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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 1999
Commission file number 0-24059
MGC Communications, Inc.
(Exact name of registrant as specified in its charter)
Nevada 88-0360042
(State of incorporation) (IRS Employer Identification Number)
3301 North Buffalo Drive
Las Vegas, Nevada 89129
(Address of principal executive offices)
(702) 310-1000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
YES [X] NO [ ]
The number of shares outstanding of the issuer's common stock,
as of August 3, 1999:
Common stock ($.001 par value) .... 22,721,818 shares outstanding
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MGC COMMUNICATIONS, INC.
INDEX
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<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations -- Three and Six months
ended June 30, 1999 and 1998 (Unaudited) 3
Consolidated Balance Sheets -- June 30, 1999 (Unaudited) and
December 31, 1998 4
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity for the period from December 31, 1997
to June 30, 1999 5
Consolidated Statements of Cash Flows -- Six months ended
June 30, 1999 and 1998 (Unaudited) 6
Condensed Notes to Unaudited Interim Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues:
Telecommunications services $ 11,485 $ 4,018 $ 19,886 $ 6,864
Operating expenses:
Cost of operating revenues 10,506 3,415 18,989 5,786
Selling, general and administrative 9,197 3,325 16,924 5,887
Depreciation and amortization 4,182 1,123 7,666 1,990
----------- ----------- ----------- -----------
23,885 7,863 43,579 13,663
----------- ----------- ----------- -----------
Loss from operations (12,400) (3,845) (23,693) (6,799)
Other income (expense):
Gain on sale of investments available-for-sale 47 -- 252 --
Interest income 1,380 2,296 2,880 4,465
Interest expense (net of amounts capitalized) (4,564) (5,363) (9,188) (10,868)
----------- ----------- ----------- -----------
Net loss (15,537) (6,912) (29,749) (13,202)
Accrued preferred stock dividend (729) -- (729) --
----------- ----------- ----------- -----------
Net loss applicable to common stockholders (16,266) (6,912) (30,478) (13,202)
=========== =========== =========== ===========
Basic and diluted loss per share of
common stock $ (.93) $ (.52) $ (1.76) $ (1.18)
=========== =========== =========== ===========
Basic and diluted weighted average
shares outstanding 17,474,941 13,377,938 17,340,688 11,147,502
=========== =========== =========== ===========
</TABLE>
See accompanying condensed notes to unaudited interim
consolidated financial statements.
<PAGE> 4
MGC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 11,256 $ 11,886
Investments available-for-sale ................................. 31,119 9,851
Restricted investments ......................................... 22,286 20,797
Accounts receivable, less allowance for doubtful
accounts of $425 and $257, .................................. 10,980 6,360
Prepaid expenses 370 208
--------- ---------
Total current assets ................................... 76,011 49,102
Property and equipment, net ...................................... 132,683 116,380
Investments available-for-sale ................................... 41,980 63,212
Restricted investments ........................................... 7,664 18,582
Deferred financing costs, net of amortization
of $1,476 and $1,065 ........................................... 4,303 4,714
Other assets ..................................................... 625 129
--------- ---------
Total assets ........................................... $ 263,266 $ 252,119
========= =========
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ........................... $ 266 $ 332
Accounts payable:
Trade ....................................................... 7,873 5,314
Property and equipment ...................................... 7,246 18,577
Accrued interest ............................................... 5,200 5,200
Accrued other expenses ......................................... 6,643 2,473
--------- ---------
Total current liabilities .............................. 27,228 31,896
Senior Secured Notes, net of unamortized discount of $3,019
and $3,307 ..................................................... 156,981 156,693
Other long-term debt ............................................. 238 270
--------- ---------
Total liabilities ...................................... 184,447 188,859
--------- ---------
Commitments and contingencies (See Note 3)
Redeemable preferred stock:
10% Series B Convertible Preferred Stock,
5,277,779 shares authorized and outstanding .................... 46,500 --
Stockholders' equity:
Preferred stock, 44,722,221 shares authorized and unissued ..... -- --
Common stock, $0.001 par value, 60,000,000 shares
authorized, 17,611,880 and 17,190,428 shares
issued and outstanding ...................................... 18 17
Additional paid-in capital ..................................... 109,660 108,991
Accumulated deficit ............................................ (74,870) (44,392)
--------- ---------
34,808 64,616
Accumulated other comprehensive income ......................... (316) 817
Notes receivable from stockholders for issuance of common
stock ....................................................... (2,173) (2,173)
--------- ---------
Total stockholders' equity ............................. 32,319 63,260
--------- ---------
Total liabilities, redeemable preferred stock and
stockholders' equity ................................. $ 263,266 $ 252,119
========= =========
</TABLE>
See accompanying condensed notes to unaudited interim
consolidated financial statements.
<PAGE> 5
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- -------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 ....... 5,148,570 $ 16,665 8,799,600 $ 9 $ 22,118
Common stock issued for cash ....... -- -- 100,680 -- 774
Common stock issued for notes
receivable ....................... -- -- 189,000 -- 1,485
Warrants and options exercised
for common stock ................. -- -- 133,309 -- 14
8% Series A Convertible Preferred
Stock issued for cash ............ 1,422,857 4,980 -- -- --
Accrued preferred stock dividend ... -- -- -- -- --
Common stock issued for cash (IPO).. -- -- 4,025,000 4 62,959
Conversion of preferred stock to
common stock .................... (6,571,427) (21,645) 3,942,839 4 21,641
Unrealized gain on investments
available-for-sale .............. -- -- -- -- --
Net loss ........................... -- -- -- -- --
---------- -------- ---------- ---- --------
BALANCE AT DECEMBER 31, 1998 ....... -- $ -- 17,190,428 $ 17 $108,991
Unrealized loss on investments
available-for-sale .............. -- -- -- -- --
Common stock issued ................ -- -- 27,001 -- 223
Warrants and options exercised
for common stock ................ -- -- 394,451 1 446
10% Series B Convertible Preferred
Stock issued for cash ............ 5,277,779 46,500 -- -- --
Accrued preferred stock dividend ... -- -- -- -- --
Net loss ........................... -- -- -- -- --
---------- -------- ---------- ---- --------
BALANCE AT JUNE 30, 1999
(UNAUDITED) ...................... 5,277,779 $ 46,500 17,611,880 $ 18 $109,660
========== ======== ========== ==== ========
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE FROM ACCUMULATED
STOCKHOLDERS FOR OTHER TOTAL
ACCUMULATED ISSUANCE OF COMPREHENSIVE STOCKHOLDERS'
DEFICIT COMMON STOCK INCOME EQUITY
----------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 ....... $(12,463) $ (688) $ -- $ 8,976
Common stock issued for cash ....... -- -- -- 774
Common stock issued for notes
receivable ....................... -- (1,485) -- --
Warrants and options exercised
for common stock ................. -- -- -- 14
8% Series A Convertible Preferred
Stock issued for cash ............ -- -- -- --
Accrued preferred stock dividend ... (654) -- -- (654)
Common stock issued for cash (IPO).. -- -- -- 62,963
Conversion of preferred stock to
common stock .................... 790 -- -- 22,435
Unrealized gain on investments
available-for-sale .............. -- -- 817 817
Net loss ........................... (32,065) -- -- (32,065)
-------- ------- ------- ---------
BALANCE AT DECEMBER 31, 1998 ....... $(44,392) $(2,173) $ 817 $ 63,260
Unrealized loss on investments
available-for-sale .............. -- -- (1,133) (1,133)
Common stock issued ................ -- -- -- 223
Warrants and options exercised
for common stock ................ -- -- -- 447
10% Series B Convertible Preferred
Stock issued for cash ............ -- -- -- --
Accrued preferred stock dividend ... (729) -- -- (729)
Net loss ........................... (29,749) -- -- (29,749)
-------- ------- ------- ---------
BALANCE AT JUNE 30, 1999
(UNAUDITED) ...................... $(74,870) $(2,173) $ (316) $ 32,319
======== ======= ======= =========
</TABLE>
See accompanying condensed notes to unaudited interim
consolidated financial statements.
<PAGE> 6
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $(29,749) $(13,202)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ................................... 7,666 1,990
Gain on sale of investments available-for-sale .................. (252) --
Amortization of debt discount ................................... 288 288
Amortization of deferred financing costs ........................ 411 446
Changes in assets and liabilities:
Increase in accounts receivable, net ......................... (4,620) (3,273)
Increase in prepaid expenses ................................. (162) (127)
Increase in other assets ..................................... (527) (8)
Increase in accounts payable - trade ......................... 2,559 1,980
Increase in accrued interest and other expenses .............. 3,441 1,747
-------- --------
Net cash used in operating activities ...................... (20,945) (10,159)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment, net of
payables ........................................................ (23,938) (28,599)
Decrease in accounts payable - property and equipment ............. (11,331) --
Purchase of investments held-to-maturity .......................... -- (41,609)
Purchase of investments available-for-sale ........................ (917) --
Sale of restricted investments .................................... 9,429 9,043
-------- --------
Net cash used in investing activities ...................... (26,757) (61,165)
-------- --------
Cash flows from financing activities:
Costs associated with issuance of Senior Secured
Notes and warrants .............................................. -- (133)
Proceeds from issuance of Convertible Preferred
Stock, net of issuance costs .................................... 46,500 4,980
Payments on other long-term debt .................................. (98) (110)
Proceeds from issuance of common stock ............................ 670 785
Proceeds from issuance of common stock (IPO) ...................... -- 63,021
-------- --------
Net cash provided by financing activities .................. 47,072 68,543
-------- --------
Net decrease in cash ....................................... (630) (2,781)
Cash and cash equivalents at beginning of period .................... 11,886 45,054
-------- --------
Cash and cash equivalents at the end of period ...................... $ 11,256 $ 42,273
======== ========
Supplemental schedule of non-cash investing and financing activities:
Increase in property and equipment purchases included
in accounts/notes payable -- property and equipment ............. $ -- $ 7,217
======== ========
Stock issued for notes receivable ................................. $ -- $ 1,485
======== ========
Other disclosures:
Cash paid for interest net of amounts capitalized ................. $ 9,188 $ 10,996
======== ========
</TABLE>
See accompanying condensed notes to unaudited interim
consolidated financial statements.
<PAGE> 7
MGC COMMUNICATIONS, INC.
Condensed Notes to Unaudited Interim Consolidated Financial Statements
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
MGC Communications, Inc. (the "Company" or "MGC"), a Nevada corporation, include
the accounts of the Company and its wholly-owned subsidiaries, MGC Lease
Corporation and MGC LJ.Net, Inc. All significant inter-company balances and
transactions have been eliminated.
These consolidated financial statements reflect all normal recurring
adjustments, which management believes are necessary to present fairly the
financial position, results of operations, and cash flows for the Company for
the respective periods presented. Certain information and footnote disclosures
normally included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission for Form
10-Q. These unaudited interim consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K filed with the
Securities and Exchange Commission.
The consolidated balance sheet at December 31, 1998 was derived from the
audited consolidated financial statements, but does not include all disclosures
required under generally accepted accounting principles.
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
Building and property ................... $ 5,158 $ 2,653
Switching equipment ..................... 104,620 57,045
Leasehold improvements .................. 844 740
Computer hardware and software .......... 3,033 2,218
Office equipment and vehicles ........... 1,303 901
--------- ---------
114,958 63,557
Less accumulated depreciation and
amortization .......................... (14,190) (6,555)
--------- ---------
100,768 57,002
Switching equipment under construction... 31,915 59,378
--------- ---------
Net property and equipment .... $ 132,683 $ 116,380
========= =========
</TABLE>
(3) COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
In the ordinary course of business, the Company enters into purchase
agreements with its vendors of telecommunications equipment. As of June 30, 1999
and December 31, 1998, the Company had a total for all vendors of approximately
$30.1 million and $15.4 million, respectively, of remaining purchase commitments
for purchases of switching and other telecommunications equipment.
(4) RISKS AND UNCERTAINTIES
The Company recognizes operating revenues from communications services
in the period the related services are provided. Due to current disputes and
pending arbitration and litigation, the Company has recognized switched access
revenues based on management's best estimate of the probable collections from
such revenue. For the six month period ended June 30, 1999 and for the year
ended December 31, 1998, the Company has recognized in operating revenues
switched access revenues of approximately $6,896,000 and $7,378,000,
respectively. Included in accounts receivable in the
<PAGE> 8
accompanying balance sheets as of June 30, 1999 and December 31, 1998 are net
receivables from carrier access billings of approximately $8,142,000 and
$3,590,000, respectively.
(5) REDEEMABLE PREFERRED STOCK AND STOCKHOLDER'S EQUITY
In May 1999, the Company completed a private placement offering in which
5,277,779 shares of Series B Convertible Preferred Stock were issued at $9.00
per share for proceeds to the Company of $46.5 million, net of expenses.
Dividends accrue at the rate of 10% per annum, are cumulative and are
payable in preference to any dividends that may be paid with respect to the
Company's common stock. Beginning November 22, 1999, the Company may elect to
terminate the accrual of dividends if the Company's stock price exceeds $27.00
per share (subject to certain adjustments) for 20 consecutive trading days (the
"Market Threshold") prior to May 2002. The holders of Series B Preferred Stock
will vote along with the common stock on an as-converted basis.
The holders of the Series B Preferred Stock have the right to nominate
one or more directors depending on the size of the Company's Board of Directors
and the percentage of the Company's stock represented by the outstanding Series
B Preferred Stock. The holders of the Series B Preferred Stock also have the
right to have their Board representative serve on each committee of the
Company's Board.
The Series B Preferred Stock is convertible into common stock at any
time at the option of the holder. Initially, each share of Series B Preferred
Stock is convertible into one share of common stock. The conversion price is
subject to adjustment as a result of stock splits, stock dividends and certain
other issuances of additional stock.
After the earlier of May 24, 2000 or the date on which the holders of
the Series B Preferred Stock exercise their demand registration rights, the
Company has the right to require the conversion of the Series B Preferred Stock
if the Company's stock price exceeds the Market Threshold referenced above. If
the Company requires conversion before May 4, 2002, no accrued dividends will be
paid.
(6) SUBSEQUENT EVENTS
In July 1999, the Company issued 5,000,000 shares of common stock and
received net proceeds, after expenses of approximately $118.1 million. In this
offering, existing stockholders sold an additional 587,696 shares of common
stock for which the Company did not receive any proceeds. The underwriters have
an option to purchase an additional 838,134 shares of common stock at $25 per
share. The option expires August 20, 1999.
On July 16, 1999, the Federal Communications Commission released a
decision ordering AT&T to pay MGC $2.0 million plus interest for originating
switched access charges covering the time period from August 1998 through March
1999 per MGC's tariffed rates. The decision is subject to appeal by AT&T.
On July 29, 1999, MGC settled the antitrust lawsuit against Sprint
Corporation. Under the terms of the settlement, MGC and other CLECs will
receive a residential market entry incentive of up to $3.65 per residential
line per month for the term of the agreement, which expires June 30, 2002.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We began providing competitive local dialtone services to small business
and residential customers in December 1996, and began offering long distance
services by February 1998. Currently, we have switches fully operational in Las
Vegas, Atlanta, Chicago, southern Florida, and in selected areas of southern
California, including Los Angeles and San Diego.
Our revenues are generated from sales of communications services
consisting primarily of local phone service, long distance services, switched
access billings and non-recurring charges, principally installation charges.
Our principal operating expenses consist of cost of operating revenues,
selling, general and administrative costs and depreciation and amortization
expense. Cost of operating revenues consists primarily of access charges, line
installation expenses, transport expenses, compensation expenses of technical
personnel, long distance expenses and collocation lease expenses. Selling,
general and administrative expenses consist primarily of compensation expenses,
advertising, provision for bad debts, professional fees and office rentals.
Depreciation and amortization expense includes depreciation of switching and
collocation equipment as well as general property and equipment.
During 1998, we expanded significantly with the installation of four
additional switches and the build out of 182 additional collocation sites. As
expected, both cost of operating revenues and selling, general and
administrative costs increased as many of the fixed costs of providing service
in new markets are incurred before significant revenue can be generated from
those markets. In addition, we incurred significant marketing costs to build our
initial base of customers in our new markets.
Building and expanding our business has required and will continue to
require us to incur significant capital expenditures primarily consisting of the
costs of purchasing switches, associated equipment and land for switching sites
and constructing buildings or improving leased buildings to house our switching
and collocation facilities. As part of our "smart build" network strategy, we
purchased and installed host switches in each of our markets while leasing the
means of transporting voice and data traffic from these switches to our
customers' telephones or other equipment. We believe this facilities-based
strategy, while initially increasing our level of capital expenditures and
operating losses, will enhance long-term financial performance in comparison to
a resale strategy.
We have experienced operating losses and generated negative cash flow
from operations since inception and expect to continue to generate negative cash
flow from operations for the foreseeable future while we continue to expand our
network and develop our product offerings and customer base. There can be no
assurance our revenue or customer base will grow or that we will be able to
achieve or sustain positive cash flow from operations.
RESULTS OF OPERATIONS
QUARTER ENDED - JUNE 30, 1999 VS. JUNE 30, 1998
Total operating revenues increased to $11.5 million for the quarter
ended June 30, 1999 as compared to $4.0 million for the quarter ended June 30,
1998. The 186% increase is a result of the increase in the number of lines in
service and increased long distance service revenue. We had 89,535 lines in
service at the end of the second quarter as compared to 26,667 lines in service
at June 30, 1998, a 236% increase.
