a
measure of liquidity as defined by generally accepted accounting principles
and EBITDA may not be comparable to other similarly titled measures of other
companies, management believes that EBITDA is a measure commonly used in the
telecommunications industry to analyze and compare telecommunications
companies on the basis of operating performance, leverage and liquidity. See
the Statements of Cash Flows included in the Company's financial statements
and the notes thereto appearing elsewhere in this Prospectus. EBITDA as
defined in this footnote is not equivalent to Consolidated EBITDA as defined
in the "Description of the Exchange Notes."
(4) The ratio of earnings to fixed charges is calculated by dividing earnings
(loss) before income taxes, plus fixed charges excluding capitalized
interest by fixed charges. For the year ended December 31, 1996, and for the
nine months ended September 30, 1996, the Company incurred net losses and
had no fixed charges. For the nine months ended September 30, 1997, the
Company incurred net losses of $5,139,000 and had fixed charges of $117,000.
On a pro forma basis, if the Notes had been issued as of the beginning of
the respective periods, the Company would have had a deficit of earnings to
fixed charges of approximately $22,300,000 and $20,700,000 for the year
ended December 31, 1996 and the nine month period ended September 30, 1997,
respectively.
28
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MGC began providing competitive local exchange services to small businesses
and residential users in December 1996. The Company expects to begin offering
long distance services in its existing markets during first quarter 1998. The
Company has adopted a strategy of providing services through the leasing of
unbundled network elements of the ILEC and dedicated transport to the Company's
switches. Currently, the Company has switches fully operational in Las Vegas,
Atlanta and the Inland Empire region of California.
The development and expansion of the Company's business will require
significant expenditures. The Company has made the strategic decision to install
Company-owned switches with broad market coverage, which initially increases its
level of capital expenditures and operating losses. The Company believes this
will enhance the Company's financial performance over the long term through
control of customer accounts.
The Company's principal operating expenses consist of: direct costs,
operating costs and depreciation. Direct costs consist of access fees, line
installation expenses, transport expenses, engineering costs and long distance
expenses. Operating costs are comprised of sales and marketing, customer service
and general and administrative expenses. As the Company expands into new
markets, both direct costs and selling, general and administrative costs will
increase prior to achieving significant revenue. Significant levels of marketing
activity may be necessary in new markets in order for the Company to build a
customer base large enough to generate sufficient revenue to offset such
marketing expenses. In addition, selling, general and administrative costs may
increase in the short term after the Company enters a new market because many of
the fixed costs of providing service in new markets are incurred before
significant revenue can be expected from those markets.
The Company has experienced operating losses and generated negative
operating cash flow since inception and expects to continue to generate negative
operating cash flow through 1999, and to incur significant operating losses
during the next several years while it installs and expands its networks and
develops its business. There can be no assurance the Company's revenue or
customer base will grow or that the Company will be able to achieve or sustain
positive cash flow.
RESULTS OF OPERATIONS
The Company's operations prior to December 1996 were limited to start-up
activities and, as a result, the Company's revenues prior to December 1996
(limited to interest earned on cash deposits) and expenditures for such period
are not indicative of anticipated revenues which may be attained or expenditures
which may be incurred by the Company in future periods. The Company did not
begin revenue operations until December 1996. As a result, any comparison of the
three or nine months ended September 30, 1997 with the three or nine months
ended September 30, 1996 would not be meaningful. Consequently, the following is
a comparison of the second quarter 1997 with the third quarter 1997.
Quarter over Quarter Comparison -- September 30, 1997 vs. June 30, 1997
Total operating revenues for the quarter ended September 30, 1997 were $1.1
million as compared to $.7 million for the quarter ended June 30, 1997. The
increase from the second quarter 1997 to the third quarter 1997 is a result of
the increase in the number of lines placed in service during the third quarter.
The Company had 12,482 lines in service at the end of the third quarter as
compared to 9,002 lines in service at the end of the second quarter.
Cost of operating revenues for the quarter ended September 30, 1997 was
$1.2 million as compared to $.8 million for the quarter ended June 30, 1997. The
increase from quarter to quarter is due to the increased number of lines placed
in service during the third quarter 1997.
For the quarter ended September 30, 1997, selling, general and
administrative expenses totaled $1.8 million as compared to $1.3 million for the
quarter ended June 30, 1997. These expenses were incurred in
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connection with the initial marketing of the Company's services and the
continued buildout of the Company's network. These expenses consisted primarily
of payroll expenses, provision for bad debts, professional fees and rents.
Depreciation expense includes depreciation on switching equipment as well
as general property and equipment. For the quarter ended September 30, 1997
depreciation was $.4 million as compared to $.3 million for the quarter ended
June 30, 1997. This increase is a result of the Company's placing additional
assets in service during the third quarter in accordance with the planned
buildout of its network.
Interest expense for third quarter 1997 totaled $.1 million. This amount is
attributable to interest incurred on the Notes issued by the Company in late
September 1997.
The Company incurred net losses of $2.3 million and $1.6 million during
third quarter 1997 and second quarter 1997, respectively.
Nine months ended September 30, 1997
During the nine months ended September 30, 1997, the Company generated $1.9
million in operating revenues, had cost of operating revenues of $2.5 million
and incurred selling, general and administrative expenses of $4.0 million in
connection with the initial marketing of its services and the continued buildout
of its network. These expenses consisted primarily of payroll expenses,
provision for bad debts, professional fees and rents.
During the nine months ended September 30, 1997, the Company recorded bad
debt expense of approximately $306,000. To minimize its bad debt exposure, the
Company is implementing a policy generally requiring new customers to prepay for
specified services and usage estimates. Receipt of the prepayment will generally
be required prior to service being activated. Additional personnel have been
dedicated to collections and credit monitoring to seek to reduce the Company's
bad debt. The new credit policy is expected to allow the Company to maintain its
focus on low cost delivery of basic telephone services.
Depreciation expense for the nine months was $.8 million as a result of the
Company's assets placed in service in accordance with the planned buildout of
its network.
Interest expense for the nine months ended September 30, 1997 totaled $.1
million. This amount is attributable to interest incurred on the Notes issued by
the Company in late September 1997.
The Company had interest income of $.3 million for the nine months ended
September 30, 1997, as a result of earnings on investments made with the
proceeds of its prior private placements.
As a result, the Company incurred a net loss in the nine month period of
$5.1 million. The loss is primarily attributable to the expenses incurred during
the period in connection with the continued development of the Company's
business.
Year ended December 31, 1996
During the year ended December 31, 1996, the Company generated $751 in
operating revenues as a result of commencing service during the month of
December. The Company had cost of operating revenues of $304,936 which
represents primarily fixed costs. In addition, the Company incurred operating
expenses of $1,250,295 in connection with the commencement of operations and the
buildout of its network. These expenses consisted primarily of payroll expenses,
professional fees, expenses related to the introduction of initial service and a
one-time write-off of purchased software.
The Company earned interest income in the period of $63,122.
As a result, the Company incurred a net loss in the period of $1,491,358.
This loss is primarily attributable to the expenses incurred in connection with
the initial development of the Company's business.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have required substantial capital investment for
the purchase of telecommunications equipment and the design and development of
the Company's networks. Capital expenditures for the Company were $3.7 million
and $15.9 million in 1996 and the first nine months of 1997, respectively. The
Company expects that it will continue to have substantial capital requirements
in connection with the (i) purchase of switches necessary for expansion of local
exchange services and provision of long distance services, and (ii) development
of new markets. Management expects capital expenditures of $40.3 million for
1998.
The Company has funded a substantial portion of these expenditures through
the private sales of equity securities and the issuance of debt. From its
inception through September 30, 1997, the Company raised approximately $17.1
million from private sales of Common Stock. In September 1997, the Company
completed an offering of units consisting of $160 million of the Notes and
warrants to purchase shares of Common Stock.
The substantial capital investment required to initiate the Company's
services and the funding of the Company's initial operations has resulted in
negative cash flow since the Company's inception. This negative cash flow is a
result of the requirement to establish the Company's switching network in
anticipation of connecting revenue generating customers. The Company expects to
continue to produce negative cash flow through 1999 due to expansion activities
associated with the development of the Company's markets. There can be no
assurance the Company will attain break-even cash flow in subsequent periods.
Until sufficient cash flow is generated, the Company will be required to utilize
its current and future capital resources to meet its cash flow requirements and
may be required to issue additional debt and/or equity securities.
At the closing of the sale of the Notes, the Company used approximately
$56.8 million of the net proceeds of the sale of the Notes to purchase a
portfolio of Government Securities that has been pledged as security to cover
the first six interest payments on the Notes and the Company used approximately
$3.1 million of the net proceeds to pay accounts payable incurred in connection
with the acquisition of equipment. In addition, the Company has granted the
holders of the Notes a security interest in certain of the Company's
Telecommunications Equipment.
In November 1997, the Company completed the Preferred Stock Offering which
consisted of the sale of 5,148,570 shares of Series A Convertible Preferred
Stock (the "Preferred Stock") at $3.50 per share for net proceeds of $16.7
million. Each share of Preferred Stock is convertible into one share of Common
Stock, subject to antidilution adjustments under certain circumstances, and is
automatically convertible upon the consummation of a public offering of Common
Stock of a certain size and at a certain price per share. The Preferred Stock
provides for a cumulative dividend of 8% per annum and participates in dividends
paid with respect to the Common Stock. The holders of the Preferred Stock are
entitled to elect two members of the Company's Board of Directors. The Preferred
Stock is subject to redemption after the maturity of the Notes (i.e., as of
October 2, 2004) and may become redeemable after November 26, 2002, if the
Company would be allowed to issue Disqualified Stock in such amount at such time
under the terms of the Indenture. See "Description of the Exchange
Notes -- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Disqualified Stock."
The Company expects its available cash, including the proceeds from the
sale of the Notes and the Preferred Stock Offering will be sufficient to fund
its capital plan and operations through 1999. If the Company's expansion occurs
more rapidly than currently anticipated or if the Company's available cash
resources are not sufficient to fund all of the Company's operating expenses and
capital expenditures, the Company will require additional capital before that
time. In addition, depending on market conditions, the Company may determine to
raise additional capital before such time. There can be no assurance as to the
availability or the terms upon which such financing might be available.
Moreover, the Indenture will impose certain restrictions upon the Company's
ability to incur additional indebtedness or issue preferred stock.
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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
128), which establishes standards for computing and presenting earnings per
share (EPS). It replaces the presentation of primary and fully diluted EPS with
a presentation of basic and diluted EPS. SFAS 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. After adoption, all prior period EPS data
should be restated to conform to SFAS 128.
The Company will adopt SFAS 128 in the fourth quarter of 1997. The pro
forma impact of SFAS 128, on the nine months ended September 30, 1997 and the
year ended December 31, 1996, is that basic and diluted EPS would have been
equal to net loss per share of common stock as presented in the respective
statements of operations.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, Disclosure of Information about Capital Structure (SFAS 129).
SFAS 129 establishes standards for disclosing information about an entity's
capital structure. The Company currently complies with the disclosure
requirements of this statement which is effective for periods ending after
December 15, 1997. Implementation will not impact the Company's financial
presentation of its capital structure.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 requires companies
to classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
sections of a statement of financial position, and is effective for financial
statements issued for fiscal years beginning after December 15, 1997. The
Company is currently assessing the impact on the financial statements for the
nine months ended September 30, 1997 (unaudited) and for the year ended December
31, 1996, and believes that SFAS 130 will not result in comprehensive income
different from net income as reported in the accompanying financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosure About Segments of an Enterprise and Related Information
(SFAS 131). SFAS 131 establishes additional standards for segment reporting in
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company currently operates as one segment.
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BUSINESS
INDUSTRY HISTORY
The present structure of the U.S. telecommunications market resulted
largely from the divestiture of the "Bell System" in 1984 (the "Divestiture").
As a result of the Divestiture, seven regional bell operating companies
("RBOCs") were created to offer services in geographically defined areas called
local access transport areas ("LATA's"). The RBOC's were separated from the long
distance provider, AT&T, resulting in the creation of two distinct industries:
local phone service and long distance (also known as interexchange). Divestiture
did not result in competition in the local exchange market, but it did provide
for direct open competition for long distance. As a result, in the past 13
years, hundreds of competitors, including MCI and Sprint now have captured in
excess of 45% of the long distance market. During this time period, several
factors have served to promote competition in the local exchange market,
including the RBOCs and ILECs monopoly position and regulated pricing structure,
which provided little incentive for the ILECs to reduce prices, improve service
or upgrade their networks. Customers' desire for an alternative to the RBOC/ILEC
monopoly and the introduction of advanced technology products (such as cellular)
have spurred the desire of consumers for alternatives in the local phone market.
Established in the mid-1980's, "competitive access providers" or "CAPs"
were among the first competitors in the local exchange market. CAPs provided
non-switched services (i.e., dedicated special access and private line) by
installing fiber optic facilities connecting interexchange carrier's ("IXCs")
points of presence ("POPs") within a metropolitan area and, in some cases,
connecting customers (primarily large businesses and government agencies) with
IXCs. CAPs used the substantial capacity and economies of scale inherent in
fiber optic cable to offer service that was generally less expensive and of a
higher quality than the ILECs. In addition, CAPs offered shorter installation
and repair intervals and improved service reliability in comparison to the
ILECs. At the same time, large numbers of regional and/or national IXCs came
into existence to compete with AT&T in the interexchange market.
As CAPs proliferated during the latter part of the 1980's and early 1990's,
regulators in some states and at the federal level issued rulings which favored
competition and promoted the opening of markets to new entrants. These rulings
allowed CAPs to offer a number of new services, including, in certain states,
certain local network services.
In the late 1980's and early 1990's, CAPs could compete effectively only
for dedicated special access and private line services to customers in buildings
physically connected to separate, privately owned CAP networks. In the early
1990's, federal regulations permitted CAPs to interconnect their networks with
the ILEC networks at the ILEC central offices. CAPs then had the opportunity to
increase significantly the number of customers and markets served without
physically expanding their networks. By connecting to the ILEC central offices,
CAPs were able to use the extensive ILEC networks to reach additional customers,
thus conserving their own capital while significantly expanding their potential
markets.
By the summer of 1995, several states began opening their markets to local
exchange competition, thus permitting CAPs to become competitive local exchange
companies ("CLECs"). On February 8, 1996, the Act was signed into law. The Act
provides a framework by which all states must allow competition for local
exchange services. The Company believes the Act will benefit the Company by,
among other things, (i) increasing market access, (ii) requiring network
interconnections, (iii) establishing number portability and (iv) providing
standards for reciprocal compensation, unbundling of network elements and resale
of ILEC network services. The current law is intended to create incentives for
certain ILECs (including all RBOCs) to facilitate access to their networks by
CLECs in order to develop "meaningful competition" in the local exchange market.
Under the Act, the RBOCs will not be permitted to provide intrastate interLATA
service until they have demonstrated compliance with the foregoing to the FCC.
On December 31, 1997, a federal judge ruled that certain of these provisions are
unconstitutional on the grounds that RBOCs were unfairly denied access to the
long distance segment of the industry. This decision is currently on appeal. The
estimated market for telecommunications services (local and long distance) in
the United States was approximately $165 billion in 1996.
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THE COMPANY
The Company is a rapidly growing, switched-based provider of
telecommunications services, offering competitive local exchange services to
small business and residential users. The Company focuses primarily on offering
basic telephone services, including switched local dialtone and enhanced calling
features such as voice mail, call waiting and call forwarding ("basic telephone
services"). These services are required by virtually all users of
telecommunications. The Company does not currently offer long distance services,
but intends to integrate long distance services with its local service offerings
in Las Vegas in January 1998. The Company provides its basic telephone services
through the leasing of unbundled network elements provided by ILECs, and through
the leasing of dedicated transport to the Company's combined local and long
distance Nortel DMS 500 switches. ILEC refers to the incumbent monopoly provider
of local exchange service prior to the opening of local exchange services to
competition. The ILEC may be a regional Bell operating company (RBOC) or a
non-RBOC incumbent (such as Sprint Central Telephone of Nevada). The Company
began its operations in Las Vegas in December 1996 and became operational in
suburban Atlanta and Los Angeles in December 1997. The Company expects to
commence offering long distance services to customers in suburban Atlanta and
Los Angeles in first quarter 1998.
At September 30, 1997, the Company had 12,482 access lines in service. Of
the lines in service, 7,564 were business and 4,918 were residential. During
September 1997, the Company sold 2,851 access lines and placed 684 net lines in
service. Net lines is the number equal to gross lines added less the number of
previously existing lines disconnected. The Company has used the results of its
experience in Las Vegas to better refine its strategy, products and customer
service procedures and to develop a sophisticated back office operation.
The Company intends to continue expanding its markets by targeting
residential and small business users in suburban areas of large metropolitan
markets. The Company intends to expand its operations to seven additional
markets in 1998 and an additional seven markets in 1999. As of September 30,
1997, the Company has obtained CLEC certification in four states (with one
application pending), has completed interconnection agreements with five ILECs
(with an additional four in negotiation), and has negotiated transport
arrangements with a long distance carrier.
The Company believes the implementation of its network architecture
represents a low risk, demand driven approach requiring less capital deployment
than that required for the build out of a fiber optic infrastructure. The
Company's network is comprised of leased, unbundled elements of the ILEC's
network coupled with the collocation of Company owned equipment in the ILEC's
central offices. The Company adds transport capacity on an incremental basis
with the addition of new customers, and utilizes compression technology to
reduce its transport costs. Management believes the Company's network
architecture and equipment installation plans will enable it to (i) increase the
size of its addressable market to reach a significant number of new potential
customers, and (ii) achieve efficient network operations and economies of scale
in sales and marketing.
Management believes offering superior customer service is critical to
achieving its goal of capturing market share. The Company is continually
enhancing its service approach which utilizes a well-trained team of customer
sales and service representatives to coordinate customer installation, billing
and service. A comprehensive back office support system is also a critical
component of the Company's service goal. The Company has installed a fully
automated, proprietary management information system which is designed to
provide comprehensive, integrated features addressing all aspects of its
business, including customer care and billing, general ledger, payroll, fixed
asset management, purchasing and personnel. The Company believes this system is
readily adaptable to changing circumstances and is scalable to support the
Company's operations throughout its expected growth.
The Company was incorporated as NevTel, Inc., a Nevada corporation in 1995.
In 1996, the Company changed its name to MGC Communications, Inc. Its principal
office is located at 3301 N. Buffalo Drive, Las Vegas, Nevada 89129. The
Company's telephone number is (702) 310-1000.
Key components of the Company's operating strategy are described below.
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BUSINESS STRATEGY
Early in Addressing Tier II Sectors of Tier I Markets. In order to gain
and sustain a competitive advantage, the Company intends to move quickly to
implement its switch-based, unbundled transport networks. MGC believes it is
currently the only CLEC utilizing as its exclusive network strategy the
employment of combined local and long distance switches and unbundled transport
and local loops to target small business and residential customers in suburban
areas of Tier I markets. The Company is targeting suburban areas because they
have concentrated numbers of basic telephone service users, such as small
businesses (3-50 lines), pay phone operators, multiple dwelling unit customers
and single family residences. The Company believes its only significant
switch-based competition is the ILEC in its target market segments.
Success Based Capital Deployment. Virtually all of the Company's planned
capital expenditures are related to switching and incremental infrastructure
resulting from additions of new revenue generating customers. Management
believes this provides for a low risk profile to the Company's planned capital
deployment and will provide an attractive return on invested capital.
Provide Simplified Product Offerings. MGC's target market segment is
comprised of basic telephone service users. While requiring sophistication for
their delivery, the Company's products and services are perceived as simple,
basic solutions. The Company has consciously narrowed its offerings, choosing
not to sell more complex telephone or data solutions or resell other complex
products at this time. Currently, the Company believes most CLECs which are
bundling such services are focused on larger businesses that require a wider
range of telecommunications products for their more sophisticated needs.
Provide Superior Customer Service. The Company believes superior customer
service will be critical to the success of its expansion plan. The Company's
proprietary customer-focused management information system allows immediate
access to the Company's customer data, enabling quick and effective responses to
customer requests and needs at any time. This system permits the Company to
present its customers with one fully integrated monthly billing statement for
all basic telephone services. In addition, by having a centralized call center
in Las Vegas, which will handle all inquiries and orders for new service, the
Company should be able to control personnel and their training to a greater
degree than if call centers were maintained in each market.
Targeted Sales and Marketing Effort. The Company's sales programs include
direct sales efforts, vendor and affinity programs, direct mail and
telemarketing. The Company has both local and national sales personnel. The
Company's national sales group concentrates on large basic telephone service
users such as multi-tenant buildings, pay phone operators and wholesale
customers. The local sales group coordinates activities with equipment vendors
and affinity groups and also assists with the national sales efforts. They also
make selective calls on business customers who have large basic telephone
service requirements which may not be solicited by the Company's national group.
Leverage Sophisticated Information System and Centralized Call Center. The
Company's proprietary management information system enables the user to record,
maintain and retrieve all customer information in one environment, including
such customer's services, equipment and billing.
Capitalize on Management Expertise. The Company has recruited a team of
experienced business executives with entrepreneurial backgrounds. Maurice J.
Gallagher, Jr., the Chairman, has been a founder of a number of start-up
businesses, including ValuJet, Inc. ("ValuJet") and BankServ, LLC ("BankServ").
Nield J. Montgomery, CEO and President, has over 34 years of telephone
experience, most recently with ICG. Other executives have held senior management
positions at major telecommunications companies, including, among others,
Sprint, Centel, NYNEX, Contel and GTE.
NETWORK STRATEGY
Accelerate Provision of Local Exchange Services. To accelerate
provisioning of local exchange services, the Company selects larger markets with
a relatively cooperative ILEC and a pro-competitive regulatory environment. The
Act significantly improved the opportunity for competition in the local exchange
market by mandating ILECs to enter into agreements with competitors such as the
Company for central office collocation and unbundling of local services. The
Company believes implementation of such pro-competitive policies creates
favorable opportunities to more aggressively pursue the provisioning of local
exchange services.
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The Company has interconnection agreements in place with BellSouth, GTE,
PacBell, Sprint Central Telephone of Nevada and Ameritech and expects to have
agreements with NYNEX in Massachusetts, Southwestern Bell in Texas, Bell
Atlantic in Pennsylvania and Central Telephone Company of Illinois. The Company
believes it is well-positioned to add switches and associated services with
minimal increases in support infrastructure.
Low Cost Network Architecture. One of the most critical elements of
creating a low-cost structure is a service provider's decision as to the type of
network to build. MGC has chosen to exclusively build a switch-based network and
to lease the necessary transport and local loops on an incremental basis, as
demand dictates, from ILECs and CAP/CLECs. As a result, the Company will not be
burdened by the carrying costs of a constructed transport network. MGC believes
this low-cost approach will allow the Company to precisely target its capital
expenditures to the specifics of each market and developing conditions.
The Company believes it will be able to lease the necessary transport at
reasonable prices. Prior to the Act, the ILEC's fiber transport was subject to
tariffs and usually priced substantially higher than a competing CAP/CLEC. With
the passage of the Act and subsequent state initiatives and introduction of
facilities-based competition, management believes network elements have become
available at cost-based prices and basic transport services have become
available at competitive prices. Most of MGC's targeted markets have numerous
competing transport suppliers with attractive unbundled transport prices.
Control Customer Elements of the Networks. Connection to customers
represents an important component of MGC's network strategy. Network control
issues of the Company's architecture are different from those of other CLECs.
MGC does not have to contend with local governments or landlords to obtain
permits or consents to construct its network, but rather with the ILEC to
acquire local loops. While this interface can be challenging, it has proven to
be a manageable process to date. Once a line has been leased from an ILEC, MGC
achieves control of its network similar to that of other CLECs. Specifically,
all changes to features, additions and billing are under the direct control of
the Company with the exception of repairs which are infrequent and may require
the participation of the ILEC's network maintenance staff.
Create a Uniform Technological Platform. A critical component of the
Company's low cost formula is the ability to standardize its switch
configuration. Unlike a traditional long distance or local switch, the Nortel
DMS 500 switch enables the Company to provide local and long distance services
from a single platform. The Company believes having a standardized switch
platform will enable it to (i) deploy features and functions quickly in all of
its networks, (ii) expand switch capacity in a cost effective manner, (iii)
lower maintenance costs through reduced training and spare parts requirements
and (iv) pursue a "switch in the box" rapid network deployment solution (under
development with Nortel) which should allow the Company to rapidly enter new
markets. In addition, the scalability and capacity of its switches will allow
the Company to switch calls from more than one market, which enhances the
Company's ability to benefit from a clustered approach to the building of its
networks.
RECENT REGULATORY DEVELOPMENTS
The Act and the issuance by the FCC of rules governing local competition,
particularly those requiring the interconnection of all networks and the
exchange of traffic among the ILECs and CLECs, as well as pro-competitive
policies already developed by state regulatory commissions, have caused
fundamental changes in the structure of the local exchange markets. On July 18,
1997, the U.S. Court of Appeals for the Eighth Circuit issued a final decision
vacating the FCC's interconnection pricing rules and "most favored nation" rules
as well as certain other interconnection rules. See "Regulation." Despite this
action, the Company's analysis shows interconnection arrangements that have been
approved or mandated by state regulatory commissions have been consistent with
the intent of the Act and the Company's business plan. On October 14, 1997, the
U.S. Court of Appeals for the Eighth Circuit ruled that ILECs are under no
obligation to provide AT&T or anyone else with a rebundled package of individual
network elements. The Company believes that the impact of this ruling is neutral
to the Company in light of the Company's switch-based network strategy employing
unbundled network elements and may be beneficial in the short-term by delaying
entrance into the local service market by IXC's such as AT&T.
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On May 16, 1997, the FCC released an order that fundamentally restructured
the "access charges" ILECs and CLECs charge to interexchange carriers and end
user customers. The Company believes the FCC's new access charge rules do not
adversely affect the Company's business plan, and they in fact present
significant opportunities for new entrants, including the Company. Aspects of
the access charge order may be changed in the future. At least ten parties have
filed appeals with federal courts and numerous parties have asked the FCC to
reconsider portions of its new rules.
On December 31, 1997, a federal judge in Dallas ruled key sections of the
Act unconstitutional on the grounds that RBOCs were unfairly denied access to
the long distance segment of the industry. The provisions held unconstitutional
require RBOCs to show sufficient cooperation in allowing access to their
networks before being approved to offer long distance services. This decision
was immediately appealed by numerous IXCs.
PRODUCTS AND SERVICES
The Company focuses primarily on offering basic telephone services,
including switched local dialtone and enhanced calling features such as voice
mail, call waiting and call forwarding ("basic telephone services"). These
services are required by virtually all users of telecommunications. The Company
does not currently offer long distance services, but intends to integrate long
distance services with its local service offerings in its existing markets in
first quarter 1998. The Company's specific product offerings are:
- Business Lines -- Single line business (with optional feature packages),
Centrex service, access trunks and customer owned coin operated telephone
lines ("COCOTs").
- Residential Lines -- Single and second line basic telephone service with
optional feature packages, including multiple dwelling unit lines.
- Long distance products consisting of Outbound 1+, Inbound 800/888 and
Calling Cards (commencing during first quarter 1998).
The Company has negotiated a contract with a vendor for long distance
services. The Company expects its cost per minute rate will make the Company's
long distance offering very competitive. The Company believes it will be able to
charge its local service customers a low cost long distance price because the
call is originating through the Company's switches, eliminating a portion of the
switched access charges. To obtain the Company's most attractive long distance
rates, customers will have to purchase the Company's switched local service. The
Company expects to offer everyday prices to its customers of ten cents per
minute or less for long distance calls and more attractive rates for customers
with greater volumes. The Company believes its low cost long distance will
generate business from all of the Company's customer segments.
In order to ensure that its products and services are identical to those
offered by the ILEC, the Company has made arrangements with the ILEC and other
carriers for the provision of interim number portability, operator and directory
services, 911 services and Yellow Page and White Page listings. Interim number
portability is available to customers that desire to retain existing telephone
numbers by charging a nominal fee for remote call forwarding. Operator services
are offered through a major IXC carrier or ILEC. Emergency 911 services are
provisioned through links to the ILEC switch which, in turn, is connected to a
911 service bureau. The Company's proprietary management information system
updates customer addresses and immediately supplies them to the appropriate
emergency authorities. In addition, the Company's interconnection agreements
with the ILEC in each of its markets will contain a provision requiring the ILEC
to list each of the Company's business customers in the Yellow Pages.
MARKETS
MGC is moving quickly to exploit its "early to market" strategy. The
Company expects to concentrate on Tier II Sectors of Tier I Markets. These Tier
II Sectors contain large populations of residential and small business,
including COCOT, prospects. In addition to its currently operational markets of
Las Vegas, Atlanta and the Inland Empire, during fiscal 1998 and 1999, the
Company is targeting 14 additional markets in the states of California, Florida,
Illinois, Massachusetts and Texas.