Cost of operating revenues for the quarter ended June 30, 1999 was $10.5
million as compared to $3.4 million for the quarter ended June 30, 1998. The
208% increase is due to the increased number of lines in service and
installation and operational expenses associated with the expansion of our
network.
For the quarter ended June 30, 1999, selling, general and administrative
expenses totaled $9.2 million; a 177% increase over the $3.3 million for the
quarter ended June 30,
<PAGE> 10
1998. The increase is a result of increased costs attributable to marketing and
delivering our service and supporting our continued network expansion.
For the quarter ended June 30, 1999, depreciation and amortization was
$4.2 million as compared to $1.1 million for the quarter ended June 30, 1998.
This increase is a result of placing additional assets in service in accordance
with the planned build-out of our network.
Gross interest expense for the quarter ended June 30, 1999 totaled $5.7
million compared to $5.5 million for the quarter ended June 30, 1998. Interest
capitalized for the quarter ended June 30, 1999 increased to $1.1 million as
compared to $0.3 million for the quarter ended June 30, 1998. This increase is
due to the increase in switching equipment under construction. Gross interest
expense is primarily attributable to the 13% Senior Secured Notes due 2004
("Senior Secured Notes") we issued in September 1997.
Interest income was $1.4 million during the quarter ended June 30, 1999
compared to $2.3 million for the quarter ended June 30, 1998. The 40% decrease
is a result of the decrease in cash and investments since June 30, 1998. Cash
and investments have been used to purchase switching equipment, pay interest on
the Senior Secured Notes, and fund operating losses.
We incurred net losses of $15.5 million during second quarter 1999 and
$6.9 million during the second quarter 1998.
SIX MONTH PERIOD ENDED - JUNE 30, 1999 VS. JUNE 30, 1998
Total operating revenues increased to $19.9 million for the six months
ended June 30, 1999 as compared to $6.9 million for the six months ended June
30, 1998. The 190% increase is a result of the increase in the number of lines
in service and increased long distance service revenue.
Cost of operating revenues for the six months ended June 30, 1999 was
$19.0 million as compared to $5.8 million for the quarter ended June 30, 1998.
The 228% increase is due to the increased number of lines in service and
installation and operational expenses associated with the expansion of our
network.
For the six months ended June 30, 1999, selling, general and
administrative expenses totaled $16.9 million; a 187% increase over the $5.9
million for the six months ended June 30, 1998. The increase is a result of
increased costs attributable to marketing and delivering our service and
supporting our continued network expansion.
For the six months ended June 30, 1999, depreciation and amortization
was $7.7 million as compared to $2.0 million for the six months ended June 30,
1998. This increase is a result of placing additional assets in service in
accordance with the planned build-out of our network.
Gross interest expense for the six months ended June 30, 1999 and 1998
totaled $11.1 million. Interest capitalized for the six months ended June 30,
1999 increased to $1.9 million as compared to $0.2 million for the six months
ended June 30, 1998. This increase is due to the increase in switching equipment
under construction. Gross interest expense is primarily attributable to the
Senior Secured Notes issued in September 1997.
Interest income was $2.9 million during the six months ended June 30,
1999 compared to $4.5 million for the six months ended June 30, 1998. The 36%
decrease is a result of the decrease in cash and investments since June 30,
1998. Cash and investments have been used to purchase switching equipment, pay
interest on the Senior Secured Notes, and fund operating losses.
We incurred net losses of $29.7 million and $13.2 million for the six
month periods ended June 30, 1999 and 1998, respectively.
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Our operations require substantial capital investment for the purchase
of communications equipment and the development and installation of our network.
Capital expenditures for the quarter ended June 30, 1999 were $8.7 million. We
expect we will continue to require substantial amounts of capital to fund the
purchase of the equipment necessary to continue expanding our network footprint
in our existing markets and to develop new products and services. In addition,
we expect to enter new markets during 2000. We expect capital expenditures of
approximately $400.0 million over the next five years, including $45.1 million
of capital expenditures expected during the last six months of 1999, which will
be funded from cash on hand and public or private debt or equity financing. In
addition, we are currently evaluating financing proposals from vendors and
equipment lease financing companies. We cannot assure you that we will be
successful in raising sufficient debt or equity capital on acceptable terms.
From our inception through September 1997, we raised approximately $17.8
million from private sales of common stock.
In September 1997, we completed a $160.0 million offering of Senior
Secured Notes and warrants to purchase 862,923 shares of common stock (after
giving effect to anti-dilution adjustments). At the closing of the sale of the
Senior Secured Notes, we used approximately $56.8 million of the net proceeds
from the sale of the Senior Secured Notes to purchase a portfolio of securities
that has been pledged as security to cover the first six interest payments on
the Senior Secured Notes. In addition, we have granted the holders of the Senior
Secured Notes a security interest in a substantial portion of our
telecommunications equipment.
In November 1997 and January 1998, we issued an aggregate of 6,571,427
shares of Series A Convertible Preferred Stock at $3.50 per share for net
proceeds of $21.6 million.
We completed our initial public offering of common stock on May 15,
1998. We sold a total of 4,025,000 shares of common stock to the public and
received net proceeds of $63.0 million. In connection with our initial public
offering of our common stock, we reduced the number of authorized and
outstanding shares of our common stock by 40%. Our outstanding shares of
preferred stock were converted into 3,942,856 shares of common stock upon our
initial public offering.
In May 1999, we issued 5,277,779 shares of Series B Convertible
Preferred Stock at $9.00 per share for net proceeds of approximately $46.5
million.
In July 1999, we issued 5,000,000 shares of common stock and received
net proceeds, after expenses of approximately 118.1 million. In this offering,
existing stockholders sold an additional 587,695 shares of common stock for
which we did not receive any proceeds. Our underwriters have an option to
purchase an additional 838,134 shares of common stock at $25 per share. The
option expires August 20, 1999.
In addition, we are currently negotiating a vendor facility to finance
at least $20 million of DSL equipment. We cannot assure you that we will be able
to obtain this vendor financing in a timely manner, on terms we consider
acceptable or at all.
The substantial capital investment required to initiate services and
fund our initial operations has exceeded our operating cash flow. This negative
cash flow from operations results from the need to establish our network in
anticipation of connecting revenue-generating customers. We expect to continue
recording negative cash flow from operations for a period of time because we are
continuing network expansion activities. We cannot assure you we will attain
break-even cash flow from operations in subsequent periods. Until sufficient
cash flow from operations is generated, we will need to use our current and
future capital resources to meet our cash flow requirements and may be required
to issue additional debt and/or equity securities. We expect our available cash
should be adequate to fund our operations and planned capital expenditures
through the end of the third quarter 2000. The indenture governing the Senior
Secured Notes and the terms of our Series B Convertible Preferred Stock impose
restrictions upon our ability to incur additional debt or issue preferred stock.
<PAGE> 12
IMPACT OF YEAR 2000
The Year 2000 issue, commonly referred to as Y2K, is a result of the way
some computer systems store dates. In many cases, when a date is stored by a
computer, a two digit field has been used to store the year (i.e., 01/01/98 =
January 1, 1998). The system assumes that the first two digits in the year field
are "19." With the end of the century approaching, those same systems should
reflect 01/01/00 as being "January 1, 2000." However, a non-compliant system
will read 01/01/00 as January 1, 1900.
We have been focused on Year 2000 issues since our inception in 1996. In
recognition of the priority associated with the Year 2000 issue, we established
a Year 2000 Project Team at the corporate level to lead the Year 2000 effort.
Since we are young, much of the hardware and software currently in place was
purchased with Y2K readiness in mind. However, in most cases, we have relied on
representations of our vendors as to the Y2K compliance of the hardware and
software we have purchased. We cannot assure you the vendor representations we
relied upon are accurate or complete or that we will have recourse against any
vendors whose representations prove misleading.
Our Y2K plans include a number of phases designed to evaluate the Y2K
readiness of our network and computer systems. We have completed the inventory
and assessment of all network and information systems and have begun the
renovation and testing phases. Renovation of mission critical components of our
network and operation support system for Year 2000 compliance were completed in
June 1999. We will continue integration testing throughout the remainder of
1999. Subject to additional compliance testing, we believe our essential
processes, systems and business functions will be ready for the 1999 to 2000
transition.
Our significant vendors, including the major communications equipment
suppliers, have assured us their applications are Year 2000 compliant. Our
business also relies on other third parties. The ability of third parties upon
whom we rely to adequately address their Year 2000 issues is outside our
control. However, we are coordinating efforts with these parties to minimize the
extent to which our business will be vulnerable to their failure to remediate
their own Year 2000 issues. We cannot assure you the systems of the third
parties will be modified on a timely basis. Our business, financial condition
and results of operations could be materially adversely affected by the failure
of the systems and applications of third parties to properly operate after 1999.
We are currently in the process of developing contingency plans should
mission critical systems fail as a result of Y2K issues.
In a recent SEC release regarding Year 2000 disclosure, the SEC stated
that public companies must disclose the most reasonably likely worst case Year
2000 scenario. Although it is not possible to assess the likelihood of any of
the following events, each must be included in a consideration of worst case
scenarios: widespread failure of electrical, gas and similar suppliers serving
us; widespread disruption of the services provided by common communications
carriers; similar disruption to the means and modes of transportation for our
employees, contractors, suppliers and customers; significant disruption to our
ability to gain access to, and remain working in, office buildings and other
facilities; the failure of substantial numbers of our critical computer hardware
and software systems, including both internal business systems and systems
controlling operational facilities such as electrical generation, transmission
and distribution systems; and the failure of outside entities' systems,
including systems related to banking and finance.
If we cannot operate effectively after December 31, 1999, we could,
among other things, face substantial claims by customers or loss of revenue due
to service interruptions, inability to fulfill contractual obligations or to
bill customers accurately and on a timely basis, as well as increased expenses
associated with litigation, stabilization of operations following critical
system failures and the execution of contingency plans. We could also experience
an inability by customers and others to pay, on a timely basis or at all,
obligations owed to us. Under these circumstances, the adverse effects, although
not quantifiable at this time, could be material.
<PAGE> 13
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants recently issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires start-up costs, as defined, to be expensed as
incurred and is effective for financial statements for fiscal years beginning
after December 15, 1998. We currently expense all start-up costs as incurred and
the application of SOP 98-5 will have no material impact on our financial
statements.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Report that state our intentions,
hopes, beliefs, expectations or predictions of the future are forward-looking
statements. We wish to caution you these forward-looking statements such as our
plans to expand our existing network through collocation and into new markets,
statements regarding development, introduction and acceptance of our products or
business, statements regarding our ability to achieve or exceed our goals or
reach profitability in the future, statements regarding the adequacy or
availability of financing, statements regarding the outcome of regulatory
proceedings or litigation or the effect of government regulations, statements
regarding our ability or the ability of others to become Y2K compliant or
similar statements contained in this Report regarding matters that are not
historical facts, are only estimates or predictions. Actual results may differ
materially as a result of risks facing us or actual results differing from
assumptions underlying such statements. Such risks and assumptions include, but
are not limited to, our ability to successfully market our existing and proposed
services to current and new customers in existing and planned markets,
successfully develop commercially viable data and Internet offerings, access
markets, install switches and obtain suitable locations for our switches,
negotiate and renew suitable interconnection agreements with the ILECs, obtain
an acceptable level of cooperation from the ILECs, all in a timely manner, at
reasonable cost and on satisfactory terms and conditions, as well as regulatory,
competitive, legislative and judicial developments that could materially affect
our future results. All forward-looking statements made in this Report are
expressly qualified in their entirety by these cautionary statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of our long term debt bears fixed interest rates, however, the fair
market value of this debt is sensitive to changes in prevailing interest rates.
We run the risk that market rates will decline and the fair market value of
required payments will exceed those based on the current market rate. We do not
use interest rate derivative instruments to manage our exposure to interest rate
changes.
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to numerous state and federal administrative proceedings.
In these proceedings, we are seeking to define and/or enforce ILEC performance
requirements related to:
o the cost and provisioning of unbundled network elements;
o the establishment of customer care and provisioning;
o the allocation of subsidies; and
o collocation costs and procedures.
The outcome of these proceedings will establish the rates and procedures
by which we obtain and provide unbundled network elements and could have a
material effect on our operating costs.
We are also involved in legal proceedings in which we are seeking to
enforce our tariffed rates for originating and terminating switched access. As
of June 30, 1999, we had outstanding receivables of approximately $8.1 million
attributable to access charges from long distance carriers. Some of these long
distance carriers have refused to pay the full amount of the access charges
billed to them. We have initiated proceedings against AT&T at the FCC under an
FCC procedure for expedited settlement of disputes between common carriers. On
July 16, 1999, the FCC released a decision ordering AT&T to pay us the full
amount we billed to them for originating switched access charges from August
1998 through March 1999 at our tariffed rate, plus interest. This decision is
subject to appeal by AT&T to a federal appeals court. We are currently
negotiating with Sprint and MCI WorldCom and have submitted our dispute with MCI
WorldCom to arbitration. The final outcome of the disputes with AT&T, Sprint and
MCI WorldCom is uncertain. If we are unable to collect our tariffed access
charges from these long distance carriers, it could have a material impact on
our financial condition. The outcome of these proceedings is uncertain, and
adverse results could have a material impact on our financial condition.
On July 29, 1999, we settled our antitrust lawsuit against Sprint
Corporation. Under the terms of the settlement, we and other CLECs will receive
a residential market entry incentive of up to $3.65 per residential line per
month for the term of the agreement, which expires June 30, 2002.
From time to time, we engage in other litigation and governmental
proceedings in the ordinary course of business. We do not believe that any
pending litigation or governmental proceedings will have a material adverse
effect on our results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) The rights of the holders of our common stock have been affected
by the issuance of 5,277,779 shares of Series B Convertible Preferred Stock (the
"Series B Preferred Stock") in May 1999. The Series B Preferred Stock has the
following rights and preferences:
Dividends accrue at the rate of 10% per year, are cumulative and must be
paid before any dividends may be paid on our common stock. Beginning November
22, 1999, we may elect to terminate the accrual of dividends if our common stock
price per share exceeds $27.00 for 20 consecutive trading days. Except as
described below, accrued dividends will be paid in common stock at the time the
Series B Preferred Stock is converted into common stock if the dividends have
not been paid prior to that time.
On any matter submitted to our stockholders, holders of shares of Series
B Preferred Stock will be treated as if they hold the number of shares of common
stock into which their shares of Series B Preferred Stock could be converted and
will be allowed to vote those shares along with the holders of our common stock.
In addition, the holders of shares of Series B Preferred Stock will have the
right to approve any action to:
o Issue preferred stock ranking equal or senior to the Series B
Preferred Stock;
o Dispose of assets in excess of a fixed dollar amount, merge or
consolidate or sell our company;
<PAGE> 15
o Liquidate our company;
o Alter the terms of the Series B Preferred Stock;
o Pay dividends on common stock or other securities junior to the
Series B Preferred Stock;
o Enter into transaction with our affiliates other than
transactions covered by specified exceptions;
o Make acquisitions in excess of a fixed dollar amount;
o Incur additional debt in excess of fixed amounts;
o Make material changes to our business plan;
o Hire a chief executive officer;
o Organize subsidiaries or enter into joint ventures unless
specified conditions are met; and
o Issue additional common stock that would result in an increase
in the number of shares of common stock into which the Series B
Preferred Stock may be converted.
If we were to take one of these restricted actions without the approval
of the holders of the Series B Preferred Stock, the holders of the Series B
Preferred Stock may have the right to require us to seed a sale of our company.
To avoid having to sell our company in the event one of the restricted actions
described above is not approved, we have the right to redeem the Series B
Preferred Stock and such a sale is not effected within six months, then the
holders of the Series B Preferred Stock would be entitled to elect a majority of
our Board of Directors.
The approval rights described above will terminate if fewer than
1,759,260 shares of Series B Preferred Stock remain outstanding and the shares
of Series B Preferred Stock outstanding constitute less than 5% of the
outstanding common stock assuming conversion of all outstanding shares of Series
B Preferred Stock. Based on the number of shares of common stock currently
outstanding, 5% of the common stock would be approximately 1,398,000 shares.
The holders of Series B Preferred Stock have the right to nominate one
or more directors depending on the size of our Board of Directors and the
percentage of our stock represented by the outstanding Series B Preferred Stock.
The holders of the Series B Preferred Stock also have the right to have their
Board representative serve on each committee of our Board and on the board of
each of our subsidiaries. The holders of the Series B Preferred Stock are
currently entitled to nominate one director since we have seven directors. Paul
J. Salem has been elected to the Board after being nominated by the holders of
the Series B Preferred Stock.
The right to nominate directors will terminate if fewer than 1,759,260
shares of the Series B Preferred Stock remain outstanding and the shares of
Series B Preferred Stock outstanding constitute less than 5% of the outstanding
common stock assuming conversion of all outstanding shares of Series B Preferred
Stock.
Upon our liquidation, the holders of the Series B Preferred Stock are
entitled to receive their liquidation amount before any amounts may be paid to
holders of our common stock or junior securities. The liquidation amount will be
the greater of (a) $9.00 per share plus accrued and unpaid dividends or (b) the
amount the holders of Series B Preferred Stock would have received if the Series
B Preferred Stock had been converted into common stock. The holders of the
Series B Preferred Stock have the right to elect that a sale of our company be
treated as a liquidation for these purposes. If the liquidation or sale occurs
before May 4, 2002, the accrued dividends will not be paid to the extent the
holders of Series B Preferred Stock will receive more than $22.50 per share.
A holder of shares of Series B Preferred Stock may convert those shares
into common stock at any time. Initially, each share of Series B Preferred Stock
may be converted into one share of common stock. The number of shares of common
stock into which each share of Series B Preferred Stock can be converted may be
adjusted as a result of stock splits, stock dividends and other issuances of
additional stock.
After the earlier of May 24, 2000 or the date on which the holders of
Series B Preferred Stock exercise their demand registration rights, which are
described below, we have the right to require the conversion of the Series B
Preferred Stock if our common stock price exceeds $27.00 per share for 20
consecutive trading days. If we require conversion before May 4, 2002, no
accrued dividends will be paid.
<PAGE> 16
The holders of Series B Preferred Stock have the right to require us to
redeem the Series B Preferred Stock after May 4, 2005 or upon a sale of our
company. The redemption price will be equal to the greater of:
o $9.00 per share plus accrued and unpaid dividends; or
o the value of the common stock into which the Series B Preferred
Stock is then convertible.
If we fail to redeem all shares of Series B Preferred Stock within six
months of the date specified by the holders of the Series B Preferred Stock,
then the holders of the Series B Preferred Stock will have the right to elect a
majority of our Board of Directors.
The holders of Series B Preferred Stock have demand and piggyback
registration rights, although a demand registration may not be initiated by the
holders of the Series B Preferred Stock before May 4, 2000, unless our stock
price exceeds $27.00 per share for 20 consecutive trading days.
(c) During second quarter 1999, we issued 259,826 shares of common
stock pursuant to the exercise of warrants acquired in a private placement. As
the warrants were exercised on a cashless basis, we did not receive any proceeds
from the issuance. All of the securities were acquired by the recipients thereof
for investment and with no view toward the sale or redistribution thereof. In
each instance, the offers and sales were made without any public solicitation;
the stock certificates bear restrictive legends; and appropriate stop transfer
instruction have been or will be given to the transfer agent. No underwriter was
involved in this transaction and no commissions were paid with respect to the
sale of such securities. These issuances of securities were made in reliance on
the exemption from registration provided by Section 3(a)(9) of the Securities
Act of 1933.
In May, 1999, we issued 5,277,779 shares of Series B Convertible
Preferred Stock at $9.00 per share to five investors for total consideration of
$47.5 million. Net proceeds to us were approximately $46.5 million. The offer
and sale of shares of Series B Preferred Stock were made without any public
solicitation; the stock certificates bear restrictive legends; and appropriate
stop transfer instructions have been or will be given to the transfer agent. No
underwriter was involved in this transaction and no commissions were paid with
respect to the sale of such securities. These issuances of securities were made
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 as a transaction by an issuer not involving a public
offering.
(d) Our Registration Statement No. 333-49085 was declared effective
on May 11, 1998, which was the offering date of our common stock thereunder.
During the period from May 11, 1998 until June 30, 1999, we paid $4,790,000 in
underwriting discounts and commissions and other offering expenses of $672,000
for total offering expenses of $5,462,000, resulting in net offering proceeds to
us of $62,963,000. Of such amounts, expenses of $16,000 were paid for charter
services to a related party of which two current board members are major
shareholders. No other amounts were paid for offering expenses directly or
indirectly to officers, Directors, 10% or greater stockholders or other
affiliates of ours.
During the period from May 11, 1998 until June 30, 1999, the net
offering proceeds were invested in government securities and money market funds.
None of such amounts were paid directly or indirectly to officers, Directors,
10% or greater stockholders or other affiliates of ours.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on Friday May 21, 1999.
At the meeting, Jack Hancock, Thomas Neustaetter and Paul J. Salem were elected
to serve on our Board of Directors for a three-year term expiring in 2002. Each
director received the vote of all 12,603,299 shares of stock represented at the
meeting. The terms of Timothy P. Flynn, Maurice J. Gallagher, Jr., David
Kronfeld and Nield J. Montgomery as directors also continued after the meeting.
At the meeting, the stockholders also approved an amendment of our Stock Option
Plan to increase the number of shares issuable under such Plan from 2,640,000
shares to 4,640,000 shares by the vote of 9,453,352 shares for, 886,014 shares
voting against and 35,400 shares abstaining.
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report. The exhibit
numbers refer to Item 601 of Regulation S-K.
27 Financial Data Schedule
99.1 Underwriting Agreement dated July 21, 1999 among the Company,
Bear, Stearns & Co. Inc., Goldman Sachs & Co. and ING Barings
LLC.
(b) No reports on Form 8-K were filed during the second quarter 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
MGC COMMUNICATIONS, INC.
Date: August 3, 1999 /s/ Maurice J. Gallagher, Jr.
------------------------------------
Maurice J. Gallagher, Jr.
Chairman of the Board
Date: August 3, 1999 /s/ Linda M. Sunbury
------------------------------------
Linda M. Sunbury
Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,256
<SECURITIES> 103,049
<RECEIVABLES> 11,405
<ALLOWANCES> 425
<INVENTORY> 0
<CURRENT-ASSETS> 76,011
<PP&E> 146,873
<DEPRECIATION> 14,190
<TOTAL-ASSETS> 263,266
<CURRENT-LIABILITIES> 27,228
<BONDS> 156,981
46,500
0
<COMMON> 18
<OTHER-SE> 32,301
<TOTAL-LIABILITY-AND-EQUITY> 263,266
<SALES> 19,886
<TOTAL-REVENUES> 19,886
<CGS> 18,989
<TOTAL-COSTS> 43,579
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,188
<INCOME-PRETAX> (29,749)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,749)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,749)
<EPS-BASIC> (1.76)
<EPS-DILUTED> (1.76)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
EXECUTION COPY
5,587,695 Shares
MGC COMMUNICATIONS, INC.
Common Stock
UNDERWRITING AGREEMENT
July 21, 1999
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
ING BARINGS LLC
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
MGC Communications, Inc., a Nevada corporation (the "Company") and the
stockholders of the Company listed on Schedule I hereto (collectively, the
"Selling Stockholders" and, together with the Company, the "Sellers"), confirm
their agreement with Bear, Stearns & Co. Inc. ("Bear Stearns"), Goldman, Sachs &
Co. and ING Barings LLC (the "Underwriters"), as follows:
1. Description of Securities. The Company and the Selling
Stockholders severally propose, upon the terms and subject to the conditions set
forth herein, to issue and sell to the Underwriters an aggregate of 5,587,695
shares (the "Firm Shares") of the Company's common stock, $0.001 par value per
share (the "Common Stock"). The Firm Shares consist of 5,000,000 million shares
to be issued and sold by the Company (the "Firm Company Shares") and 587,695
outstanding shares to be sold by the Selling Stockholders. The Company also
proposes to sell to the Underwriters, upon the terms and subject to the
conditions set forth in Section 3 hereof, up to an additional 838,154 shares
(the "Additional Shares" and together with the Firm Company Shares, the "Company
Shares"). The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "Shares."
2. Registration Statement and Prospectus. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations promulgated thereunder by the Commission
(the "Securities Act Regulations"; which together with the Exchange Act
Regulations (as defined below), are referred to herein as the "Regulations"), a
registration statement, as amended by certain amendments thereto, on Form S-3
(File No. 333-79863), including a preliminary prospectus, subject to completion,
relating to the Shares. The Company will next file with the Commission either
(i) prior to the effectiveness of such registration statement, a further
<PAGE> 2
amendment thereto, including therein a final prospectus or (ii) after the
effectiveness of such registration statement, a final prospectus in accordance
with Rules 430A and 424(b)(1) of the Securities Act Regulations, the documents
so filed in either case to include all Rule 430A Information (as defined below)
and to conform, in content and form, to the last printer's proof thereof
furnished to and approved by the Underwriters immediately prior to such filing.
If the Company files a registration statement to register a portion of the
Shares and relies on Rule 462(b) for such registration statement to become
effective upon filing with the Commission (the "Rule 462 Registration
Statement"), then any reference to "Registration Statement" herein shall be
deemed to be both the registration statement referred to above (No. 333-79863)
and the Rule 462 Registration Statement, as each such registration statement may
be amended pursuant to the Act.
As used in this Underwriting Agreement (the "Agreement"), (i) the term
"Effective Date" means the later of the date the registration statement is
declared effective by the Commission, or, if a post-effective amendment is filed
with respect thereto, the date of such post-effective amendment's effectiveness,
(ii) the term "Registration Statement" means the registration statement, as
amended at the time when it becomes effective or, if a post-effective amendment
is filed with respect thereto, as amended by such post-effective amendment at
the time of its effectiveness, including in each case all information
incorporated by reference therein, all Rule 430A Information deemed to be
included therein at the Effective Date pursuant to Rule 430A of the Securities
Act Regulations and all financial statements and exhibits included or
incorporated by reference therein, (iii) the term "Rule 430A Information" means
information with respect to the Shares and the public offering thereof
permitted, pursuant to the provisions of paragraph (a) of Rule 430A of the
Securities Act Regulations, to be omitted from the form of prospectus included
in the Registration Statement at the time it is declared effective by the
Commission, (iv) the term "Prospectus" means the form of final prospectus
relating to the Shares first filed with the Commission pursuant to Rule 424(b)
of the Securities Act Regulations or, if no filing pursuant to Rule 424(b) is
required, the form of final prospectus included in the Registration Statement at
the Effective Date and (v) the term "preliminary prospectus" means any
preliminary prospectus (as described in Rule 430 of the Securities Act
Regulations) with respect to the Shares that omits Rule 430A Information. Any
reference herein to the Registration Statement, the Prospectus, any amendment or
supplement thereto or any preliminary prospectus shall be deemed to refer to and
include the documents incorporated by reference therein which were filed under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
rules and regulations of the Commission promulgated thereunder (the "Exchange
Act Regulations"), and any reference herein to the terms "amend," "amendment" or
"supplement" with respect to the Registration Statement or Prospectus shall be
deemed to refer to and include the filing after the execution hereof of any
document with the Commission deemed to be incorporated by reference therein. For
purposes of this Agreement the term "subsidiaries" shall mean MGC Lease
Corporation, a Nevada corporation, MGC License Corporation, a Georgia
corporation and MGC LJ.Net, Inc., a Nevada corporation, and shall include those
corporations, partnerships and other business entities, whether domestic or
foreign, which are, or under generally accepted accounting principles should be,
consolidated for purposes of the Company's financial reporting.
3. Purchase and Sale of the Shares. Subject to all the terms and
conditions set forth herein (i) the Company agrees to issue and sell 5,000,000
Firm Shares and (ii) each Selling Stockholder agrees, severally and not jointly,
to sell the number of Firm Shares set forth opposite
2
<PAGE> 3
such Selling Stockholder's name on Schedule I hereto to the Underwriters and,
upon the basis of the representations, warranties, covenants and agreements of
the Company and the Selling Stockholders herein contained and subject to all the
terms and conditions set forth herein, each Underwriter agrees, severally and
not jointly, to purchase from the Company and the Selling Stockholders, at a
purchase price of $23.75 per Share, the number of Firm Shares set forth opposite
the name of such Underwriter on Schedule II hereto (or such number of Firm
Shares increased as set forth in Section 12 hereof).
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Company, solely for the purpose of covering
over-allotments in connection with sales of the Firm Shares, at the purchase
price per Share of $23.75, pursuant to an option (the "over-allotment option")
which may be exercised at any time and from time to time prior to 9:00 p.m., New
York City time, on the 30th day after the date of the Prospectus (or, if such
30th day shall be a Saturday or Sunday or a holiday, on the next business day
thereafter when the New York Stock Exchange is open for trading), up to an
aggregate of 838,154 Additional Shares. Upon any exercise of the over-allotment
option, each Underwriter, severally and not jointly, agrees to purchase from the
Company the number of Additional Shares (subject to such adjustments as the
Underwriters may determine in order to avoid fractional shares) that bears the
same proportion to the aggregate number of Additional Shares to be purchased by
the Underwriters as the number of Firm Shares set forth opposite the name of
such Underwriter on Schedule II hereto (or such number of Firm Shares increased
as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares.
The Sellers hereby agree, severally and not jointly, and the Company
shall, concurrently with the execution of this Agreement, deliver agreements
substantially in the form attached hereto as Exhibit D, or in such other form as
shall be reasonably acceptable to the Underwriters, executed by each of the
directors and officers of the Company and by each stockholder listed on Schedule
III hereto, pursuant to which each such person agrees, not to offer, sell,
contract to sell, grant any option to purchase, or otherwise dispose of, any
Common Stock of the Company or any securities convertible into or exercisable or
exchangeable for such Common Stock, for a period of 90 days after the date of
the Prospectus, except to the Underwriters pursuant to this Agreement.
Notwithstanding the foregoing, during such period the Company may (i) issue
shares of its Common Stock and grant stock options pursuant to the Company's
existing Stock Option Plan (the "Stock Option Plan"), (ii) issue shares of its
Common Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and (iii) issue shares of its Common
Stock and grant options to newly hired management level employees consistent
with past practices of the Company.
4. Offering. It is understood that the Underwriters propose to make
a public offering of their respective portions of the Shares as soon after the
Registration Statement and this Agreement have become effective as in the
Underwriters' judgment is advisable and initially to offer the Shares for sale
to the public as set forth in the Prospectus.
3
<PAGE> 4
5. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Kronish Lieb Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, NY
10036, at 10:00 a.m., New York City time, on July 27, 1999 (the "Closing Date").
The place of closing for the Firm Shares and the Closing Date may be varied by
agreement between the Underwriters and the Company.
Delivery to the Underwriters of and payment for any Additional Shares to
be purchased by the Underwriters shall be made at the office of Kronish Lieb
Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, NY 10036 at such
time and on such date (the "Option Closing Date"), which may be the same as the
Closing Date but shall in no event be earlier than the Closing Date nor earlier
than two nor later than ten business days after the giving of the notice
hereinafter referred to, as shall be specified in a written notice from the
Underwriters to the Company of the Underwriters' determination to purchase a
number, specified in such notice, of Additional Shares. The place of closing for
any Additional Shares and the Option Closing Date for such Shares may be varied
by agreement between the Underwriters and the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as the Underwriters shall request prior to 9:30 a.m., New York City time, on the
second business day preceding the Closing Date or the Option Closing Date, as
the case may be. Such certificates shall be made available to the Underwriters
in New York City for inspection and packaging not later than 9:30 a.m., New York
City time, on the business day next preceding the Closing Date or the Option
Closing Date, as the case may be. The certificates evidencing the Firm Shares
and any Additional Shares to be purchased hereunder shall be delivered to the
Underwriters on the Closing Date or the Option Closing Date, as the case may be,
against payment of the purchase price therefor by wire transfer of immediately
available funds to the Company's and each of the Selling Stockholders' accounts,
provided that each of the Company and the Selling Stockholders shall give at
least two business days' prior written notice to the Underwriters of the
information required to effect such wire transfers.
6. Covenants of the Company. The Company covenants and agrees with
each of the Underwriters as follows:
(a) The Company will, if the Registration Statement has not
heretofore become effective under the Act, file an amendment to the
Registration Statement or, if necessary pursuant to Rule 430A of the
Securities Act Regulations, file a post-effective amendment to the
Registration Statement, as soon as practicable after the execution and
delivery of this Agreement, and will use its best efforts to cause the
Registration Statement or such post-effective amendment to become
effective at the earliest possible time. If the Registration Statement
has become or becomes effective pursuant to Rule 430A of the Securities
Act Regulations, or filing of the Prospectus is otherwise required under
Rule 424(b) of the Securities Act Regulations, the Company will file the
Prospectus, properly completed, pursuant to Rule 424(b) of the
Securities Act Regulations within the time period therein prescribed and
will provide evidence satisfactory to the Underwriters of such timely
filing. The Company in all other respects will comply fully and in a
timely manner with the
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<PAGE> 5
applicable provisions of Rule 424 and Rule 430A of the Securities Act
Regulations and with Rule 462 of the Securities Act Regulations, if
applicable.
(b) The Company will promptly advise the Underwriters, and,
if requested by the Underwriters, confirm such advice in writing, (i)
when the Registration Statement, any Rule 462 Registration Statement or
any post-effective amendment thereto has become effective and if and
when the Prospectus is sent for filing pursuant to Rule 424(b) of the
Securities Act Regulations, (ii) of receipt by the Company or any
representative or attorney of the Company of any communications from the
Commission relating to the Company, the Registration Statement, any
preliminary prospectus, the Prospectus, any document incorporated by
reference therein, or the transactions contemplated by this Agreement,
including, without limitation, the receipt of a request by the
Commission for any amendment or supplement to the Registration Statement
or Prospectus, or any document incorporated by reference therein, or the
receipt of any comments from the Commission, (iii) of the initiation or
threatening of any proceedings for, or receipt by the Company of any
notice with respect to, the issuance by the Commission of any stop order
suspending effectiveness of the Registration Statement or any
post-effective amendment thereto or the issuance by any state securities
commission or other regulatory authority of any order suspending the
qualification or exemption from qualification of the Shares for the
offering or sale in any jurisdiction and (iv) during the period when the
Prospectus is required to be delivered under the Act, of any material
change in the Company's condition (financial or otherwise), business,
prospects, properties, assets, liabilities, net worth, results of
operations, cash flows or of the happening of any event that makes any
statement of a material fact made in the Registration Statement untrue
or that requires the making of any additions to or changes in the
Registration Statement in order to make the statements therein not
misleading or that makes any statement of a material fact made in the
Prospectus untrue or that requires the making of any additions to or
changes in the Prospectus required to be made therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Company will use its
best efforts to prevent the issuance of an order by the Commission at
any time suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto, or by any state securities
commission or other regulatory authority suspending the qualification or
exemption from qualification of the Shares and, if any such order is
issued, to obtain its withdrawal or lifting at the earliest possible
time.