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These markets were chosen because of the cooperative profile of the ILECs
and their pro-competitive regulatory environments. The Company believes that
BellSouth in Georgia and Ameritech in the Chicago area are progressive RBOCs
which are publicly on record favoring deregulation and cooperation with
competition. Additionally, in the Park Ridge and Des Plaines area, adjacent to
O'Hare Airport, the Company expects to collocate its facilities with Sprint and
to work with Ameritech as well. In the Los Angeles region the Company will
collocate with GTE, but work with PacBell as well. Both incumbents have a large
presence in the Los Angeles basin.
The Company intends to continue expanding its markets by targeting
residential and small business users in suburban areas of large metropolitan
markets. The Company's ability to commence operations in each of the above
markets in accordance with its expansion plan is based on many factors over
which the Company may not have control, including the ability of the Company to:
(i) negotiate interconnection agreements at favorable rates, (ii) obtain all
regulatory approvals required, (iii) install switches at locations from which
the Company can access the relevant market, (iv) obtain timely and reasonably
priced collocation space in the ILEC central offices, and (v) employ qualified
personnel at each location. As a result, there can be no assurance the Company
will be able to establish its service in each of the above areas at the time
indicated, if at all. There can be no assurance the Company will not pursue
other markets in lieu of or in addition to the foregoing.
SALES AND MARKETING
The Company concentrates its sales and marketing efforts on users of basic
telephone services. The specific retail customer groups the Company pursues are:
- Small Business -- Targeted small business customers typically have
between three and 50 lines. The Company also targets COCOTs.
- Residential -- The Company solicits single family residential users,
including those located in multi-dwelling units.
Sales Programs -- Retail. The Company's highly focused marketing efforts
allow for efficiency in capital deployment by generating well-managed profitable
growth through increased market share with minimal customer churn. Retail sales
programs include direct sales efforts, vendor and affinity programs, direct mail
and telemarketing.
As of September 30, 1997, the Company employed 11 local sales personnel and
assistants and three national sales personnel. Within each local market, the
Company expects to employ five sales personnel and two sales assistants. The
national sales force is responsible for identifying and soliciting prospective
multi-dwelling unit owners and managers and COCOT customers. The local sales
personnel are responsible for coordinating activities with equipment vendors and
assisting the national sales effort for pay phones and multi-dwelling unit
programs. Such personnel also make selective calls to local business customers
who have been identified by the Company as possessing large basic telephone
requirements but have not otherwise been solicited by the Company's national
group.
To complement its local and national sales representatives, the Company
intends to use established telephone equipment vendors as agents to sell the
Company's local and long distance service in conjunction with equipment sales to
potential business customers. In Las Vegas, for instance, the Company is
currently selling local service through equipment vendors to whom it pays a
commission for each sale.
Affinity programs are being developed to work with organizations such as
schools, religious organizations, charities and local chambers of commerce
pursuant to which the Company and the selected organizations will jointly
promote the Company's services. The organizations will receive a royalty for
each member who purchases the Company's service.
Direct mail materials have been and will continue to be used to target
specific areas where the Company will have established service. These materials
introduce the Company's service, single billing convenience and lower cost for
both local and long distance service. In addition, telemarketing efforts will
also be used to solicit
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<PAGE> 44
primarily residential customers. The Company is testing a variety of
telemarketing alternatives for use with its targeted prospects.
The Company targets COCOTs and multi-dwelling unit sales on a national
basis from its headquarters in Las Vegas. In addition to offering low rates to
COCOTs, the Company has a proprietary management information system designed to
facilitate the verification of dial around compensation from IXCs. MGC currently
has contracts with several pay phone operators in Las Vegas.
The Company also targets apartments and multi-dwelling units by offering
owners and managers a turn-key telephone product for its occupants. To initiate
such service at an apartment complex, the Company will initially utilize the
ILEC's unbundled loop from the apartment to the Company's switch. Once
installed, the service will remain active for the next tenant. Under the
Company's multi-dwelling unit program, the tenant does not have to arrange for
the service independently, pay deposits (which can be managed through the
deposit process with the apartments) or wait for installation. Additionally,
installation charges may be reduced from traditional amounts charged to
individual customers. After the Company and the apartment complex complete the
initial installation, the apartment owner/manager will be able to offer new
tenants telephone service the day the lease is signed. A call from the apartment
manager or the tenant will provide the necessary customer information to begin
service. Larger complexes (100 or more lines) will allow the Company to
economically install hardware at the apartment site and lease T1 spans to
transport the traffic directly to its switch, bypassing the ILEC's loops. For
example, by avoiding the leasing of unbundled local loops for a 125 unit
multi-dwelling complex, the Company, in Atlanta, would avoid paying monthly
lease charges to the ILEC of $1,777 and the aggregate cost of alternate
transport would be approximately $700 for a cost savings of $1,077 per month.
Sales Programs -- Wholesale. The Company also seeks wholesale customers
(i.e., long distance IXCs) who desire to resell the Company's local service
product offerings. The Company is selling this product through its national
sales force. In May 1997, the Company signed its first wholesale contract to
provide local service in Las Vegas to a long distance reseller.
Advertising. To better manage its resources, the Company strives to
generate a steady flow of service installation calls. As a result, the Company,
at this time, does not plan extensive general media advertising which it
believes could stimulate a deluge of calls and cause a subsequent erosion of
service and responsiveness of its customer service representatives ("CSRs"). The
Company's inauguration of service in Las Vegas generated interest in both the
print and broadcast media.
Additionally, the Company expects to benefit from its listing in the
information pages of the ILEC's directory. The Company intends to work closely
with the phone book publisher to insure timely and accurate placement of its
information.
NETWORK
Network Architecture. MGC has chosen to exclusively build a switch-based
network and to lease transport and local loops on an incremental basis, as
demand dictates, from ILECs and CAP/CLECs. As a result, the Company is not and
will not be burdened by the operating and financing expenses associated with
owning a fiber optic transport network. By using the ILEC's or CAP/CLEC's
network of interoffice fiber and loops through collocation, the Company seeks to
reach a broad market of customers for a fraction of the cost of a constructed
fiber network.
The Company's switch deployment plan includes the acquisition, where
possible, of sites within 1,000 feet of ILEC central offices, which allows the
Company to interconnect its network to the ILEC by a copper interface (as is the
case with the Company's site in Pomona, California, a suburb of Los Angeles).
The copper interface is substantially less expensive than a fiber interface and
collocated equipment. If a site within 1,000 feet is not secured, the Company
will interconnect via a fiber interface and collocated equipment. The Company
generally plans to control its switch sites through ownership of the property,
rather than leasing. The Company believes that property ownership is desirable
for control of its long term future. To date, the Company has acquired title
only to its facility in Pomona, California.
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<PAGE> 45
Las Vegas Network. MGC's Las Vegas network demonstrates the network
concept. The Company installed a Nortel DMS 500 digital switch with
approximately 7,000 lines of capacity and connections (via leased transport from
Sprint, the ILEC) to nine of the 19 Sprint COs in Las Vegas at an equipment cost
of approximately $3.3 million. This project was completed in seven months and
the switch became operational in December 1996. In response to its initial
success in provisioning access lines, the Company has expanded its capacity. By
the end of September 1997, the Company spent an additional $4.4 million to
increase network capacity to approximately 20,000 lines and connected an
additional seven COs (for a total of 16 of the 19 COs in the Las Vegas
metropolitan area).
This network design, which leverages Sprint's facilities, provides the
Company with a broad reach. The initial $3.3 million invested gave MGC access to
an addressable market of approximately 450,000 lines. The June expansion
increased the Company's addressable market to approximately 95% of Las Vegas'
800,000 lines.
In Las Vegas, the Company has signed an interconnection agreement with a
term of two years. In the Las Vegas market, MGC utilizes Sprint (the ILEC),
NextLink and ACSI for transport. The Company seeks to select the transport
provider that can best interconnect its locations through redundant network at
the lowest possible price.
The Company believes it will be able to lease the necessary transport at
reasonable prices in markets in addition to Las Vegas. Prior to passage of the
Act in February 1996, ILEC's fiber transport was subject to tariffs and usually
priced substantially higher than a competing CAP/CLEC. With the passage of the
Act, ILECs were required to lease their network elements at cost based prices.
MGC seeks to find two to three competing transport suppliers in its markets with
attractive competitive prices.
The Company believes the traditional copper loop connection from the ILEC
central office to the end user (the "last mile") is getting considerable
attention from manufacturers looking for more economic solutions. Beyond the
traditional copper based T1 span and the more recent direct fiber connections,
wireless radio including 38GHz and 2.4GHz are becoming practical and, often,
less costly. The Company believes "last mile" solutions, including an array of
new technology with significant bandwidth improvement, is on the horizon. The
Company's network architecture anticipates this evolution and avoids capital
investment that may prove technically and economically obsolete.
Switch Hardware. The Company's switching platform is the Nortel DMS 500.
MGC has executed a contract with Nortel providing for the purchase of 20 DMS 500
switches (two of which have already been delivered). The contract specifies
industry standard warranties. The DMS 500 system offers a flexible and cost
effective means of establishing a single point of presence in, and the ability
to provide revenue generating services to, both the local and long distance
markets. The DMS 500 combines the DMS 100 local switch functionality with long
distance toll and tandem switching capability.
The Company's early-to-market strategy requires an accelerated switch
deployment schedule. Reducing the customization of the building to house the
switch is one method. With this in mind, the Company is pursuing a number of
alternative solutions including working with Nortel to supply it with a "switch
in a box." The switch would be installed at Nortel's factory in a series of
self-contained units, with all the necessary environmental, fire and other
elements pre-installed, which could be trucked to and inserted in a facility
through a standard eight foot door and be operational within a short period of
time. By using this approach or other modifications to traditional installation,
the Company believes it can move quickly to open new markets and be operational
in as short as four months from the date of site selection. The Company may
employ more than one switch in a particular market.
Interconnection Agreements. The Company has interconnection agreements
with Sprint for operation in Las Vegas (it expects to expand this agreement for
operations in Chicago), BellSouth for operation in Georgia, GTE in Southern
California, PacBell in California and Ameritech in Illinois. The Company
believes it has secured favorable agreements which will allow it to operate
profitably in these jurisdictions, but there can be no assurance to that effect.
The Company has authority to operate as a CLEC in Illinois, Georgia, Nevada and
California and has made application for such authority in Florida.
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OPERATIONS
Customer Service. The Company strives to provide customer service superior
to the ILEC in each of its markets. This includes:
- Personnel. CSRs and sales personnel who are well trained and attentive
to customers' needs. CSRs are available 24 hours a day, seven days a
week, 365 days a year.
- Phones. Prioritizing the answering of phones such that calls are
answered after a limited number of rings.
- Coordination. Coordinating the installation with both the customer and
the ILEC, if involved.
- Customer Information. Keeping the customer informed if there is an
installation or repair problem and dedicating the necessary resources to
resolve the problem as soon as possible.
- Billing. Providing the customer a timely bill which is accurate, simple
to read and understand and comprehensive.
Centralization. The Company has a centralized customer service center,
including a centralized call center, which operates seven days per week 24 hours
a day. Centralization allows the Company to control personnel and their training
to a greater degree than with call centers in each city and thereby provides
consistent, high quality customer service with lower overhead costs.
Automation. The Company believes automation of internal processes
contributes greatly to the overall success of a service provider and billing is
a critical element of any telephone company's operation. The Company's
management information system has been designed to allow a CSR to quickly take
all the necessary information from a customer in a logical, conversational
manner, establish the appropriate billing and credit information and
electronically process the order with the ILEC for the local loop. It creates
the correct emergency 911 address update for new customers and supplies the
information to the appropriate emergency authorities. Concurrently, it will
establish the related cost elements with the order to track the expense of the
facility leased from the ILEC.
Thereafter, the system will track the progress of the order based on
electronic or facsimile updates from the ILEC. The installation desk will follow
the customer's order, ensuring the installation date is met. Additionally, CSRs
will be able to handle all other customer service inquiries, including billing
questions, repair calls or directory assistance information. All this
information is available in the integrated system available to the CSR.
In addition, the Company's proprietary management information system has
been designed to track and bill all forms of local service, including line and
feature charges and long distance charges. Additionally, the billing system can
provide sophisticated solutions for business bills. Companies desiring a single
bill for many locations, summary bills only without detail or any other
combination can be accommodated. Lastly, the Company expects to be able to
deliver billing information in a number of media besides paper including
electronic files, Internet inquiry or on-line inquiry.
LOW COST FOCUS
To offer service to its targeted segments of the market and insure long
term profitability, the Company has created a low cost structure and focus. The
key components of this strategy are:
Low Cost Network Architecture. One of the most critical elements of
creating a low cost structure is a service provider's decision as to the
type of network to build. MGC has chosen to exclusively build a
switch-based network. MGC believes this is the lowest cost approach. To
accomplish this, the Company has made the decision to lease the necessary
transport and local loops on an incremental basis, as demand dictates, from
ILECs and CAP/CLECs. As a result, the Company will not be burdened by the
carrying cost of a constructed transport network. This approach allows the
Company to precisely target its capital expenditures to the specifics of
each market and developing conditions.
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<PAGE> 47
Standardized Switch/Installation. The Company plans to use only
Nortel switches, all configured in the same manner and where possible
delivered in a portable environment such as a container. The Company
believes this approach will reduce the time to install its switches.
Simple Product. The Company's product offerings are based on basic
telephone services. This simplified approach allows the Company to
standardize training, order processing and interfaces with the different
ILECs. The Company does not expect to offer complex telecommunications
packages.
Automation. An important component in producing a low cost
environment is automation of the processes involved. The Company has
installed a proprietary management information system designed to be a
comprehensive, integrated system that addresses all aspects of its
business, including customer care and billing, general ledger, payroll,
fixed asset management, purchasing and personnel. This system is scalable
and has been designed to support the Company's operation as it grows.
Credit Policy. The Company's early lack of formal credit or deposit
procedures resulted in an unacceptable level of uncollectible accounts and
resulting bad debt. During third quarter 1997, a total of 2,471 lines were
disconnected, the majority of which were terminated for non-payment. To
minimize its bad debt exposure, the Company is implementing a policy
generally requiring new customers to prepay for specified services and
usage estimates. Receipt of the prepayment will generally be required prior
to service being activated. Additional personnel have been dedicated to
collections and credit monitoring to seek to reduce the Company's bad debt.
The new credit policy is expected to allow the Company to maintain its
focus on low cost delivery of basic telephone services.
Efficient Customer Service. The Company has a centralized customer
service center, including a centralized call center, which operates seven
days per week 24 hours per day. The centralized calling center handles all
inquiries and orders for new service. This centralization allows the
Company to control personnel and their training to a greater degree than
with call centers in each city.
COMPETITION
The Company believes the only significant switch-based competitor for its
targeted markets (small businesses and residential users in suburban areas of
large metropolitan markets) is the ILEC in each market. However, the CAP/CLECs
and other telecommunications suppliers in each of the metropolitan areas in
which the Company will be present could also elect to compete for the Company's
targeted market.
General competition in each of the service categories provided by the
Company is discussed below.
Local Services. In each of its geographic markets, the Company faces
significant competition for the local services it offers from RBOCs and other
ILECs, which currently dominate their local telecommunications markets. These
companies all have long-standing relationships with their customers and have
financial, personnel and technical resources substantially greater than those of
MGC.
The Company will also face competition in most markets in which it will
operate from one or more CAP/CLECs operating fiber optic networks. Other local
service providers have operations or are initiating operations within one or
more of the Company's service areas. MGC expects WorldCom, MCI, Teleport
Communications Group, Inc. ("Teleport"), and certain cable television providers,
all of which are substantially larger and have substantially greater financial
resources than the Company, to enter some or all of the markets the Company will
serve. MGC also understands other entities have indicated their desire to enter
the local exchange services market within specific metropolitan areas served or
targeted by MGC.
In addition, a continuing trend toward consolidation and strategic
alliances within the telecommunications industry could result in significant new
competition for the Company. AT&T and MCI have begun to enter the local services
market. Other potential competitors of the Company include utility companies,
other long distance carriers and wireless telephone systems. The Company cannot
predict the number of competitors that will emerge as a result of existing or
new federal and state regulatory or legislative actions.
Competition in all of the Company's market areas is based on quality,
reliability, customer service and responsiveness, service features and price.
The Company intends to keep its prices at levels below those of the ILECs while
providing, in the opinion of the Company, a higher level of service and
responsiveness to its customers.
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<PAGE> 48
Although the ILECs are generally subject to greater pricing and regulatory
constraints than other local network service providers, ILECs are achieving
increasing pricing flexibility for their local services as a result of recent
legislative and regulatory developments. The ILECs have continued to lower
rates, resulting in downward pressure on prices for certain services.
Long Distance Services. The Company will compete with AT&T, MCI and others
in the long distance services market. Many of the Company's competitors have
long-standing relationships with their customers and have financial, personnel
and technical resources substantially greater than those of MGC. In providing
these services, the Company will focus on quality service and economy to
distinguish itself in a very competitive marketplace.
GOVERNMENT REGULATIONS
Government Regulation and Requirements
Overview. The Company's services are subject to varying degrees of
federal, state and local regulation. The FCC exercises jurisdiction over all
facilities of, and services offered by, telecommunications common carriers such
as the Company, to the extent those facilities are used to provide, originate or
terminate interstate or international communications. The state regulatory
commissions retain jurisdiction over most of the same facilities and services to
the extent they are used to originate or terminate intrastate communications. In
addition, many of the regulations issued by these regulatory bodies may be
subject to judicial review, the result of which the Company is unable to
predict.
Federal Regulation. The Company must comply with the requirements of
common carriage under the Communications Act of 1934 (the "Communications Act"),
as amended. Comprehensive amendments to the Communications Act were made by the
Act, which was signed into law on February 8, 1996. The Act effected plenary
changes in regulation at both the federal and state levels that affect virtually
every segment of the telecommunications industry. The stated purpose of the Act
is to promote competition in all areas of telecommunications and to reduce
unnecessary regulation to the greatest extent possible. While it will take years
for the industry to feel the full impact of the Act, it is already clear the
legislation provides the Company with both opportunities and challenges.
The Act gives the FCC the authority to forebear from regulating companies
if it finds such regulation does not serve the public interest, and directs the
FCC to review its regulations for continued relevance on a regular basis. As a
result of this directive, a number of the regulations that historically applied
to CLECs have been and may continue to be eliminated in the future. While it is
therefore expected that a number of regulations that were developed prior to the
Act will be eliminated in time, those which apply to the Company at present are
discussed below.
The Act greatly expands the FCC's interconnection requirements on the
ILECs. The Act requires the ILECs to: (i) provide physical collocation, which
allows companies such as MGC and other interconnectors to install and maintain
their own network termination equipment in ILEC central offices, and virtual
collocation only if requested or if physical collocation is demonstrated to be
technically unfeasible; (ii) unbundle components of their local service networks
so other providers of local service can compete for a wider range of local
services customers; (iii) establish "wholesale" rates for their services to
promote resale by CLECs and other competitors; (iv) establish number
portability, which will allow a customer to retain its existing phone number if
it switches from the ILEC to a competitive local service provider; (v) establish
dialing parity, which ensures customers will not detect a quality difference in
dialing telephone numbers or accessing operators or emergency services; and (vi)
provide nondiscriminatory access to telephone poles, ducts, conduits and
rights-of-way. In addition, the Act requires ILECs to compensate competitive
carriers for traffic originated by the ILECs and terminated on the competitive
carrier's networks. The FCC is charged with establishing national guidelines to
implement the Act. The FCC issued its Interconnection Order on August 8, 1996,
which established detailed rules regarding rates, terms and conditions for
interconnection between CLECs and ILECs. The Interconnection Order was appealed
to the U.S. Court of Appeals for the
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Eighth Circuit. On July 18, 1997, the Court issued a final decision vacating the
interconnection pricing rules and "most favored nation" rules as well as certain
other interconnection rules. It is expected that the Eighth Circuit decision
will be appealed to the United States Supreme Court, although it is not possible
at this time to determine how or when the Supreme Court will respond to these
appeals. MGC does not believe the Eighth Circuit decision will have any
significant impact on its operation. On October 14, 1997, the U.S. Court of
Appeals for the Eighth Circuit ruled that ILECs are under no obligation to
provide AT&T or anyone else with a rebundled package of individual network
elements. The Company believes that the impact of this ruling is neutral to the
Company in light of the Company's switch-based network strategy employing
unbundled network elements and may be beneficial in the short-term by delaying
entrance into the local service market by IXC's such as AT&T.
On May 16, 1997, the FCC released an order that fundamentally restructured
the "access charges" ILECs charge to interexchange carriers and end user
customers. The Company's analysis of the FCC's order leads it to believe the
FCC's new access charge rules do not adversely affect the Company's business
plan, and they do in fact present significant opportunities for new entrants,
including the Company. Aspects of the order may be changed in the future. At
least ten parties have filed appeals with federal courts, and numerous parties
have asked the FCC to reconsider portions of its new rules.
As part of its pro-competitive policies, the Act frees the RBOCs from the
judicial order that prohibited their provision of interLATA services.
Specifically, the Act permits RBOCs to provide long distance services outside
their local service regions immediately, and will permit them to provide
in-region interLATA service upon demonstrating to the FCC and state regulatory
agencies they have adhered to the FCC's interconnection regulations. As of
August 31, 1997, ILECs in two states have filed applications for in-region long
distance authority with the FCC -- Ameritech in Michigan and Southwestern Bell
in Oklahoma. The FCC recently denied Ameritech's application.
On December 31, 1997, a federal judge in Dallas ruled key sections of the
Act unconstitutional on the grounds that RBDCs were unfairly denied access to
the long distance segment of the industry. This decision was immediately
appealed by numerous IXCs.
As a result of provisions of the Act, the Company has taken the steps
necessary to be a provider of local exchange services. As of September 30, 1997,
MGC had obtained local certification in four states and had applications pending
for local certification in one additional state. In addition, the Company has
successfully negotiated interconnection agreements that meet the interconnection
provisions contained in the Act with five ILECs and is in negotiation for
interconnection agreements with four additional ILECs. At the same time, the Act
also makes competitive entry more attractive to RBOCs, other ILECs and
interexchange carriers and other companies, and likely will increase the level
of competition the Company faces.
The Act's interconnection requirements also apply to interexchange carriers
and all other providers of telecommunications services, although the terms and
conditions for interconnection provided by these carriers are not regulated as
strictly as interconnection provided by the ILECs. This may provide the Company
with the ability to reduce its own access costs by interconnecting directly with
non-ILECs, but may also cause the Company to incur additional administrative and
regulatory expenses in replying to interconnection requests.
While the Act reduces regulation to which non-dominant local exchange
carriers are subject, it also reduces the level of regulation that applies to
the ILECs, and increases their ability to respond quickly to competition from
the Company and others. For example, in accordance with the Act, the FCC has
applied "streamlined" tariff regulation to the ILECs, which greatly accelerates
the time required for changes to tariffed service rates to take effect, and
eliminates the requirement that ILECs obtain FCC authorization before
constructing new domestic facilities. These actions will allow ILECs to change
service rates more quickly in response to competition. Similarly, the FCC is
expected to release an order later this year that may provide significant new
pricing flexibility to ILECs. To the extent such increased pricing flexibility
is provided, the Company's ability to compete with ILECs for certain service may
be adversely affected.
On May 8, 1997, in compliance with the requirements of the Act, the FCC
released an order establishing a new Universal Service support fund, which
provide subsidies to carriers that provide service to under-served
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individuals and customers in high cost areas, and to companies that provide
telecommunications services and wiring for schools and libraries. The Company is
required to contribute into the Universal Service fund, but may also obtain
subsidies for services it provides. The new Universal Service rules will be
administered jointly by the FCC and state regulatory authorities, many of which
are still in the process of establishing their administrative rules. The net
revenue effect of these regulations on the Company cannot be determined at this
time.
State Regulation
The Company has received CLEC certification in Nevada, Georgia, Illinois
and California and is in the process of applying for certification in Florida.
State authorizations vary in their regulatory intensity. State laws and
regulations that prohibit or have the effect of prohibiting, local and
long-distance telecommunications competition may be preempted under the Act.
In most states, the Company is required to file tariffs setting forth the
terms, conditions, and prices for services which are classified as intrastate.
In some states, the Company's tariff can list a range of prices for particular
services, and in others, such prices can be set on an individual customer basis.
The Company is not at this time subject to price cap or to rate of return
regulation in Nevada or any of its planned expansion markets.
Under the Act, implementation of the Company's plans to compete in local
markets is and will continue to be, to a certain extent, controlled by the
individual states. The Company continues to support efforts at the state
government level to more quickly implement competition in their markets under
the new federal law and to permit CAPs/CLECs to operate on the same basis and
with the same rights as the ILECs, sometimes referred to as "co-carrier status."
Currently, a number of state regulatory agencies have authorized varying degrees
of co-carrier privileges to new competitors. As of January 1, 1996, over
one-half of the states have taken regulatory and legislative action to open
local communications markets to various degrees of local exchange competition
and co-carrier status, including the five states in which the Company operates
or currently plans to operate (California, Illinois, Georgia, Massachusetts, and
Nevada).
Since early 1995, several CAPs/CLECs have entered into co-carrier
agreements with ILECs which address CLEC/ILEC interconnection issues, such as
reciprocal compensation and number portability. While the Act mandates the
implementation of interconnection arrangements, there can be no assurance such
negotiations will enable the Company to secure its desired co-carrier
arrangements in a timely fashion or upon reasonable rates and terms.
PROPERTIES
In Las Vegas, the Company has a five year lease with a five year option for
the 8,000 square feet housing its switch site. The Company has entered into an
agreement to lease 24,125 square feet of additional space to house the Company's
corporate headquarters, national customer service operations, national sales
personnel, Las Vegas sales personnel and general administration. This building
is owned by two of the Company's principal stockholders and directors, Maurice
J. Gallagher, Jr. and Timothy P. Flynn. See "Certain Transactions." Management
believes the terms and conditions of this transaction are equal to or better
than market rates. Additionally, Messrs. Gallagher and Flynn have agreed to work
with the Company to construct additional facilities when needed. The Company
leases two other offices in the Las Vegas area under short term leases. These
offices house the Company's general office space and customer service personnel
and will be vacated when the new facility is ready for occupancy.
The Company has entered into a lease for its Atlanta switch site in the
suburb of Toco Hills. The Company has a ten year lease with two five year
options for 6,400 square feet. This site has sufficient space for the Company's
switch and adequate office space to house its local sales staff and
administrative support.
The Company purchased a 3,800 square foot facility for $260,000 in Pomona,
California to house its switch and technical staff.
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The Company places great importance on each switch facility and seeks to
insure maximum security and environmental control. MGC believes this can be
achieved through standalone structures. This approach minimizes the risk of fire
or other hazards from adjacent tenants or properties.
PERSONNEL
As of September 30, 1997, there were 111 employees of the Company, the
majority of whom were located in Las Vegas. The Company expects to substantially
increase its employee count over the next two years.
MGC has non-disclosure and non-compete agreements with all of its executive
employees. None of MGC's employees is represented by a collective bargaining
agreement.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings of a material
nature.
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MANAGEMENT
The following table sets forth, as of September 30, 1997, the name, age and
position within the Company of each executive officer and director of the
Company. Their respective backgrounds are described following the table.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Nield J. Montgomery.................. 53 Chief Executive Officer, President,
Director
Maurice J. Gallagher, Jr. ........... 48 Chairman of the Board of Directors
Mitchell Allee....................... 56 Vice President -- Information Technology,
Chief Information Officer
John Boersma......................... 37 Vice President -- Operations
Michael E. Burke..................... 53 Vice President -- Engineering and
Operations
Michael D. English................... 50 President -- Eastern Region
Timothy P. Flynn..................... 47 Director
Jack Hancock......................... 67 Director
Kent F. Heyman....................... 42 Vice President and General Counsel
Thomas G. Keough..................... 53 Vice President -- Sales and Marketing
Linda M. Sunbury..................... 36 Vice President -- Administration
Mark W. Peterson..................... 43 President -- Western Region
David A. Rahm ....................... 43 Vice President -- Network Development
</TABLE>
NIELD J. MONTGOMERY has been the Chief Executive Officer and President and
a member of the Board of Directors of the Company since he participated in its
founding. Mr. Montgomery has over 34 years of telephone experience, most
recently serving as General Manager -- Switch Implementation for ICG from April
1994 to June 1995. In that capacity, he was responsible for developing strategy
and deploying telephone switches nationally to position it to enter the local
phone service business. Prior to that, Mr. Montgomery served as General
Marketing and Sales Manager for Sprint/Centel (successor to Centel Nevada)
("Centel"). During his 13 year Centel career from 1989 to 1993, he served in
senior executive positions directing engineering, operations, business office,
sales, and marketing functions. Before joining Centel, Mr. Montgomery held a
variety of management positions with NYNEX from 1969 to 1980.