(c) The Company will furnish to the Underwriters without
charge up to four signed copies of the Registration Statement (including
all exhibits and all documents incorporated by reference therein, as
filed with the Commission) and four signed copies of all amendments
thereto, and the Company will furnish without charge to those persons
designated by each Underwriter such number of conformed copies of the
Registration Statement, of each preliminary prospectus, the Prospectus
and all amendments of and supplements to such documents, if any, as such
Underwriter may reasonably request. The Company consents to the use of
the Prospectus and any amendments or supplements thereto by any
Underwriter or any dealer, both in connection with the offering or sale
of the Shares and for such period of time thereafter as delivery of a
Prospectus is required by the Act.
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<PAGE> 6
(d) The Company will not file any amendment or supplement to
the Registration Statement, or any document that upon filing is deemed
to be incorporated by reference in the Registration Statement or
Prospectus or any amendment of or supplement to the Prospectus, whether
before or after the Effective Date, unless the Underwriters shall
previously have been advised thereof and shall have not objected thereto
within a reasonable time after being furnished a copy thereof. The
Company shall promptly prepare and file with the Commission, upon the
Underwriters' request, any amendment to the Registration Statement or
any supplement to the Prospectus that may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters. The
Company will use its best efforts to cause any such amendment or
supplement to become effective as promptly as possible.
(e) During the time that a prospectus relating to the Shares
is required to be delivered under the Act, the Company will (i) comply
with all requirements imposed upon it by the Act and by the Regulations,
as from time to time in force, so as to permit the continuance of sales
of or dealing in the Shares as contemplated by the provisions hereof and
the Prospectus, and (ii) will file promptly all documents required to be
filed with the Commission pursuant to Section 13 or 14 of the Exchange
Act and the Exchange Act Regulations. If at any time when a prospectus
relating to the Shares is required to be delivered under the Act any
event shall have occurred as a result of which the Registration
Statement or the Prospectus as then supplemented includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or if it shall be necessary, in the judgment of the Company
or in the reasonable opinion of either counsel to the Company or counsel
to the Underwriters, at any time to amend or supplement the Registration
Statement or Prospectus to comply with the Act or the Regulations, or to
file under the Exchange Act, so as to comply therewith, any document
incorporated by reference in the Registration Statement or Prospectus or
in any amendment or supplement thereto, the Company will notify the
Underwriters promptly and prepare and file with the Commission an
appropriate amendment or supplement (in form and substance satisfactory
to the Underwriters) so that the statements in the Registration
Statement and the Prospectus, as so amended or supplemented, will not,
in light of the circumstances existing as of the date the Prospectus is
so delivered, be misleading, or so to effect such compliance with the
Act or the Exchange Act and the Regulations, and the Company will use
its best efforts to cause any such amendment to the Registration
Statement to be declared effective as promptly as possible.
(f) The Company will cooperate with the Underwriters and
Underwriters' counsel, at or prior to the time the Registration
Statement becomes effective, to qualify or register the Shares for
offering and sale and to determine the eligibility for investment of the
Shares under the securities laws of such jurisdictions as the
Underwriters may designate and to maintain such qualification or
registration in effect for so long as required for the distribution
thereof; provided, however, that the Company shall not be required in
connection therewith to register or qualify as a foreign corporation
where it is not now so qualified or to take any action that would
subject it to service of process in suits or taxation,
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<PAGE> 7
in each case, other than as to matters and transactions relating to the
Registration Statement, in any jurisdiction where it is not now so
subject.
(g) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to the
Underwriters as soon as practicable, but not later than 60 days after
the close of the period covered thereby, an earnings statement, covering
a period of at least twelve consecutive full calendar months commencing
after the effective date of the Registration Statement (but in no event
commencing later than 90 days after such date), that satisfies the
provisions of Section 11(a) of the Act and Rule 158 of the Securities
Act Regulations.
(h) The Company will apply the proceeds from the sale of the
Shares as set forth under the heading "How We Intend to Use the Proceeds
of this Offering" in the Prospectus.
(i) The Company will do and perform all things required or
necessary to be done and performed under this Agreement by it prior to
the Closing Date and to satisfy all conditions precedent on its part to
the delivery of the Shares.
(j) Prior to the Closing Date, the Company will furnish to
the Underwriters, as soon as they have been prepared in the ordinary
course by the Company, copies of any unaudited interim financial
statements of the Company, for any periods subsequent to the periods
covered by the financial statements appearing in the Registration
Statement and the Prospectus.
(k) Neither the Company nor any of its subsidiaries will
take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares. Except as permitted by the Act, the
Company will not distribute any Registration Statement, preliminary
prospectus, Prospectus or other offering material in connection with the
offering and sale of the Shares.
(l) The Company will use its best efforts to have the Shares
listed for quotation on the Nasdaq National Market concurrently with the
effectiveness of the Registration Statement.
(m) The Company will cooperate and assist in any filings
required to be made with the National Association of Securities Dealers,
Inc. ("NASD") and in the performance of any due diligence investigation
by any broker/dealer participating in the sale of the Shares.
(n) For a period of three years from Closing Date the
Company will deliver without charge to the Underwriters, promptly upon
their becoming available, copies of (i) all reports or other publicly
available information that the Company shall mail or otherwise make
available to its stockholders and (ii) all reports, financial statements
and proxy or
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<PAGE> 8
information statements filed by the Company with the Commission or any
national securities exchange and such other publicly available
information concerning the Company or its subsidiaries, including
without limitation, press releases.
(o) Except for (i) shares of Common Stock issuable upon
exercise of outstanding warrants of the Company or upon conversion of
outstanding convertible securities of the Company, (ii) shares of Common
Stock issued and options granted pursuant to the Stock Option Plan or
(iii) shares of Common Stock issued and options granted to newly hired
management level employees consistent with past practices of the
Company, the Company will not, directly or indirectly, sell, offer to
sell, solicit an offer to buy, contract to sell, grant any option to
purchase or otherwise transfer or dispose of or register or announce the
sale or offering of any shares of capital stock of the Company, or any
securities that are convertible into or exercisable or exchangeable for
capital stock of the Company, for a period of 120 days after the date of
the Prospectus, without the prior written consent of Bear Stearns.
(p) The Company shall cause each officer and director and
each stockholder listed on Schedule III hereto to enter into an
agreement substantially in the form set forth in Exhibit D to the effect
that he, she or it will not, for a period of 90 days after the date of
the Prospectus, offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock (or any
securities convertible into or exercisable or exchangeable for Common
Stock) or grant any options or warrants to purchase any shares of Common
Stock, without the prior written consent of Bear Stearns.
(q) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement under the heading
"Where You Can Find More Information."
(r) Prior to the Closing Date or any Option Closing Date, as
the case may be, except as may be required by law, the Company will not
(i) issue any press release or other communications relating to the sale
of the Shares, or (ii) hold any press conferences with respect to the
Company or its financial condition, results of operation, business,
properties, assets or liabilities, or the sale of the Shares, without
the prior consent of the Underwriters.
7. Representations and Warranties of the Company and the Selling
Stockholders.
(1) The Company represents and warrants to each of the Underwriters
that:
(a) When the Registration Statement becomes effective, when
any post-effective amendment to the Registration Statement becomes
effective, when the Prospectus is first filed with the Commission
pursuant to Rule 424(b) of the Securities Act Regulations, when any
supplement to or amendment of the Prospectus is filed with the
Commission, and at the Closing Date and during such longer period as the
Prospectus may be required to be delivered in connection with sales by
the Underwriters or a dealer, the Registration Statement (which, as
defined, includes all documents incorporated by reference therein) and,
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<PAGE> 9
if filed at such time, the Prospectus (which, as defined, includes all
documents incorporated by reference therein) and any amendments thereof
and supplements thereto will comply in all material respects with the
applicable provisions of the Act, the Exchange Act and the Regulations,
and such Registration Statement did not and will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements
therein not misleading; and such Prospectus or supplement thereto did
not and will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading. When any related preliminary prospectus
was first filed with the Commission (whether filed as part of the
Registration Statement or an amendment thereof or pursuant to Rule
424(a) of the Regulations) and when any amendment or supplement thereto
was first filed with the Commission, such preliminary prospectus and any
amendment or supplement thereto complied in all material respects with
the applicable provisions of the Act and the Regulations and did not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. No representation or warranty is made in this
subsection (a), however, with respect to any statements in or omissions
from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment or supplement thereto based upon
and conforming with information furnished in writing by or on behalf of
the Underwriters to the Company expressly for use therein. The Company
acknowledges for all purposes under this Agreement (including Section 10
hereof) that the statements set forth in the last paragraph on the cover
page of the Prospectus and in the third paragraph below the first table
under the caption "Underwriting" in the Prospectus and the last four
paragraphs of the section under the caption "Underwriting" in the
Prospectus constitute the only written information furnished to the
Company by the Underwriters for use in the Prospectus or any preliminary
prospectus (or any amendments or supplements thereto).
(b) The Company and the transactions contemplated by this
Agreement meet the requirements for using Form S-3 under the Act. The
documents incorporated by reference in the Registration Statement, the
Prospectus, any amendment or supplement thereto or any preliminary
prospectus and any further documents incorporated by reference, when
they became or become effective under the Act or were or are filed with
the Commission under the Exchange Act, as the case may be, conformed or
will conform in all material respects with the requirements of the Act
or the Exchange Act, as applicable, and the Regulations; no such
document when it was or is filed (or, if an amendment with respect to
any such document was or is filed, when such amendment was filed),
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to
make the statements therein not misleading. Each preliminary prospectus
and Prospectus filed as part of the Registration Statement, as part of
any amendment thereto or pursuant to Rule 424 under the Securities Act
Regulations, if filed by electronic transmission pursuant to Regulation
S-T under the Securities Act, was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and
sales of the Shares (except as may be permitted by Regulation S-T under
the Securities Act).
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<PAGE> 10
(c) There are no contracts or documents of the Company or
any of its subsidiaries that are required to be filed as exhibits to the
Registration Statement or to any of the documents incorporated by
reference therein by the Act, the Exchange Act or by the Regulations
that have not been so filed.
(d) No stop order suspending the effectiveness of the
Registration Statement or preventing or suspending the use of any
preliminary prospectus has been issued and no proceedings for that
purpose have been commenced or are pending before or, to the best
knowledge of the Company, are contemplated by the Commission. No stop
order suspending the sale of the Shares in any jurisdiction designated
by the Underwriters has been issued and no proceedings for that purpose
have been commenced or are pending or, to the best knowledge of the
Company, are contemplated.
(e) Each of the Company and its subsidiaries (A) has been
duly organized and is validly existing as a corporation in good standing
under the laws of its respective jurisdiction of incorporation, (B) has
all requisite corporate power and authority to carry on its business as
it is currently being conducted and as described in the Registration
Statement and the Prospectus and to own, lease and operate its
properties, and (C) is duly qualified and in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires
such qualification except, with respect to this clause (C), where the
failure to be so qualified or in good standing does not and could not
reasonably be expected to (x) individually or in the aggregate, result
in a material adverse effect on the properties, business, results of
operations, condition (financial or otherwise), affairs or prospects of
the Company and its subsidiaries, taken as a whole, (y) interfere with
or adversely affect the issuance or marketability of the Shares pursuant
hereto or (z) in any manner draw into question the validity of this
Agreement (any of the events set forth in clauses (x), (y) or (z), a
"Material Adverse Effect"). All of the issued and outstanding shares of
capital stock of, or other ownership interests in, each subsidiary have
been duly authorized and validly issued, and are fully paid and
non-assessable and were not issued in violation of or subject to any
preemptive or similar rights and are owned by the Company directly, free
and clear of any security interest, mortgage, pledge, lien, encumbrance,
claim or other restriction on transferability or voting. Except for the
capital stock of the subsidiaries owned by the Company, neither the
Company nor any of its subsidiaries owns or holds any interest in any
corporation partnership, trust or association, joint venture or other
entity.
(f) The authorized capital stock of the Company immediately
prior to the Closing Date will consist of the following: (i) 60,000,000
shares of Common Stock, of which 17,685,434 shares, plus any shares of
Common Stock issued upon exercise of options or warrants currently
outstanding or upon conversion of the Series B Preferred Stock (as
defined below) between July 20, 1999 and the Closing Date, will be
issued and outstanding immediately prior to the Closing Date and (ii)
50,000,000 shares of preferred stock, of which 5,278,000 have been
designated as Series B Convertible Preferred Stock (the "Series B
Preferred Stock"), and of which 5,277,779 shares of the Series B
Preferred Stock will be
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<PAGE> 11
issued and outstanding immediately prior to the Closing Date (except to
the extent any shares of Series B Preferred Stock are converted into
Common Stock). All of the outstanding shares of capital stock of the
Company and each subsidiary have been duly authorized, validly issued,
and are fully paid and nonassessable and were not issued in violation of
any preemptive or similar rights. Except as set forth in the Prospectus,
there are no outstanding subscriptions, rights, warrants, calls,
commitments of sale or options to acquire (other than options issued
during the period commencing on the date hereof and ending on the
Closing Date or the Option Closing Date, as the case may be, pursuant to
the Stock Option Plan in accordance with the third paragraph of Section
3 of this Agreement), or instruments convertible or exchangeable or
exercisable for, any capital stock or other equity interest in the
Company or its subsidiaries. The Shares have been duly authorized and,
when the Company Shares are issued and delivered to the Underwriters
against payment therefor in accordance with the terms hereof, the Shares
will be validly issued, fully paid and nonassessable and free of any
preemptive or similar rights. The authorized capital stock of the
Company conforms in all respects to the description thereof in the
Registration Statement and the Prospectus. All of the Company's
subsidiaries are listed in Section 2 hereof. The authorized capital
stock of (i) MGC Lease Corporation consists of 5,000 shares of common
stock, $.10 par value per share, all of which are issued to, and owned
of record and beneficially by, the Company, (ii) MGC LJ.Net, Inc.
consists of 10,000 shares of common stock, $.01 par value per share, of
which 100 are issued and outstanding, all of which are issued to, and
owned of record and beneficially by, the Company, and (iii) MGC License
Corporation consists of 10,000 shares of common stock, $.01 par value
per share, of which 100 shares are issued and outstanding, all of which
are issued to, and owned of record and beneficially by, the Company.
(g) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement, and to consummate the transactions contemplated hereby,
including, without limitation, the corporate power and authority to
issue, sell and deliver the Company Shares as provided herein.
(h) This Agreement has been duly and validly authorized,
executed and delivered by the Company and is the legal, valid and
binding agreement of the Company, enforceable against it in accordance
with its terms, except insofar as indemnification and contribution
provisions may be limited by applicable law or equitable principles and
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization or similar laws affecting the rights of creditors
generally and subject to general principles of equity.
(i) None of the Company or any of the subsidiaries is (A) in
violation of its charter or bylaws, (B) in default in the performance of
any bond, debenture, note, indenture, mortgage, deed of trust or other
agreement or instrument to which it is a party or by which it is bound
or to which any of its properties is subject, or (C) in violation of any
local, state or Federal law, statute, ordinance, rule, regulation,
requirement, judgment or court decree (including, without limitation,
the Communications Act of 1934, as amended by the Telecommunications Act
of 1996 and the rules and regulations of the Federal Communications
Commission (the "FCC") and environmental laws, statutes, ordinances,
11
<PAGE> 12
rules, regulations, judgments or court decrees) applicable to the
Company or any subsidiary or any of their assets or properties (whether
owned or leased) other than, in the case of clauses (B) and (C), any
default or violation that could not reasonably be expected to have a
Material Adverse Effect. There exists no condition that, with notice,
the passage of time or otherwise, would constitute a default under any
such document or instrument.
(j) None of (A) the execution, delivery or performance by
the Company of this Agreement; (B) the issuance of the Company Shares;
and (C) the sale of the Shares will violate, conflict with or constitute
a breach of any of the terms or provisions of, or a default under (or an
event that with notice or the lapse of time, or both, would constitute a
default), or require consent under, or result in the imposition of a
lien or encumbrance on any properties of the Company or any subsidiary,
or an acceleration of any indebtedness of the Company or any subsidiary
pursuant to, (i) the charter or bylaws of the Company or any subsidiary,
(ii) any bond, debenture, note, indenture, mortgage, deed of trust or
other agreement or instrument to which the Company or any subsidiary is
a party or by which any of them or their property is or may be bound,
(iii) any statute, rule or regulation applicable to the Company or any
subsidiary or any of their respective assets or properties or (iv) any
judgment, order or decree of any court or governmental agency or
authority having jurisdiction over the Company or the subsidiaries or
any of their assets or properties, except that the Company has not
received written approval from the Georgia Public Service Commission as
to the sale of the Shares and except in the case of clauses (ii), (iii)
and (iv) for such violations, conflicts, breaches, defaults, consents,
impositions of liens or accelerations that would not singly, or in the
aggregate, have a Material Adverse Effect. Other than as described in
the Prospectus, no consent, approval, authorization or order of, or
filing, registration, qualification, license or permit of or with, (A)
any court or governmental agency, body or administrative agency
(including, without limitation, the FCC) or (B) any other person is
required for (1) the execution, delivery and performance by the Company
of this Agreement, (2) the issuance of the Company Shares, and (3) the
sale of the Shares and the consummation of the transactions contemplated
hereby or by the Prospectus, except (x) such as have been obtained and
made under the Act and state securities or Blue Sky laws and regulations
or such as may be required by the NASD or (y) where the failure to
obtain any such consent, approval, authorization or order of, or filing,
registration, qualification, license or permit would not reasonably be
expected to result in a Material Adverse Effect.