MAURICE J. GALLAGHER, JR. has served as the Chairman of the Board of
Directors since its founding. Mr. Gallagher was instrumental in organizing the
Company with Mr. Montgomery. Mr. Gallagher was a founder of ValuJet in 1993 and
served as a Director of ValuJet from 1993 until November 1997. Mr. Gallagher
also held prior positions (President and Chief Financial Officer) with ValuJet
from 1993 to 1994 and served as Vice Chairman from 1994 to 1997. Prior to
ValuJet, Mr. Gallagher was a founder and President of WestAir Holding, Inc.
("WestAir"), a commuter airline headquartered in Fresno, California. WestAir was
sold to Mesa Airlines ("Mesa") in June 1992. Mr. Gallagher was a member of the
Mesa Board of Directors from June 1992 through March 1993 and served as a
director of Submicron Systems, Inc. from April 1997 until November 1997.
MITCHELL ALLEE has served as Vice President -- Information Technology and
Chief Information Officer of the Company since July 1997. Although Mr. Allee is
expected to devote the majority of his time to the Company, pursuant to an
independent contractor agreement, he will continue to direct CMS Solutions
("CMS"), a company which he owns and serves as president. Since its founding in
1985, CMS has been a software development company specializing in high volume
financial transaction software. CMS clients have ranged from the smallest Public
Utility District in California to Unocal Corporation where CMS developed a
nationwide chemical distribution and accounting system. CMS also developed a
ticketless reservation system for ValuJet.
JOHN BOERSMA has served as Vice President -- Operations of the Company
since May 1997. He served as Vice President of Carrier Relations for ICG Telecom
Group, Inc. ("ICG Telecom") from 1996 to 1997. He was responsible for ICG
Telecom's relationship with local exchange carriers and implementation, purchase
agreements and service quality and served as Vice President, Northern California
Operations from April 1994
47
<PAGE> 53
to September 1996. He joined Bay Area Transport, now a part of ICG Telecom, in
1986 and held various positions having responsibility for overall financial and
operational performance, marketing management, new business development,
regulatory affairs, and information systems development. He served on the CLEC
Industry Board of Directors and served as the chairman of the association's
Tariff Committee from 1991 until 1993.
MICHAEL E. BURKE has served as Vice President -- Engineering and Operations
of the Company since 1996. Mr. Burke has over 27 years of engineering and
engineering project management experience in the telecommunications industry,
and served from 1990 to 1995 as a member of the Board of Directors and as Vice
President -- Network Design for Contel of California. Mr. Burke also served in
various engineering management roles with Continental Telephone Company (from
1971 to 1995), California Pacific Utilities (from 1970 to 1971), and General
Telephone Company of California (from 1963 to 1970).
MICHAEL D. ENGLISH has served as President -- Eastern Region of the Company
since 1996. Mr. English has over 23 years of telephone industry experience,
serving from 1993 to 1996 as Vice President at Metro Access Networks. Prior to
joining Metro Access Networks, Mr. English served in 1993 as a consultant to
Time Warner Communications. Mr. English was President and Chief Executive
Officer at Virginia MetroTEL from 1993 to 1994, and served during 1992 as Vice
President at FiberCom, a subsidiary of BTI. From 1988 to 1992, Mr. English
served as President and Chairman of FiberLan, Inc. ("FiberLan"), a subsidiary of
BellSouth and Siecor. He joined FiberLan in 1985 as Vice President. Mr. English
also previously served in senior management positions in strategic planning and
switch engineering at BellSouth (from 1984 to 1985), AT&T (from 1978 to 1981),
and Southern Bell (from 1973 to 1978 and 1981 to 1983).
TIMOTHY P. FLYNN has served as Member of the Board of Directors of the
Company since 1996. Mr. Flynn served as a member of the Board of Directors of
ValuJet since he participated in its founding in 1993 until November 1997. Prior
to ValuJet, Mr. Flynn was Chairman of the Board and CEO of WestAir. He and Mr.
Gallagher purchased WestAir Airlines in 1983 and operated it through June 1992
when it was sold to Mesa. Mr. Flynn was a member of the Board of Directors of
Mesa from June 1992 through March 1993. Mr. Flynn and Mr. Gallagher are
affiliated in a number of other transactions.
JACK L. HANCOCK has served as a Member of the Board of Directors of the
Company since 1996. Mr. Hancock was Vice President of Systems Technology and
Executive Vice President, Product and Technology for PacBell (from 1988 to
1993). Prior to joining PacBell, Mr. Hancock was Executive Vice President for
Information Systems, Strategic Planning, and Human Resources at Wells Fargo Bank
(from 1982 to 1987). Before that, he was Senior Vice President for Management
Information Systems at Chemical Bank (from 1978 to 1981). He is a member of the
Boards of Directors of several public and private companies, including Union
Bank of California (from 1994 to present) and Wittaker Corporation (from 1994 to
present).
KENT F. HEYMAN has served as Vice President and General Counsel of the
Company since June 1996. Mr. Heyman has 17 years of legal experience, most
recently as chairman of the litigation department and Senior Trial Counsel of
the Dowling, Magarian, Aaron & Heyman Law Firm. Mr. Heyman has served as a
California Superior Court Judge pro tempore presiding over trial, settlement
conference and other proceedings from 1990 to 1996.
THOMAS G. KEOUGH has served as Vice President -- Sales and Marketing of the
Company since December 1996 and is responsible for all marketing and sales, and
customer service activities. He has over 20 years experience as a marketing and
sales executive, serving most recently as Executive Vice President and Director
of Sales for Jetstream Aircraft, a subsidiary of British Aerospace from 1992 to
1996. Mr. Keough also served in senior marketing and sales management roles with
Beech Aircraft (from 1989 to 1992), Bombardier (from 1988 to 1989), Saab
Aircraft of America (from 1983 to 1988), and DeHavilland (from 1976 to 1983).
LINDA M. SUNBURY has served as Vice President -- Administration of the
Company since June 1996. Ms. Sunbury has over 12 years accounting and
administrative experience, having held similar positions in the airline
industry. Most recently, Ms. Sunbury was Vice President of Administration for
Business Express, Inc. ("Business Express") dba the Delta Connection from 1994
to 1996. While Ms. Sunbury was at Business
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<PAGE> 54
Express, creditors of Business Express filed an involuntary petition for
bankruptcy in January 1996. Business Express subsequently reorganized and
emerged from bankruptcy in April 1997. Prior to that, Ms. Sunbury served as
Controller for West Air Commuter Airlines, Inc. dba United Express from 1988 to
1994. Ms. Sunbury began her career with the accounting firm of KPMG Peat Marwick
LLP where she was employed from 1983 to 1988.
MARK W. PETERSON has served as President -- Western Region of the Company
since March 1997. He previously served as head of corporate affairs for both
WestAir Airlines, dba United Express in Fresno, California from 1988 to 1992 and
for AirCal Airlines in Newport Beach, California from 1978 to 1982. He also
served as a marketing communications manager with Bank of America in San
Francisco, worked as marketing consultant in Northern California from 1985 to
1986, and was an instructor in business communications at California State
University, Chico.
DAVID A. RAHM has served as Vice President of Network Development of the
Company since May 1996. Mr. Rahm served as general counsel of Chadmoore Wireless
Group, Inc. from 1995 to 1996. Prior to that, Mr. Rahm served as Director of
Administration, Acting Director of Production and General Counsel of Sigma Game,
Inc. from 1993 to 1994. Mr. Rahm also served as Assistant Vice President,
Manager of Marketing, Credit, Leasing and Administration for Lodgistix, Inc.
from 1980 to 1990.
The holders of the Preferred Stock have the right to select two members of
the Board of Directors, but such persons have yet to be designated.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal year ended December 31, 1996, the
cash compensation paid by the Company, as well as certain other compensation
paid or accrued for such year, for the Company's Chief Executive Officer. No
Executive Officer received compensation in excess of $100,000 in 1996. No
compensation was paid to any Executive Officers of the Company prior to April 1,
1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------- -------------------------
OTHER ANNUAL
COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
--------------------------- ---- --------- ------------ ------- ----------------
<S> <C> <C> <C> <C> <C>
Nield J. Montgomery..................... 1996 $45,077(1) -- 600,000 --
President and Chief Executive Officer
</TABLE>
- ---------------
(1) $2,000 of such compensation was paid in April 1996, prior to the
commencement of the Company's operations, in the form of 800,000 shares of
Common Stock in the Company.
The following table shows the names and current annual compensation levels
of the Chief Executive Officer and the four most highly compensated Executive
Officers based upon a full year of employment.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY
- --------------------------- --------
<S> <C>
Nield J. Montgomery......................................... $150,000
President and Chief Executive Officer
Thomas G. Keough............................................ 110,000
Vice President -- Sales & Marketing
John Boersma................................................ 105,000
Vice President -- Operations
Michael E. Burke............................................ 100,000
Vice President -- Engineering & Operations
Michael D. English.......................................... 100,000
President -- Eastern Region
</TABLE>
49
<PAGE> 55
EMPLOYMENT AND STOCK PURCHASE/REPURCHASE AGREEMENTS
Nield J. Montgomery. The Company's employment agreement with Mr.
Montgomery provides for a base salary of $150,000 per year, effective September
1, 1997, and discretionary bonuses. Prior to the commencement of revenue
producing operations in December 1996, Mr. Montgomery's base salary was $5,000
per month. Mr. Montgomery is required to devote his full time and efforts to the
business of the Company during the term of his employment agreement which
expires in September 2000. Mr. Montgomery's employment may be terminated by
either the Company or Mr. Montgomery at any time. Mr. Montgomery has agreed not
to participate in a business offering local, long distance and related telephone
services during the term of his employment and for a period of 18 months
following termination. If Mr. Montgomery's employment is terminated by the
Company without cause, he will be entitled to severance pay of $150,000 payable
over a period of 12 months. Under the terms of Mr. Montgomery's employment
agreement, the other stockholders have certain rights to repurchase a portion of
Mr. Montgomery's stock in the Company if his employment is terminated on or
before April 1, 2001.
John Boersma. The Company's employment agreement with Mr. Boersma provides
for a base salary of $105,000 per year and a bonus of up to 50% of his base
salary based on his and the Company's performance. Mr. Boersma's employment may
be terminated at any time during its term by either the Company or Mr. Boersma.
Mr. Boersma has agreed not to participate in a business offering local, long
distance and related telephone services in the State of Nevada during the term
of his employment and for a period of six months following termination. In
addition, Mr. Boersma has exercised certain rights to acquire 50,000 shares of
Common Stock at $2.00 per share and an additional 100,000 shares of Common Stock
at $2.50 per share. Such shares are subject to repurchase at their cost if Mr.
Boersma's employment with the Company is terminated prior to May 19, 2000. The
Company has agreed to finance over a period of three years the purchase price of
the shares purchased at $2.50 per share.
Mitchell Allee. Mitchell Allee has exercised certain rights to acquire
200,000 shares of Common Stock at $2.00 per share and an additional 175,000
shares of Common Stock at $2.50 per share. The Company has agreed to finance
over a period of three years the purchase price of the shares purchased at $2.50
per share. A prorated portion of such shares is subject to repurchase at their
cost if Mr. Allee's engagement with the Company is terminated (other than as a
result of his death or disability) prior to June 2000.
STOCK OPTION PLAN
The Company has adopted the NevTEL, Inc. Stock Option Plan (the "Plan"). A
total of 2,400,000 shares of Common Stock are reserved for issuance under the
Plan. As of September 30, 1997, options to purchase 1,739,600 shares have been
granted under the Plan. No options issued under the Plan have been exercised and
as of September 30, 1997, options to purchase 56,000 shares have lapsed. At such
date, options to purchase 1,683,600 shares were outstanding under the Plan at an
average exercise price of $1.52 per share and options for up to 716,400
additional shares may be granted under the Plan.
Options granted under the Plan may be either incentive stock options or
nonqualified options.
The Plan contemplates that options may be granted to directors, key
employees and consultants of the Company. The exercise price of the options
granted under the Plan will be determined by the Company's Board of Directors or
by the Compensation Committee of the Board of Directors. The terms of the
options and the dates after which they become exercisable are established by the
Compensation Committee or the Board of Directors, subject to the terms of the
Plan. Options granted under the Plan generally vest over a five year period.
The Company has from time to time granted stock options under the Plan in
order to provide certain officers, directors, employees and consultants with a
competitive total compensation package and to reward them for their contribution
to the Company's performance. These grants of stock options are designed to
align the individual's interest with that of the Stockholders of the Company.
50
<PAGE> 56
BONUS PLAN
The Company's Bonus Plan is predicated on established EBITDA targets and
individual goals and achievements of key corporate personnel.
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth information regarding all stock options granted
in the 1996 fiscal year under the Company's Plan to the Chief Executive Officer
of the Company named in the Compensation Table above:
<TABLE>
<CAPTION>
% OF POTENTIAL REALIZED
TOTAL MARKET VALUE AT
NUMBER OF OPTIONS PRICE ASSUMED ANNUAL RATES
SECURITIES GRANTED TO OR FAIR OF STOCK PRICE
UNDERLYING EMPLOYEES VALUE APPRECIATION (1)
OPTIONS IN FISCAL EXERCISE ON DATE --------------------
GRANTED YEAR PRICE OF GRANT EXPIRATION DATE 5% 10%
---------- ---------- -------- ---------- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Nield J. Montgomery....... 600,000 70% $0.50 $0.25 April 1, 2006 -- $89,061
</TABLE>
- ---------------
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the Securities and Exchange Commission and therefore
are not intended to forecast possible future appreciation, if any, of the
price of the Company's Common Stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table shows aggregate exercises of options during 1996 and
the values of options held by the Company's Chief Executive Officer as of
December 31, 1996.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS DECEMBER 31, 1996
SHARES ACQUIRED VALUE DECEMBER 31, 1996 (1)
NAME ON EXERCISE REALIZED (UNEXERCISABLE) (UNEXERCISABLE)
- ---- --------------- -------- --------------------- --------------------
<S> <C> <C> <C> <C>
Nield J. Montgomery......... -- -- 600,000 $900,000
</TABLE>
- ---------------
(1) Based upon a value for the Company's Common Stock on December 31, 1996,
estimated for these purposes to be $2.00 per share.
DIRECTOR COMPENSATION
The Company's outside Directors receive meeting fees of $500 per meeting of
the Board of Directors or committees of the Board of Directors attended in
person in addition to reimbursement of their expenses in attending meetings of
the Board of Directors.
51
<PAGE> 57
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of November 30, 1997, certain
information with respect to the Company's Common Stock owned beneficially by
each director, by all Executive Officers and directors as a group and by each
person known by the Company to be a beneficial owner of more than 5% of the
outstanding Common Stock of the Company. Except as noted in the footnotes, each
of the persons listed has sole investment and voting power with respect to the
shares of Common Stock included in the table.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNERSHIP(1)
------------------------ ------------------ ------------
<S> <C> <C>
Maurice J. Gallagher, Jr.(2)(3)........................ 5,245,000 26.4%
Timothy P. Flynn(2)(4)................................. 1,441,500 7.3%
Robert L. and Carol A. Priddy(2)(5).................... 1,437,500 7.2%
JK&B Management, L.L.C.(6)............................. 1,428,572 7.2%
David Kronfeld(6)...................................... 1,428,572 7.2%
Nield J. Montgomery(7)................................. 1,380,000 6.9%
Circle F Ventures, LLC(8).............................. 1,250,000 6.3%
Thomas Neustaetter(9).................................. 1,142,857 5.8%
Wind Point Partners III, L.P.(10)...................... 1,142,857 5.8%
Jack L. Hancock(11).................................... 54,000 *
All Executive Officers and Directors as a Group (13
persons)(2)(3)(4)(7)(11)(12)......................... 9,495,000 47.2%
</TABLE>
- ---------------
* Less than 1% of total.
(1) The percent of outstanding Common Stock owned is determined by assuming the
conversion of all outstanding Preferred Stock and by assuming that in each
case the person only, or group only, exercised his or its rights to
purchase all shares of Common Stock underlying presently exercisable stock
options.
(2) Includes presently exercisable warrants issued as a commitment fee in
connection with the Common Stock Commitment. See "Certain Transactions."
(3) Includes options to purchase 20,000 shares of Common Stock which are
presently exercisable and 5,187,500 shares of Common Stock owned by the
various partnerships or trusts with respect to which Mr. Gallagher is a
general partner and/or beneficiary. Mr. Gallagher's address is 3301 N.
Buffalo Drive, Las Vegas, Nevada 89129.
(4) Includes options to purchase 4,000 shares which are presently exercisable.
Mr. Flynn's address is 6900 Westcliff Drive, Suite 505, Las Vegas, Nevada
89128.
(5) The Priddys' address is 9410 Laguna Niguel Drive, Las Vegas, Nevada 89134.
(6) Includes 957,143 shares of Series A Preferred Stock owned by JK&B Capital,
L.P. ("JK&B") and 471,429 shares of Series A Preferred Stock owned by JK&B
Capital II, L.P. ("JK&BII"), which Preferred Stock is convertible into
Common Stock on a one for one basis. JK&B Capital Management, L.L.C.
("JK&BCM") is the general partner of JK&B and JK&BII. David Kronfeld is the
manager of JK&BCM. The address of these beneficial owners is c/o JK&B
Capital Management, L.L.C., 205 North Michigan, Suite 808, Chicago,
Illinois 60601.
(7) Includes options to purchase 120,000 shares which are presently
exercisable. Mr. Montgomery's address is 3301 N. Buffalo Drive, Las Vegas,
Nevada 89129.
(8) Includes 250,000 shares owned by Hayden R. Fleming, the managing member of
Circle F Ventures, LLC. Mr. Fleming has voting and dispositive power over
the shares of Common Stock owned by Circle F Ventures, LLC. The address of
Hayden R. Fleming and Circle F Ventures, LLC is 14988 N. 78th Way,
Scottsdale, Arizona 85260.
(9) Includes 571,429 shares of Series A Preferred Stock owned by Strategic
Investment Partners Limited ("SIP"), 357,142 shares of Series A Preferred
Stock owned by S-C Phoenix Holdings, L.L.C. ("SC"),
52
<PAGE> 58
142,857 shares of Series A Preferred Stock owned by Winston Partners II LDC
("Winston LDC") and 71,429 shares of Series A Preferred Stock owned by
Winston Partners II LLC ("Winston LLC"), entities associated with
Chatterjee Management Company. The Preferred Stock is convertible into
Common Stock on a one for one basis. Mr. Neustaetter is an officer of
Chatterjee Management Company. Mr. Neustaetter disclaims beneficial
ownership of these shares over which he does not exercise investment or
voting power. Mr. Neustaetter's address is c/o Chatterjee Management
Company, 888 Seventh Avenue, New York, New York 10106.
(10) Includes 1,142,857 shares of Series A Preferred Stock which is convertible
into Common Stock on a one for one basis. Wind Point Partners III, L.P.
("WPIII") is a private equity investment limited partnership, for which
Wind Point Investors, L.L.C. ("WPI") is the general partner. Decisions with
respect to investment and voting of shares by WPI are made by a committee
of managing directors. WPI expressly disclaims beneficial ownership of
shares owned by WPIII. The address of this beneficial owner is 676 N.
Michigan Avenue, Suite 3300, Chicago, Illinois 60611.
(11) Includes options to purchase 4,000 shares which are presently exercisable.
(12) Includes options to purchase 42,000 shares owned by Executive Officers not
named above which are presently exercisable.
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<PAGE> 59
CERTAIN TRANSACTIONS
The Company has entered into an agreement to lease 24,125 square feet of
office space from two of the Company's directors and principal stockholders,
Maurice J. Gallagher, Jr. and Timothy P. Flynn. The rental rate is $1.65 per
square foot which includes common area maintenance charges of $.20 per square
foot. Management believes that the terms and conditions of this lease
arrangement are at least as favorable to the Company as those which the Company
could have received from an unaffiliated third party.
The Company has entered into an agreement with Palms Centre Drive, Inc.
("PCDI"), a company owned and operated by Mitchell Allee, an officer and
stockholder of the Company, to provide, support and maintain the Company's
proprietary management information computer system. The agreement provides that
PCDI shall design and install the system at a cost of $600,000 payable in
monthly installments of $100,000 per month beginning July 1, 1997. Management
believes that the terms of the agreement with PCDI are at competitive prices and
terms.
Certain persons have deposited an aggregate of $15.0 million in escrow (the
"Common Stock Commitment"), which funds were to have been applied to the
purchase of shares of Common Stock in the event the Preferred Stock Offering was
not closed within 60 days after the Issue Date. Since the Preferred Stock
Offering closed within that time period, the investors received a return of
their funds contributed in escrow. As a commitment fee for the Common Stock
Commitment, the Company has issued to all such persons contributing to the
escrow funds warrants to purchase an aggregate of 150,000 shares of Common Stock
at $.01 per share. Such warrants will be exercisable at any time prior to
October 1, 2004.
A significant portion of the Common Stock Commitment has been provided by
the following Directors and more than 5% stockholders of the Company: Maurice J.
Gallagher, Jr. -- $3.75 million, Timothy P. Flynn -- $3.75 million and Robert L.
Priddy -- $3.75 million. As a commitment fee for their Common Stock Commitment,
such persons received warrants to purchase shares of Common Stock at $.01 per
share as follows: Gallagher -- 37,500 shares, Flynn -- 37,500 shares and
Priddy -- 37,500 shares.
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<PAGE> 60
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Outstanding Notes were issued under an Indenture dated as of September
29, 1997 (the "Indenture") between the Company and Marine Midland Bank, trustee
(the "Trustee"). The Exchange Notes will also be issued under the Indenture, and
the Indenture will be qualified under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act") upon the effectiveness of the Registration
Statement of which this Prospectus is a part. The form and terms of the Exchange
Notes will be same as the Outstanding Notes, except that the issuance of the
Exchange Notes has been registered under the Securities Act and thus the
Exchange Notes will not bear legends restricting their transferability. The
Exchange Notes will evidence the same indebtedness as the Outstanding Notes,
will be entitled to the benefits of the Indenture, and will be treated as a
single class under the Indenture with any Outstanding Notes. The Exchange Notes
and Outstanding Notes will be considered collectively to be a single class for
all purposes of this "Description of the Exchange Notes" (except under the
caption "-- Registration Rights; Liquidated Damages"), and all references herein
to "Notes" shall be deemed to refer collectively to the Outstanding Notes and
any Exchange Notes, unless the context otherwise requires.
The definitions of certain terms used in the following summary are set
forth below under "-- Certain Definitions." As of the date of this Prospectus,
the Company has no subsidiaries. However, under certain circumstances, the
Company will be able to designate future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture. As used in this section, the
term "Company" refers only to MGC Communications, Inc. and not to its
Subsidiaries.
RANKING
The Notes will rank senior in right of payment to all subordinated
Indebtedness of the Company. The Notes will rank pari passu in right of payment
with all existing and future senior borrowings, including borrowings under the
Credit Facility, except with respect to the assets securing the Notes. Holders
of other secured Indebtedness of the Company will, however, have claims that are
prior to the claims of the holders of the Notes with respect to the assets
securing such other Indebtedness.
Certain of the Company's operations may in the future be conducted through
its Subsidiaries and, therefore, the Company may become dependent upon the cash
flow of its Subsidiaries to meet its obligations, including its obligations
under the Notes. The Notes will be effectively subordinated to all indebtedness
and other liabilities and commitments (including trade payables and lease
obligations) of the Company's Subsidiaries. Any right of the Company to receive
assets of any of its Subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that Subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
Subsidiary and any indebtedness of such Subsidiary senior to that held by the
Company. As of September 30, 1997, the total amount of outstanding debt of the
Company, including the Notes, was approximately $155.7 million. The Notes have
been recorded at $155.0 million to recognize that a portion of the proceeds from
the issuance of the Notes has been allocated to the value of the warrants issued
to the purchasers of the Notes.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $160.0 million and
will mature on October 1, 2004. Interest on the Notes will accrue at 13% per
annum and will be payable semi-annually in arrears on April 1 and October 1 of
each year, commencing on April 1, 1998, to holders of record on the immediately
preceding March 15 and September 15. Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the Issue Date. Interest will be computed on the
55
<PAGE> 61
basis of a 360-day year comprised of twelve 30-day months. The Notes will be
issued in registered form, without coupons, and in denominations of $1,000 and
integral multiples thereof.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to October
1, 2001. Thereafter, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on October 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2001........................................................ 106.50%
2002........................................................ 103.25%
2003 and thereafter......................................... 100.00%
</TABLE>
Notwithstanding the foregoing, in the event of the sale by the Company
prior to October 1, 2000 of its Capital Stock (other than Disqualified Stock) in
one or more Equity Offerings, up to a maximum of 35% of the aggregate principal
amount of the Notes originally issued will, at the option of the Company, be
redeemable from the net cash proceeds of one or more Equity Offerings (but only
to the extent the proceeds of such Equity Offering consist of cash or readily
marketable cash equivalents) at a redemption price equal to 113% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the redemption date, provided that at least 65% of
the aggregate principal amount of the Notes originally issued remain outstanding
immediately after the occurrence of such redemption and that such redemption
occurs within 90 days of the date of the closing of such Equity Offering.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemption or sinking
fund payments with respect to the Notes.
SECURITY
Interest Reserve
The Indenture provides that, upon the closing of the sale of the Notes, the
Company must purchase and pledge to the Trustee for the benefit of the holders
of the Notes the Pledged Securities in such amount as will be sufficient upon
receipt of scheduled interest and principal payments on such Pledged Securities,
in the opinion of any nationally recognized firm of independent public
accountants selected by the Company, to provide payment in full of the first six
scheduled interest payments due on the Notes. The Company has used approximately
$56.8 million of the net proceeds of the sale of the Notes to acquire the
Pledged Securities. The Pledged Securities have been pledged by the Company to
the Trustee for the benefit of the holders of Notes pursuant to the Pledge
Agreement and will be held by the Trustee in the Pledge Account. Pursuant to the
Pledge Agreement, immediately prior to an interest payment date on the Notes,
the Company may either deposit with the Trustee from funds otherwise available
to the Company cash sufficient to pay the interest scheduled to be paid on such
date or the Company may direct the Trustee to release from the Pledge Account
proceeds sufficient to pay interest then due. In the event that the Company
exercises the former option, the Company may thereafter direct the Trustee to
release to the Company proceeds or Pledged Securities from the Pledge Account in
a like amount. A failure by the Company to pay interest on the Notes in a timely
manner through October 1, 2000 will constitute an immediate Event of Default
under the Indenture, with no grace or cure period.
Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed the amount sufficient, in the opinion of a nationally recognized
firm of independent public accountants selected by the Company, to provide for
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<PAGE> 62
payment in full of the first six scheduled interest payments due on the Notes
(or, in the event an interest payment or payments have been made, an amount
sufficient to provide for payment in full of any interest payments remaining, up
to and including the sixth scheduled interest payment) the Trustee will be
permitted to release to the Company at the Company's request any such excess
amount. The Notes will be secured by a first priority security interest in the
Pledged Securities and in the Pledge Account and, accordingly, the Pledged
Securities and the Pledge Account will also secure repayment of the principal
amount of the Notes to the extent of such security.
Under the Pledge Agreement, assuming that the Company makes the first six
scheduled interest payments on the Notes in a timely manner, all of the Pledged
Securities will be released from the Pledge Account.
Telecommunications Equipment
Pursuant to the Indenture and related documents, including the Security
Agreement, between the Company and the Trustee, the Trustee, for its benefit and
the benefit of the holders of the Notes, has received or will receive a security
interest in: (i) all Telecommunications Equipment currently owned by the Company
other than Telecommunications Equipment located in Las Vegas, Nevada or the
surrounding suburban area and all Telecommunications Equipment acquired by the
Company after the Issue Date (other than Telecommunications Equipment located or
to be located in Las Vegas, Nevada or the surrounding suburban area) and prior
to such time as the aggregate dollar value of the Company's purchases of
Telecommunications Equipment subsequent to the Issue Date (excluding
Telecommunications Equipment located or to be located in Las Vegas, Nevada or
the surrounding suburban area) equals or exceeds $100.0 million; (ii) the
proceeds of any sale or other disposition of such Telecommunications Equipment
(including any insurance proceeds from the loss or destruction of such
Telecommunications Equipment); and (iii) any additional Telecommunications
Related Assets acquired by the Company with the proceeds of any such sale or
other disposition of Telecommunications Equipment (collectively, the
"Collateral").