(k) Except as set forth in the Prospectus, there is (i) no
action, suit, investigation or proceeding before or by any court,
arbitrator or governmental agency, body or official, domestic or
foreign, now pending or, to the best knowledge of the Company or any
subsidiary, threatened or contemplated to which the Company or any of
its subsidiaries is or may be a party or to which the business or
property of the Company or any of its subsidiaries is or may be subject,
(ii) no statute, rule, regulation or order that has been enacted,
adopted or issued by any governmental agency or that has been proposed
by any governmental body and (iii) no injunction, restraining order or
order of any nature by a federal or state court or foreign court of
competent jurisdiction to which the Company or any subsidiary is or may
be subject or to which the business, assets, or property of the Company
or any subsidiary are or may be subject, that, in the case of clauses
(i), (ii) and (iii) above,
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<PAGE> 13
(x) is required to be disclosed in the Registration Statement or the
Prospectus, (y) could reasonably be expected to, individually or in the
aggregate, result in a Material Adverse Effect or (z) might interfere
with, adversely affect or in any manner question the validity of the
issuance and sale of the Shares or any of the other transactions
contemplated by this Agreement and the Registration Statement.
(l) There is (i) no significant unfair labor practice
complaint pending against the Company or any subsidiary nor, to the best
knowledge of the Company, threatened against any of them, before the
National Labor Relations Board, any state or local labor relations board
or any foreign labor relations board, and no significant grievance or
significant arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against the Company or any
subsidiary or, to the best knowledge of the Company, threatened against
any of them, (ii) no significant strike, labor dispute, slowdown or
stoppage pending against the Company or any subsidiary nor, to the best
knowledge of the Company, threatened against the Company or any
subsidiary and (iii) to the best knowledge of the Company, no union
representation question existing with respect to the employees of the
Company or any subsidiary that, in the case of clauses (i), (ii) or
(iii), could reasonably be expected to result in a Material Adverse
Effect. To the best knowledge of the Company, no collective bargaining
organizing activities are taking place with respect to the Company or
any subsidiary. None of the Company or any subsidiary has violated (A)
any federal, state or local law or foreign law relating to
discrimination in hiring, promotion or pay of employees (except as set
forth in the Registration Statement), (B) any applicable wage or hour
laws or (C) any provision of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or the rules and regulations thereunder,
which in the case of clause (A), (B) or (C) above could reasonably be
expected to result in a Material Adverse Effect.
(m) No employee pension benefit plan (within the meaning of
Section 3(2) of ERISA, but excluding any "multiemployer plan" within the
meaning of Section 3(37) of ERISA) established or maintained by the
Company or any subsidiary or to which the Company or any subsidiary has
made contributions, which is subject to Part 3 or Subtitle B of Title I
of ERISA, or Section 412 of the Internal Revenue Code of 1986 (the
"Code"), had an accumulated funding deficiency (as such term is defined
in Section 302 of ERISA or Section 412 of the Code), whether or not
waived, as of the last day of the most recent plan year of such plan
heretofore ended for which an excise tax is due (or would be due if such
deficiency were not waived). Each of the Company and the subsidiaries
has made all contributions required to be made by it to any
"multiemployer pension plan" (within the meaning of Section 3(37) of
ERISA). Neither the Company nor any subsidiary nor any Related Person
(as such term is defined below) has incurred, or is expecting to incur,
any withdrawal liability (determined under Section 4201 of ERISA) with
respect to any plan covered by Title IV of ERISA and in respect of which
the Company or any subsidiary or a Related Person is an "employer" as
defined in Section 3(5) of ERISA, and to the best of the Company's
knowledge, there has not been any "reportable event" (within the meaning
of Section 4043 of ERISA and regulations thereunder, other than an event
for which the 30-day notice requirement has been waived), or any other
event or condition which presents a
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<PAGE> 14
material risk of the termination of any such plan, including, but not
limited to, a termination by action of the Pension Benefit Guaranty
Corporation, which termination would create a material liability of the
Company or any subsidiary or a Related Person to the Pension Benefit
Guaranty Corporation. "Related Person" shall mean any trade or business
(whether or not incorporated) which is under common control (as defined
in Section 414(b) and (c) of the Code) with the Company within the
meaning of Section 4001(b) of ERISA. As of the last day of the most
recent plan year heretofore ended of each employee benefit plan
described in the preceding sentence (other than a "multiemployer plan"),
the present value of all accrued benefits under each such employee
benefit plan (calculated on the basis of the actuarial assumptions
specified in the most recent actuarial valuation for each such plan) did
not exceed the fair market value of the assets of such plan allocable to
such benefits by more than $1,000,000. Neither any employee pension
benefit plan (excluding any "multiemployer plan" within the meaning of
Section 3(37) of ERISA) established or maintained by the Company or any
subsidiary or to which the Company or any subsidiary has made
contributions, nor any trust created thereunder, nor any trustee or
administrator thereof (including the Company), has engaged in any
non-exempt prohibited transaction (as described in Section 406 of ERISA
or in Section 4975 of the Code) that could subject the Company or any
subsidiary either directly or indirectly through an obligation to
indemnify to any material tax or material penalty on prohibited
transactions imposed under said Section 4975 of the Code or under ERISA.
Each employee benefit plan described in the preceding sentence is in
compliance in all material respects with all applicable provisions of
ERISA and the Code, except for plan amendments required or permitted by
such statutes as to which applicable grace periods for making such
amendments have not expired, and each of the Company and the
subsidiaries has made, accrued or provided for all contributions
heretofore required to be made by the Company and the subsidiaries and
each of the Company and the subsidiaries has complied in all material
respects with the continuation coverage requirements of Title X of the
Consolidated Omnibus Budget Act of 1985, as amended. The execution and
delivery of this Agreement and the sale of the Shares will not involve
any prohibited transaction within the meaning of Section 406 of ERISA or
Section 4975 of the Code. Neither the Company nor any subsidiary has any
material "expected post-retirement benefit obligation" (within the
meaning of Financial Accounting Standards Board Statement No. 106). The
consummation of the transactions contemplated by this Agreement
(including, without limitation, the provisions of the Prospectus
described under the heading "How We Intend to Use the Proceeds of this
Offering") will not result in any material payment (including, without
limitation, severance, golden parachute or other) becoming due from the
Company to any employee of the Company or any of its subsidiaries as a
consequence of such transaction.
(n) None of the Company or any subsidiary has violated any
environmental, safety or similar law or regulation applicable to it or
its business or property relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), lacks any permit,
license or other approval required of it under applicable Environmental
Laws or is violating any term or condition of such permit, license or
approval which could reasonably be expected to, either individually or
in the aggregate, have a Material Adverse Effect. No facilities owned
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<PAGE> 15
or leased by the Company or any subsidiary, or to the best knowledge of
the Company, any facilities of any predecessor in interest of the
Company or any subsidiary, is listed or, to the best knowledge of the
Company, formally proposed for listing on the National Priorities List
or the Comprehensive Environmental Response, Compensation, and Liability
Information System, both as promulgated under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), or on
any comparable state list, or comparable local list, and the Company has
not received any written notification of potential or actual liability,
or any written request for information, pursuant to CERCLA or any
comparable state, local or foreign environmental law.
(o) Each of the Company and the subsidiaries has (i) good
and marketable title to all of the properties and assets described in
the Prospectus as owned by it, free and clear of all liens, charges,
encumbrances and restrictions, except such as are described in the
Registration Statement or as would not have a Material Adverse Effect,
(ii) peaceful and undisturbed possession under all material leases to
which any of them is a party as lessee, (iii) all licenses,
certificates, permits, authorizations, approvals, franchises and other
rights from, and has made all declarations and filings with, all
federal, state and local authorities (including, without limitation, the
FCC), all self-regulatory authorities and all courts and other tribunals
(each an "Authorization") necessary to engage in the business conducted
by any of them in the manner described in the Prospectus, except as
described in the Prospectus or where failure to hold such Authorizations
would not, individually or in the aggregate, have a Material Adverse
Effect and, (iv) no reason to believe that any governmental body or
agency is considering limiting, suspending or revoking any such
Authorization. Except where the failure to be in full force and effect
would not have a Material Adverse Effect, all such Authorizations are
valid and in full force and effect and each of the Company and the
subsidiaries is in compliance in all material respects with the terms
and conditions of all such Authorizations and with the rules and
regulations of the regulatory authorities having jurisdiction with
respect thereto. All material leases to which the Company or any
subsidiary is a party are valid and binding and no default by the
Company or any subsidiary has occurred and is continuing thereunder and,
to the best knowledge of the Company and the subsidiaries no material
defaults by the landlord are existing under any such lease that could
reasonably be expected to result in a Material Adverse Effect.
(p) Each of the Company and the subsidiaries owns, possesses
or has the right to employ all patents, patent rights, licenses
(including all FCC, state, local or other jurisdictional regulatory
licenses), inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, software, systems or procedures), trademarks, service marks
and trade names, inventions, computer programs, technical data and
information (collectively, the "Intellectual Property") presently
employed by it or its subsidiaries in connection with the businesses now
operated by it or which are proposed to be operated by it or its
subsidiaries free and clear of and without violating any right, claimed
right, charge, encumbrance, pledge, security interest, restriction or
lien of any kind of any other person and none of the Company or any
subsidiary has received any notice of infringement of or conflict with
asserted rights of others with respect to any of the foregoing except as
could not reasonably be expected to have a Material
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<PAGE> 16
Adverse Effect. The use of the Intellectual Property in connection with
the business and operations of the Company and the subsidiaries does not
infringe on the rights of any person, except as could not reasonably be
expected to have a Material Adverse Effect.
(q) None of the Company or any subsidiary, or to the best
knowledge of the Company, any of their respective officers, directors,
partners, employees, agents or affiliates or any other person acting on
behalf of the Company or any subsidiary has, directly or indirectly,
given or agreed to give any money, gift or similar benefit (other than
legal price concessions to customers in the ordinary course of business)
to any customer, supplier, employee or agent of a customer or supplier,
official or employee of any governmental agency (domestic or foreign),
instrumentality of any government (domestic or foreign) or any political
party or candidate for office (domestic or foreign) or other person who
was, is or may be in a position to help or hinder the business of the
Company or any subsidiary (or assist the Company or any subsidiary in
connection with any actual or proposed transaction) which (i) might
subject the Company or any subsidiary, or any other individual or entity
to any damage or penalty in any civil, criminal or governmental
litigation or proceeding (domestic or foreign), (ii) if not given in the
past, might have had a Material Adverse Effect or (iii) if not continued
in the future, might have a Material Adverse Effect.
(r) All material tax returns required to be filed by the
Company and each of the subsidiaries in all jurisdictions have been so
filed. All taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due or claimed to be due from such
entities or that are due and payable have been paid, other than those
being contested in good faith and for which adequate reserves have been
provided or those currently payable without penalty or interest. To the
best knowledge of the Company, there are no material proposed additional
tax assessments against the Company, any subsidiary or the assets or
property of the Company or any subsidiary.
(s) None of the Company or the subsidiaries is (i) an
"investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended, or (ii) a "holding company" or a "subsidiary company" or an
"affiliate" of a holding company within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
(t) Except for the Shares sold by the Selling Stockholders,
no holders of any securities of the Company or of any subsidiary or
their respective affiliates or of any options, warrants or other
convertible or exchangeable securities of the Company or any subsidiary
or their respective affiliates are entitled to include any such
securities in or to have such securities registered under the
Registration Statement.
(u) Each of the Company and the subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that: (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for
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<PAGE> 17
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect
thereto.
(v) Each of the Company and the subsidiaries maintains
insurance covering its properties, operations, personnel and businesses.
Such insurance insures against such losses and risks as are adequate in
accordance with customary industry practice to protect the Company and
the subsidiaries and their respective businesses. None of the Company or
any subsidiary has received notice from any insurer or agent of such
insurer that substantial capital improvements or other expenditures will
have to be made in order to continue such insurance. All such insurance
is outstanding and duly in force on the date hereof, subject only to
changes made in the ordinary course of business, consistent with past
practice, which do not, singly or in the aggregate, materially alter the
coverage thereunder or the risks covered thereby.
(w) None of the Company or any of its subsidiaries has
taken, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares. Except as permitted by the Act, the
Company has not distributed any Registration Statement, preliminary
prospectus, Prospectus or other offering material in connection with the
offering and sale of the Shares.
(x) Subsequent to the respective dates as of which
information is given in the Registration Statement and up to the Closing
Date, except as set forth in the Registration Statement, there has not
been and there shall not be any material adverse change in the business,
prospects, properties, assets, liabilities, operations, condition
(financial or otherwise), results of operations or cash flows of the
Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business, and since the date
of the latest balance sheet included in the Registration Statement,
neither the Company nor any of its subsidiaries has incurred or
undertaken any liabilities or obligations, direct or contingent, which
are material to the Company and its subsidiaries, taken as a whole,
except for liabilities or obligations which were incurred or undertaken
in the ordinary course of business or are reflected in the Registration
Statement and the Prospectus. Subsequent to the dates as of which
information is given in the Registration Statement and the Prospectus,
except as disclosed therein, there has not been any decrease in the
capital stock of the Company, any increase in long-term indebtedness or
any material increase in short-term indebtedness of the Company or any
of its subsidiaries or any payment or declaration to pay any dividends
or any other distribution with respect to the capital stock of the
Company.
(y) To the best knowledge of the Company, KPMG LLC and
Arthur Andersen LLP, whose reports are included or incorporated by
reference in the Registration Statement, are or have been independent
certified public accountants with regard to the Company as required by
the Act and the Securities Act Regulations.
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<PAGE> 18
(z) The consolidated financial statements of the Company and
its subsidiaries and the related notes and schedules included in the
Registration Statement and the Prospectus comply in all material
respects with the requirements of the Act and the Securities Act
Regulations, including, without limitation, Regulation S-X, and present
fairly the financial position of the Company and its subsidiaries as of
the dates indicated and the results of operations and cash flows of the
Company and its subsidiaries for the periods therein specified. Such
consolidated financial statements (including the related notes and
schedules) have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the
periods therein specified, subject in the case of interim statements to
normal year-end audit adjustments. Since the date of the latest of such
consolidated financial statements, except as disclosed in the
Prospectus, there has been no material adverse change in the financial
position, results of operations or business of the Company and its
subsidiaries, taken as a whole.
(aa) The financial information of the Company and its
subsidiaries set forth in the Prospectus under the captions "Prospectus
Summary -- Summary Consolidated Financial and Operating Data,"
"Dilution," "Capitalization," "Selected Consolidated Financial and
Operating Data," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" has been fairly stated in all
material respects in relation to the relevant financial statements of
the Company and its subsidiaries and from which such information has
been derived.
(bb) The as adjusted financial information and the related
notes thereto included in the Registration Statement have been prepared
in accordance with the Commission's rules and guidelines with respect to
as adjusted financial statements, have been properly compiled on the as
adjusted basis described therein and, in the opinion of the Company, the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions and circumstances referred to therein.
(cc) Except pursuant to this Agreement, there are no
contracts, agreements or understandings between the Company and any
other person that would give rise to a valid claim against the Company
or any of the Underwriters for a brokerage commission, finder's fee or
like payment in connection with the issuance, purchase and sale of the
Company Shares.
(dd) Each certificate signed by any officer of the Company
and delivered to the Underwriters or counsel for the Underwriters shall
be deemed to be a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(ee) Each of the Shares and this Agreement, as or when
executed and delivered, will conform in all material respects to the
descriptions thereof contained in the Registration Statement and the
Prospectus.
(ff) The Company has complied with all of its obligations to
the Selling Stockholders as set forth in (i) the Warrant Registration
Rights Agreement, dated as of
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<PAGE> 19
September 29, 1997, by and among the Company, Bear Stearns and Furman
Selz LLC (the "Warrant Agreement"), (ii) the Stockholders Agreement,
dated as of November 26, 1997, by and among the Company and the persons
listed therein (the "Series A Agreement"), (iii) the Series B Preferred
Stock Registration Rights Agreement, dated as of May 4, 1999, by and
among the Company and the persons listed therein (the "Series B
Agreement"), and (iv) the Agreement and Plan of Merger, dated as of
March 15, 1999, by and among the Company, LJ.Net, Inc., MGC LJ.Net,
Inc., Patrick Chicas and James Thompson (the "Merger Agreement").
(gg) Each holder of five percent or more of the total issued
and outstanding capital stock of the Company (assuming conversion of all
outstanding shares of the Series B Preferred Stock) is listed on
Schedule III to this Agreement.
(2) Each Selling Stockholder severally represents and warrants to
the Underwriters and the Company that:
(a) Such Selling Stockholder is the lawful owner of the
Shares to be sold by such Selling Stockholder pursuant to this Agreement
and has, and on the Closing Date will have, good and clear title to such
Shares, free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever.