If the Notes become due and payable prior to their stated maturity or are
not paid in full at the stated maturity thereof, the Trustee, on behalf of the
holders of the Notes, in addition to any other rights or remedies available to
it under the Indenture, may take such action as it deems advisable to protect
and enforce the rights of the Trustee and such holders in the Collateral,
including the institution of foreclosure proceedings. Any proceeds received by
the Trustee from the disposition of the Collateral will be applied by the
Trustee, first to pay certain expenses of the Trustee and the holders of the
Notes, second to pay interest with respect to the Notes, third to pay unpaid
principal of the Notes, fourth to pay costs and expenses of, and all premiums
on, and all other amounts due under, the Notes, and finally, to pay any
remainder to the Company or as a court of competent jurisdiction otherwise
directs.
The right of the Trustee to repossess and dispose of the Collateral upon
the occurrence of an Event of Default is likely to be significantly impaired by
applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or
against the Company prior to the Trustee's having disposed of the Collateral.
Under Title XI of the United States Code (the "Bankruptcy Code"), a secured
creditor such as the Trustee is prohibited from disposing of security
repossessed from a debtor in a bankruptcy case without bankruptcy court
approval. Moreover, the Bankruptcy Code prohibits a secured creditor from
disposing of collateral even though the debtor is in default under the
applicable debt instruments if the secured creditor is given "adequate
protection." The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the collateral and may include cash payments or the
granting of additional security, if and at such times as the court in its
discretion determines, for any diminution in the value of the collateral as a
result of the stay of disposition during the pendency of the bankruptcy case. In
view of the lack of a precise definition of the term "adequate protection" and
the broad discretionary powers of a bankruptcy court, it is impossible to
predict how long payments under the Notes could be delayed following
commencement of a bankruptcy case, whether or when the Trustee could dispose of
the Collateral or whether or to what extent holders would be compensated for any
delay in payment or loss of value of the Collateral through the requirement of
"adequate protection."
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In addition, notwithstanding anything to the contrary described above,
unless an Event of Default shall have occurred and be continuing, the Company
will have the right to remain in possession of and retain exclusive control of
the Collateral, will have the right to freely utilize the Collateral (including
the right to lease such Collateral) and will have the right to collect, invest
and dispose of any income thereon. Upon any foreclosure by the Trustee, on
behalf of holders of the Notes, on any Collateral that has been made the subject
of a lease by the Company, the Trustee's ability to dispose of such Collateral
may be restricted by the terms of such lease arrangement. See "Risk
Factors -- Failure to Maintain Perfected Security Interest."
Collateral may be released from the liens of the Indenture in connection
with an Asset Sale of Telecommunications Equipment, in which case the Company
will be required to comply with the covenant described below under "-- Certain
Covenants -- Asset Sales."
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
make an offer (the "Change of Control Offer") to each holder of Notes to
repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at a purchase price equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase (the "Change of Control Payment"). The Change of
Control Offer must be commenced within 30 days following a Change of Control,
must remain open for at least 30 and not more than 40 days (unless required by
applicable law) and must comply with the requirements of Rule 14e-1 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and any other
applicable securities laws and regulations.
Except as described above with respect to a Change of Control, the
Indenture will not contain provisions that permit the holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
Due to the leveraged structure of the Company and the effective
subordination of the Notes to other secured Indebtedness of the Company and
future Indebtedness of the Company's Subsidiaries, the Company may not have
sufficient funds available to purchase the Notes tendered in response to a
Change of Control Offer. In addition, the agreements relating to future
Indebtedness of the Company's Subsidiaries may contain prohibitions or
restrictions on the Company's ability to effect a Change of Control Payment.
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 the Company's assets. Although there is a developing 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 the Company to repurchase such Notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of the Company to another Person may be uncertain.
OFFER TO PURCHASE WITH EXCESS ASSET SALE PROCEEDS
When the cumulative amount of Excess Proceeds (as defined below under
"Certain Covenants -- Asset Sales") exceeds $5.0 million, the Company will make
an offer to all holders of Notes and Pari Passu Notes (an "Excess Proceeds
Offer"), to purchase the maximum principal amount of Notes and Pari Passu Notes
that may be purchased out of such Excess Proceeds, at an offer price in cash in
an amount equal to 100% of the outstanding principal amount of the Notes and
100% of the accreted value or 100% of the outstanding principal amount, as
applicable, of the Pari Passu Notes, plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date fixed for the closing of such
offer, in accordance with the procedures specified in the Indenture.
If the aggregate principal amount and/or accreted value, as the case may
be, of Notes and Pari Passu Notes surrendered by holders thereof exceeds the
amount of Excess Proceeds, the Trustee will select the Notes and Pari Passu
Notes to be purchased on a pro rata basis. To the extent that the aggregate
amount of Notes and Pari Passu Notes tendered pursuant to an Excess Proceeds
Offer is less than the amount of Excess
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Proceeds, the Company may use such deficiency for general purposes. Upon
completion of an Excess Proceeds Offer, the amount of Excess Proceeds will be
reset at zero.
SELECTION OF NOTES FOR REDEMPTION OR OFFERS TO PURCHASE
If less than all of the Notes are to be redeemed or to be purchased
pursuant to any purchase offer required under the Indenture at any time,
selection of Notes for redemption or purchase will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed, or, if the Notes are not so listed, on a
pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate, provided that no Notes with a principal amount of $1,000 or less
shall be redeemed or purchased in part. A new Note in principal amount equal to
the unredeemed or unpurchased portion will be issued in the name of the holder
thereof upon cancellation of the original Note. On and after the redemption or
purchase date, interest will cease to accrue on the Notes or portions of them
called for redemption or purchase.
NOTICE OF REDEMPTION
Notice of redemption shall 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. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount to be redeemed.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly:
(i) declare or pay any dividend or make any distribution on account of
any Equity Interests of the Company or any of its Restricted Subsidiaries
other than dividends or distributions payable (A) in Equity Interests of
the Company that are not Disqualified Stock or (B) to the Company or any
Restricted Subsidiary;
(ii) purchase, redeem, defease, retire or otherwise acquire for value
("Retire" and correlatively, a "Retirement") any Equity Interests of the
Company or any of its Restricted Subsidiaries or other Affiliate of the
Company (other than any such Equity Interests owned by the Company or any
Restricted Subsidiary);
(iii) Retire for value any Indebtedness of (A) the Company that is
subordinate in right of payment to the Notes or (B) any Restricted
Subsidiary, except, with respect to clause (A) or (B) above, at final
maturity or in accordance with the mandatory redemption or repayment
provisions set forth in the original documentation governing such
Indebtedness; or
(iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of such
Restricted Payment:
(a) no Default or Event of Default has occurred and is continuing
or would occur as a consequence thereof;
(b) after giving effect to such Restricted Payment on a pro forma
basis as if such Restricted Payment had been made at the beginning of
the applicable four-quarter period, the Company could incur at least
$1.00 of additional Indebtedness pursuant to the Consolidated Cash Flow
Leverage Ratio test described under "-- Incurrence of Indebtedness and
Issuance of Disqualified Stock;" and
(c) such Restricted Payment, together with the aggregate of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (including any Restricted
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Payments made pursuant to clauses (i), (v) and (vi) of the next
paragraph), minus any Restricted Payment Credits, is less than the sum
of
(x) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the Issue Date to the
end of the Company'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
(y) 100% of the aggregate net cash proceeds received by the
Company from the issue or sale of Equity Interests of the Company or
of debt securities or Disqualified Stock of the Company that have
been converted into such Equity Interests (other than Equity
Interests (or convertible debt securities) sold to a Restricted
Subsidiary of the Company and other than Disqualified Stock or debt
securities that have been converted into Disqualified Stock) after
the Issue Date (other than any such Equity Interests, the proceeds of
which were used as set forth in clause (ii) below), plus
(z) $2.0 million.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) the Retirement of (A) any Equity Interests of the Company or any
Restricted Subsidiary of the Company, (B) Indebtedness of the Company that
is subordinate to the Notes or (C) Indebtedness of a Restricted Subsidiary
of the Company, in exchange for, or out of the proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary of the
Company) of, Equity Interests of the Company (other than Disqualified
Stock);
(iii) the Retirement of any Indebtedness of the Company subordinated
in right of payment to the Notes in exchange for, or out of the proceeds
of, the substantially concurrent incurrence of Indebtedness of the Company
(other than Indebtedness to a Restricted Subsidiary of the Company), but
only to the extent that such new Indebtedness is permitted under the
covenant described below under the caption, "-- Incurrence of Indebtedness
and Issuance of Disqualified Stock" and (1) is subordinated in right of
payment to the Notes at least to the same extent as, (2) has a Weighted
Average Life to Maturity at least as long as, and (3) has no scheduled
principal payments due in any amount earlier than, any equivalent amount of
principal under the Indebtedness so Retired;
(iv) the Retirement of any Indebtedness of a Restricted Subsidiary of
the Company in exchange for, or out of the proceeds of, the substantially
concurrent incurrence of Indebtedness of the Company or any Restricted
Subsidiary but only to the extent that such incurrence is permitted under
the covenant described below under the caption "-- Incurrence of
Indebtedness and Issuance of Disqualified Stock" and only to the extent
that such Indebtedness (1) is not secured by any assets of the Company or
any Restricted Subsidiary to a greater extent than the Indebtedness so
Retired was so secured, (2) has a Weighted Average Life to Maturity at
least as long as the Indebtedness so Retired and (3) if the Indebtedness so
Retired was an obligation of the Company, is pari passu or subordinated in
right of payment to the Notes at least to the same extent as the
Indebtedness so Retired;
(v) the Retirement of any Equity Interests of the Company or any
Restricted Subsidiary of the Company held by any member of the Company's
(or any of its Subsidiaries') management pursuant to any management equity
subscription agreement or stock option agreement; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $250,000 in any twelve-month
period plus the aggregate cash proceeds received by the Company during such
twelve-month period from any reissuance of Equity Interests by the Company
to members of management of the Company and its Subsidiaries;
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(vi) the Retirement of any Equity Interests of the Company held by
Nield J. Montgomery, Mitchell Allee or John Boersma pursuant to the terms
of agreements between the Company and each such individual in effect on the
Issue Date upon or following any termination of employment of any of them;
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $500,000 in any
twelve-month period; and
(vii) the payment of cash in lieu of fractional shares (a) payable as
dividends on Equity Interests of the Company or (b) issuable upon
conversion of or in exchange for securities convertible into or
exchangeable for Equity Interests of the Company or (c) issuable as a
result of a corporate reorganization, provided that, in the case of (a) and
(b), the issuance of such Equity Interests or securities and, in the case
of (c), such corporate reorganization, was permitted under the terms of the
Indenture;
provided, however, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (i), (ii), (iii), (iv), (v), (vi) and
(vii), no Default or Event of Default shall have occurred and be continuing.
The Indenture also provides that a Permitted Investment that ceases to be a
Permitted Investment pursuant to the definition thereof, shall become a
Restricted Investment, deemed to have been made on the date that it ceases to be
a Permitted Investment.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary if such designation would not cause a Default or an Event of Default,
provided, however, the Company may not designate any Subsidiary which holds any
permit or license which is material to the operations of the Company and its
Restricted Subsidiaries taken as a whole as an Unrestricted Subsidiary. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
such Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
greatest of (x) the net book value of such Investments at the time of such
designation, (y) the fair market value of such Investments at the time of such
designation and (z) the original fair market value of such Investments at the
time they were made. Such designation will only be permitted if such Restricted
Payment would be permitted at such time.
The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
is permitted under the covenant entitled "-- Incurrence of Indebtedness and
Issuance of Disqualified Stock," and (ii) no Default or Event of Default would
be in existence following such designation.
Not later than the date of making any Restricted Payment, the Company shall
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 the covenant "-- Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements. The Trustee shall have no duty or obligation to confirm or verify
the calculations set forth in such Officers' Certificate.
Incurrence of Indebtedness and Issuance of Disqualified Stock
The Indenture provides that:
(i) the Company and its Restricted Subsidiaries may not, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable for the payment of (collectively, "incur"
and, correlatively, "incurred" and "incurrence") any Indebtedness
(including, without limitation, Acquired Debt) and
(ii) the Company and its Restricted Subsidiaries may not issue any
Disqualified Stock,
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provided, however, that the Company and/or any of its Restricted Subsidiaries
may incur Indebtedness (including, without limitation, Acquired Debt) or issue
shares of Disqualified Stock if, after giving effect to the incurrence of such
Indebtedness or the issuance of such Disqualified Stock, the Consolidated Cash
Flow Leverage Ratio for the Company's most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date of such incurrence or issuance (A) does not exceed 5.5 to 1
if such incurrence or issuance occurs on or prior to October 1, 2000 and (B)
does not exceed 5.0 to 1 if such incurrence or issuance occurs after October 1,
2000, in each case, determined on a pro forma basis (including a pro forma
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. If the Company incurs any
Indebtedness or issues or redeems any Preferred Stock subsequent to the
commencement of the period for which such ratio is being calculated but prior to
the event for which the calculation of the ratio is made, then the ratio will be
calculated giving pro forma effect to any such incurrence of Indebtedness, or
such issuance or redemption of Preferred Stock, as if the same had occurred at
the beginning of the applicable period. In making such calculation on a pro
forma basis, interest attributable to Indebtedness bearing a floating interest
rate shall be computed as if the rate in effect on the date of computation had
been the applicable rate for the entire period.
The foregoing limitation will not apply to (with each exception to be given
independent effect):
(a) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness under the Credit Facility in an aggregate
principal amount at any one time outstanding (with letters of credit being
deemed to have a principal amount equal to the maximum potential liability
of the Company and/or any of its Restricted Subsidiaries thereunder) not to
exceed $25.0 million, less the aggregate amount of all Net Proceeds of
Asset Sales applied to permanently reduce the commitments with respect to
such Indebtedness pursuant to the covenant described above under the
caption "-- Asset Sales;"
(b) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Vendor Indebtedness, provided that the aggregate amount of
such Vendor Indebtedness incurred does not exceed 80% of the total cost of
the Telecommunications Related Assets financed therewith (or 100% of the
total cost of the Telecommunications Related Assets financed therewith if
such Vendor Indebtedness was extended for the purchase of tangible physical
assets and was so financed by the vendor thereof or an affiliate of such
vendor);
(c) the incurrence by the Company and/or any of its Subsidiaries of
the Existing Indebtedness;
(d) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness in an aggregate amount not to exceed $5.0
million at any one time outstanding;
(e) the incurrence by the Company of (1) Indebtedness (other than
secured Acquired Debt) in an aggregate principal amount not to exceed 2.0
times the sum of the net cash proceeds received by the Company after the
closing of the Preferred Stock Offering or, if the Preferred Stock Offering
is not closed, the closing of the Common Stock Commitment from the issuance
and sale of Equity Interests of the Company (that are not Disqualified
Stock), plus the fair market value of Equity Interests (other than
Disqualified Stock) issued after consummation of a Qualified Equity
Offering in connection with an acquisition of a Telecommunications Business
or Telecommunications Related Assets and (2) subsequent to consummation of
a Qualified Equity Offering, secured Acquired Debt, in an aggregate
principal amount not to exceed (i) the net cash proceeds received by the
Company from the issuance and sale of Equity Interests of the Company
(other than Disqualified Stock) subsequent to the consummation of a
Qualified Equity Offering plus (ii) the fair market value of Equity
Interests (other than Disqualified Stock) issued in connection with any
acquisition of a Telecommunications Business or Telecommunications Related
Assets subsequent to the consummation of a Qualified Equity Offering;
provided, however, to the extent the Company incurs secured Acquired Debt
pursuant to the provisions of this clause (2), its ability to incur
Indebtedness pursuant to clause (1) of this clause (e) shall be reduced by
an amount equal to two times the aggregate principal amount of secured
Acquired Debt so incurred;
(f) the incurrence (a "Permitted Refinancing") by the Company and/or
any of its Restricted Subsidiaries of Indebtedness issued in exchange for,
or the proceeds of which are used to refinance,
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replace, refund or defease ("Refinance" and correlatively, "Refinanced" and
"Refinancing") Indebtedness, other than Indebtedness incurred pursuant to
clause (a) above, but only to the extent that:
(1) the net proceeds of such Refinancing Indebtedness do not exceed
the principal amount of and premium, if any, and accrued interest on the
Indebtedness so Refinanced (or if such Indebtedness was issued at an
original issue discount, the original issue price plus amortization of
the original issue discount at the time of the repayment of such
Indebtedness) plus the fees, expenses and costs of such Refinancing and
prepayment premiums, if any, in connection therewith;
(2) the Refinancing Indebtedness shall have a final maturity no
earlier than, and a Weighted Average Life to Maturity equal to or
greater than, the final maturity and Weighted Average Life to Maturity
of the Indebtedness being Refinanced; and
(3) if the Indebtedness being Refinanced is subordinated in right
of payment to the Notes, the Refinancing Indebtedness shall be
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 so Refinanced;
(g) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; and
(h) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate or foreign currency risk with respect to
any floating rate Indebtedness that is permitted by the terms of the
Indenture to be outstanding.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness or Disqualified Stock meets the criteria of more
than one of the categories described in clauses (a) through (h) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item in any manner that
complies with this covenant and such item will be treated as having been
incurred pursuant to only one of such clauses or pursuant to the first paragraph
herein. Accrual of interest or dividends, the accretion of accreted value or
liquidation preference and the payment of interest or dividends in the form or
additional Indebtedness, Common Stock or Preferred Stock will not be deemed to
be an incurrence of Indebtedness for purposes of this covenant.
Asset Sales
The Indenture provides that the Company and its Restricted Subsidiaries may
not, whether in a single transaction or a series of related transactions
occurring within any twelve-month period,
(i) sell, lease, convey, dispose or otherwise transfer any assets
(including by way of a Sale and Leaseback Transaction) other than sales,
leases, conveyances, dispositions or other transfers (A) in the ordinary
course of business, (B) to the Company by any Restricted Subsidiary of the
Company or from the Company to any Restricted Subsidiary of the Company,
(C) that constitute a Restricted Payment, Investment or dividend or
distribution permitted under the covenant described below under the caption
"Restricted Payments" or (D) that constitute the disposition of all or
substantially all of the assets of the Company pursuant to the covenant
described above under the caption "Merger, Consolidation or Sale of Assets"
or
(ii) issue or sell Equity Interests in any of its Restricted
Subsidiaries (other than an issuance or sale of Equity Interests of any
such Restricted Subsidiary to the Company or a Restricted Subsidiary),
if, in the case of either (i) or (ii) above, in a single transaction or a series
of related transactions occurring within any twelve-month period, such assets or
securities
(x) have a Fair Market Value in excess of $2.0 million (excluding the
Fair Market Value of Telecommunications Equipment sold to ILECs in
connection with establishing virtual collocation arrangements with such
ILECs) or
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(y) are sold or otherwise disposed of for net proceeds in excess of
$2.0 million (each of the foregoing, an "Asset Sale"), unless:
(a) no Default or Event of Default exists or would occur as a
result thereof;
(b) the Company, or such Restricted Subsidiary, as the case may be,
receives (except in the case of sales of Telecommunications Equipment to
ILECs in connection with establishing virtual collocation arrangements
with such ILECs) consideration at the time of such Asset Sale at least
equal to the Fair Market Value (evidenced by a resolution of the Board
of Directors of the Company set forth in an Officers' Certificate
delivered to the Trustee), of the assets or securities issued or sold or
otherwise disposed of; and
(c) at least 85% of the consideration therefor received by the
Company or such Restricted Subsidiary is in the form of cash, provided,
however, that (A) the amount of (x) any liabilities (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet or
in the notes thereto) of the Company or any Restricted Subsidiary of the
Company (other than liabilities that are by their terms subordinated to
the Notes) that are assumed by the transferee of any such assets and (y)
any notes, obligations or other securities received by the Company or
any such Restricted Subsidiary from such transferee that are immediately
converted by the Company or such Restricted Subsidiary into cash, shall
be deemed to be cash (to the extent of the cash received in the case of
subclause (y)) for purposes of this clause (c); and (B) an amount equal
to the Fair Market Value (determined as set forth in clause (b) above)
of Telecommunications Related Assets received by the Company or any such
Restricted Subsidiary from the transferee that will be used by the
Company or any such Restricted Subsidiary in the operation of a
Telecommunications Business in the United States will be deemed to be
cash for purposes of this clause (c).
The foregoing provisions will not apply to a sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company, which will
be governed by the provisions of the Indenture described below under "-- Merger,
Consolidation, or Sale of Assets."
The Indenture also provides that within 365 days after the receipt of net
proceeds of any Asset Sale, the Company (or such Restricted Subsidiary, as the
case may be) may apply the Net Proceeds from such Asset Sale to (i) permanently
reduce the amounts permitted to be borrowed by the Company under the terms of
any of its Senior Indebtedness or (ii) the purchase of Telecommunications
Related Assets or Voting Stock of any Person engaged in the Telecommunications
Business in the United States (provided that such Person concurrently becomes a
Restricted Subsidiary of the Company). Any Net Proceeds from any Asset Sales
that are not so applied or invested will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be
required to make an Excess Proceeds Offer in accordance with the terms set forth
under "-- Offer to Purchase with Excess Asset Sale Proceeds."
Liens
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly, create, incur, assume or suffer to exist any Lien
on any asset now owned or hereafter acquired, or any income or profits therefrom
or assign or convey any right to receive income therefrom, except for Permitted
Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly, create or otherwise cause to become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(i) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries on its Capital Stock or with respect to
any other interest or participation in, or measured by, its profits, or pay
any Indebtedness owed to the Company or any of its Restricted Subsidiaries;
(ii) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
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(iii) transfer any of its properties or assets to the Company or any
of its Restricted Subsidiaries;
except for such encumbrances or restrictions existing as of the Issue
Date or under or by reason of:
(a) Existing Indebtedness;
(b) applicable law;
(c) any instrument governing Acquired Debt as in effect at the time
of 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;
(d) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices;
(e) Indebtedness in respect of a Permitted Refinancing, provided
that the restrictions contained in the agreements governing such
Refinancing Indebtedness are not materially more restrictive than those
contained in the agreements governing the Indebtedness being refinanced;
(f) with respect to clause (iii) above, purchase money obligations
for property acquired in the ordinary course of business, Vendor
Indebtedness incurred in connection with the purchase or lease of
Telecommunications Related Assets or performance bonds or similar
security for performance which liens securing such obligations do not
cover any asset other than the asset acquired or, in the case of
performance bonds or similar security for performance, the assets
associated with the Company's performance;
(g) Indebtedness incurred under clause (a) of the covenant entitled
"-- Incurrence of Indebtedness and Issuance of Disqualified Stock;"
(h) the Indenture and the Notes; or
(i) in the case of clauses (a), (c), (e), (f), (g) and (h) above,
any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided
that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are not materially
more restrictive with respect to such dividend and other payment
restrictions than those contained in such instruments as in effect on
the date of their incurrence or, if later, the Issue Date.
Use of Proceeds
The Indenture provides that the Company may use the gross proceeds from the
sale of the Notes only for the following purposes:
(i) to pay the fees and expenses of the issuance of the Notes
including any discount or commission to the Initial Purchasers of the
Notes;
(ii) to acquire Telecommunications Related Assets (other than Voting
Stock), including the payment of the purchase price and related sales and
use taxes therefor and shipping, handling, storage, transportation, testing
and insurance charges, design, integration and site preparation expenses
and installation and service/warranty costs associated with the acquisition
of any Telecommunications Related Assets;
(iii) to acquire the Voting Stock of any Person engaged in the
Telecommunications Business in the United States to the extent that the
purchase price paid by the Company or any Restricted Subsidiary for such
Voting Stock is allocated (as determined by a resolution of the Board of
Directors) to the purchase of Telecommunications Equipment at a purchase
price not in excess of fair market value;
(iv) to purchase the Pledged Securities; and
(v) for working capital purposes.
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The Company will deliver to the Trustee an Officer's Certificate with each
annual compliance certificate certifying that the proceeds of the Notes were
applied in accordance with this covenant.
Security Interests
The Indenture provides that, until the date upon which the Trustee has been
granted a first priority security interest in Telecommunications Equipment
purchased after the Issue Date having a purchase price at least equal to $100.0
million, upon the acquisition of any Telecommunications Equipment, other than
Telecommunications Equipment located or to be located in Las Vegas, Nevada or
the surrounding suburban area, the Company will, and will cause its Restricted
Subsidiaries to, take such action as is required to vest in the Trustee a first
priority security interest in such Telecommunications Equipment, for the benefit
of the holders of Notes, and thereupon all provisions of the Indenture relating
to Collateral shall be deemed to relate to and include such Telecommunications
Equipment. On the Closing Date and from time to time thereafter, the Company
will, and will cause each Restricted Subsidiary to, execute such security
instruments and financing statements as may be reasonably necessary to vest in
the Trustee such security interest. In addition, with respect to any
telecommunications switch that constitutes Collateral, the Company will post a
notice on, or in the location housing, such telecommunications switch,
identifying the Company or the relevant Restricted Subsidiary as the owner of
such telecommunications switch and stating that such telecommunications switch
is subject to the security interest under the Indenture. The release of any lien
on Telecommunications Equipment upon the sale thereof to any ILEC in connection
with the establishment of a virtual collocation with such ILEC shall not
eliminate the credit of the purchase price of such Telecommunications Equipment
against the $100.0 million requirement set forth in the first sentence of this
paragraph, provided that upon any reacquisition by the Company of title to such
Telecommunications Equipment the first priority security interest granted to the
Trustee in such Telecommunications Equipment shall be reinstated.
Impairment of Security Interest
The Indenture provides that the Company will, and will cause its Restricted
Subsidiaries to, on or prior to the Closing Date, file UCC-1s in each state in
the United States in which any Collateral is located covering all such
Collateral, to file UCC-1s in additional states from time to time as may be
necessary to cover Collateral acquired after the Issue Date and to file such
UCC-3 continuation statements from time to time as may be necessary to continue
the effectiveness of such filings and the Company will not, and will not permit
any of its Restricted Subsidiaries to, grant to any Person (other than the
Trustee on behalf of holders of the Notes) any security interest in the
Collateral.
Merger, Consolidation or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving entity), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions to, another
corporation, Person or entity unless:
(i) the Company is the surviving entity or the entity or Person formed
by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition has been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
(ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person
to which such sale, assignment, transfer, lease, conveyance or other
disposition has been made assumes all the obligations of the Company under
the Notes, the Indenture, the Pledge Agreement and the Security Agreement
pursuant to a supplemental indenture in form reasonably satisfactory to the
Trustee;
(iii) immediately after such transaction no Default or Event of
Default exists;
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(iv) except in connection with a Merger with or into a wholly owned
subsidiary of the Company, the Company, or any entity or Person formed by
or surviving any such consolidation or merger, or to which such sale,
assignment, transfer, lease, conveyance or other disposition has been made,
at the time of such transaction after giving pro forma effect thereto as if
such transaction had occurred at the beginning of the applicable fiscal
quarter (including any Indebtedness incurred or anticipated to be incurred
in connection with or in respect of such transaction (A) could incur at
least $1.00 of additional Indebtedness pursuant to the Consolidated Cash
Flow Leverage Ratio test described under "-- Incurrence of Indebtedness and
Issuance of Disqualified Stock" and (B) has Consolidated Net Worth in an
amount which is equal to or greater than the Consolidated Net Worth of the
Company immediately prior to such transaction;
(v) such transaction would not result in the loss, material impairment
or adverse modification or amendment of any authorization or license of the
Company or its Restricted Subsidiaries that would have a material adverse
effect on the business or operations of the Company and its Restricted
Subsidiaries taken as a whole; and
(vi) the Company has delivered to the Trustee an Officer's Certificate
and an Opinion of Counsel each to the effect that, with respect to the
transaction, items (i) through (v) as stated above have been satisfied.
Transactions with Affiliates
The Indenture provides that the Company and its Restricted Subsidiaries may
not sell, lease, transfer or otherwise dispose of any of their respective
properties or assets to, or purchase any property or assets from, or enter into
any contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless:
(i) such Affiliate Transaction is on terms that are no less favorable
to the Company or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person;
(ii) such Affiliate Transaction is approved by a majority of the
disinterested directors on the Board of Directors of the Company;
(iii) the Company delivers to the Trustee, with respect to any
Affiliate Transaction involving aggregate payments in excess of $1.0
million, a resolution of a committee of independent directors of the
Company set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clauses (i) and (ii) above; and
(iv) the Company delivers to the Trustee, with respect to any
Affiliate Transaction involving aggregate payments in excess of $5.0
million, an opinion of an Independent Appraiser that such Affiliate
Transaction complies with clause (i) above;
provided that
(a) transactions pursuant to any employment, stock option or stock
purchase agreement entered into by the Company or any of its Restricted
Subsidiaries, or any grant of stock, in the ordinary course of business
that are approved by the Board of Directors of the Company,
(b) transactions between or among the Company and its Restricted
Subsidiaries,
(c) transactions permitted by the provisions of the Indenture
described above under the covenant "-- Restricted Payments,"
(d) loans and advances to employees and officers of the Company or
any of its Restricted Subsidiaries in the ordinary course of business in
an aggregate principal amount not to exceed $1.0 million at any one time
outstanding, and
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(e) transactions pursuant to existing contracts to which the
Company is a party in accordance with the terms of such contracts as
they exist on the Issue Date,
shall not be deemed Affiliate Transactions.
Business Activities
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly, engage in any business other than the
Telecommunications Business.
The Indenture will provide that, until such time as the Company's
Consolidated EBITDA is positive for each of two consecutive fiscal quarters, the
Company and its Restricted Subsidiaries may not, directly or indirectly (through
the acquisition of Voting Stock, corporate reorganization or otherwise),
purchase, lease, acquire, install or operate more than twenty telecommunications
switches (including telecommunications switches already installed but excluding
remote switches); provided, however, that the 20 switch limitation shall be
increased by the number of telecommunications switches that could be purchased
with the net proceeds to the Company from the sale of any Equity Interests
(other than Disqualified Stock) subsequent to the closing of the Preferred Stock
Offering or, if the Preferred Stock Offering is not closed, the closing of the
Common Stock Commitment.
Limitations on Sale and Leaseback Transactions
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly, enter into, assume, Guarantee or otherwise become
liable with respect to any Sale and Leaseback Transaction, provided that the
Company or any Restricted Subsidiary of the Company may enter into any such
transaction if (i) the Company or such Restricted Subsidiary would be permitted
under the covenants described above under "-- Incurrence of Indebtedness and
Issuance of Disqualified Stock" and "-- Liens" to incur secured Indebtedness in
an amount equal to the Attributable Debt with respect to such transaction, (ii)
the consideration received by the Company or such Restricted Subsidiary from
such transaction is at least equal to the Fair Market Value of the property
being transferred, and (iii) the Net Proceeds received by the Company or such
Restricted Subsidiary from such transaction are applied in accordance with the
covenant described above under the caption "-- Asset Sales."
Reports
The Indenture provides that the Company will file with the Trustee within
15 days after it files them with the Securities and Exchange Commission (the
"Commission") copies of the annual and quarterly reports and the information,
documents, and other reports that the Company is required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC
Reports"). In the event the Company is not required or shall cease to be
required to file SEC Reports, pursuant to the Exchange Act, the Company will
nevertheless continue to file such reports with the Commission (unless the
Commission will not accept such a filing) and the Trustee. Whether or not
required by the Exchange Act to file SEC Reports with the Commission, so long as
any Notes are outstanding, the Company will furnish copies of the SEC Reports to
the holders of Notes at the time the Company is required to file the same with
the Trustee and make such information available to investors who request it in
writing. In addition, the Company has agreed that, for so long as any Notes
remain outstanding, it will furnish to the holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Payments for Consent
The Indenture provides that neither the Company nor any of its Affiliates
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any holder of any 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 or agreed to be paid to all holders of the
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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.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default in payment when due of interest on or Liquidated Damages,
if any, with respect to the Notes as to any interest payment date falling
on or prior to October 1, 2000, and default for 30 days in payment when due
of interest on, or Liquidated Damages, if any, with respect to, the Notes
as to any interest payment date thereafter;
(ii) default in payment when due of principal or premium, if any, on
the Notes at maturity, upon redemption or otherwise;
(iii) failure by the Company to perform or comply with the provisions
of the covenants described above under "-- Offer to Purchase Upon Change of
Control," "-- Asset Sales," "-- Restricted Payments," "-- Incurrence of
Indebtedness and Issuance of Disqualified Stock" or "-- Merger,
Consolidation or Sale of Assets;"
(iv) failure by the Company for 30 days after notice to the Company
from the Trustee or to the Company and the Trustee by the holders of at
least 25% in principal amount of the Notes then outstanding to comply with
its other agreements in the Indenture or the Notes;
(v) 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 the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries), whether such Indebtedness or Guarantee now
exists, or is created after the Issue Date, which default (x) is caused by
a failure to pay when due principal, premium, if any, or interest on such
Indebtedness within the grace period provided in such Indebtedness (a
"Payment Default"), and the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness of the
Company or any Significant Subsidiary under which there has been a Payment
Default or the maturity of which has been accelerated as provided in clause
(y), aggregates $5.0 million or more or (y) results in the acceleration
(which acceleration has not been rescinded) of such Indebtedness prior to
its express maturity and 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;
(vi) failure by the Company or any of its Significant Subsidiaries to
pay final judgments (other than any judgment as to which a reputable
insurance company has accepted full liability in writing) aggregating in
excess of $5.0 million which judgments are not paid, discharged or stayed
within 45 days after their entry; and
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries.
In addition to the foregoing, it shall be an Event of Default under the
Indenture if any of the provisions of the Indenture relating to the Security
Documents or the Security Documents shall cease to be in full force and effect
or shall cease to give the secured parties the Liens, rights, powers and
privileges purported to be created thereby.
If any Event of Default occurs and is continuing under the Indenture, the
Trustee, by notice to the Company, or the holders of at least 25% in principal
amount of the then outstanding Notes, by notice to the Company and the Trustee,
may declare all the Notes to be due and payable immediately. Upon such
declaration, the principal of, premium, if any, and accrued and unpaid interest
and Liquidated Damages, if any, on the Notes shall be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries, the foregoing amount shall ipso
facto become due and payable without further
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action or notice. No premium is payable upon acceleration of the Notes except
that in the case of an Event of Default that is the result of an action or
inaction by the Company or any of its Restricted Subsidiaries intended to avoid
restrictions on or premiums related to redemptions of the Notes contained in the
Indenture or the Notes, the amount declared due and payable will include the
premium that would have been applicable on a voluntary prepayment of the Notes
or, if voluntary prepayment is not then permitted, the premium set forth in the
Indenture. 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 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 payments of principal or
interest) if it determines that withholding notice is in such holders' 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 or Liquidated Damages or premium on, or the principal of,
the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default 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 the Company,
as such, shall have any liability for any obligations of the Company 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. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes and have the liens
and security interests created by the Security Agreement released ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for:
(a) the rights of holders of outstanding Notes to receive from the
trust described below payments in respect of the principal of, premium, if
any, and interest on and Liquidated Damages with respect to such Notes when
such payments are due, or on the redemption date, as the case may be;
(b) the Company'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;
(c) the rights, powers, trust, duties and immunities of the Trustee,
and the Company's obligations in connection therewith; and
(d) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture and have the liens and security interests created
by the Security Agreement released ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including nonpayment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance:
(i) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the holders of the Notes, cash in U.S. dollars,
non-callable U.S. government obligations, or a combination thereof, in such
amounts as will be sufficient (after taking into account the amount, if
any, remaining in the Pledge Account), in the opinion of a nationally
recognized firm of independent public accountants selected by the Company,
to pay the principal of, premium, if any, and interest on and Liquidated
Damages with respect to the outstanding Notes, on the stated maturity or on
the applicable optional redemption date, as the case may be, of such
principal or installment of principal of, premium, if any, or interest on
or Liquidated Damages with respect to the outstanding Notes;
(ii) in the case of Legal Defeasance, the Company must deliver to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (B) since the
Issue Date, 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 shall 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;
(iii) in the case of Covenant Defeasance, the Company must deliver to
the Trustee an opinion of counsel in the United States 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;
(iv) no Default or Event of Default shall have occurred and be
continuing 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 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;
(v) 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 the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day (or such other applicable
date) 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;
(vii) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the holders of Notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors
of the Company or others; and
(viii) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for in the Indenture relating to the Legal Defeasance or
the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange 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 the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
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The registered holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the Indenture or the
Notes may be amended or supplemented with the consent of the holders of at least
a majority in principal amount of the Notes then outstanding (including consents
obtained in connection with a tender offer or exchange offer for Notes), and any
existing default or compliance with any provision of the Indenture or the Notes
may be waived with the consent of the holders of a majority in principal amount
of the then outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for Notes).
Without the consent of each holder affected, however, an amendment or
waiver may not (with respect to any Note held by a non-consenting holder):
(i) reduce the principal amount of Notes whose holders must consent to
an amendment, supplement or waiver;
(ii) reduce the principal 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 under the caption
"-- Offer to Purchase upon Change of Control" and "-- Offer to Purchase
with Excess Asset Sale Proceeds");
(iii) reduce the rate of or change the time for payment of interest on
any Notes;
(iv) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on 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);
(v) make any Note payable in money other than that stated in the
Notes;
(vi) 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, premium, if any, or interest on the Notes;
(vii) waive a redemption payment with respect to any Note (other than
a payment required by one of the covenants described above under the
captions "-- Offer to Purchase upon Change of Control" and "-- Offer to
Purchase with Excess Asset Sale Proceeds");
(viii) make any change in the foregoing amendment and waiver
provisions; or
(ix) amend the Pledge Agreement or the Security Agreement or otherwise
affect the interests of any Holder in the Pledged Securities or the
Collateral, in each case in any manner that adversely affects the rights of
any Holder or the Trustee.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(c) to provide for the assumption of the Company's obligations to
holders of the Notes in the case of a merger or consolidation;
(d) to make any change that would provide any additional rights or
benefits to the holders of the Notes or that does not adversely affect the
legal rights under the Indenture of any such holder; or
(e) to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture
Act.
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CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Company, 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 with the Company; however, if the Trustee acquires any
conflicting interest, it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue as Trustee or resign.
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 will provide that in case an Event of Default
shall occur and be continuing, the Trustee will be required, in the exercise of
its powers, 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, the Pledge Agreement
or the Security Agreement at the request of any holder of Notes, unless such
holder shall have offered to the Trustee security and indemnity satisfactory to
it against any loss, liability or expense. No holder of any Note will have any
right to institute any proceeding with respect to the Indenture, the Pledge
Agreement or the Security Agreement or for any remedy under any thereof, unless
(i) such holder gives to the Trustee written notice of a continuing Event of
Default, (ii) holders of at least 25% in principal amount of the then
outstanding Notes make a written request to pursue the remedy, (iii) such
holders of the Notes provide to the Trustee satisfactory indemnity and (iv) the
Trustee does not comply within 60 days. Otherwise, no holder of any Note will
have any right to institute any proceeding with respect to the Indenture, the
Pledge Agreement or the Security Agreement or for any remedy under any thereof,
except: (i) a holder of a Note may institute suit for enforcement of payment of
the principal of and premium, if any, or interest on or Liquidated Damages with
respect to such Note on or after the respective due dates expressed in such Note
(including upon acceleration thereof) or (ii) the institution of any proceeding
with respect to the Indenture, the Pledge Agreement or the Security Agreement or
any remedy under any thereof, including without limitation acceleration, by the
holders of a majority in principal amount of the outstanding Notes, provided
that, upon institution of any proceeding or exercise of any remedy such holders
provide the Trustee with prompt notice thereof.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchasers have entered into the Registration
Rights Agreement on September 29, 1997. Pursuant to the Registration Rights
Agreement, the Company has agreed to file with the Commission the Exchange Offer
Registration Statement on the appropriate form under the Securities Act. Upon
the effectiveness of the Exchange Offer Registration Statement, the Company will
offer to the holders of Transfer Restricted Securities pursuant to the Exchange
Offer who are able to make certain representations the opportunity to exchange
their Transfer Restricted Securities for a new issue of senior notes of the
Company (the "Exchange Notes") registered under the Securities Act, with terms
substantially identical to those of the Notes. If (i) the Company is not
required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any holder of Transfer Restricted
Securities notifies the Company within the specified time period that (A) it is
prohibited by law or Commission policy from participating in the Exchange Offer,
(B) that it may not resell the Exchange Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and the prospectus contained
in the Exchange Offer Registration Statement is not appropriate or available for
such resales or (C) that it is a broker-dealer and owns Notes acquired directly
from the Company or an affiliate of the Company, the Company will file with the
Commission a Shelf Registration Statement to cover resales of the Notes by the
holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. The Company
will use its best efforts to cause the applicable registration statement to be
declared effective as promptly as possible by the Commission. For purposes of
the foregoing, "Transfer Restricted Securities" means each Note until (i) the
date on which such has been exchanged by a Person other than a broker-dealer for
an Exchange Note in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of a Note for an Exchange Note, the date on
which such an Exchange Note is sold to a purchaser who receives from
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such broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on which
such Note has been effectively registered under the Securities Act and disposed
of in accordance with the Shelf Registration Statement or (iv) the date on which
such Note is distributed to the public pursuant to Rule 144 under the Securities
Act.
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to 30
days after the Closing Date, (ii) the Company will use its best efforts to have
the Exchange Offer Registration Statement declared effective by the Commission
on or prior to 120 days after the Closing Date, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company will
commence the Exchange Offer and use its best efforts to issue, on or prior to 30
business days after the date on which the Exchange Offer Registration Statement
was declared effective by the Commission, Exchange Notes in exchange for all
Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file
the Shelf Registration Statement, the Company will use its best efforts to file
the Shelf Registration Statement with the Commission on or prior to 30 days
after such filing obligation arises (and in any event within 150 days after the
Closing Date) and to cause the Shelf Registration to be declared effective by
the Commission on or prior to 90 days after such obligation arises (and in any
event within 240 days after the Closing Date). If (a) the Company fails to file
any of the Registration Statements required by the Registration Rights Agreement
on or before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), (c) the
Company fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement, (each such
event referred to in clauses (a) through (d) above a "Registration Default"),
then the Company will pay Liquidated Damages to each holder of Transfer
Restricted Securities, with respect to the first 90-day period immediately
following the occurrence of such Registration Default in an amount equal to $.05
per week per $1,000 principal amount of Notes constituting Transfer Restricted
Securities held by such holder. The amount of the Liquidated Damages will
increase by an additional $.05 per week per $1,000 principal amount of Notes
constituting Transfer Restricted Securities with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages of $.50 per week per $1,000 principal amount of
Notes constituting Transfer Restricted Securities. All accrued Liquidated
Damages will be paid by the Company on each Interest Payment Date. Following the
cure of all Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and 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 their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture, the
Registration Rights Agreement, the Pledge Agreement and the Security Agreement
without charge by writing to the Company at 3301 N. Buffalo Drive, Las Vegas,
Nevada 89129, Attention: General Counsel.
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.
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"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by 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"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, 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, however,
that beneficial ownership of 25% or more of the voting securities of a Person
shall be deemed to be control.
"Attributable Debt" means, with respect to any Sale and Leaseback
Transaction, the present value at the time of determination (discounted at a
rate consistent with accounting guidelines, as determined in good faith by the
Company) of the payments during the remaining term of the lease (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended) or until the earliest date on which the lessee may
terminate such lease without penalty or upon payment of a penalty (in which case
the rental payments shall include such penalty), after excluding all amounts
required to be paid on account of maintenance and repairs, insurance, taxes,
assessments, water, utilities and similar charges.
"Beneficial Owner" means a beneficial owner as defined in Rules 13d-3 and
13d-5 under the Exchange Act (or any successor rules), including the provision
of such Rules that a Person shall be deemed to have beneficial ownership of all
securities that such Person has a right to acquire within 60 days; provided that
a Person will not be deemed a beneficial owner of, or to own beneficially, any
securities if such beneficial ownership (1) arises solely as a result of a
revocable proxy delivered in response to a proxy or consent solicitation made
pursuant to, and in accordance with, the Exchange Act and (2) is not also then
reportable on Schedule 13D or Schedule 13G (or any successor schedule) under the
Exchange Act.
"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 such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock and (iii) in the case of a partnership, partnership interests
(whether general or limited) and 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, such partnership.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the Company
and its Restricted Subsidiaries, taken as a whole, to any Person or group (as
such term is used in Section 13(d)(3) and 14(d)(2) of the Exchange Act), (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) any Person or group (as defined above) other than the Permitted
Holders is or becomes the Beneficial Owner, directly or indirectly, of more than
50% of the total Voting Stock or Total Common Equity of the Company, including
by way of merger, consolidation or otherwise or (iv) the first day on which a
majority of the members of the Board of Directors of the Company are not
Continuing Directors.
"Closing Date" means September 29, 1997.
"Closing Price" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or
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admitted to trading on any national securities exchange, on the Nasdaq National
Market or, if such shares are not listed or admitted to trading on any national
securities exchange or quoted on Nasdaq National Market but the issuer is a
Foreign Issuer (as defined in Rule 3b-4(b) under the Exchange Act) and the
principal securities exchange on which such shares are listed or admitted to
trading is a Designated Offshore Securities Market (as defined in Rule 902(a)
under the Securities Act), the average of the reported closing bid and asked
prices regular way on such principal exchange, or, if such shares are not listed
or admitted to trading on any national securities exchange or quoted on Nasdaq
National Market and the issuer and principal securities exchange do not meet
such requirements, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
that is selected from time to time by the Company for that purpose and is
reasonably acceptable to the Trustee.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Common Stock Commitment" means the binding commitment of certain investors
to purchase shares of Common Stock of the Company at a price to be agreed upon
by the Company and such investors, which price shall be not less than $3.50 per
share nor more than $5.00 per share, for an aggregate purchase price of $15.0
million if the Preferred Stock Offering has not been consummated before the
sixtieth day following the Issue Date.
"Consolidated Cash Flow Leverage Ratio" with respect to any Person means
the ratio of the Consolidated Indebtedness of such Person to the Consolidated
EBITDA of such Person for the relevant period; provided, however, that (1) if
the Company or any Restricted Subsidiary of the Company has incurred any
Indebtedness (including Acquired Debt) or if the Company has issued any
Disqualified Stock or if any Restricted Subsidiary of the Company has issued any
Preferred Stock since the beginning of such period that remains outstanding on
the date of such determination or if the transaction giving rise to the need to
calculate the Consolidated Cash Flow Leverage Ratio is an incurrence of
Indebtedness (including Acquired Debt) or the issuance of Disqualified Stock by
the Company, Consolidated EBITDA and Consolidated Indebtedness for such period
will be calculated after giving effect on a pro forma basis to (A) such
Indebtedness, Disqualified Stock or Preferred Stock, as applicable, as if such
Indebtedness had been incurred or such stock had been issued on the first day of
such period, (B) the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new Indebtedness or
sale of stock as if such discharge had occurred on the first day of such period,
and (C) the interest income realized by the Company or its Restricted
Subsidiaries on the proceeds of such Indebtedness or of such stock sale, to the
extent not yet applied at the date of determination, assuming such proceeds
earned interest at the rate in effect on the date of determination from the
first day of such period through such date of determination, (2) if since the
beginning of such period the Company or any Restricted Subsidiary of the Company
has made any sale of assets (including, without limitation, any Asset Sales or
pursuant to any Sale and Leaseback Transaction), Consolidated EBITDA for such
period will be (A) reduced by an amount equal to Consolidated EBITDA (if
positive) directly attributable to the assets which are the subject of such sale
of assets for such period or (B) increased by an amount equal to Consolidated
EBITDA (if negative) directly attributable thereto for such period and (3) if
since the beginning of such period the Company or any Restricted Subsidiary of
the Company (by merger or otherwise) has made an Investment in any Restricted
Subsidiary of the Company (or any Person which becomes a Restricted Subsidiary
of the Company) or has made an acquisition of assets, including, without
limitation, any acquisition of assets occurring in connection with a transaction
causing a calculation of Consolidated EBITDA to be made hereunder, which
constitutes all or substantially all of an operating unit of a business,
Consolidated EBITDA for such period will be calculated after giving pro forma
effect thereto (including the incurrence of any Indebtedness (including Acquired
Debt)) as if such Investment or acquisition occurred on the first day of such
period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the pro forma calculations will be determined
in good faith by a responsible financial or accounting Officer of the Company,
provided, however, that such Officer shall assume (i) the historical sales and
gross profit margins associated with such assets for any consecutive 12-month
period ended prior to the date of purchase (provided that the first month of
such
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12-month period will be no more than 18 months prior to such date of purchase)
and (ii) other expenses as if such assets had been owned by the Company since
the first day of such period. If any Indebtedness (including, without
limitation, Acquired Debt) bears a floating rate of interest and is being given
pro forma effect, the interest on such Indebtedness will be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period.
"Consolidated EBITDA" as of any date of determination means the
Consolidated Net Income for such period (but without giving effect to
adjustments, accruals, deductions or entries resulting from purchase accounting,
extraordinary losses or gains and any gains or losses from any Asset Sales),
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) provision for taxes based on income or profits of such Person and
its Subsidiaries or, in the case of the Company, its Restricted Subsidiaries for
such period, (ii) Consolidated Interest Expense, (iii) depreciation,
amortization (including amortization of goodwill and other intangibles) and
other non-cash charges (excluding any such non-cash charge to the extent that it
represents an accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period and
excluding non-cash interest and dividend income) of such Person and its
Subsidiaries or, in the case of the Company, its Restricted Subsidiaries for
such period, in each case, on a consolidated basis and determined in accordance
with GAAP. Notwithstanding the foregoing, the provision for taxes on the income
or profits of, and the depreciation, amortization, interest expense and other
non-cash charges of, a Subsidiary or, in the case of the Company, a Restricted
Subsidiary of the referent Person shall be added to Consolidated Net Income to
compute Consolidated EBITDA only to the extent (and in same proportion) that the
Net Income of such Subsidiary or, in the case of the Company, such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary, or, in the
case of the Company, such Restricted Subsidiary or loaned to the Company by any
such Subsidiary, or, in the case of the Company any such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Subsidiary or,
in the case of the Company, any such Restricted Subsidiary or its stockholders.
"Consolidated Indebtedness" means, with respect to any Person, as of any
date of determination, the aggregate amount of Indebtedness of such Person and
its Subsidiaries or, in the case of the Company, its Restricted Subsidiaries as
of such date calculated on a consolidated basis in accordance with GAAP
consistently applied.
"Consolidated Interest Expense" means, for any Person, for any period, the
aggregate of the following for such Person for such period determined on a
consolidated basis in accordance with GAAP: (a) the amount of interest in
respect of Indebtedness (including amortization of original issue discount,
amortization of debt issuance costs, and non-cash interest payments on any
Indebtedness, the interest portion of any deferred payment obligation and after
taking into account the effect of elections made under any Interest Rate
Agreement, however denominated with respect to such Indebtedness), (b) the
amount of Redeemable Dividends (to the extent not already included in
Indebtedness in determining Consolidated Interest Expense for the relevant
period) and (c) the interest component of rentals in respect of any Capital
Lease Obligation paid, in each case whether accrued or scheduled to be paid or
accrued by such Person during such period to the extent such amounts were
deducted in computing Consolidated Net Income, determined on a consolidated
basis in accordance with GAAP. For purposes of this definition interest on a
Capital Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by such Person to be the rate of interest implicit in such
Capital Lease Obligation in accordance with GAAP consistently applied.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries or, in the
case of the Company, its Restricted Subsidiaries for such period, on a
consolidated basis, determined in accordance with GAAP; provided that:
(i) the Net Income of any Person that is not a Subsidiary or, in the
case of the Company, a Restricted Subsidiary or that is accounted for by
the equity method of accounting shall be included only
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to the extent of the amount of dividends or distributions paid in cash to
the referent Person or a Subsidiary or, in the case of the Company, a
Restricted Subsidiary thereof,
(ii) the Net Income of any Subsidiary or, in the case of the Company,
any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or other distributions by that
Subsidiary, or Restricted Subsidiary, as the case may be, of that Net
Income is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or Restricted Subsidiary, as the
case may be, or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded,
(iv) the cumulative effect of a change in accounting principles shall
be excluded, and
(v) the Net Income of any Unrestricted Subsidiary shall be excluded,
whether or not distributed to the Company or one of its Restricted
Subsidiaries.
"Consolidated Net Worth" means the total amount shown on the balance sheet
of the Company and its consolidated Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company for which internal financial statements are then
available, prior to the taking of any action for the purpose of which the
determination is being made, as (i) the par or stated value of all outstanding
Capital Stock of the Company plus (ii) paid-in capital or capital surplus
relating to such Capital Stock plus (iii) any retained earnings or earned
surplus less (a) any accumulated deficit and (b) any amounts attributable to
Disqualified Stock.
"Contingent Investment" means, with respect to any Person, any guarantee by
such Person of the performance of another Person or any commitment by such
Person to invest in another Person. Any Investment that consists of a Contingent
Investment shall be deemed made at the time that the guarantee of performance or
the commitment to invest is given, and the amount of such Investment shall be
the maximum monetary obligation under such guarantee of performance or
commitment to invest. To the extent that a Contingent Investment is released or
lapses without payment under the guarantee of performance or the commitment to
invest, such Investment shall be deemed not made to the extent of such release
or lapse. With respect to any Contingent Investment, the payment of the
guarantee of performance or the payment under the commitment to invest shall not
be deemed to be an additional Investment.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the affirmative vote of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facility" means any credit facility entered into by and among the
Company and one or more commercial banks or financial institutions, providing
for senior term or revolving credit borrowings of a type similar to credit
facilities typically entered into by commercial banks and financial
institutions, including any related notes, Guarantees, collateral documents,
instruments and agreements executed in connection therewith, as such credit
facility and related agreements may be amended, extended, refinanced, renewed,
restated, replaced or refunded from time to time.
"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 to the extent that, and only
to the extent that, by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the date on which the Notes mature,
provided, however, that any Capital Stock which would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require the Company to repurchase or
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redeem such Capital Stock upon the occurrence of a Change of Control occurring
prior to the final maturity of the Notes shall not constitute Disqualified Stock
if the change in control provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than the provisions applicable to
the Notes contained in the covenant described under "-- Offer to Purchase Upon a
Change of Control" and such Capital Stock specifically provides that the Company
will not repurchase or redeem any such stock pursuant to such provisions prior
to the Company's repurchase of such Notes as are required to be repurchased
pursuant to the covenant described under "-- Offer to Purchase Upon Change of
Control."
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500.0 million or its equivalent
in foreign currency, whose debt is rated "A" (or higher) according to S&P or
Moody's at the time as of which any investment or rollover therein is made.
"Eligible Receivable" means any Receivable not more than 90 days past due
under its scheduled payment terms.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock or that are measured by the value of Capital
Stock (but excluding any debt security that is convertible into or exchangeable
for Capital Stock).
"Equity Offering" means an underwritten offering of Capital Stock (other
than Disqualified Stock) of the Company registered under the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or
any successor act), and the rules and regulations thereunder.
"Existing Indebtedness" means all Indebtedness of the Company and its
Restricted Subsidiaries in existence on the Issue Date.
"Fair Market Value" means with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"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 may be approved by a significant segment of the accounting
profession of the United States, which are in effect on the Issue Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"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, without limitation, letters of credit and
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 Interest Rate Agreements.
"ILEC" means the incumbent local exchange carrier.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing the balance
deferred and unpaid of the purchase price of any property (including pursuant to
capital leases) or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to the extent any
of the foregoing (other than Hedging Obligations or letters of credit) would
appear as a liability upon a balance sheet of such Person prepared in accordance
with GAAP, all indebtedness of others secured by a Lien on any asset of such
Person (whether or not such indebtedness is assumed by such Persons), all
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obligations to purchase, redeem, retire, defease or otherwise acquire for value
any Disqualified Stock or any warrants, rights or options to acquire such
Disqualified Stock valued, in the case of Disqualified Stock, at the greatest
amount payable in respect thereof on a liquidation (whether voluntary or
involuntary) plus accrued and unpaid dividends, the liquidation value of any
Preferred Stock issued by Subsidiaries of such Person or by Restricted
Subsidiaries of the Company, as the case may be, plus accrued and unpaid
dividends, and also includes, to the extent not otherwise included, the
Guarantee of items that would be included within this definition and any
amendment, supplement, modification, deferral, renewal, extension or refunding
of any of the above; notwithstanding the foregoing, in no event will performance
bonds or similar security for performance be deemed Indebtedness so long as such
performance bonds or similar security for performance would not appear as a
liability on a balance sheet of such Person prepared in accordance with GAAP;
and provided further, that the amount of any Indebtedness in respect of any
Guarantee shall be the maximum principal amount of the Indebtedness so
guaranteed.
"Independent Appraiser" means a nationally recognized accounting, appraisal
or investment banking firm experienced in the review of similar types of
transactions which does not have, and whose directors, officers and employees or
Affiliates do not have, a direct or indirect financial interest in the Affiliate
Transaction and which, in the opinion of the Board of Directors, is otherwise
independent and qualified to perform the task for which it is to be engaged.
"Interest Rate Agreements" means (i) interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements and (ii) 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 loans,
Guarantees, Contingent Investments, 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 of any other Person and
all other items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP; provided, however, that any investment
to the extent made with Capital Stock of the Company (other than Disqualified
Stock) shall not be deemed an "Investment" for purposes of the Indenture.
"Issue Date" means September 29, 1997.