(b) Upon delivery of and payment for such Shares pursuant to
this Agreement, good and clear title to such Shares will pass to the
Underwriters, free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever.
(c) Such Selling Stockholder has no reason to believe that
the representations and warranties of the Company contained in this
Section 7 are not true and correct, is familiar with the Registration
Statement and has no knowledge of any material fact, condition or
information not disclosed in the Prospectus or any supplement thereto
which has adversely affected or may adversely affect the business of the
Company or any of its subsidiaries; and the sale of Shares by such
Selling Stockholder pursuant hereto is not prompted by any information
concerning the Company or any of its subsidiaries which is not set forth
in the Prospectus or any supplement thereto.
(d) If such Selling Stockholder is a corporation, such
Selling Stockholder has been duly incorporated and is an existing
corporation in good standing under the laws of its jurisdiction of
incorporation.
(e) Such Selling Stockholder has, and on the Closing Date
will have, full legal right, power and authority to enter into this
Agreement and the Custody Agreement (the "Custody Agreement") between
the Selling Stockholders and MGC Communications, Inc., as Custodian (the
"Custodian") and to sell, assign, transfer and deliver such Shares in
the manner provided herein and therein, and this Agreement and the
Custody Agreement have been duly authorized, executed and delivered by
such Selling Stockholder and each of this Agreement and the Custody
Agreement is a valid and binding agreement of such Selling
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<PAGE> 20
Stockholder enforceable in accordance with its terms, except insofar as
indemnification and contribution provisions may be limited by applicable
law or equitable principles and subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization or similar laws
affecting the rights of creditors generally and subject to general
principles of equity. Certificates in negotiable form representing the
Shares to be sold by the Selling Stockholders as provided herein have
been placed in custody under the terms of the Custody Agreement for
delivery pursuant to the terms hereof.
(f) The power of attorney signed by such Selling Stockholder
appointing David S. Clark and Linda M. Sunbury, or either of them, as
its attorney-in-fact to the extent set forth therein with regard to the
transactions contemplated hereby and by the Registration Statement and
the Custody Agreement has been duly authorized, executed and delivered
by or on behalf of such Selling Stockholder and is a valid and binding
instrument of such Selling Stockholder enforceable in accordance with
its terms and, pursuant to such power of attorney, such Selling
Stockholder has authorized David S. Clark and Linda M. Sunbury, or
either of them, to execute and deliver on its behalf this Agreement and
any other document necessary or desirable in connection with the
transactions contemplated hereby and to deliver the Shares to be sold by
such Selling Stockholder pursuant to this Agreement.
(g) Such Selling Stockholder has not taken, and will not
take, directly or indirectly, any action designed to, or which might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares pursuant to the distribution
contemplated by this Agreement, and other than as permitted by the Act,
the Selling Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering
and sale of the Shares.
(h) The execution, delivery and performance of this
Agreement by such Selling Stockholder, compliance by such Selling
Stockholder with all the provisions hereof and the consummation of the
transactions contemplated hereby will not require any consent, approval,
authorization or other order of any court, regulatory body,
administrative agency or other governmental body (except as such may be
required under the Act, state securities laws or Blue Sky laws) and will
not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, organizational documents of such
Selling Stockholder, if not an individual, or any agreement, indenture
or other instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder or property of such Selling Stockholder
is bound, or violate or conflict with any laws, administrative
regulation or ruling or court decree applicable to such Selling
Stockholder or property of such Selling Stockholder.
(i) Such parts of the Registration Statement, comprised of
the table and notes thereto under the caption "Selling Stockholders"
which specifically relate to such Selling Stockholder do not, and will
not on the Closing Date, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to
20
<PAGE> 21
make the statements therein, in light of circumstances under which they
were made, not misleading.
(j) At any time during the period described in paragraph
6(e) hereof, if there is any change in the information referred to in
the above paragraph, the Selling Stockholders will immediately notify
Bear Stearns of such change.
(k) Each certificate signed by or on behalf of any Selling
Stockholder and delivered to the Underwriters or counsel for the
Underwriters shall be deemed to be a representation and warranty by such
Selling Stockholder to the Underwriters as to the matters covered
thereby.
The Company and the Selling Stockholders acknowledge that each
of the Underwriters and, for purposes of the opinions to be delivered to the
Underwriters pursuant to Section 10 hereof, counsel to the Company, counsel to
each Selling Stockholder and counsel to the Underwriters, will rely upon the
accuracy and truth of the foregoing representations and hereby consents to such
reliance.
8. Payment of Expenses. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement becomes
effective or is terminated, the Company agrees to pay and be responsible for all
costs, expenses, fees and taxes related to the following matters: (i) preparing,
printing, duplicating, filing and distributing the Registration Statement, as
originally filed and all amendments thereto (including, without limitation,
financial statements and all exhibits thereto), each preliminary prospectus, the
Prospectus and any amendments thereof or supplements thereto, the underwriting
documents (including this Agreement) and all other documents related to the
public offering of the Shares (including those supplied to the Underwriters in
quantities as hereinabove stated); (ii) the preparation (including, without
limitation, duplication costs) and delivery of all preliminary and final Blue
Sky memoranda prepared and delivered in connection herewith; (iii) the
registration with the Commission and the Nasdaq National Market (including all
filing fees incident thereto) and the issuance, transfer and delivery of the
Shares to the Underwriters, including, without limitation, the fees of the
transfer agent and registrar for the Company, the cost of its personnel and
other internal costs, the costs of printing and engraving the certificates
representing the Shares and any transfer or other taxes payable in connection
with the original issuance and sale of the Company Shares; (iv) the
qualification or registration of the Shares for offering and sale under state
and foreign securities or Blue Sky laws, including, without limitation, the
costs of printing and mailing preliminary and final Blue Sky memoranda and the
reasonable fees and disbursements of Underwriters' counsel in relation thereto;
(v) the fees, disbursements and expenses of the Company's counsel and
accountants; (vi) the filing, registration, review and clearance of the terms of
the public offering of the Shares with and by the NASD including, in each case,
any filing fees and fees and disbursements of Underwriters' counsel in
connection therewith; (vii) all other fees, costs and expenses incident to the
performance of the obligations of the Company hereunder; (viii) all fees, costs
and expenses of the Selling Stockholders which are not specifically designated
as expenses to be paid by the Selling Stockholders under the terms of the
Warrant Agreement, the Series A Agreement, the Series B Agreement or the Merger
Agreement; and (ix) "roadshow" travel and other
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<PAGE> 22
expenses incurred in connection with the marketing and sale of the Shares (other
than out-of-pocket expenses incurred by the Underwriters for travel, meals and
lodging).
9. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters to purchase and pay for the Firm Shares and the Additional
Shares, as provided herein, shall be subject to the absence from any
certificates, opinions, written statements or letters furnished pursuant to this
Section 9 to the Underwriters or to Underwriters' counsel of any misstatement or
omission and to the satisfaction of each of the following additional conditions,
except that with respect to the Additional Shares, references to the Closing
Date shall mean the Option Closing Date:
(a) All of the representations and warranties of the Company
contained herein shall be true and correct on the date hereof and on the
Closing Date with the same force and effect as if made on and as of the
date hereof and the Closing Date, respectively. The Company shall have
performed or complied with all of the agreements herein contained and
required to be performed or complied with by it at or prior to the
Closing Date.
(b) The Registration Statement shall have become effective
(or if a post-effective amendment is required to be filed pursuant to
Rule 430A under the Securities Act Regulations, such post effective
amendment shall become effective) not later than 5:00 P.M., New York
City time, on the date of this Agreement or at such later time and date
as shall have been consented to in writing by the Underwriters. At or
prior to the Closing Date no stop order suspending the effectiveness of
the Registration Statement or any post-effective amendment thereof shall
have been issued and no proceedings therefor shall have been initiated
or threatened by the Commission, and every request for additional
information on the part of the Commission (including, without
limitation, any request or comment with respect to the Registration
Statement, the Prospectus or any document incorporated by reference
therein) shall have been complied with in all material respects. No stop
order suspending the sale of the Shares in any jurisdiction designated
by the Underwriters shall have been issued and no proceedings for that
purpose shall have been commenced or be pending or, to the best
knowledge of the Company, be contemplated.
(c) No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency which would, as of the Closing Date, prevent the
issuance of the Company Shares; and no action, suit or proceeding shall
have been commenced and be pending against or affecting or, to the best
knowledge of the Company, threatened against, the Company or any
subsidiary before any court or arbitrator or any governmental body,
agency or official that, if adversely determined, could reasonably be
expected to result in a Material Adverse Effect.
(d) Since the date of the latest balance sheet included in
the Registration Statement and the Prospectus, and except as disclosed
in the Registration Statement or contemplated thereby, (i) there shall
not have been any material adverse change, or any development that is
reasonably likely to result in a material adverse change, in the capital
stock or the long-term debt, or material increase in the short-term
debt, of the Company and the subsidiaries from that set forth in the
Registration Statement and the Prospectus, (ii) no
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<PAGE> 23
dividend or distribution of any kind shall have been declared, paid or
made by the Company or any subsidiary on any class of its capital stock
and (iii) neither the Company nor any subsidiary shall have incurred any
liabilities or obligations, direct or contingent, that are material,
individually or in the aggregate, to the Company and the subsidiaries,
taken as a whole, and that are required to be disclosed on a balance
sheet or notes thereto in accordance with generally accepted accounting
principles and are not disclosed on the latest balance sheet or notes
thereto included in the Registration Statement and the Prospectus. Since
the date hereof and since the dates as of which information is given in
the Registration Statement and the Prospectus, there shall not have
occurred any Material Adverse Effect.
(e) The Underwriters shall have received a certificate,
dated the Closing Date, signed on behalf of the Company by (i) Nield J.
Montgomery, President and Chief Executive Officer and (ii) Linda M.
Sunbury, Senior Vice President and Chief Financial Officer of the
Company in form and substance reasonably satisfactory to the
Underwriters, confirming, as of the Closing Date, the matters set forth
in paragraphs (a), (b), (c) and (d) of this Section 9 and that, as of
the Closing Date, the obligations of the Company to be performed
hereunder on or prior thereto have been duly performed and stating that
each signer of such certificate has examined the Registration Statement
and the Prospectus and (A) as of the date of such certificate, such
documents do not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in
order to make the statements therein (in the case of the Prospectus, in
light of the circumstances under which they were made) not misleading
and (B) since the Effective Date no event has occurred as a result of
which it is necessary to amend or supplement the Registration Statement
or Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not untrue or misleading in
any material respect, and (C) there has been no document required to be
filed under the Exchange Act and the Exchange Act Regulations that upon
such filing would be incorporated by reference into the Prospectus that
has not been so filed.
(f) All of the representations and warranties of the Selling
Stockholders contained in this Agreement shall be true and correct on
the Closing Date with the same force and effect as if made on and as of
the Closing Date and the Underwriters shall have received a certificate,
dated the Closing Date, signed by an authorized officer, partner,
member, manager, trustee or similar person of such Selling Stockholder,
if not an individual, or by such Selling Stockholder, if an individual,
to the effect that the person signing such certificate has examined the
Registration Statement, the Prospectus and this Agreement and the
representations and warranties of such Selling Stockholder in this
Agreement are true and correct in all material respects on and as of the
Closing Date with the same force and effect as if made on the Closing
Date.
(g) At the Closing Date, the Underwriters and the Selling
Stockholders shall have received the opinion of Ellis, Funk, Goldberg,
Labovitz & Dokson, P.C., counsel for the Company, dated the Closing
Date, in form and substance reasonably satisfactory to the Underwriters
and Underwriters' counsel, to the effect set forth in Exhibit A hereto.
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<PAGE> 24
(h) At the Closing Date, the Underwriters and the Selling
Stockholders shall have received the opinion of Kelley Drye & Warren
LLP, special regulatory counsel for the Company, dated the date of its
delivery, addressed to the Underwriters and in form and substance
satisfactory to the Underwriters' counsel, to the effect set forth in
Exhibit B hereto.
(i) At the Closing Date, each Selling Stockholder shall have
delivered to the Underwriters the opinion of counsel for such Selling
Stockholder, in each case dated the Closing Date, in form and substance
reasonably satisfactory to the Underwriters and Underwriters' counsel,
to the effect set forth in Exhibit C hereto or to such effect as may
otherwise be agreed by the Underwriters.
(j) At the time this Agreement is executed and at the
Closing Date the Underwriters and the Selling Stockholders shall have
received from Arthur Andersen LLP, independent certified public
accountants for the Company, dated as of the date of this Agreement and
as of the Closing Date, a customary comfort letter addressed to the
Underwriters and in form and substance satisfactory to the Underwriters
and counsel to the Underwriters with respect to the financial statements
and certain financial information of the Company together with each of
its subsidiaries contained in the Registration Statement and the
Prospectus.
(k) Kronish Lieb Wiener & Hellman LLP shall have been
furnished with such documents, in addition to those set forth above, as
they may reasonably require for the purpose of enabling them to review
or pass upon the matters referred to in this Section 9 and in order to
evidence the accuracy, completeness or satisfaction in all material
respects of any of the representations, warranties or conditions herein
contained.
(l) On or prior to the Closing Date, the Underwriters shall
have received the executed agreements referred to in Section 6(p)
hereof.
(m) Prior to the Closing Date, the Company, its subsidiaries
and the Selling Stockholders shall have furnished to the Underwriters
such further information, certificates and documents as the Underwriters
may reasonably request.
(n) On or prior to the Closing Date, the Company shall have
filed a Notification Form for Listing Additional Shares on the Nasdaq
National Market and a copy thereof shall have been provided by the
Company to the Underwriters.
If any of the conditions specified in this Section 9 shall not
have been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to the
Underwriters or to Underwriters' counsel pursuant to this Section 9 shall not be
reasonably satisfactory in form and substance to the Underwriters and to
Underwriters' counsel, all of the obligations of the Underwriters hereunder may
be cancelled by the Underwriters at, or at any time prior to, the Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telecopy, telex or telegraph, confirmed in writing.
24
<PAGE> 25
10. Indemnification.
(a) The Company agrees to indemnify and hold harmless (i)
each of the Underwriters, (ii) each person, if any, who controls any of
the Underwriters within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act and (iii) the respective officers, directors,
partners, employees, representatives and agents of any of the
Underwriters or any controlling person to the fullest extent lawful,
from and against any and all losses, liabilities, claims, damages and
expenses whatsoever (including but not limited to attorneys' fees and
any and all expenses whatsoever incurred in investigating, preparing or
defending against any investigation or litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation), joint or several, to which they
or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or
expenses (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement as originally filed or any
amendment thereof, or any related preliminary prospectus or the
Prospectus, or in any supplement thereto or amendment thereof, or arise
out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein (in the case of the preliminary prospectus
or the Prospectus, in light of the circumstances under which they were
made) not misleading; provided, however, that the Company will not be
liable in any such case to the extent, but only to the extent, that any
such loss, liability, claim, damage or expense arises out of or is based
upon any such untrue statement or alleged untrue statement or omission
or alleged omission made therein in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the
Underwriters expressly for use therein. This indemnity agreement will be
in addition to any liability which the Company may otherwise have,
including, under this Agreement.
(b) Each Selling Stockholder, severally but not jointly,
agrees to indemnify and hold harmless (i) each of the Underwriters, (ii)
each person, if any, who controls any of the Underwriters within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act
and (iii) the respective officers, directors, partners, employees,
representatives and agents of any of the Underwriters or any controlling
person to the fullest extent lawful, from and against any and all
losses, liabilities, claims, damages and expenses whatsoever (including
but not limited to attorneys' fees and any and all expenses whatsoever
incurred in investigating, preparing or defending against any
investigation or litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, (x) to which they or any of them may
become subject, insofar as such losses, liabilities, claims, damages or
expenses (or actions in respect thereof) arise out of or are based upon
the breach of the representations or warranties made by the Selling
Stockholders in Section 7(2)(b) of this Agreement, or (y) to which they
or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or
expenses (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact
contained in
25
<PAGE> 26
the Registration Statement as originally filed or any amendment thereof,
or any related preliminary prospectus or the Prospectus, or in any
supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein (in the case of the preliminary prospectus or the Prospectus, in
light of the circumstances under which they were made) not misleading,
in each case to the extent, but only to the extent that such loss,
liability, claim, damage or expense arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon information furnished to the
Company or the Underwriters by or on behalf of such Selling Stockholder
expressly for use therein; provided, however, that in no case shall any
Selling Stockholder be liable or responsible for any amount in excess of
the aggregate gross proceeds received by such Selling Stockholder from
the sale of such Selling Stockholder's Shares hereunder. This indemnity
agreement will be in addition to any liability which any Selling
Stockholder may otherwise have, including under this Agreement.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company, each Selling Stockholder and
each person, if any, who controls the Company or such Selling
Stockholder within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act, against any losses, liabilities, claims, damages
and expenses whatsoever (including but not limited to attorneys' fees
and any and all expenses whatsoever incurred in investigating, preparing
or defending against any investigation or litigation, commenced or
threatened, or any claim whatsoever and any and all amounts paid in
settlement of any claim or litigation), joint or several, to which they
or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or
expenses (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, as originally filed or any
amendment thereof, or any related preliminary prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading, in each case to the extent, but only to
the extent, that any such loss, liability, claim, damage or expense
arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by
or on behalf of any Underwriter expressly for use therein; provided,
however, that in no case shall any Underwriter be liable or responsible
for any amount in excess of the discounts and commissions received by
such Underwriter, as set forth on the cover page of the Prospectus. This
indemnity agreement will be in addition to any liability which any
Underwriter may otherwise have, including under this Agreement.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under such subsection, notify
each party against whom indemnification is to be sought in writing of
the commencement thereof (but the failure so to notify an indemnifying
party shall not relieve it
26
<PAGE> 27
from any liability which it may have under this Section 10 except to the
extent that it has been prejudiced in any material respect by such
failure or from any liability which it may otherwise have). In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein, and to the extent it may elect
by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume
the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party
or parties shall have the right to employ its or their own counsel in
any such case (and where the Underwriters are the indemnified parties,
Bear Stearns shall have the right to select such counsel for the
Underwriters), but the fees and expenses of such counsel shall be at the
expense of such indemnified party or parties unless (i) the employment
of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action, (ii)
the indemnifying parties shall not have employed counsel to take charge
of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties
shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to
one or all of the indemnifying parties (in which case the indemnifying
party or parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which
events such fees and expenses of counsel shall be borne by the
indemnifying parties; provided, however, that the indemnifying party
under subsection (a), (b) or (c) above, shall only be liable for the
legal expenses of one counsel (in addition to any local counsel) for all
indemnified parties in each jurisdiction in which any claim or action is
brought. Anything in this subsection to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim
or action effected without its prior written consent; provided, however,
that such consent was not unreasonably withheld.
11. Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 10 is for any
reason held to be unavailable from the Company or any of the Selling
Stockholders or is insufficient to hold harmless a party indemnified thereunder,
the Company, the Selling Stockholders and the Underwriters shall contribute to
the aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting in the case of losses, claims, damages, liabilities and expenses
suffered by the Company or any Selling Stockholder, any contribution received by
the Company or any Selling Stockholder from persons, other than the
Underwriters, who may also be liable for contribution, including persons who
control the Company or such Selling Stockholder within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act) to which the Company and any
Selling Stockholder, on the one hand, and any of the Underwriters, on the other
hand, may be subject, in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders, on the
one hand, and the Underwriters, on the other hand, from the sale of the Shares
or, if such allocation is not permitted by applicable law or indemnification is
not available as a result of the indemnifying party not having received notice
as provided in Section 10, in such proportion as is
27
<PAGE> 28
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company and the Selling Stockholders, on the one hand,
and the Underwriters, on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders, on the one hand,
and the Underwriters, on the other hand, shall be deemed to be in the same
proportion as (x) the total proceeds from the sale of Shares (net of discounts
but before deducting expenses) received by the Company or any Selling
Stockholder and (y) the underwriting discounts and commissions received by the
Underwriters, respectively, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault of the Company, the Selling
Stockholders and of the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the Selling Stockholders and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 11 were determined by pro
rata allocation or by any other method of allocation which does not take into
account the equitable considerations referred to above. Notwithstanding the
provisions of this Section 11, (i) in no case shall any Underwriter be required
to contribute any amount in excess of the amount by which the underwriting
discount applicable to the Shares purchased by such Underwriter pursuant to this
Agreement exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of any untrue or alleged untrue statement or
omission or alleged omission, (ii) the aggregate liability of any Selling
Stockholder pursuant to the provisions of this paragraph shall be limited to an
amount equal to the aggregate gross proceeds received by such Selling
Stockholder from the sale of such Selling Stockholder's Shares hereunder and
(iii) no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of this
Section 11, (A) each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and (B)
the respective officers, directors, partners, employees, representatives and
agents of any of the Underwriters or any controlling person shall have the same
rights to contribution as such Underwriters; and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as the
Company; and each person who controls each Selling Stockholder within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have
the same rights to contribution as such Selling Stockholder, subject in each
case to clauses (i), (ii) and (iii) of this Section 11. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this Section 11,
notify such party or parties from whom contribution may be sought, but the
failure to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have under this Section 11 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its prior
written consent; provided, however, that such written consent was not
unreasonably withheld.
28
<PAGE> 29
12. Substitution of Underwriters.
(a) If any Underwriter or Underwriters shall default in its
or their obligation to purchase Shares hereunder, and if the total
number of Shares with respect to which such default relates do not
(after giving effect to arrangements, if any, made pursuant to
subsection (b) below) exceed 10% of the total number of Shares which the
Underwriters have agreed to purchase hereunder, then such Shares to
which the default relates shall be purchased by the non-defaulting
Underwriters in proportion to the respective proportions which the
number of Shares set forth opposite their respective names on Schedule
II hereto bear to the total number of Shares set forth opposite the
names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10%
of the total number of Shares, the non-defaulting Underwriters may in
their discretion arrange for themselves or for another party or parties
to purchase the Shares to which such default relates on the terms
contained herein. In the event that within five (5) calendar days after
such a default the non-defaulting Underwriters do not arrange for the
purchase of the Shares to which such default relates as provided in this
Section 12, this Agreement and the obligations of the Underwriters to
purchase, and of the Company to sell, the Shares shall thereupon
terminate without liability on the part of the Company with respect
thereto (except in each case as provided in Sections 8, 10(a), 10(b) and
11) or the Selling Stockholders (except as provided in Sections 10(a),
10(b), 11 and 14(a)) or the Underwriters (except as provided in Sections
10(c) and 11), but nothing in this Agreement shall relieve a defaulting
Underwriter of its liability, if any, to the other Underwriters and the
Company for damages occasioned by its default hereunder.
(c) In the event that the Shares to which the default
relates are to be purchased by the non-defaulting Underwriters, or are
to be purchased by another party or parties as aforesaid, the
Underwriters or the Company shall have the right to postpone the Closing
Date for a period not exceeding five (5) business days in order to
effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the
opinion of Underwriters' counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall
include any party substituted under this Section 12 with like effect as
if it had originally been a party to this Agreement with respect to such
Shares.
13. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective when the
Underwriters and the Company shall have received notification of the
effectiveness of the Registration Statement. Until this Agreement
becomes effective as aforesaid, it may be terminated by the Company by
notifying the Underwriters or by the Underwriters by notifying the
29
<PAGE> 30
Company. Notwithstanding the foregoing, the provisions of this Section
13 and of Sections 8, 10, 11 and 14(a) shall at all times be in full
force and effect.
(b) The Underwriters shall have the right to terminate this
Agreement at any time prior to the Closing Date by notice to the Company
from the Underwriters, without liability (other than with respect to
Sections 10 and 11) on the Underwriters' part to the Sellers if, on or
prior to such date, (i) the Company or any Selling Stockholder shall
have failed, refused or been unable to perform in any material respect
any agreement on its part to be performed hereunder, (ii) any other
condition to the obligations of the Underwriters hereunder as provided
in Section 9 is not fulfilled when and as required in any material
respect, (iii) in the reasonable judgment of the Underwriters any
material adverse change shall have occurred since the respective dates
as of which information is given in the Registration Statement in the
condition (financial or otherwise), business, properties, assets,
liabilities, prospects, net worth, results of operations or cash flows
of the Company and the subsidiaries taken as a whole, or (iv)(A) any
domestic or international event or act or occurrence has materially
disrupted, or in the opinion of the Underwriters will in the immediate
future materially disrupt, the market for the Company's securities or
for securities in general; or (B) trading in securities generally on the
New York or American Stock Exchanges shall have been suspended or
materially limited, or minimum or maximum prices for trading shall have
been established, or maximum ranges for prices for securities shall have
been required, on such exchange, or by such exchange or other regulatory
body or governmental authority having jurisdiction; or (C) a banking
moratorium shall have been declared by Federal or state authorities, or
a moratorium in foreign exchange trading by major international banks or
persons shall have been declared; or (D) there is an outbreak or
escalation of armed hostilities involving the United States on or after
the date hereof, or if there has been a declaration by the United States
of a national emergency or war, the effect of which shall be, in the
Underwriters' judgment, to make it inadvisable or impracticable to
proceed with the offering or delivery of the Shares on the terms and in
the manner contemplated in the Registration Statement; or (E) there
shall have been such a material adverse change in general economic,
political or financial conditions or if the effect of international
conditions on the financial markets in the United States shall be such
as, in the Underwriters' judgment, makes it inadvisable or impracticable
to proceed with the delivery of the Shares as contemplated hereby.
(c) Any notice of termination pursuant to this Section 13
shall be by telephone, telex, telephonic facsimile, or telegraph,
confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of
the provisions hereof (otherwise than pursuant to (i) notification by
the Underwriters as provided in Section 13(a) or (ii) Section 12(b)), or
if the sale of the Shares provided for herein is not consummated because
any condition to the obligations of the Underwriters set forth herein is
not satisfied or because of any refusal, inability or failure on the
part of the Company or the Selling Stockholders to perform any agreement
herein or comply with any provision hereof, the Company will, subject to
demand by the Underwriters,
30
<PAGE> 31
reimburse the Underwriters for all out-of-pocket expenses (including,
without limitation, the reasonable fees and expenses of Underwriters'
counsel) incurred by the Underwriters in connection herewith.
14. Agreements of the Selling Stockholders. Each Selling Stockholder
severally agrees with the Underwriters and the Company:
(a) To pay or to cause to be paid all transfer taxes with
respect to the Shares to be sold by such Selling Stockholder and all
other expenses required to be paid by such Selling Stockholder pursuant
to the terms of the Warrant Registration Rights Agreement, the Series A
Agreement, the Series B Agreement or the Merger Agreement; and
(b) To take all reasonable actions in cooperation with the
Company and the Underwriters to cause the Registration Statement to
become effective at the earliest possible time, to do and perform all
things to be done and performed under this Agreement prior to the
Closing Date and to satisfy all conditions precedent to the delivery of
the Shares pursuant to this Agreement.
15. Survival of Representations and Agreements. All representations
and warranties, covenants and agreements of the Underwriters, the Company and
the Selling Stockholders contained in this Agreement, including, without
limitation, the agreements contained in Sections 8, 13(d) and 14(a), the
indemnity agreements contained in Section 10 and the contribution agreements
contained in Section 11, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter, any
controlling person thereof or by or on behalf of the Company or any controlling
person thereof, and shall survive delivery of and payment for the Shares to and
by the Underwriters. The representations contained in Section 7 and the
agreements contained in Sections 8, 10, 11, 13(d) and 14(a) shall survive the
termination of this Agreement, including, without limitation, any termination
pursuant to Sections 12 or 13.
16. Notice. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to the
Underwriters shall be mailed, delivered, or telexed, telegraphed or telecopied
and confirmed in writing c/o Bear, Stearns & Co. Inc., Goldman, Sachs & Co. and
ING Barings LLC, c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New
York 10167, Attention: Corporate Finance Department, telecopy number: (212)
272-3092; and if sent to the Company, shall be mailed, delivered or telexed,
telegraphed or telecopied and confirmed in writing to MGC Communications, Inc.,
3301 N. Buffalo Drive, Las Vegas, Nevada 89129, Attention: Chief Financial
Officer, telecopy number: (702) 310-5715, with a copy to Ellis, Funk, Goldberg,
Labovitz & Dokson, P.C., One Securities Centre, Suite 400, 3490 Piedmont Road,
Atlanta, Georgia 30305, telecopy number: (404) 233-2188; and if sent to the
Selling Stockholders, shall be mailed, delivered or telexed, telegraphed or
telecopied and confirmed in writing to David S. Clark or Linda M. Sunbury c/o
MGC Communications, Inc., 3301 N. Buffalo Drive, Las Vegas, Nevada 89129;
provided, however, that any notice to
31
<PAGE> 32
any party pursuant to Section 10 or 11 shall be mailed, delivered or telexed,
telegraphed or telecopied and confirmed in writing to such party.
17. Parties. This Agreement shall inure solely to the benefit of,
and shall be binding upon, the Underwriters and the Sellers and the controlling
persons and agents referred to in Sections 10 and 11, and their respective
successors and assigns, and no other person shall have or be construed to have
any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provision herein contained. The term "successors
and assigns" shall not include a purchaser, in its capacity as such, of Shares
from the Underwriters.
18. Construction. This Agreement shall be construed in accordance
with the internal laws of the State of New York.
19. Captions. The captions included in this Agreement are included
solely for convenience of reference and are not to be considered a part of this
Agreement.
20. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all of which shall together constitute one and the
same instrument.
[Signature page to follow]
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<PAGE> 33
If the foregoing correctly sets forth the understanding among
the Underwriters and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
between us.
Very truly yours,
MGC COMMUNICATIONS, INC.
By:
-------------------------------------
Name:
Title:
THE SELLING STOCKHOLDERS NAMED
ON SCHEDULE I HERETO
By:
-------------------------------------
Name:
Title:
Accepted and agreed to as of
the date first above written:
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
ING BARINGS LLC
By: BEAR, STEARNS & CO. INC.
By:
-----------------------------------
Name:
Title:
GOLDMAN, SACHS & CO.
By:
-----------------------------------
Name:
Title:
ING BARINGS LLC
By:
-----------------------------------
Name:
Title:
<PAGE> 34
Schedule I
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Selling Stockholder Shares
------------------- ------
<S> <C>
Winston Partners II LDC 33,436
Winston Partners II LLC 10,627
S-C Phoenix Holdings, LLC 171,428
Prospect Street High Income Portfolio Inc. 15,870
Strategic Investment Partners Ltd. 342,857
Libertyview Funds LP 2,695
CPR (USA) Inc. 8,357
Libertyview Enhanced High Yield Fund 2,425
</TABLE>
<PAGE> 35
Schedule II
<TABLE>
<CAPTION>
Number of Shares
Underwriter to be Purchased
----------- ---------------
<S> <C>
Bear, Stearns & Co. Inc. 1,862,565
Goldman, Sachs & Co. 1,862,565
ING Barings LLC 1,862,565
</TABLE>
<PAGE> 36
Schedule III
Stockholders Subject to Lockup Agreements
Darren Adair
Marilyn Ash
John Boersma
Michael Burke
Patrick Chicas
Dave Clark
Charles Clay
Larry Costa
Raoul Fernandes
Timothy Flynn
Maurice Gallagher
Gallagher Corporation
Gallagher Family Investments L.P.
Gallagher Stock Trust dated 4/2/94
Gallagher Trust dated 10/20/92
Jack Hancock
Jeff Hein
Aida Herrera
Kent Heyman
Cornell Hudson
James Hurley
JK&B Capita, L.P.
JK&B Capital II, L.P.
JK&B Capital III, L.P.
Thomas Keough
David Kronfeld
Andrew Levy
James D. Mitchelle III
Carol Mittwede
Nield Montgomery
Janet Nogle
Thomas Neustaetter
Lucinda O'Mara
Molly Pace
Mark Peterson
Providence Equity Operating Partners III, L.P.
Providence Equity Partners III, LLC
David Rahm
Walter Rusak
Paul Salem
Linda Sunbury
Wind Point Investors, L.L.C.
<PAGE> 37
EXHIBIT A
Form of Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
1. Each of the Company and its subsidiaries (A) is duly organized
and validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, (B) has all requisite corporate power and
authority to carry on its business as it is being conducted and as described in
the Registration Statement and Prospectus and to own, lease and operate its
properties, and (C) is duly qualified and in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification except, with respect to this clause (C), where the failure to be
so qualified or in good standing does not and could not reasonably be expected
to have a Material Adverse Effect. All of the issued and outstanding shares of
capital stock of, or other ownership interests in, each subsidiary have been
duly authorized and validly issued, are fully paid and non-assessable and were
not issued in violation of or subject to any preemptive or similar rights under
the Nevada General Corporation Law, or known to us, after reasonable inquiry,
and are owned by the Company of record, and to our knowledge, after reasonable
inquiry, beneficially, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or other restriction on transferability or
voting. Except for the capital stock of the subsidiaries owned by the Company,
to our knowledge, neither the Company nor any of its subsidiaries owns or holds
any interest in any corporation, partnership, trust or association, joint
venture or other entity.
2. All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) and each
subsidiary have been duly authorized, validly issued, and are fully paid and
nonassessable and were not issued in violation of any preemptive or similar
rights. The authorized, issued and outstanding capital stock of the Company
conforms in all respects to the description thereof set forth in the
Registration Statement and Prospectus. Except as set forth in the Prospectus,
there are no outstanding subscriptions, rights, warrants, calls, commitments of
sale or options to acquire (other than options issued during the period
commencing on July 20, 1999 and ending on the Closing Date pursuant to the Stock
Option Plan in accordance with the third paragraph of Section 3 of the
Underwriting Agreement), or instruments convertible into or exercisable or
exchangeable for, any capital stock or other equity interest in the Company or
any of its subsidiaries known to us, after reasonable inquiry. None of the
outstanding shares of the capital stock of the Company or the subsidiaries were
issued in violation of the registration requirements of the Act or the
registration or qualification requirements of the applicable state securities or
"Blue Sky" laws.
3. The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under the Underwriting Agreement to
consummate the transactions contemplated thereby, including, without limitation,
the corporate power and authority to issue, sell and deliver the Company Shares
as provided therein.
<PAGE> 38
4. The Underwriting Agreement has been duly and validly authorized,
executed and delivered by the Company and, assuming due execution by the other
parties thereto, is the legally valid and binding agreement of the Company.