"Joint Venture" means a Person in the Telecommunications Business in which
the Company holds less than a majority of the shares of Voting Stock or an
Unrestricted Subsidiary in the Telecommunications Business.
"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).
"Marketable Securities" means:
(i) Government Securities;
(ii) any certificate of deposit maturing not more than 270 days after
the date of acquisition issued by, or time deposit of, an Eligible
Institution;
(iii) commercial paper maturing not more than 270 days after the date
of acquisition issued by a corporation (other than an Affiliate of the
Company) with a rating at the time as of which any investment therein is
made, of "A-1" (or higher) according to S&P or "P-1" (or higher) according
to Moody's;
(iv) any banker's acceptances or money market deposit accounts issued
or offered by an Eligible Institution; and
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<PAGE> 86
(v) any fund investing exclusively in investments of the types
described in clauses (i) through (iv) above.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) 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 (including, without
limitation, dispositions pursuant to Sale and Leaseback Transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or, in
the case of the Company, any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries or,
in the case of the Company, any of its Restricted Subsidiaries and (ii) 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 the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale, net of the
direct costs relating to such Asset Sale (including, without limitation, 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 (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the asset or assets that are
the subject of such Asset Sale and any reserve for adjustment in respect of the
sale price of such asset or assets. Net Proceeds shall exclude any non-cash
proceeds received from any Asset Sale, but shall include such proceeds when and
as converted by the Company or any Restricted Subsidiary of the Company to cash.
"Pari Passu Notes" means any notes issued by the Company which, by their
terms and the terms of any indenture governing such notes, have an obligation to
be repurchased by the Company upon the occurrence of an Asset Sale.
"Permitted Holder" means (i) Circle F Ventures, LLC or any of its
Affiliates, (ii) any of Maurice J. Gallagher, Jr., Timothy P. Flynn, Robert L.
Priddy or Nield J. Montgomery or their respective spouses or lineal descendants
and their respective spouses (collectively, the "Individual Family Holders")
whether acting in their own name or as a majority of persons having the power to
exercise the voting rights attached to, or having investment power over, shares
held by others, (iii) any Affiliate of any member of the Individual Family
Holders, (iv) any trust principally for the benefit of one or more members of
the Individual Family Holders (whether or not any member of the Individual
Family Holders is a trustee of such trust) and (v) any charitable foundation
whose majority of members, trustees or directors, as the case may be, are
persons referred to in (ii) above.
"Permitted Investment" means (a) any Investments in the Company or any
Restricted Subsidiary of the Company; (b) any Investments in Marketable
Securities; (c) Investments by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of such Investment (i) such Person becomes a
Restricted Subsidiary of the Company or (ii) such Person is merged, consolidated
or amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary of the
Company; (d) any Investments in property or assets to be used in (A) any line of
business in which the Company or any of its Restricted Subsidiaries was engaged
on the Issue Date or (B) any Telecommunications Business; (e) up to $20.0
million at any one time outstanding in Investments in Joint Ventures, provided,
however, that Investments in Joint Ventures which are not also Unrestricted
Subsidiaries shall not exceed $10.0 million at any one time outstanding; (f)
Investments pursuant to any agreement or obligation of the Company or a
Restricted Subsidiary, in effect on the Issue Date or on the date a Subsidiary
becomes a Restricted Subsidiary (provided that any such agreement was not
entered into in contemplation of such Subsidiary becoming a Restricted
Subsidiary), to make such Investments; (g) Investments in prepaid expenses,
negotiable instruments held for collection and lease, utility and workers'
compensation, performance and other similar deposits; (h) Hedging Obligations
permitted to be incurred by the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock"; (i) bonds, notes, debentures or other
securities received as a result of Asset Sales permitted under the covenant
entitled "Asset Sales"; and (j) loans and
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<PAGE> 87
advances to employees and officers of the Company or any of its Restricted
Subsidiaries permitted under the covenant entitled "Transactions with
Affiliates."
"Permitted Liens" means (i) Liens securing Indebtedness (including Capital
Lease Obligations) permitted to be incurred pursuant to clauses (a) and (b) of
the second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock"; (ii) Liens in favor of the Company; (iii) Liens on
property of a Person existing, at the time such Person is merged into or
consolidated with the Company or any Restricted Subsidiary of the Company;
provided that such Liens were not incurred in contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing at
the time of acquisition thereof by the Company or any Restricted Subsidiary of
the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition; (v) 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; (vi)
Liens existing, on the Issue Date; (vii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings timely instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(viii) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $3.0 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 the Company or such
Restricted Subsidiary; (ix) Liens on Telecommunications Related Assets existing
during the time of the construction thereof; (x) Liens on Receivables to secure
Indebtedness permitted to be incurred by the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock," but only to the extent that the
outstanding amount of the Indebtedness secured by such Liens would not represent
more than 80% of Eligible Receivables; (xi) Liens on Telecommunications
Equipment required to be incurred pursuant to the covenant entitled "Security
Interests"; and (xii) Liens to secure any Permitted Refinancing of any
Indebtedness secured by Liens referred to in the foregoing clauses (i), (iii),
(iv), (v), (vi) or (x); but only to the extent that such Liens do not extend to
any other property or assets and the principal amount of the Indebtedness
secured by such Liens is not increased by more than the fees and expenses
incurred in connection with such refinancing.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Pledge Account" means an account established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the Pledged Securities
purchased by the Company with a portion of the proceeds from the sale of the
Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the date of the Indenture, by and between the Trustee and the
Company, governing the disbursement of funds from the Pledge Account.
"Pledged Securities" means the securities purchased by the Company with a
portion of the proceeds from the sale of the Notes, which shall consist of
Government Securities, to be deposited in the Pledge Account.
"Preferred Stock" as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to payment of dividends or as to the distribution of assets upon
any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"Preferred Stock Offering" means the offering of Convertible Preferred
Stock of the Company to generate aggregate gross proceeds of at least $15.0
million.
"Qualified Equity Offering" means an Equity Offering in which the net
proceeds to the Company are not less than $25.0 million.
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<PAGE> 88
"Receivables" means, with respect to any Person, all of the following
property and interests in property of such person or entity, whether now
existing or existing in the future or hereafter acquired or arising: (i)
accounts; (ii) accounts receivable, including, without limitation, all rights to
payment created by or arising from sales of goods, leases of goods or the
rendition of services no matter how evidenced, whether or not earned by
performance; (iii) all unpaid seller's or lessor's rights including, without
limitation, rescission, replevin, reclamation and stoppage in transit, relating
to any of the foregoing after creation of the foregoing or arising therefrom;
(iv) all rights to any goods or merchandise represented by any of the foregoing,
including, without limitation, returned or repossessed goods; (v) all reserves
and credit balances with respect to any such accounts receivable or account
debtors; (vi) all letters of credit, security, or Guarantees for any of the
foregoing; (vii) all insurance policies or reports relating to any of the
foregoing; (viii) all collection of deposit accounts relating to any of the
foregoing; (ix) all proceeds of any of the foregoing; and (x) all books and
records relating to any of the foregoing.
"Redeemable Dividend" means, for any dividend with regard to Disqualified
Stock and Preferred Stock, the quotient of the dividend divided by the
difference between one and the maximum statutory federal income tax rate
(expressed as a decimal number between 1 and 0) then applicable to the issuer of
such Disqualified Stock or Preferred Stock.
"Registration Rights Agreement" means the Registration Rights Agreement
between the Company and the Initial Purchasers.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Payment Credit" means the sum of (i) any cash received by the
Company as repayment of a Restricted Payment and (ii) the lesser of (x) the net
book value of any Restricted Investment at the time it becomes a Permitted
Investment, (y) the fair market value of such Restricted Investment at the time
it becomes a Permitted Investment and (z) the original fair market value of such
Restricted Investment at the time it was made.
"Restricted Subsidiary" means any subsidiary of the Company that is not
designated by the Board of Directors as an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which any property (other than
Capital Stock) is sold by such Person or a Subsidiary, or, in the case of the
Company, a Restricted Subsidiary of such Person and is thereafter leased back
from the purchaser or transferee thereof by such Person or one of its
Subsidiaries or, in the case of the Company, one of its Restricted Subsidiaries.
"Security Agreement" means the Security Agreement, dated as of the date of
the Indenture, by and between the Company and the Trustee, as collateral agent.
"Security Documents" means the Security Agreement and any other agreements,
instruments or documents entered into or delivered in connection with the
Security Agreement, as such agreements, instruments or documents may from time
to time be amended in accordance with their terms.
"Senior Indebtedness" means any Indebtedness permitted to be incurred by
the Company under the terms of the Indenture, unless the instrument under which
such Indebtedness is incurred expressly provides that it is subordinated in
right of payment to the Notes. Notwithstanding anything to the contrary in the
foregoing, Senior Indebtedness will not include (i) any liability for federal,
state, local or other taxes owed or owing by the Company, (ii) any Indebtedness
of the Company to any of its Subsidiaries or other Affiliates, (iii) any trade
payables or (iv) any Indebtedness that is incurred in violation of the
Indenture.
"Significant Subsidiary" means (i) any Restricted Subsidiary that would be
a "Significant Subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof and (ii) any Subsidiary which holds any permit or license which
is material to the operations of the Company and its Restricted Subsidiaries
taken as a whole.
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<PAGE> 89
"Subsidiary" of any Person means (i) any corporation, association or
business entity of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by such Person or one or more of
the other Subsidiaries of such Person or a combination thereof and (ii) any
partnership (a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person or (b) the only general
partners of which are such Person or one or more Subsidiaries of such Person or
any combination thereof.
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities and (ii) creating, developing or
marketing communications related network equipment, software and other devices
for use in a Telecommunications Business.
"Telecommunications Equipment" means telecommunications switches and
related equipment and inventory, including, without limitation, all remote
switching nodes, modems, line cards, transport hardware and equipment or
hardware necessary to install and operate the telecommunications switches.
"Telecommunications Related Assets" means all assets, rights (contractual
or otherwise) and properties, whether tangible or intangible, real or personal,
used or to be used, in connection with a Telecommunications Business.
"Total Common Equity" of any Person means, as of any date of determination
the product of (i) the aggregate number of outstanding primary shares of Common
Stock of such Person on such day (which shall not include any options or
warrants on, or securities convertible or exchangeable into, shares of Common
Stock of such Person) and (ii) the average Closing Price of such Common Stock
over the 20 consecutive Trading Days immediately preceding such day. If no such
Closing Price exists with respect to shares of any such class, the value of such
shares for purposes of clause (ii) of the preceding sentence shall be determined
by the Board of Directors of the Company in good faith and evidenced by a
resolution of the Board of Directors filed with the Trustee.
"Trading Day," with respect to a securities exchange or automated quotation
system, means a day on which such exchange or system is open for a full day of
trading.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a resolution of the
Board of Directors.
"Vendor Indebtedness" means any Indebtedness of the Company or any
Restricted Subsidiary incurred in connection with the acquisition or
construction of Telecommunications Related Assets.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or Persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
principal amount of such Indebtedness into (b) the total of the product obtained
by multiplying (x) 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 (y) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment; provided, that with respect to Capital Lease Obligations, that
maturity shall be calculated after giving effect to all renewal options by the
lessee.
84
<PAGE> 90
UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES OF THE EXCHANGE OF NOTES
The following summary of all material federal income tax consequences of
the exchange of Notes is based on the opinion of Ellis, Funk, Goldberg, Labovitz
& Dokson, P.C., counsel to the Company, which opinion has been filed as an
exhibit to the Registration Statement. Such opinion is based upon the provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), the final,
temporary and proposed regulations promulgated thereunder, and administrative
rulings and judicial decisions in effect as of the date hereof, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. The following summary is not binding on the Internal Revenue
Service ("IRS") and there can be no assurance that the IRS will take a similar
view with respect to the tax consequences described below. No ruling has been or
will be requested by the Company from the IRS on any tax matters relating to the
Notes or the Exchange Offer. This discussion is for general information only and
does not purport to address the possible federal income tax consequences or any
state, local or foreign tax consequences of the acquisition, ownership and
disposition of the Notes or the Exchange Notes other than the exchange of
Outstanding Notes for Exchange Notes in this Exchange Offer.
This summary deals only with holders that hold Notes as capital assets and
does not address tax considerations applicable to investors that may be subject
to special tax rules, such as banks, tax exempt organizations, insurance
companies, dealers in securities or currencies, persons that hold Notes as a
position in a "straddle" for tax purposes, persons that hold Notes that are a
hedge or that are hedged against currency risks or that are part of a conversion
transaction, or persons that have a "functional currency" other than the U.S.
dollar. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
APPLICATION OF THE FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION.
Subject to the foregoing, the opinion of Ellis, Funk, Goldberg, Labovitz &
Dokson, P.C. states that: (1) The exchange of the Outstanding Notes for Exchange
Notes pursuant to the Exchange Offer will not be treated as an "exchange"
because the Exchange Notes will not be considered to differ materially in kind
or extent from the Outstanding Notes. (2) Rather, the Exchange Notes received by
a holder of the Outstanding Notes will be treated as a continuation of the
Outstanding Notes in the hands of such holder. (3) As a result, there will be no
federal income tax consequences to holders exchanging the Outstanding Notes for
the Exchange Notes pursuant to the Exchange Offer.
PLAN OF DISTRIBUTION
Based on positions taken by the staff of the Commission set forth in
no-action letters issued to Exxon Capital Holdings Corp. and Morgan Stanley &
Co. Inc., among others, the Company believes that Exchange Notes issued pursuant
to the Exchange Offer in exchange for Outstanding Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any
holder which is (i) an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act, (ii) a broker-dealer who acquired Notes directly from
the Company, or (iii) broker-dealers who acquired Notes as a result of
market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions for the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business, and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes; provided that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange Offer
will be subject to a prospectus delivery requirement with respect to resales of
such Exchange Notes. To date, the staff of the Commission has taken the position
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to transactions involving an exchange of securities
such as the exchange pursuant to the Exchange Offer (other than a resale of an
unsold allotment from the sale of the Outstanding Notes to the Initial
Purchasers thereof) with the Prospectus contained in the Exchange Offer
Registration Statement. Pursuant to the Registration Rights Agreement, the
Company has agreed to permit Participating Broker-
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<PAGE> 91
Dealers and other persons, if any, subject to similar prospectus delivery
requirements to use this Prospectus in connection with the resale of such
Exchange Notes. The Company has agreed that, for a period of 365 days after the
effective date of the Registration Statement, it will make this Prospectus, and
any amendment or supplement to this Prospectus, available to any broker-dealer
that requests such documents.
Each holder of Outstanding Notes who wishes to exchange its Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer -- Terms and
Conditions of the Letter of Transmittal." In addition, each holder who is a
broker-dealer and who receives Exchange Notes for its own account in exchange
for Outstanding Notes that were acquired by it as a result of market-making
activities or other trading activities, will be required to acknowledge that it
will deliver a prospectus in connection with any resale by it of such Exchange
Notes.
Holders who tender Outstanding Notes in the Exchange Offer with the
intention to participate in a distribution of the Exchange Notes may not rely
upon the Morgan Stanley or similar no-action letters.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the 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 Exchange 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 at 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 broker-dealer and/or the purchasers of any such Exchange Notes. The Letter
of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Outstanding Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act, as
set forth in the Registration Rights Agreement.
LEGAL MATTERS
Certain legal matters regarding the validity of the Exchange Notes offered
hereby and the United States federal income tax consequences of the Exchange
Offer will be passed upon for the Company by Ellis, Funk, Goldberg, Labovitz &
Dokson, P.C., Atlanta, Georgia. Certain shareholders of Ellis, Funk, Goldberg,
Labovitz & Dokson, P.C. own approximately 60,000 shares of common stock of the
Company.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1995
and for the year ended December 31, 1996, have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
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<PAGE> 92
INDEX TO FINANCIAL STATEMENTS
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets as of September 30, 1997 (unaudited) and
December 31, 1996 and 1995................................ F-3
Statements of Operations for the nine months ended September
30, 1997 and 1996 (unaudited) and for the year ended
December 31, 1996......................................... F-4
Statements of Stockholders' Equity for the period from
October 16, 1995 (inception) to December 31, 1996 and for
the period from January 1, 1997 to September 30, 1997
(unaudited)............................................... F-5
Statements of Cash Flows for the nine months ended September
30, 1997 and 1996 (unaudited) and for the year ended
December 31, 1996......................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 93
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MGC Communications, Inc.:
We have audited the accompanying balance sheets of MGC Communications, Inc.
(a development stage company) as of December 31, 1996 and 1995 (Note 1) and the
related statements of operations and cash flows for the year ended December 31,
1996 and the statement of stockholders' equity for the period October 16, 1995
(inception) through December 31, 1996. The 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 audits 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 MGC Communications, Inc. (a
development stage company) as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Las Vegas, Nevada
August 18, 1997
F-2
<PAGE> 94
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------
1997 1996 1995
------------- ------- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 95,390 $ 7,897 $--
Restricted investments.................................... 18,235 -- --
Amounts receivable for shares issued...................... 400 1,153 --
Accounts receivable:
Trade, less allowance for doubtful accounts of $137
(unaudited) at September 30, 1997..................... 744 1 --
Other................................................... 394 9 --
-------- ------- ---
Total accounts receivable.......................... 1,138 10 --
Prepaid expenses.......................................... 66 23 --
-------- ------- ---
Total current assets............................... 115,229 9,083 --
Property and equipment, net................................. 18,339 3,250 --
Restricted investments...................................... 38,532 -- --
Deferred financing costs.................................... 5,870 -- --
Other assets................................................ 56 6 1
-------- ------- ---
Total assets....................................... $178,026 $12,339 $ 1
======== ======= ===
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 390 $ -- $--
Accounts payable:
Trade................................................... 923 76 --
Property and equipment.................................. 5,251 1,372 --
Accrued expenses.......................................... 455 99 --
-------- ------- ---
Total current liabilities.......................... 7,019 1,547 --
-------- ------- ---
Senior Secured Notes, net of unamortized discount of
$4,026.................................................... 155,974 -- --
Other long-term debt........................................ 225 -- --
-------- ------- ---
Total liabilities.................................. 163,218 1,547 --
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value, 100,000,000 shares
authorized, 14,666,000 (unaudited), 11,960,000, and
400,000 shares issued and outstanding................... 15 12
Additional paid-in capital................................ 22,111 12,271 1
Accumulated deficit (during development stage as of
December 31, 1996)...................................... (6,630) (1,491) --
-------- ------- ---
15,496 10,792 1
Notes receivable from stockholders for issuance of common
stock................................................... (688) -- --
Total stockholders' equity......................... 14,808 10,792 1
-------- ------- ---
Total liabilities and stockholders' equity......... $178,026 $12,339 $ 1
======== ======= ===
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 95
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
------------------------- DECEMBER 31,
1997 1996 1996
----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Telecommunication services:
Operating revenues........................................ $ 1,924 $ -- $ 1
------- ------ -------
Operating expenses:
Cost of operating revenues (excluding depreciation shown
below)................................................. 2,512 44 305
------- ------ -------
Selling, general and administrative....................... 3,954 359 841
Depreciation and amortization............................. 818 -- 54
Write-off of purchased software........................... -- -- 355
------- ------ -------
7,284 403 1,555
------- ------ -------
Loss from operations.............................. (5,360) (403) (1,554)
Other income (expense):
Interest income........................................... 338 31 63
Interest expense.......................................... (117) -- --
Net loss.......................................... $(5,139) $ (372) $(1,491)
======= ====== =======
Net loss per share of common stock.......................... $ (0.37) $(0.40) $ (1.27)
======= ====== =======
Weighted average shares outstanding......................... 13,917 936 1,178
======= ====== =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 96
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM OCTOBER 16, 1995 (INCEPTION) TO DECEMBER 31, 1996 AND FOR
THE PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 30, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FROM
STOCKHOLDERS
COMMON STOCK FOR ISSUANCE TOTAL
PRICE PER -------------------- ADDITIONAL PAID- ACCUMULATED OF COMMON STOCKHOLDERS'
SHARE SHARES AMOUNT IN CAPITAL DEFICIT STOCK EQUITY
--------- ---------- ------- ---------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
October 16, 1995
(inception) --
Issuance of common stock
for incorporation costs
contributed by a
stockholder.............. $0.0025 400,000 -- 1 -- -- 1
---------- ------- ----------- ----------- -------- ------------
Balance at December 31,
1995..................... 400,000 -- 1 -- -- 1
Issuance of common stock
for services contributed
by stockholder........... $0.0025 800,000 1 1 -- -- 2
Issuance of common stock
for cash................. $0.50 6,160,000 6 3,074 -- -- 3,080
Issuance of common stock
for cash................. $2.00 4,600,000 5 9,195 -- -- 9,200
Net loss................... -- -- -- (1,491) -- (1,491)
---------- ------- ----------- ----------- -------- ------------
Balance at December 31,
1996..................... 11,960,000 12 12,271 (1,491) -- 10,792
Issuance of common stock
for cash (unaudited)..... $2.00 2,431,000 3 4,859 -- -- 4,862
Issuance of common stock
for notes receivable
(unaudited).............. $2.50 275,000 -- 688 -- (688) --
Proceeds from Senior
Secured Notes and Warrant
Offering allocated to
Warrants, net of expenses
of $141 (unaudited)...... -- -- 3,884 -- -- 3,884
Warrants issued as
consideration in Senior
Secured Notes and Warrant
Offering (unaudited)..... -- -- -- 409 -- -- 409
Net loss (unaudited)....... -- -- -- -- (5,139) -- (5,139)
---------- ------- ----------- ----------- -------- ------------
Balance at September 30,
1997 (unaudited)......... 14,666,000 15 22,111 (6,630) (688) 14,808
========== ======= =========== =========== ======== ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 97
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
------------------------- DECEMBER 31,
1997 1996 1996
----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (5,139) $ (372) $(1,491)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 818 -- 54
Write-off of purchased software......................... -- -- 355
Stock issued for services rendered...................... -- -- 2
Changes in assets and liabilities:
Increase in accounts receivable, net................. (1,128) (2,391) (9)
Increase in prepaid expenses......................... (43) (17) (23)
Increase in other assets............................. (50) (11) (5)
Increase in accounts payable -- trade................ 847 -- 76
Increase in accrued expenses......................... 356 19 99
-------- ------- -------
Net cash used in operating activities.............. (4,339) (2,772) (942)
-------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment, net of payables....... (11,413) (308) (2,287)
Purchase of restricted investments........................ (56,767) -- --
-------- ------- -------
Net cash used in investing activities.............. (68,180) (308) (2,287)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of Senior Secured Notes and
warrants................................................ 160,000 -- --
Costs associated with issuance of Senior Secured Notes and
warrants of $5,462 and $141, respectively (unaudited)... (5,603) -- --
Proceeds from issuance of common stock.................... 5,615 3,080 11,126
-------- ------- -------
Net cash provided by financing activities.......... 160,012 3,080 11,126
-------- ------- -------
Net increase in cash............................... 87,493 -- 7,897
Cash and cash equivalents at beginning of period............ 7,897 -- --
-------- ------- -------
Cash and cash equivalents at the end of period.............. $ 95,390 $ -- $ 7,897
======== ======= =======
Non-cash transactions:
Stock issued for services rendered........................ $ -- $ 2 $ 2
======== ======= =======
Increase in property and equipment purchases included in
accounts payable -- property and equipment.............. $ 3,879 $ -- $ 1,372
======== ======= =======
Notes payable issued for property and equipment........... $ 615 $ -- $ --
======== ======= =======
Stock issued for notes receivable......................... $ 688 $ -- $ --
======== ======= =======
Warrants issued as consideration in debt and warrant
offering capitalized as deferred financing costs........ $ 409 $ -- $ --
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 98
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED.)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
DESCRIPTION OF BUSINESS
MGC Communications, Inc. (the "Company"), a Nevada Corporation, was
organized on October 16, 1995 as a competitive local exchange carrier to provide
low cost alternative local telecommunication services to residential and small
business users through the utilization of Company owned switches and network
architecture leased from incumbent local exchange carriers. The Company's
revenue operations commenced in December 1996. The Company is headquartered in
Las Vegas, Nevada. The Company expects to continue expansion and development of
services and entering into new markets.
PERIOD FROM OCTOBER 16, 1995 (INCEPTION) TO DECEMBER 31, 1995
Statements of operations and cash flows for the period from October 16,
1995 (inception) to December 31, 1995 have been omitted as no revenues or
expenses were recognized and no cash transactions occurred during the period.
One non-cash transaction occurred during the period ended December 31, 1995 in
which the Company issued 400,000 shares of $.001 par value common stock valued
at $.0025 per share to the founding shareholder as reimbursement for
incorporation costs.
As of December 31, 1996, the Company was a development stage company
wherein the Company's activities consist primarily of acquiring
telecommunications equipment, designing and developing the Company's networks,
negotiating agreements with incumbent local exchange carriers for the
utilization of their transport network architecture and raising capital. The
Company began its operations in December 1996 by operating its first telephone
switch in Las Vegas, Nevada. The Company plans to be operational in an
additional two, seven, and seven suburban metropolitan areas by the end of 1997,
1998, and 1999, respectively. Expansion and development of the Company's
business and services and the development of new markets require significant
capital expenditures. The Company expects to fund its capital requirements
through existing resources, debt or equity financing and internally generated
funds. During the nine months ended September 30, 1997, the Company's planned
principal activities commenced. Therefore, the Company has emerged from its
development stage and the inception to date disclosures for the nine months
ended September 30, 1997, have been excluded from the accompanying financial
statements.
To the extent the Company is unable to achieve its funding plan, management
has contingency plans which include curtailing capital expenditure activities,
reducing infrastructure costs associated with expansion and development plans,
achieving profitable operations as soon as practicable and raising additional
capital from certain of the existing majority shareholders as may be necessary.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of and for the nine month periods ending
September 30, 1997 and 1996 are unaudited, but include all adjustments,
consisting of normal recurring accruals, which management considers necessary
for a fair presentation.
REVENUE RECOGNITION
The Company recognizes operating revenues from telecommunication services
in the period the related services are provided.
F-7
<PAGE> 99
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED.)
COST OF OPERATING REVENUES
The Company includes all direct and indirect costs in cost of operating
revenues except depreciation which is reported separately on the statement of
operations.
CASH AND CASH EQUIVALENTS
The Company considers short-term investments with a remaining maturity of
three months or less at the date of purchase to be cash equivalents.
RESTRICTED INVESTMENTS
Restricted investments represent United States Treasury Notes maturing in
various installments which will be utilized to fund the interest expense on the
Senior Secured Notes as further discussed in Note 3.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated useful
life of the asset, which is generally 3-8 years.
The costs of major remodeling and improvements on leased offices are
capitalized as leasehold improvements. Leasehold improvements are depreciated on
the straight-line method over the shorter of the life of the applicable lease or
the useful life of the asset.
DEFERRED FINANCING COSTS
Deferred financing costs will be amortized over the life of the related
debt.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating losses. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
LOSS PER SHARE
Loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding. Usually equivalent shares in the form of
stock options or other common stock equivalents are included in the calculation
only when the effects are dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 Disclosure About Fair
Value of Financial Instruments (SFAS 107) requires all entities to disclose the
fair value of financial instruments, both assets and liabilities recognized and
not recognized on the balance sheet, for which it is practicable to estimate
fair value.
F-8
<PAGE> 100
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED.)
SFAS 107 defines fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
At September 30, 1997 and December 31, 1996, the carrying value of all financial
instruments (accounts receivable, accounts payable and long-term debt)
approximates fair value due to the short term nature of these instruments or
interest rates which are comparable with current rates.
LONG-LIVED ASSETS
Management evaluates the carrying value of all long-lived assets to
determine recoverability based generally on an analysis of non-discounted cash
flows. Management believes no material impairment in the value of long-lived
assets exists at September 30, 1997 or December 31, 1996.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
128), which establishes standards for computing and presenting earnings per
share (EPS). It replaces the presentation of primary and fully diluted EPS with
a presentation of basic and diluted EPS. SFAS 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. After adoption, all prior period EPS data
should be restated to conform to SFAS 128.
The Company will adopt SFAS 128 in the fourth quarter of 1997. The pro
forma impact of SFAS 128, on the nine months ended September 30, 1997 and the
year ended December 31, 1996, is that basic and diluted EPS would have been
equal to net loss per share of common stock as presented in the respective
statements of operations.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, Disclosure of Information about Capital Structure (SFAS 129).
SFAS 129 establishes standards for disclosing information about an entity's
capital structure. The Company currently complies with the disclosure
requirements of this statement which is effective for periods ending after
December 15, 1997. Implementation will not impact the Company's financial
presentation of its capital structure.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 requires companies
to classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
sections of a statement of financial position, and is effective for financial
statements issued for fiscal years beginning after December 15, 1997. The
Company is currently assessing the impact on the financial statements for the
nine months ended September 30, 1997 and for the year ended December 31, 1996,
and believes that SFAS 130 will not result in comprehensive income different
from net income as reported in the accompanying financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosure About Segments of an Enterprise and Related Information
(SFAS 131). SFAS 131 establishes additional standards for segment reporting in
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company currently operates as one segment.
F-9
<PAGE> 101
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED.)
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Building and property...................................... $ 257 $ --
Switching equipment........................................ 11,526 2,813
Leasehold improvements..................................... 445 429
Computer hardware and software............................. 593 51
Office equipment........................................... 74 --
---------- ----------
12,895 3,293
Less accumulated depreciation.............................. (861) (43)
---------- ----------
12,034 3,250
Switching equipment under construction..................... 6,305 --
---------- ----------
Net property and equipment....................... $ 18,339 $ 3,250
========== ==========
</TABLE>
(3) DEBT
The Company had no long-term borrowings as of December 31, 1996. Long-term
borrowings at September 30, 1997 consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
13% Senior Secured Notes, due October 1, 2004, net of
unamortized discount of $4,026..................... $155,974
10% note payable in monthly installments through
February 1999...................................... 597
Other................................................ 18
--------
156,589
Less current portion................................. (390)
--------
$156,199
========
</TABLE>
F-10
<PAGE> 102
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED.)
Maturities of long-term debt for each of the next five years consist of the
following:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30: (IN THOUSANDS)
- ------------------------- --------------
<S> <C>
1998................................................. $ 390
1999................................................. 225
2000................................................. --
2001................................................. --
2002................................................. --
2003 and thereafter.................................. 155,974
--------
$156,589
========
</TABLE>
In September 1997, the Company completed an offering for 160,000 units
consisting of $160 million of 13% Senior Secured Notes ("Notes") due in 2004 and
warrants to purchase 1,291,200 shares of common stock (collectively the
"Offering").
The Notes bear interest at the rate of 13% per annum, payable semi-annually
in arrears on April 1 and October 1, commencing April 1, 1998. As set forth in
the Indenture Agreement dated September 29, 1997, the Company shall hold in a
trust account sufficient funds to provide for payment in full of interest on the
Notes through October 1, 2000. The accompanying financial statements reflect
approximately $56.8 million as restricted investments as security for the
interest payments on the Notes. In addition, the Notes are secured by a security
interest in certain telecommunications equipment owned by the Company or which
may be acquired in the future. As of September 30, 1997, the Notes were secured
by a security interest in telecommunications equipment with a net book value of
$7.1 million and restricted investments of approximately $56.8 million (at
cost).
In conjunction with the Offering, the Company engaged an investment banking
firm which determined a value for each warrant and share of common stock.
Consistent with this determination, the Company has allocated a portion of the
Offering proceeds to the warrants based on a value of $2.81 per share of common
stock less the exercise price of $.01 per share for the warrant.
The warrants are exercisable at any time on or after the earlier to occur
of (i) October 1, 1998, or (ii) the date on which a change in control occurs. As
set forth in the Warrant Agreement, if the preferred stock offering or the
common stock commitment is consummated at a price less than $5.00 per share, the
number of warrants issued will be adjusted to represent 6.4% of the outstanding
common stock on a fully diluted basis. As further discussed in Note 8, the
Company completed the preferred stock offering for $3.50 per share. Accordingly,
the warrants issued in connection with the Offering were increased from
1,291,200 to 1,438,205 and have been reflected in the accompanying financial
statements as of September 30, 1997. Expenses allocated to the warrants in
connection with the Offering were approximately $140,896. The warrants expire on
October 1, 2004.
In conjunction with the Offering, the Company received binding commitments
from certain investors to purchase common stock for $15 million if a preferred
stock offering had not been consummated within a specified period of time.
Certain investors deposited an aggregate of $15.0 million in escrow, which was
to have been applied to the purchase of common stock in the event the preferred
stock offering was not closed within a specified period of time. As a commitment
fee for the common stock commitment, the Company issued to all such investors
warrants to purchase an aggregate of 150,000 shares of common stock at $.01 per
share. Such warrants will be exercisable at any time prior to October 1, 2004.
The Company has recorded the commitment fee as non-cash consideration in
connection with the Offering. The value of the warrants issued
F-11
<PAGE> 103
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED.)
as a commitment fee was determined based on a value of the Company's common
stock at $2.81 per share less the exercise price of $.01 per share for the
warrant.
The Notes may be redeemed at the option of the Company, in whole or in
part, on or after October 1, 2001, at a premium declining to par in 2003, plus
accrued and unpaid interest and liquidated damages, if any, through the
redemption date as follows:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2001.................................................... 106.50
2002.................................................... 103.25
2003 and thereafter..................................... 100.00
</TABLE>
In the event of a sale by the Company prior to October 1, 2000 of its
capital stock in one or more equity offerings, up to a maximum of 35% of the
aggregate principal amount of the Notes originally issued will, at the option of
the Company, be redeemed from the net cash proceeds at a redemption price equal
to 113% of the principal amount, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date, provided at least 65% of the aggregate
principal amount of Notes originally issued remain outstanding immediately after
the occurrence of such redemption.
The Indenture Agreement contains certain covenants that among other things,
limits the ability of the Company and its restricted subsidiaries to incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, acquire
an aggregate of more than 20 switches until consolidated earnings before
interest, taxes, depreciation and amortization (EBITDA) is positive for two
consecutive quarters (with certain exceptions), engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company or its restricted subsidiaries, conduct
certain lines of business, issue or sell equity interests of the Company's
restricted subsidiaries or enter into certain mergers and consolidations.
Associated with the issuance of the Senior Secured Notes, expenses of
approximately $60,000 were paid to a related party for charter services.
(4) STOCKHOLDERS' EQUITY
On December 6, 1996, the Board of Directors approved a four-hundred-for-one
stock split, effected in the form of a stock dividend distributed on December
31, 1996 to shareholders of record as of June 8, 1996. All share and per share
data presented in the financial statements and notes thereto have been
retroactively restated to give effect to this stock split.
During 1995, in exchange for expending cash to incorporate the Company, a
shareholder received 400,000 shares of $.001 par value common stock valued at
the total of cash expended, resulting in an exchange price of $.0025 per share.
The Company capitalized the value of the expended cash as organization costs in
other assets in the accompanying financial statements, which costs are being
amortized over 60 months using the straight-line method of accounting.
In April 1996, the Company issued 800,000 shares of $.001 par value common
stock for the fair value of services rendered by a stockholder totaling $2,000
resulting in an issuance price of $.0025 per share.
During 1996, NevTEL LLC (the "LLC") was formed for the purpose of funding
the development stage of MGC Communications, Inc. In June 1996, the Company and
LLC entered into an agreement whereby
F-12
<PAGE> 104
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED.)
LLC would acquire 6,160,000 shares of $.001 par value common stock of the
Company for $.50 per share. The agreement called for LLC to advance funds for
operational expenses incurred by the Company (to be applied against the purchase
price of the stock) until the Company produced operating revenues, at which time
the remaining purchase price would be remitted to the Company, the Company's
common stock would be issued to LLC owners and LLC would terminate. The
agreement stipulated that the funds advanced for operational expenses were to be
paid back to LLC if the Company did not generate operating revenue by December
31, 1996. The Company began revenue generating activities in December 1996. The
shares were issued to LLC owners on December 31, 1996, at which time LLC
terminated and the remaining purchase price was owed to the Company. Such amount
was transferred to the Company in February 1997 and is classified as amounts
receivable for shares issued at December 31, 1996.
In December 1996, the Company offered 6,781,000 shares of $.001 par value
common stock at $2.00 per share through a private placement. In connection with
this offering, the Company issued 2,181,000 shares and 4,600,000 shares of $.001
par value common stock and received proceeds of $4,362,000 and $9,200,000 during
the nine months ended September 30, 1997 and the year ended December 31, 1996,
respectively.
In June 1997, the Company approved agreements with two key members of
management granting them rights to purchase a total of 250,000 shares at $2.00
per share and 275,000 shares at $2.50 per share. In both cases, the Company
retains the right to repurchase these shares at their cost in the event of
termination within a certain period of time and has agreed to finance the
purchase price of the shares purchasable at $2.50 per share over a period of
three years. During September 1997, the members of management exercised their
rights and the respective aforementioned shares were issued. The Company
received $100,000 and $400,000 in September 1997 and October 1997, respectively,
for the 250,000 shares issued at $2.00 per share. The Company has classified in
the accompanying balance sheet as amounts receivable for shares issued $400,000,
which proceeds were received in October 1997 for 200,000 shares. The $688,000
owed to the Company for the 275,000 shares issued at $2.50 per share has been
classified in the accompanying statements of stockholders' equity as notes
receivable from stockholders for issuance of common stock.
In August 1997, the authorized capital stock of the Company was increased
to 100,000,000 shares of common stock, $.001 par value per share, and 50,000,000
shares of preferred stock, $.001 per value per share. As of September 30, 1997,
no shares of preferred stock have been issued.
(5) STOCK OPTION PLAN
In June 1996, the Company adopted a stock option plan which allows the
Board of Directors, through the Stock Option Committee, to grant incentives to
employees in the form of incentive stock options and non-qualified stock
options. As of September 30, 1997 and December 31, 1996, the Company has
reserved 2,400,000 shares of common stock to be issued under the plan.
Under the plan, substantially all options have been granted to employees at
a price exceeding the then-current market price, as estimated by management, and
vest primarily over a 5-year period. All options expire within ten years of the
date of grant.
F-13
<PAGE> 105
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED.)
Stock option transactions during 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1995............................ -- --
Granted..................................................... 1,353,100 $0.81
Canceled.................................................... (50,000) $1.00
---------
Outstanding at December 31, 1996............................ 1,303,100 $0.81
Granted..................................................... 386,500 $3.94
Canceled.................................................... (6,000) $3.50
---------
Outstanding at September 30, 1997........................... 1,683,600 $1.52
=========
Exercisable at December 31, 1996............................ 19,600 $2.00
=========
Exercisable at September 30, 1997........................... 276,200 $0.88
=========
</TABLE>
The weighted average fair value of each of the options issued during the
year ended December 31, 1996, substantially all of which have been granted at a
price exceeding the then current market price as estimated by management, was
estimated to be $0.55 using an option pricing model with the following
assumptions: dividend yield of 0%; expected option life of 6.5 years; and risk
free interest rate of 6.12%.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICE 1996 LIFE PRICE 1996 PRICE
- ----------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.50 700,000 9.25 years $0.50 -- N/A
$1.00 503,500 9.60 years $1.00 -- N/A
$2.00 99,600 9.92 years $2.00 19,600 $2.00
--------- ------
$0.50-$2.00 1,303,100 9.44 years $0.81 19,600 $2.00
========= ======
</TABLE>
The Company applied Accounting Principles Board (APB) Opinion No. 25 in
accounting for its plan. No compensation expense was recognized for the nine
months ended September 30, 1997 and for the year ended December 31, 1996. Had
the Company determined compensation cost based on the minimum value method under
SFAS 123, the Company's net loss for the year ended December 31, 1996 would have
increased by approximately $10,000.
(6) INCOME TAXES
The Company has incurred net operating losses for both financial reporting
and income tax purposes since inception. As of September 30, 1997 and December
31, 1996, the Company has net operating loss carryforwards for income tax
reporting purposes totaling approximately $6,731,000 and $788,000, respectively.
The deferred tax asset arising from such net operating loss carryforward and
temporary differences aggregates approximately $2,668,000 and $557,000 at
September 30, 1997 and December 31, 1996, respectively. A valuation allowance is
provided for amounts of the deferred tax asset for which it cannot be concluded
that
F-14
<PAGE> 106
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED.)
future realization is more likely than not. Inasmuch as the Company has not
achieved profitable operations, a valuation allowance of $2,318,000 and $522,000
for September 30, 1997 and December 31, 1996, respectively, has been provided.
(7) COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
During the year ended December 31, 1996, the Company entered into a lease
agreement for its offices and switching facility in Las Vegas. During the nine
months ended September 30, 1997, the Company entered into lease agreements for
additional offices in Las Vegas and its offices and switching facility in
Atlanta.
The facility which houses the Company's headquarters in Las Vegas is owned
by two of the Company's principal stockholders and directors. Future minimum
lease obligations in effect as of September 30, 1997 and December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Payments during the year ending December 31:
1997 (payments through December 31, 1997)................ $ 79 $ 67
1998..................................................... 166 69
1999..................................................... 152 71
2000..................................................... 156 74
2001..................................................... 123 37
2002..................................................... 88 --
Thereafter............................................... 429 --
------ ----
$1,193 $318
====== ====
</TABLE>
Rent expense was approximately $134,000 and $33,000 for the nine months
ended September 30, 1997 and the year ended December 31, 1996, respectively.
PURCHASE COMMITMENTS
In May 1997, the Company signed an agreement to purchase 20 Northern
Telecom DMS-500 switches and related AccessNodes. As of September 30, 1997, the
Company had approximately $40,542,000 of remaining purchase commitments for the
purchase of switching equipment.
In May 1997, the Company entered into an agreement with Palm Centre Drive,
Inc., the owner of which is a stockholder of the Company, for the purchase of
certain computer software pursuant to which the Company is required to pay the
contract price of $600,000 in six equal monthly installments beginning July 1,
1997. At September 30, 1997, $43,750 is included in accounts payable for
property and equipment related to this agreement. Subsequent to entering into
the agreement, the stockholder became an officer of the Company.
In June 1997, in connection with the switching facility in Atlanta, the
Company entered into an agreement for leasehold improvements of approximately
$298,000.
F-15
<PAGE> 107
MGC COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED.)
In July 1997, in connection with the switching facility in Pomona, the
Company entered into an agreement for building improvements of approximately
$309,000.
INTERCONNECTION AGREEMENTS
In September 1996, March 1997 and May 1997, the Company signed
interconnection agreements with Sprint for operations in Nevada, Bell South for
operations in Georgia, and GTE for operations in California, respectively. These
agreements expire from November 1998 to March 2000.
Certain rates per the Sprint interconnection agreement have been
established at the Federal Communications Commission (FCC) proxy rates and are
subject to adjustment upon final negotiations. The Company has recorded costs of
sales related to this agreement in amounts which are management's best estimates
of the probable outcome of the final negotiated rates, which are less than the
FCC proxy rates. The difference, which totals approximately $307,000 at
September 30, 1997, has not been recorded in the accompanying financial
statements. Management believes that the resolution of this matter will not have
a material adverse effect on the Company's financial position, results of
operations, or liquidity.
(8) SUBSEQUENT EVENT
CONVERTIBLE PREFERRED STOCK
In November 1997, the Company completed a private placement offering in
which 5,148,570 shares of 8% Series A Convertible Preferred Stock ("Preferred
Stock") were issued at $3.50 per share, for total proceeds to the Company of
approximately $16.7 million, net of expenses. Each share of Preferred Stock is
convertible into shares of Common Stock at any time at the option of the holder.
In addition, each share of Preferred Stock is automatically converted into
Common Stock at its then applicable conversion rate in the event of the closing
of a qualified firm-commitment underwritten public offering.
Dividends on the Preferred Stock accumulate whether or not the Company has
earnings or profits, whether or not there are funds legally available for the
payment of such dividends and whether or not dividends are declared. Except as
may otherwise be required by law, holders of shares of Preferred Stock are
entitled to vote together with the holders of Common Stock and not as a separate
class and are entitled to elect two members of the Company's Board of Directors.
Commencing at any time on or after October 2, 2004, at the option and
written election of the holders of a majority of the outstanding shares of the
Preferred Stock, the Company shall, subject to applicable law, redeem all of the
outstanding shares of Preferred Stock at the price equal to the greater of (i)
$3.50, plus an amount equal to any unpaid dividends thereon, or (ii) the market
value of the Preferred Stock, on an as converted basis, determined by an
independent appraiser.
The $15 million deposited in escrow with respect to the Common Stock
commitment was released after consummation of the Preferred Stock offering. As
set forth in the Warrant Agreement, if the Preferred Stock offering or the
Common Stock commitment is consummated at a price less than $5.00 per share, the
number of warrants issued was to have been adjusted to represent 6.4% of the
outstanding Common Stock on a fully diluted basis. Accordingly, the warrants
issued in connection with the Offering were increased from 1,291,200 to
1,438,205 and have been reflected in the accompanying financial statements as of
September 30, 1997.
F-16
<PAGE> 108
ANNEX A
MGC COMMUNICATIONS, INC.
GLOSSARY
Access Charges -- The charges paid by an interexchange carrier to an
ILEC/CLEC for the origination or termination of the IXC's customer's long
distance calls.
Access Line -- A circuit that connects a telephone user (customer) to the
public switched telephone network. The access line usually connects to a
telephone at the customer's end.
Bell System -- The name given to the large, single entity that comprised
what are today AT&T and the RBOCs, including Bell Laboratories and other
subsidiaries.
CAP (Competitive Access Provider) -- A name for a category of local service
provider that appeared in the late 1980's, who competed with local telephone
companies by placing its own fiber optic cables in a city and sold various
private line telecommunications services in direct competition to the local
telephone company.
CAP/CLEC -- First appearing in the early 1980's, Competitive Access
Providers (CAPs) resulted from the original deregulation of the
telecommunications industry. CAPs control (either through contractual
arrangement or actual construction) fiber routes which serve as an alternative
means of access to long distance carriers. CAP facilities provide a "buy-pass"
to the traditional means of routing long distance traffic through the RBOC/ILEC.
With the passage of the Act, many CAPs are now also entering the competitive
local phone service arena.
Central Office (CO) -- The switching center and/or central circuit
termination facility of a local telephone company.
CLEC (Competitive Local Exchange Carrier) -- A category of telephone
service provider (carrier) that offers services similar to the former monopoly
local telephone company, as recently allowed by changes in telecommunications
law and regulation. A CLEC may also provide other types of telecommunications
services (long distance, etc.).
CLEC Certification -- Granted by a state public service commission or
public utility commission, this certification provides a telecommunications
services provider with the legal standing to offer local exchange telephone
services in direct competition with the incumbent LEC and other CLECs. Such
certifications are granted on a state by state basis.
COCOT -- Customer owned, coin operated telephone lines.
Communications Act of 1934 -- The first major federal legislation that
established rules for broadcast and non-broadcast communications, including both
wireless and wired telephone service.
FCC (Federal Communications Commission) -- The US Government organization
charged with the oversight of all public communications media.
Facilities-based -- A telecommunications provider that delivers its
services to the end-user via owned switches and leased (or owned) transport in
contrast to a reseller of an ILEC's services.
ILEC (Incumbent Local Exchange Carrier) -- The local exchange carrier that
was the monopoly carrier, prior to the opening of local exchange services to
competition.
ILEC Collocation -- A location serving as the interface point for a CLEC's
network interconnection to the ILEC. Collocation can be 1) physical, in which
the CLEC "builds" a fiber optic network extension into the ILEC central office,
or 2) virtual, in which the CLEC leases a facility, similar to that which it
might build, to affect a presence in the ILEC central office.
A-1
<PAGE> 109
Interconnection (co-carrier) Agreement -- A contract between an ILEC and a
CLEC for the interconnection of the two networks, for the purpose of mutual
passing of traffic between the networks, allowing customers of one of the
networks to call users served by the other network. These agreements set out the
financial and operational aspects of such interconnection.
Interexchange Services -- Telecommunications services that are provided
between two exchange areas, generally meaning between two cities, i.e. long
distance.
Interim Number Portability -- A temporary technique that allows local
exchange service customers of an ILEC to keep their existing telephone number,
while moving their service to a CLEC. The interim technique uses a central
office feature called remote call forwarding. The permanent solution to number
portability is to be implemented over the next few years.
IXC (Interexchange Carrier) -- A provider of telecommunications services
that extend between exchanges or cities.
LATA (Local Access and Transport Area) -- A geographic area inside of which
an ILEC can offer switched telecommunications services, even long distance
(known as local toll). There are 161 LATAs in the continental US. The LATA
boundaries were established at the Divestiture of the RBOCs.
Local Exchange -- An area inside of which telephone calls are generally
completed without any toll, or long distance charges. Local exchange areas are
defined by the state regulator of telephone services.
Local Exchange Services -- Telephone services that are provided within a
local exchange. These usually refer to local calling services (dial tone
services.) Business local exchange services include Centrex, access lines and
trunks and COCOT.
POP (Point of Presence) -- A location where a carrier, usually an IXC, has
located transmission and terminating equipment to connect its network to the
networks of other carriers or to customers.
RBOC (Regional Bell Operating Company) -- One of the ILECs created by the
Divestiture of the local exchange business by AT&T. These include BellSouth,
NYNEX, Bell Atlantic, Ameritech, US West, SBC and PacBell.
Tier I Markets -- Major metropolitan areas of the United States, with a
minimum population of one million people.
Tier II Sectors -- The suburban areas surrounding the core urban areas of
Tier I Markets.
A-2
<PAGE> 110
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation of the Registrant provide that directors of
the Registrant will not be personally liable for monetary damages to the
Registrant for certain breaches of their fiduciary duty as directors to the
fullest extent allowable by Nevada law. Under current Nevada law, directors
would remain liable for: (i) acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law, and (ii) approval of certain
illegal dividends or redemptions. In appropriate circumstances, equitable
remedies or nonmonetary relief, such as an injunction, will remain available to
a stockholder seeking redress from any such violation. In addition, the
provision applies only to claims against a director arising out of his role as a
director and not in any other capacity (such as an officer or employee of the
Registrant).
The Registrant also has the obligation, pursuant to such Registrant's
By-laws, to indemnify any director or officer of the Registrant for all expenses
incurred by them in connection with any legal action brought or threatened
against such person for or on account of any action or omission alleged to have
been committed while acting in the course and scope of the person's duties, if
the person acted in good faith and in a manner which the person reasonably
believed to be in or not opposed to the best interests of the Registrant, and
with respect to criminal actions, had no reasonable cause to believe the
person's conduct was unlawful, provided that such indemnification is made
pursuant to then existing provisions of Nevada General Corporation Law at the
time of any such indemnification.
The Registration Rights Agreement filed as Exhibit 4.2 hereto contains
certain provisions pursuant to which certain officers, directors and controlling
persons of the Company may be entitled to be indemnified by the Initial
Purchasers and other holders of Notes.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this Registration
Statement:
<TABLE>
<S> <C> <S>
3.1 -- Articles of Incorporation of the Registrant, as amended.(1)
3.2 -- Bylaws of the Registrant.(1)
3.3 -- Certificate of Designation of Series A Convertible Preferred
Stock.(1)
3.4 -- Stockholders Agreement dated on November 26, 1997, among the
Company, Maurice J. Gallagher, Jr., Nield J. Montgomery and
certain investors identified therein.(1)
4.1 -- Indenture dated as of September 29, 1997, between the
Company and Marine Midland Bank, as Trustee.(1)
4.2 -- Registration Rights Agreement dated as of September 29, 1997
among the Company, Bear, Stearns & Co., Inc. and Furman Selz
LLC.(1)
4.3 -- Security Agreement dated as of September 29, 1997, between
the Company and Marine Midland Bank.(1)
4.4 -- Collateral Pledge and Security Agreement dated as of
September 29, 1997, between the Company and Marine Midland
Bank.(1)
4.5 -- Form of Note (included in Exhibit 4.1).
5.1 -- Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.(1)
8.1 -- Tax Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson,
P.C.
10.1 -- Network Products Purchase Agreement dated May 21, 1997,
between the Company and Northern Telecom, Inc.(1)
10.2 -- Employment/Stock Repurchase Agreement dated as of June 1996
between the Company and Nield J. Montgomery, as amended as
of September 1, 1997.(1)
10.3 -- Employment and Stock Repurchase Agreement dated May 28,
1997, between the Company and John Boersma.(1)
</TABLE>
II-1
<PAGE> 111
10.4 -- Stock Purchase Agreement dated August 29, 1997, between the
Company and Mitchell Allee.(1)
10.5 -- Stock Option Plan.(1)
10.6 -- Purchase Agreement dated September 24, 1997, among the
Company, Bear, Stearns & Co. Inc. and Furman Selz LLC.(1)
10.7 -- Warrant Agreement dated September 29, 1997, between the
Company and Marine Midland Bank.(1)
10.8 -- Warrant Registration Rights Agreement dated as of September
29, 1997, among the Company, Bear, Stearns & Co. Inc. and
Furman Selz LLC.(1)
10.9 -- Private Placement Bank Escrow Agreement dated September 1997
among the Company, Bear, Stearns & Co. Inc. and certain
investors identified therein.(1)
10.10 -- Standard Office Lease Agreement dated July 1, 1997, between
the Company and Cheyenne Investments L.L.C.(1)
10.11 -- Securities Purchase Agreement dated as of November 26, 1997,
among the Company and the investors identified therein.(1)
12.1 -- Computation of ratio of earnings to fixed charges.(1)
23.1 -- Consent of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
(included in Exhibits 5.1 and 8.1)
23.2 -- Consent of KPMG Peat Marwick LLP.
24.1 -- Powers of Attorney.(1)
25.1 -- Statement of Eligibility of Trustee.(1)
27.1 -- Financial Data Schedule (for SEC use only).(1)
99.1 -- Form of Transmittal Letter.
99.2 -- Form of Notice of Guaranteed Delivery.(1)
- ---------------
(1) Previously filed with this Registration Statement.
(b) Financial Statement Schedule
The following Financial Statement Schedule is filed as part of the
Registration Statement.
Schedule II -- Valuation and Qualifying Accounts. (Previously filed).
All other financial statement schedules have been omitted because the
required information is not present or not present in amounts to require
submission of the schedules, or because the information required is included in
the financial statements.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) (i) The undersigned Registrant hereby undertakes:
(A) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(1) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(2) 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;
(3) 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.
II-2
<PAGE> 112
(B) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(C) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unissued at the
termination of the offering.
(ii) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 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.
(c) The undersigned Registrant hereby undertakes to 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-3
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 2 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Las Vegas, State of Nevada on the 16th day of January, 1998.
MGC COMMUNICATIONS, INC.
By: /s/ NIELD J. MONTGOMERY
------------------------------------
Nield J. Montgomery
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 2 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Las Vegas, State of Nevada on the 16th day of January, 1998.
<TABLE>
<C> <S>
/s/ NIELD J. MONTGOMERY President (principal executive officer) and Director
- -----------------------------------------------------
Nield J. Montgomery
/s/ MAURICE J. GALLAGHER, JR. Chairman of the Board and Director
- -----------------------------------------------------
Maurice J. Gallagher, Jr.
/s/ LINDA M. SUNBURY Vice President -- Administration
- ----------------------------------------------------- (principal financial and accounting officer)
Linda M. Sunbury
/s/ TIMOTHY P. FLYNN* Director
- -----------------------------------------------------
Timothy P. Flynn
Director
- -----------------------------------------------------
Jack L. Hancock
*By: /s/ MAURICE J. GALLAGHER, JR.
-------------------------------------------------
Maurice J. Gallagher, Jr.
Attorney-in-fact
</TABLE>
II-4
<PAGE> 114
SCHEDULE II
MGC COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
BALANCE CHARGED DEDUCTIONS BALANCE
AT BEGINNING TO COSTS OTHER FROM AT END
DEDUCTIONS FROM ASSETS OF PERIOD AND EXPENSES ADDITIONS RESERVES(1) OF PERIOD
- ---------------------- ------------ ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1997
Allowance for Doubtful Accounts............ $ -- $306,220 $ -- $168,942 $137,278
DECEMBER 31, 1996
Allowance for Doubtful Accounts............ $ -- $ -- $ -- $ -- $ --
</TABLE>
- ---------------
(1) Principally accounts written off.
<PAGE> 1
EXHIBIT 8.1
January 7, 1998
MGC Communications, Inc.
3301 N. Buffalo Drive
Las Vegas, Nevada 89129
Ladies and Gentlemen:
We have acted as counsel for MGC Communications, Inc., a Nevada corporation (the
"Company"), in connection with the offer by the Company to exchange (the
"Exchange Offer") its 13% Series B Senior Secured Notes Due 2001 (the "Exchange
Notes"), for all outstanding 13% Senior Secured Notes Due 2001 (the "Outstanding
Notes"). This letter will confirm that we have advised the Company with respect
to certain United States federal income tax consequences of the Exchange Offer,
as described in the discussion set forth under the caption "United States
Federal Income Tax Consequences of the Exchange of Notes" in the Prospectus
included in the Registration Statement on Form S-4 (the "Registration
Statement"), filed on this date with the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "Act"). Unless
otherwise defined, capitalized terms used herein shall have the respective
meanings ascribed to them in the Registration Statement.
We have based our opinions set forth in this letter on the provisions of the
Internal Revenue Code of 1986, as presently amended (the "Code"), existing
Treasury regulations thereunder (the "Regulations"), published rulings and
practices of the Internal Revenue Service (the "Service") and court decisions.