5. The Company Shares have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor in accordance with
the terms of the Underwriting Agreement, will be validly issued, fully paid and
nonassessable and, to our knowledge after reasonable inquiry, free of any
preemptive or similar rights that entitle or will entitle any person to acquire
any Shares upon the issuance thereof by the Company.
6. The statements under the caption "Description of Securities" in
the Prospectus, insofar as such statements constitute a summary of documents
referred to therein, present a fair summary thereof.
7. None of (A) the execution, delivery or performance by the
Company of the Underwriting Agreement or (B) the issuance of the Company Shares
and the sale of the Shares by the Company and the Selling Stockholders violates,
conflicts with or constitutes a breach of any of the terms or provisions of, or
a default under (or an event that with notice or the lapse of time, or both,
would constitute a default), or require consent under, or result in the
imposition of a lien or encumbrance on any properties of the Company or any
subsidiary, or an acceleration of any indebtedness of the Company or any
subsidiary pursuant to, (i) the charter or bylaws of the Company or any
subsidiary, (ii) any bond, debenture, note, indenture, mortgage, deed of trust
or other agreement or instrument known to us to which the Company or any
subsidiary is a party or by which any of them or their property is or may be
bound, (iii) any local, state, federal or administrative statute, rule or
regulation applicable to the Company or any subsidiary or any of their
respective assets or properties (except that we express no opinion as to the
matters addressed by the opinion of Kelley Drye & Warren LLP) or (iv) any
judgment, order or decree of any court or governmental agency or authority
having jurisdiction over the Company or any subsidiary or any of their assets or
properties known to us (except that we need express no opinion as to the matters
addressed by the opinion of Kelley Drye & Warren LLP), except that the Company
has not received written approval from the Georgia Public Service Commission as
to the sale of the Company Shares and except in the case of clauses (ii), (iii)
and (iv) for such violations, conflicts, breaches, defaults, consents,
impositions of liens or accelerations that (x) would not, singly or in the
aggregate, have a Material Adverse Effect or (y) are disclosed in the
Registration Statement. Assuming compliance with applicable state securities and
Blue Sky laws, as to which we express no opinion, and except for the filing of a
registration statement under the Act and for the approval required to be
obtained from the Georgia Public Service Commission, no consent, approval,
authorization or order of, or filing, registration, qualification, license or
permit of or with, any court or governmental agency, body or administrative
agency is required for (1) the execution, delivery and performance by the
Company of the Underwriting Agreement, or (2) the issuance of the Company Shares
and the sale of the Shares by the Company, except such as have been obtained and
made or have been disclosed in the Registration Statement, and except where the
failure to obtain such consents or waivers would not, singly or in the
aggregate, have a Material Adverse Effect. To our knowledge, after
<PAGE> 39
reasonable inquiry, no consents or waivers from any other person are required
for the execution, delivery and performance by the Company of the Underwriting
Agreement or the issuance of the Company Shares and the sale of the Shares by
the Company, other than such consents and waivers as have been obtained and
except that we express no opinion as to the matters addressed in the opinion of
Kelley Drye & Warren LLP.
8. None of the Company or the subsidiaries is (i) an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended or (ii) a "holding company" or
a "subsidiary company" or an "affiliate" of a holding company within the meaning
of the Public Utility Holding Company Act of 1935, as amended.
9. Except for the Shares sold by the Selling Stockholders, no
holders of any securities of the Company or of any subsidiary or their
respective affiliates or of any options, warrants or other convertible or
exchangeable securities of the Company or any subsidiary or their respective
affiliates are entitled to include any such securities in or to have such
securities registered under the Registration Statement.
10. Except as set forth in the Prospectus, to our knowledge, after
reasonable inquiry, there is (i) no action, suit, investigation or proceeding
(other than proceedings with respect to pending license applications) before or
by any court, arbitrator or governmental agency, body or official, domestic or
foreign, now pending, or threatened or contemplated to which any of the Company
or any subsidiary is or may be a party or to which the business or property of
the Company or any of its subsidiaries is or may be subject, (ii) no statute,
rule, regulation or order that has been enacted, adopted or issued by any
governmental agency or that has been proposed by any governmental body (except
that we need express no opinion with respect to Telecommunications Laws) or
(iii) no injunction, restraining order or order of any nature by a federal or
state court of competent jurisdiction to which any of the Company or any
subsidiary is or may be subject or to which the business, assets or property of
the Company or any of its subsidiaries are or may be subject has been issued
that, in the case of clauses (i), (ii) and (iii) above, (x) is required to be
disclosed in the Registration Statement or the Prospectus, (y) could reasonably
be expected to have, either individually or in the aggregate, a Material Adverse
Effect or (z) might interfere with, adversely affect or in any manner question
the validity of the issuance of the Company Shares and the sale of the Shares by
the Company or any of the other transactions contemplated by the Underwriting
Agreement and the Registration Statement and except that we express no opinion
as to the matters addressed in the opinion of Kelley Drye & Warren LLP.
11. We are not aware of any order directed to any document
incorporated by reference in the Registration Statement which has been issued by
the Commission or any challenge that has been made by the Commission as to the
accuracy or adequacy of any such document.
12. The Company and the transactions contemplated by the
Underwriting Agreement meet the requirements for using Form S-3 under the Act.
The Registration Statement
<PAGE> 40
and the Prospectus, and the documents filed under the Act and the Exchange Act
and incorporated by reference in the Registration Statement and the Prospectus
or any amendment thereof or supplement thereto or from which information is so
incorporated by reference (other than financial statements, notes and schedules
thereto and other financial and accounting information included or incorporated
by reference therein, as to which we express no opinion) comply as to form in
all material respects with the Act or the Exchange Act, as the case may be, and
the Regulations.
13. The Registration Statement was declared effective under the Act
on July 21, 1999. To our knowledge, after reasonable inquiry, no stop order
suspending the effectiveness of the Registration Statement or preventing or
suspending the use of any preliminary prospectus has been issued, and no
proceedings for that purpose have been instituted or threatened.
14. There are no contracts or documents of the Company or any of its
subsidiaries known to us, after reasonable inquiry, that are required to be
filed (A) as exhibits to the Registration Statement by the Act, or (B) as
exhibits to any of the documents incorporated by reference by the Exchange Act
or (C) by the Regulations that have not been so filed. Insofar as statements in
the Prospectus (other than statements addressed in the opinion of Kelley Drye &
Warren LLP) purport to summarize the provisions of laws, rules, regulations,
proposed rules, proposed regulations, orders, judgments, decrees, contracts,
agreements, instruments, leases or licenses, such statements accurately reflect
the status of such provisions purported to be summarized and are correct in all
material respects.
15. The Company has authorized capital stock as set forth in the
Prospectus. All the shares of capital stock of the Company outstanding prior to
the issuance of the Company Shares are duly and validly authorized and issued,
are fully paid and nonassessable and were not issued in violation of or subject
to any preemptive rights.
16. The form of certificates for the Shares conforms to the
requirements of the General Corporation Law of the State of Nevada.
17. The Company's Notification Form for Listing Additional Shares on
the Nasdaq National Market has been filed.
We have participated in conferences with officers and other
representatives of the Company, representatives of the independent certified
public accountants of the Company and the Underwriters and their representatives
at which the contents of the Prospectus and the Registration Statement and any
amendment thereof or supplement thereto and related matters were discussed and,
although we have not undertaken to investigate or verify independently, and do
not assume any responsibility for, the accuracy, completeness or fairness of the
statements contained in the Prospectus and the Registration Statement or any
amendment thereof or supplement thereto (except as indicated above), on the
basis of the foregoing, no facts have come to our attention which led us to
believe that the Prospectus and the Registration Statement (or any amendment
thereof made prior to the Closing Date as of the date of such amendment) as of
its date or the Closing Date, contained an untrue statement of a material fact
or omitted to state
<PAGE> 41
any fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (except as to financial statements and related notes, the financial
statement schedules and other financial data included therein).
We are members of the Bar of the State of Georgia, and we do not herein
express an opinion as to any matters governed by any laws other than the laws of
the State of Georgia, the laws of the State of Nevada governing corporations and
the Federal laws of the United States of America. In rendering this opinion, we
have relied on Kronish, Lieb, Weiner & Hellman LLP as to the laws of the State
of New York.
<PAGE> 42
EXHIBIT B
Form of Opinion of Kelley Drye & Warren LLP
1. All of the licenses, permits and authorizations required by the
FCC for the provision of telecommunications services by the Company and the
subsidiaries, as we understand those services to be provided currently based
upon the Prospectus and the Registration Statement, have been issued to and are
validly held by the Company and the subsidiaries. All of the licenses, permits
and authorizations required by any "state commissions" as defined in Section 3
of the Communications Act of 1934, as amended (the "State Telecommunications
Agencies") for the provision of telecommunications services by the Company and
the subsidiaries, as we understand those services to be provided currently based
upon the Prospectus and the Registration Statement, have been issued to and, to
the best of our knowledge, are validly held by the Company and the subsidiaries,
except where the failure to obtain or hold such license, permit or authority
would not have a Material Adverse Effect. All such licenses, permits and
authorizations are in full force and effect.
2. Neither the Company nor its subsidiaries is the subject of any
proceeding (including a rule making proceeding), pending complaint or
investigation, or, to the best of our knowledge, any threatened complaint or
investigation, before the FCC, or, to the best of our knowledge after oral
inquiry, of any proceeding (including a rule making proceeding), pending
complaint or investigation, or any threatened complaint or investigation, before
the State Telecommunications Agencies based, in each case, on any alleged
violation of any statutes governing the FCC or the State Telecommunications
Agencies and the rules and regulations promulgated thereunder (the
"Telecommunications Laws") by the Company or any subsidiary in connection with
their provision of or failure to provide telecommunications services of a
character required to be disclosed in the Registration Statement which is not
disclosed in the Registration Statement.
3. The statements in the Registration Statement under the headings
of "Risk Factors - Our services are highly regulated and changes in current or
future laws or regulations could restrict the way we operate our business" and
"Business Regulation" regarding the Telecommunications Laws of the FCC or the
State Telecommunications Agencies fairly and accurately summarize the matters
therein described.
4. The Company and its subsidiaries have the consents, approvals,
authorizations, licenses, certificates, permits, or orders of the FCC or the
State Telecommunications Agencies, if any is required, for the consummation of
the transactions contemplated in the Registration Statement, except where the
failure to obtain the consents, approvals, authorizations, licenses,
certificates, permits or orders would not have a Material Adverse Effect.
5. Neither the execution and delivery of the Underwriting Agreement
nor the sale of the Shares contemplated thereby will conflict with or result in
a violation of any
<PAGE> 43
Telecommunications Laws applicable to the Company or its subsidiaries, except
where the conflict with or the violation of any Telecommunications Laws would
not have a Material Adverse Effect.
6. In connection with our representation of the Company and its
subsidiaries, except as disclosed in the Registration Statement or the
Prospectus, we have not become aware of any Telecommunications Laws that could
reasonably be expected to have a Material Adverse Effect on the business of the
Company, taken as a whole, as described in the Prospectus and the Registration
Statement. The foregoing assumes that the Company and its subsidiaries currently
are in substantial compliance with all material Telecommunications Laws
applicable to them except as disclosed in the Registration Statement or the
Prospectus.
<PAGE> 44
EXHIBIT C
[FORM OF OPINION OF COUNSEL TO SELLING STOCKHOLDERS]
[Letterhead of Counsel]
July __, 1999
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
ING Barings LLC
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Re: MGC Communications, Inc.
Ladies and Gentlemen:
We have acted as counsel for each of the selling stockholders listed of
Schedule A hereto (the "Selling Stockholders"), in connection with the
sale by the Selling Stockholders of ______________ shares of common
stock (the "Securities") of MGC Communications, Inc. (the "Company") to
Bear, Stearns & Co. Inc., Goldman, Sachs & Co. and ING Barings LLC
(together, the "Underwriters"). The sale is being made pursuant to an
underwriting agreement (the "Underwriting Agreement") dated as of July
__, 1999, by and among the Company, the Selling Stockholders and the
Underwriters.
This opinion is delivered to the Underwriters at the request of the
Selling Stockholders pursuant to Section 9(i) of the Underwriting
Agreement. All capitalized terms used herein and not otherwise defined
shall have the respective meanings assigned to them in the Underwriting
Agreement.
Based upon and subject to the limitations and qualifications set forth
herein, we are of the opinion that:
1. The Underwriting Agreement and the Custody Agreement
relating to the sale of the Securities by the Selling Stockholders, and
the Power of Attorney, dated as of __________, 1999, appointing David S.
Clark and Linda M. Sunbury as the attorneys in fact of the Selling
Stockholders have been duly authorized, executed and delivered by each
Selling Stockholder and are valid and binding on each Selling
Stockholder, and each Selling Stockholder has full legal right and
authority to sell, transfer and deliver in the manner provided in the
Underwriting Agreement and the Custody Agreement the Securities being
sold by such Selling Stockholder thereunder.
<PAGE> 45
2. The delivery by each Selling Stockholder to the several
Underwriters of certificates for the Securities being sold pursuant to
the Underwriting Agreement by such Selling Stockholder against payment
therefor as provided in the Underwriting Agreement will pass good and
marketable title to such Securities to the several Underwriters, free
and clear of all liens, encumbrances, equities and claims whatsoever.
3. No consent, approval, authorization or order of any
court or governmental agency or body known by us to be applicable to the
transactions contemplated in the Underwriting Agreement is required for
the consummation by each Selling Stockholder of the transactions
contemplated in the Underwriting Agreement, except such as may have been
obtained under the Securities Act of 1933, as amended, and such as may
be required under the blue sky laws of any jurisdiction in connection
with the purchase and distribution of the Securities by the Underwriters
and such other approvals as have been obtained and are listed on
Schedule B hereto.
4. Neither the sale of the Securities being sold by the
Selling Stockholders nor the consummation of any other of the
transactions contemplated in the Underwriting by any Selling Stockholder
or the fulfillment of the terms of the Underwriting Agreement by any
Selling Stockholder will conflict with, result in a breach or violation
of, or constitute a default under any law or the charter or by-laws of
the Selling Stockholder, if not an individual, or the terms of any
indenture or other agreement or instrument known to us and to which any
Selling Stockholder or, if not an individual, any of its subsidiaries,
is a party or bound, or any judgment, order or decree known to us to be
applicable to any Selling Stockholder or, if not an individual, any of
its subsidiaries, of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over any Selling
Stockholder or, if not an individual, any of its subsidiaries.
In rendering such opinions, we have relied (A) as to matters involving
the application of laws of any jurisdiction other than the State of [New
York] or the Federal laws of the United States, to the extent we deemed
proper [specify], upon the opinion of other counsel of good standing
whom we believe to be reliable and who are satisfactory to counsel for
the Underwriters (which opinions are attached hereto), and (B) as to
matters of fact, to the extent we deemed proper, on certificates of
authorized officers of the Selling Stockholders and public officials.
<PAGE> 46
EXHIBIT D
FORM OF LOCK-UP AGREEMENT
June __, 1999
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
ING Barings LLC
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
MGC Communications, Inc.
3301 North Buffalo Drive
Las Vegas, Nevada 89103
Ladies and Gentlemen:
In order to induce Bear, Stearns & Co. Inc. ("Bear Stearns"),
Goldman, Sachs & Co. ("Goldman") and ING Barings LLC (together with Bear
Stearns and Goldman, the "Underwriters") and MGC Communications, Inc., a
Nevada corporation (the "Company"), to enter into an underwriting
agreement (the "Underwriting Agreement") pursuant to which the
Underwriters will purchase, severally but not jointly, shares of common
stock, par value $.001 per share, of the Company ("Common Stock"), the
undersigned hereby agrees that for a period of 90 days following the
date on which the Company's registration statement on Form S-3
(Commission file No. 333-79863) shall become effective by order of the
United States Securities and Exchange Commission (the "Effective Date"),
the undersigned will not directly or indirectly offer to sell, sell,
contract to sell, grant an option for the sale of, assign, transfer,
pledge, hypothecate or otherwise encumber or dispose of (either pursuant
to Rule 144 of the regulations under the Securities Act of 1933, as
amended, or otherwise) any shares of Common Stock or any other
securities issued by the Company ("Securities") registered in the
undersigned's name or beneficially owned by the undersigned, including
without limitation, any Securities with respect to which the undersigned
becomes the registered or beneficial owner after the date hereof, or
dispose of any beneficial interest therein without the prior written
consent of Bear Stearns and the Company.
In order to enable you to enforce the aforesaid agreement and
grant of rights, the undersigned hereby consents to the placing of
legends and stop-transfer orders with the transfer agent of the
Company's Securities with respect to any of the Securities registered in
the undersigned's name or beneficially owned by the undersigned.
<PAGE> 47
This agreement shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to
conflict of law principles. Any legal action or proceeding with respect
to this agreement shall be brought exclusively in the courts of the
State of New York residing in the Borough of Manhattan or of the United
States of America for the Southern District of New York, and, by
execution and delivery of this agreement, the parties hereto hereby
accept for themselves and in respect of their property, generally and
unconditionally, the exclusive jurisdiction of the aforesaid courts.
This agreement shall be binding on the undersigned and his, her
or its respective heirs, personal representatives, successors and
assigns.
----------------------------------------
Signature
----------------------------------------
Print Name of Stockholder
----------------------------------------
Print Name and Title of Officer
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Print Address
----------------------------------------
Print Social Security
Number or Taxpayer I.D. Number