It should be noted that the federal income tax consequences discussed in this
letter might be modified by legislative, judicial or administrative action at
any time, and such action might be applied retroactively or otherwise in a
manner that might alter such tax consequences.
Based on the assumptions and subject to the qualifications and limitations set
forth therein, (i) we adopt the discussion set forth under the caption "United
States Federal Income Tax Consequences of the Exchange of Notes" in the
Registration Statement as our opinion with respect to the material United States
federal income tax consequences of the Exchange Offer, and (ii) in our opinion
such discussion accurately describes the material United States federal income
tax consequences of the exchange of the Notes. Such discussion is limited to the
material United States federal income tax consequences discussed therein, and it
does not purport to discuss all possible federal income tax consequences or any
state, local or foreign tax consequences, of the exchange of the Notes.
Except as stated above, we express no opinion with respect to any other matter.
<PAGE> 2
MGC Communications, Inc.
January 7, 1998
Page 2
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement, to the use of our name in the Registration Statement and
to the reference to us and this opinion letter in the Registration Statement. By
giving such consent, we do not thereby admit that we are "experts" with respect
to this letter, as that term is used in the Act, or the rules and regulations of
the SEC thereunder.
Very truly yours,
ELLIS, FUNK, GOLDBERG, LABOVITZ
& DOKSON, P.C.
By: /s/ Robert B. Goldberg
----------------------------------------
Robert B. Goldberg
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
MGC Communications, Inc.
We consent to the use of our report dated August 18, 1997 related to the
financial statements of MGC Communications, Inc. as of December 31, 1996 and
1995 and for the year and period ended December 31, 1996, as applicable,
included herein and to the reference to our firm under the headings "Experts",
"Summary Financial Data" and "Selected Historical Financial Data" in the
prospectus.
KPMG Peat Marwick LLP
Las Vegas, Nevada
January 16, 1998
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR
TENDER OF 13% SENIOR SECURED NOTES DUE 2004
IN EXCHANGE FOR
13% REGISTERED SERIES B SENIOR SECURED NOTES DUE 2004
MGC COMMUNICATIONS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, ON___________, 1998,
UNLESS EXTENDED (THE "EXPIRATION DATE"). OUTSTANDING NOTES TENDERED IN THE
EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
Deliver To The Exchange Agent: The Marine Midland Bank
<TABLE>
<S> <C> <C>
By Hand/Overnight Courier: By Mail: By Facsimile:
140 Broadway 140 Broadway (212) 658-6425
New York, NY 10005-1180 New York, NY 10005-1180 Confirm by Telephone: (212) 658-6433
Attention Corporate Trust Attention Corporate Trust Operations (For Eligible Institutions Only)
Operations
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned hereby acknowledges receipt and review of the
Prospectus dated________ , 1997 (the "Prospectus") of MGC Communications, Inc.
(the "Company") and this Letter of Transmittal (the "Letter of Transmittal"),
which together describe the Company's offer (the "Exchange Offer") to exchange
its 13% SeriesSenior Secured Notes due 2004 (the "Exchange Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which the Prospectus is a part,
for a like principal amount of its issued and outstanding 13% Senior Secured
Notes due 2004 (the "Outstanding Notes"). Capitalized terms used but not defined
herein have the respective meaning given to them in the Prospectus.
The Company reserves the right, at any time and from time to time, to
extend the Exchange Offer at its discretion, in which event the term "Expiration
Date" shall mean the latest time and date to which the Exchange Offer is
extended. The Exchange Offer will no event, however, be extended to a date
beyond__________ , 1998. The Company shall notify the holders of the Outstanding
Notes of any extension by oral or written notice prior to 9:00 A.M., New York
time, on the next Business Day after the previously scheduled Expiration Date.
This Letter of Transmittal is to be used by a Holder of Outstanding
Notes if original Outstanding Notes are to be forwarded herewith and may be used
if delivery of Outstanding Notes, if available, is to be made by book-entry
transfer to the account maintained by the Exchange Agent at The Depository Trust
Company (the "Book-Entry Transfer Facility") pursuant to the procedures set
forth in the Prospectus under the caption "The Exchange Offer-Book-Entry
Transfer." Holders of Outstanding Notes whose Outstanding Notes are not
immediately available, or who are unable to deliver their Outstanding Notes and
all other documents required by this Letter of Transmittal to the Exchange Agent
on or prior to the Expiration Date, or who are unable to complete the procedure
for book-entry transfer on a timely basis, must tender their Outstanding Notes
according to the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer-Guaranteed Delivery Procedures." See
Instruction 2. Delivery of documents to the Book-Entry Transfer Facility does
not constitute delivery to the Exchange Agent.
<PAGE> 2
If Outstanding Notes are tendered pursuant to the procedures for
book-entry transfer set forth in the Prospectus, a holder tendering Outstanding
Notes may transmit an Agent's Message (defined herein) to the Exchange Agent in
lieu of this Letter of Transmittal on or prior to the Expiration Date. A holder
of Outstanding Notes causing an Agent's Message to be delivered on its behalf
will be deemed to have executed and delivered this Letter of Transmittal. An
Agent's Message is a message, transmitted to the Book-Entry Transfer Facility,
received by the Exchange Agent and forming a part of a timely confirmation of
book-entry transfer, stating that the Book-Entry Transfer Facility has received
an express acknowledgment from the tendering participant in the Book-Entry
Transfer Facility that such participant has received and agrees to be bound by
this Letter of Transmittal and that the Company may enforce this Letter of
Transmittal against such participant.
The term "Holder" with respect to the Exchange Offer means any person
in whose name Outstanding Notes are registered on the books of the Company or
any other person who has obtained a properly completed bond power from the
registered Holder. The undersigned has completed, executed and delivered this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer. Holders who wish to tender their Outstanding
Notes must complete this Letter of Transmittal in its entirety.
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS
CAREFULLY BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE
FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE
PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Outstanding Notes to which this Letter of Transmittal
relates. If the space below is inadequate, list the registered numbers and
principal amounts on a separate signed schedule and affix the list to this
Letter of Transmittal.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OUTSTANDING NOTES TENDERED
- -------------------------------------------------------------------------------------------------------------------
Aggregate* Registered
Name(s) and Address(es) of Registered Holder(s) Principal Amount Numbers**
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Attach separate schedule if necessary
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Unless otherwise indicated, any tendering Holder of Outstanding Notes will
be deemed to have tendered the entire aggregate principal amount represented
by such Outstanding Notes. All tenders must be in integral multiples of
$1,000.
** Need not be completed by book-entry Holders.
[ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE ENCLOSED HEREWITH.
-2-
<PAGE> 3
[ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED
BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE
EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND
COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS
ONLY):
Name of Tendering Institution:
Account Number:
Transaction Code Number:
[ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT
TO A NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE
FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name(s) of Registered Holder(s) of Outstanding Notes:
--------------------------
Date of Execution of Notice of Guaranteed Delivery:
----------------------------
Window Ticket Number (if available):
-------------------------------------------
Name of Eligible Institution that Guaranteed Delivery:
-------------------------
Account Number (if delivered by book-entry transfer):
--------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO:
Name:
---------------------------------------
Address:
---------------------------------------
---------------------------------------
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Outstanding Notes, it acknowledges
that the Outstanding Notes were acquired as a result of market-making activities
or other trading activities and that it will deliver a prospectus in connection
with any resale of such Exchange Notes; however, by so acknowledging and by
delivering a prospectus, the undersigned will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
SIGNATURES MUST BE PROVIDED BELOW;
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company for exchange the principal amount of Outstanding
Notes indicated above. Subject to and effective upon the acceptance for exchange
of the principal amount of Outstanding Notes tendered in accordance with this
Letter of Transmittal, or in accordance with an Agent's Message delivered in
lieu of this Letter of Transmittal, the undersigned hereby exchanges, assigns
and transfers to the Company all right, title and interest in and to the
Outstanding Notes tendered for exchange hereby. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent the agent and
attorney-in-fact of the undersigned (with full knowledge that the Exchange Agent
also acts as the agent of the Company in connection with the Exchange Offer)
with respect to the tendered Outstanding Notes with full power of substitution
to (i) deliver such Outstanding Notes, or transfer ownership of such Outstanding
Notes on the account books maintained by the Book-Entry Transfer Facility, to
the Company and deliver all accompanying evidences of transfer and authenticity,
and (ii) present such Outstanding Notes for transfer on the books of the Company
and receive all benefits and otherwise exercise all rights of beneficial
ownership of such Outstanding Notes, all in accordance with the terms of the
Exchange Offer. The power of attorney granted in this paragraph shall be deemed
to be irrevocable and coupled with an interest.
-3-
<PAGE> 4
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign and transfer the
Outstanding Notes tendered hereby and to acquire the Exchange Notes issuable
upon the exchange of such tendered Outstanding Notes, and that the Company will
acquire good and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim,
when the same are accepted for exchange by the Company.
The undersigned acknowledge(s) that this Exchange Offer is being made in
reliance upon interpretations contained in no-action letters issued to third
parties by the staff of the Securities and Exchange Commission (the
"Commission"), that the Exchange Notes issued in exchange for the Outstanding
Notes pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by Holders thereof (other than any such Holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or a broker-dealer who acquired Outstanding Notes from the Company to resell
pursuant to Rule 144 or any other available exemption under the Securities Act),
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such Holders' business and such Holders are not engaging in
and do not intend to engage in a distribution of the Exchange Notes and have no
arrangement or understanding with any person to participate in a distribution of
such Exchange Notes. The undersigned hereby further represent(s) to the Company
that (i) the Outstanding Notes tendered were, and any Exchange Notes acquired in
exchange for Outstanding Notes tendered hereby are being, acquired in the
ordinary course of business of the person receiving such Exchange Notes, whether
or not the undersigned is such person, (ii) neither the undersigned nor any such
other person is engaging in or intends to engage in a distribution of the
Exchange Notes, (iii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes, and (iv) neither the Holder nor any such other person is
an "affiliate," as defined in Rule 405 under the Securities Act, of the Company
or, if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
If the undersigned or the person receiving the Exchange Notes is a
broker-dealer that is receiving Exchange Notes for its own account in exchange
for Outstanding Notes that were acquired as a result of market-making activities
or other trading activities, the undersigned acknowledges that it or such other
person will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that the undersigned or such other
person is an "underwriter" within the meaning of the Securities Act. The
undersigned acknowledges that if the undersigned is participating in the
Exchange Offer for the purpose of distributing the Exchange Notes (i) the
undersigned cannot rely on the position of the staff of the Commission in
certain no-action letters and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction of the Exchange
Notes, in which case the registration statement must contain the selling
security holder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission, and (ii) failure to comply with such
requirements in such instance could result in the undersigned incurring
liability under the Securities Act for which the undersigned is not indemnified
by the Company.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of the Outstanding
Notes tendered hereby, including the transfer of such Outstanding Notes on the
account books maintained by the Book-Entry Transfer Facility.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange validly tendered Outstanding Notes when, as and if the
Company gives oral or written notice thereof to the Exchange Agent. Any tendered
Outstanding Notes that are not accepted for exchange pursuant to the Exchange
Offer for any reason will be returned, without expense, to the undersigned at
the address shown below or at a different address as may be indicated herein
under "Special Delivery Instructions" as promptly as practicable after the
Expiration Date.
-4-
<PAGE> 5
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned acknowledges that the Company's acceptance of properly
tendered Outstanding Notes pursuant to the procedures described under the
caption "The Exchange Offer -- Procedures for Tendering" in the Prospectus and
in the instructions hereto will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of the
Exchange Offer.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the Exchange Notes issued in exchange for the Outstanding Notes accepted
for exchange and return any Outstanding Notes not tendered or not exchanged, in
the name(s) of the undersigned. Similarly, unless otherwise indicated under
"Special Delivery Instructions," please mail or deliver the Exchange Notes
issued in exchange for the Outstanding Notes accepted for exchange and any
Outstanding Notes not tendered or not exchanged (and accompanying documents, as
appropriate) to the undersigned at the address shown below the undersigned's
signature(s). In the event that both "Special Issuance Instructions" and
"Special Delivery Instructions" are completed, please issue the Exchange Notes
issued in exchange for the Outstanding Notes accepted for exchange in the
name(s) of, and return any Outstanding Notes not tendered or not exchanged to,
the person(s) so indicated. The undersigned recognizes that the Company has no
obligation pursuant to the "Special Issuance Instructions" and "Special Delivery
Instructions" to transfer any Outstanding Notes from the name of the registered
holder(s) thereof if the Company does not accept for exchange any of the
Outstanding Notes so tendered for exchange.
-5-
<PAGE> 6
SIGN HERE
(Complete Substitute Form W-9 on Reverse)
_______________________________________________________________________________
_______________________________________________________________________________
Signature(s) of Owner(s)
(See Guarantee Requirement Below)
Date:_____________
(Must be signed by the registered Holder(s) exactly as name(s) appear(s) on
Outstanding Notes or on a security position listing or by person(s) authorized
to become registered Holder(s) by a properly completed bond power from the
registered Holder(s), a copy of which must be transmitted with this Letter of
Transmittal. If Outstanding Notes to which this Letter of Transmittal relate are
held of record by two or more joint Holders, then all such Holders must sign
this Letter of Transmittal. If signing by an executor, administrator, trustee,
guardian, attorney-in-fact, agent or other person acting in a fiduciary or
representative capacity, please provide the following information. See
Instruction 6.)
Names(s)_______________________________________________________________________
_______________________________________________________________________________
(Please Print)
Capacity (full title)_______________________________________________________
Address ________________________________________________________________
________________________________________________________________
(Print Address, Including Zip Code)
Area Code and Telephone Number ______________________________________________
Tax Identification or Social Security No_____________________________________
(Complete Substitute Form W-9 on Reverse)
MEDALLION SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 5)
Certain signatures must be Guaranteed by an Eligible Institution.
Signatures(s) Guaranteed by an Eligible Institution:___________________________
(Authorized Signature)
_______________________________________________________________________________
(Title)
_______________________________________________________________________________
(Name of Firm)
_______________________________________________________________________________
(Address, Include Zip Code)
_______________________________________________________________________________
Area Code and Telephone Number)
Dated:______________________________________________________, 1998
-6-
<PAGE> 7
SPECIAL INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
<TABLE>
<CAPTION>
- ---------------------------------------------------- ------------------------------------------------
Box A: SPECIAL ISSUANCE Box B: SPECIAL DELIVERY
INSTRUCTIONS INSTRUCTIONS
<S> <C>
To be completed ONLY (i) if Outstanding Notes in To be completed ONLY if Outstanding
a principal amount not tendered, or Exchange Notes Notes in a principal amount not tendered, or
issued in exchange for Outstanding Notes accepted for Exchange Notes issued in exchange for
exchange, are to be issued in the name of someone other Outstanding Notes accepted for exchange, are to be
than the undersigned, or (ii) if Outstanding Notes mailed or delivered to someone other than the
tendered by book-entry transfer which are not undersigned, or to the undersigned at an address
exchanged are to be returned by credit to an account other than that shown below the undersigned's
maintained by at the Book-Entry Transfer Facility. signature
Issue Exchange Notes and/or Outstanding Notes to: Mail to:
Name:
Name: --------------------------------------------
----------------------------------------------- (Print Name)
(Print Name)
Address:
Address: -----------------------------------------
--------------------------------------------
-------------------------------------------------
- ---------------------------------------------------- (Print Address, Including Zip Code)
(Print Address, Including Zip Code) [ ] Check ONLY if the address above is a new
permanent address.
- ----------------------------------------------------
(Tax Identification or Social Security Number) (Attach Separate Signed Schedule if Necessary)
(Complete Substitute Form W-9)
(Attach Separate Signed Schedule if Necessary)
- ---------------------------------------------------- ------------------------------------------------
</TABLE>
[ ] Credit unexchanged Outstanding Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility set forth below:
------------------------------------------------------------
(Book-Entry Transfer Facility Account Number, if applicable)
INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE
OFFER.
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OUTSTANDING NOTES OR
BOOK-ENTRY CONFIRMATIONS. All physically delivered Outstanding Notes or any
confirmation of a book-entry transfer to the Exchange Agent's account at the
Book-Entry Transfer Facility of Outstanding Notes tendered by book-entry
transfer (a "Book-Entry Confirmation"), as well as a properly completed and duly
executed copy of this Letter of Transmittal or facsimile hereof, or delivery of
an Agent's Message in lieu of this Letter of Transmittal, and any other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
time, on the Expiration Date. The method of delivery of the tendered Outstanding
Notes, this Letter of Transmittal and all other required documents to the
Exchange Agent is at the election and risk of the Holder and, except as
otherwise provided below, the delivery will be deemed made only when actually
received or confirmed by the Exchange Agent. Instead of delivery by mail, it is
recommended that the Holder use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure delivery to the Exchange
Agent before the Expiration Date. No Letter of Transmittal or Outstanding Notes
should be sent to the Company.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their
Outstanding Notes and (a) whose Outstanding Notes are not immediately available,
or (b) who cannot deliver their Outstanding Notes, this Letter of Transmittal or
any other documents required hereby to the Exchange Agent prior to the
Expiration Date, or (c) who are unable to complete the procedure for book-entry
transfer on a timely basis, must tender their Outstanding Notes according to the
guaranteed
-7-
<PAGE> 8
delivery procedures set forth in the Prospectus. Pursuant to such procedures:
(i) such tender must be made by or through a firm which is a member of a
registered national securities exchange or of the National Association of
Securities Dealers Inc. or a commercial bank or a trust company having an office
or correspondent in the United States (an "Eligible Institution"); (ii) prior to
the Expiration Date, the Exchange Agent must have received from the Eligible
Institution a properly completed and duly executed Notice of Guaranteed Delivery
(by facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder of the Outstanding Notes, the registration number(s) of
such Outstanding Notes and the principal amount of Outstanding Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three (3) New York Stock Exchange, Inc. ("NYSE") trading days after the
Expiration Date, this Letter of Transmittal (or facsimile hereof) together with
the Outstanding Notes (or a Book-Entry Confirmation) in proper form for
transfer, will be received by the Exchange Agent; and (iii) the certificates for
all physically tendered shares of Outstanding Notes, in proper form for
transfer, or Book-Entry Confirmation, as the case may be, and all other
documents required by this Letter must be received by the Exchange Agent within
three (3) NYSE trading days after the date of execution of the Notice of
Guaranteed Delivery.
Any Holder of Outstanding Notes who wishes to tender Outstanding Notes
pursuant to the guaranteed delivery procedures described above must ensure that
the Exchange Agent receives the Notice of Guaranteed Delivery prior to 12:00
midnight, New York time, on the Expiration Date. Upon request of the Exchange
Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to
tender their Outstanding Notes according to the guaranteed delivery procedures
set forth above. See "The Exchange Offer -- Guaranteed Delivery Procedures"
section of the Prospectus.
3. TENDER BY HOLDER. Only a Holder of Outstanding Notes may tender such
Outstanding Notes in the Exchange Offer. Any beneficial Holder of Outstanding
Notes who is not the registered Holder and who wishes to tender should arrange
with the registered Holder to execute and deliver this Letter of Transmittal on
his behalf or must, prior to completing and executing this Letter of Transmittal
and delivering his Outstanding Notes, either make appropriate arrangements to
register ownership of the Outstanding Notes in such Holder's name or obtain a
properly completed bond power from the registered Holder.
4. PARTIAL TENDERS. Tenders of Outstanding Notes will be accepted only in
integral multiples of $1,000. If less than the entire principal amount of any
Outstanding Notes is tendered, the tendering Holder should fill in the principal
amount tendered in the second column of the box entitled "Description of
Outstanding Notes Tendered" above. The entire principal amount of Outstanding
Notes delivered to the Exchange Agent will be deemed to have been tendered
unless otherwise indicated. If the entire principal amount of all Outstanding
Notes is not tendered, then Outstanding Notes for the principal amount of
Outstanding Notes not tendered and Exchange Notes issued in exchange for any
Outstanding Notes accepted will be sent to the Holder at his or her registered
address, unless a different address is provided in the appropriate box on this
Letter of Transmittal, promptly after the Outstanding Notes are accepted for
exchange.
5. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
MEDALLION GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile
hereof) is signed by the record Holder(s) of the Outstanding Notes tendered
hereby, the signature must correspond with the name(s) as written on the face of
the Outstanding Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal is signed by a participant in the Book-Entry
Transfer Facility, the signature must correspond with the name as it appears on
the security position listing as the Holder of the Outstanding Notes.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder or Holders of Outstanding Notes listed and tendered hereby and
the Exchange Note(s) issued in exchange therefor are to be issued (or any
untendered principal amount of Outstanding Notes is to be reissued) to the
registered Holder, the said Holder need not and should not endorse any tendered
Outstanding Notes, nor provide a separate bond power. In any other case, such
Holder must either properly endorse the Outstanding Notes tendered or transmit a
properly completed separate bond power with this Letter of Transmittal, with the
signatures on the endorsement or bond power guaranteed by an Eligible
Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered Holder or Holders of any Outstanding Notes listed,
such Outstanding Notes must be endorsed or accompanied by appropriate bond
powers, in each case signed as the name of the registered Holder or Holders
appears on the Outstanding Notes.
-8-
<PAGE> 9
If this Letter of Transmittal (or facsimile hereof) or any Outstanding
Notes or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, or officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, unless waived by the Company, evidence satisfactory to the Company
of their authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Outstanding Notes or signatures on bond powers required by
this Instruction 5 must be guaranteed by an Eligible Institution.
No signature guarantee is required if (i) this Letter of Transmittal is
signed by the registered holder(s) of the Outstanding Notes tendered herewith
(or by a participant in the Book-Entry Transfer Facility whose name appears on a
security position listing as the owner of the tendered Outstanding Notes) and
the issuance of Exchange Notes (and any Outstanding Notes not tendered or not
accepted) are to be issued directly to such registered holder(s) (or, if signed
by a participant in the Book-Entry Transfer Facility, any Exchange Notes or
Outstanding Notes not tendered or not accepted are to be deposited to such
participant's account at such Book-Entry Transfer Facility) and neither the box
entitled "Special Delivery Instructions" nor the box entitled "Special Issuance
Instructions" has been completed, or (ii) such Outstanding Notes are tendered
for the account of an Eligible Institution. In all other cases, all signatures
on this Letter of Transmittal must be guaranteed by an Eligible Institution.
6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate, in the applicable box or boxes, the name and address (or account at
the Book-Entry Transfer Facility) to which Exchange Notes or substitute
Outstanding Notes for principal amounts not tendered or not accepted for
exchange are to be issued or sent, if different from the name and address of the
person signing this Letter of Transmittal. In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
7. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Outstanding Notes pursuant to the Exchange Offer.
If, however, Exchange Notes or Outstanding Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered Holder
of the Outstanding Notes tendered hereby, or if tendered Outstanding Notes are
registered in the name of any person other than the person signing this Letter
of Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Outstanding Notes pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered Holder or any other
persons) will be payable by the tendering Holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with this Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering Holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 7, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OUTSTANDING NOTES LISTED IN THIS LETTER
OF TRANSMITTAL.
8. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a holder
of any Outstanding Notes which are accepted for exchange must provide the
Company (as payor) with its correct taxpayer identification number ("TIN"),
which, in the case of a holder who is an individual, is his or her social
security number. If the Company is not provided with the correct TIN, the Holder
may be subject to a $50 penalty imposed by Internal Revenue Service. (If
withholding results in an over-payment of taxes, a refund may be obtained.)
Certain holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. See the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup withholding.
If the Outstanding Notes are registered in more than one name or are not in the
name of the actual owner, see the enclosed "Guidelines for Certification of
Taxpayer Identification Number of Substitute Form W-9" for information on which
TIN to report.
-9-
<PAGE> 10
The Company reserves the right in its sole discretion to take whatever
steps are necessary to comply with the Company's obligation regarding backup
withholding.
9. VALIDITY OF TENDERS. All questions as to the validity, form, eligibility
(including time of receipt), and acceptance of tendered Outstanding Notes will
be determined by the Company, in its sole discretion, which determination will
be final and binding. The Company reserves the right to reject any and all
Outstanding Notes not validly tendered or any Outstanding Notes, the Company's
acceptance of which would, in the opinion of the Company or its counsel, be
unlawful. The Company also reserves the right to waive any conditions of the
Exchange Offer or defects or irregularities in tenders of Outstanding Notes as
to any ineligibility of any holder who seeks to tender Outstanding Notes in the
Exchange Offer. The interpretation of the terms and conditions of the Exchange
Offer (which includes this Letter of Transmittal and the instructions hereto) by
the Company shall be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Outstanding Notes must
be cured within such time as the Company shall determine. The Company will use
reasonable efforts to give notification of defects or irregularities with
respect to tenders of Outstanding Notes, but shall not incur any liability for
failure to give such notification.
10. WAIVER OF CONDITIONS. The Company reserves the right, in its reasonable
discretion, to waive, in whole or part, any of the conditions to the Exchange
Offer set forth in the Prospectus.
11. NO CONDITIONAL TENDER. No alternative, conditional, irregular or
contingent tender of Outstanding Notes on transmittal of this Letter of
Transmittal will be accepted.
12. MUTILATED, LOST, STOLEN, OR DESTROYED OUTSTANDING NOTES. Any Holder
whose Outstanding Notes have been mutilated, lost, stolen or destroyed should
contact the Exchange Agent at the address indicated above for further
instructions.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance
or for additional copies of the Prospectus or this Letter of Transmittal may be
directed to the Exchange Agent at the address or telephone number set forth on
the cover page of this Letter of Transmittal. Holders may also contact their
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning the Exchange Offer.
14. ACCEPTANCE OF TENDERED OUTSTANDING NOTES AND ISSUANCE OF EXCHANGE
NOTES; RETURN OF OUTSTANDING NOTES. Subject to the terms and conditions of the
Exchange Offer, the Company will accept for exchange all validly tendered
Outstanding Notes as soon as practicable after the Expiration Date and will
issue Exchange Notes therefor as soon as practicable thereafter. For purposes of
the Exchange Offer, the Company shall be deemed to have accepted tendered
Outstanding Notes when, as and if the Company has given written and oral notice
thereof to the Exchange Agent. If any tendered Outstanding Notes are not
exchanged pursuant to the Exchange Offer for any reason, such unexchanged
Outstanding Notes will be returned, without expense, to the undersigned at the
address shown above (or credited to the undersigned's account at the Book-Entry
Transfer Facility designated above) or at a different address as may be
indicated under the box entitled "Special Delivery Instructions."
15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the Prospectus under the caption "The Exchange
Offer -- Withdrawal of Tenders."
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF
(TOGETHER WITH THE OUTSTANDING NOTES WHICH MUST BE DELIVERED BY BOOK-ENTRY
TRANSFER OR IN ORIGINAL HARD COPY FORM) OR THE NOTICE OF GUARANTEED DELIVERY
MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M. ON THE EXPIRATION
DATE.
-10-
<PAGE> 11
(TO BE COMPLETED BY ALL TENDERING HOLDERS (SEE INSTRUCTION 5))
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PAYER'S NAME: MGC COMMUNICATIONS, INC.
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PART 1 - PLEASE PROVIDE YOUR TIN IN Social security number
THE BOX AT RIGHT AND CERTIFY BY
SIGNING AND DATING BELOW. OR
-----------------------------------
SUBSTITUTE Employer Identification Number
--------------------------------------------------------------------------------------
Form W-9 PART 2 - Check the box if you are NOT subject to backup withholding under the provisions of
Department of the Treasury Section 3406(a)(i)(C) of the Internal Revenue Code because (1) you have not been notified
Internal revenue Service that you are subject to backup withholding as a result of failure to report all interest or
dividends, or (2) the Internal Revenue Service has notified you that you are no longer subject
to backup withholding. - [ ]
--------------------------------------------------------------------------------------
Payer's Request for Taxpayer CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I PART 3-
Identification Number ("TIN") CERTIFY THAT THE INFORMATION PROVIDED ON THIS
FORM IS TRUE, CORRECT AND COMPLETE Awaiting TIN - [ ]
SIGNATURE DATE
--------------------------------- -------------
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</TABLE>
Part 1 - Taxpayer Identification No. - For All Accounts. Enter your taxpayer
identification number in the appropriate box. For most individuals and sole
proprietors, this is your social security number. For other entities, it is your
Employer Identification Number. If you do not have a number, see How to Obtain a
TIN in the enclosed Guidelines. Note: If the account is in more than one name,
see the chart on page 2 of the enclosed Guidelines to determine what number to
enter.
Part 2 - For Payees Exempt from Backup Withholding (see enclosed Guidelines).
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU WITH RESPECT TO THE EXCHANGE
NOTES. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office, or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number within sixty (60) days, 31% of all
reportable payments made to me thereafter will be withheld until I provide a
number.
SIGNATURE_________________________________ DATE _________________
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