<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
MGC Communications, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
MGC COMMUNICATIONS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of MGC Communications, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of MGC
Communications, Inc. (the "Company") will be held at the Desert Vista Community
Center, 10360 Sun City Boulevard, Las Vegas, Nevada 89134 on Friday, May 21,
1999 at 10:00 a.m. local time, for the following purposes:
(1) To elect three Directors for three year terms expiring in
2002;
(2) To approve an amendment to the Company's Stock Option Plan to
increase the number of shares available for purchase under the plan from
2,640,000 to 4,640,000;
(3) If required by The Nasdaq Stock Market, to approve the
issuance of 5,277,779 shares of Series B Convertible Preferred Stock at a price
of $9.00 per share; and
(4) To transact such other business as may properly come before
the meeting.
Holders of the Common Stock of record at the close of business on
March 31, 1999, will be entitled to notice of and to vote at the meeting.
Whether or not you expect to be present in person at the meeting,
please sign and date the accompanying proxy and return it promptly in the
enclosed postage paid reply envelope. This will assist us in preparing for the
meeting.
By Order of the Board of Directors
Kent F. Heyman
Secretary
April 29, 1999
Las Vegas, Nevada
<PAGE> 3
MGC COMMUNICATIONS, INC.
3301 N. Buffalo Drive
Las Vegas, Nevada 89129
(702) 310-1000
PROXY STATEMENT
This proxy statement is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors of MGC Communications, Inc., a
Nevada corporation (the "Company"), to be voted at the Annual Meeting of the
Stockholders of the Company to be held on May 21, 1999, and any adjournment or
adjournments thereof, for the purposes set forth in the accompanying Notice of
Annual Meeting of Stockholders. The Annual Meeting of Stockholders will be held
at the Desert Vista Community Center, 10360 Sun City Boulevard, Las Vegas,
Nevada 89134, on Friday, May 21, 1999, at 10:00 a.m. local time. This proxy
statement and accompanying form of proxy were first sent or given to
Stockholders on or about April 29, 1999. The Company's Annual Report for the
year ended December 31, 1998, is being sent, concurrently herewith, to each
Stockholder of record.
ABOUT THE MEETING
What is the purpose of the annual meeting?
At the Company's annual meeting, Stockholders will act upon the
matters outlined in the accompanying notice of meeting, including the election
of Directors. In addition, the Company's management will report on the
performance of the Company during the 1998 year and respond to questions from
Stockholders.
Who is entitled to vote?
Only Stockholders of record at the close of business on the record
date, March 31, 1999, are entitled to receive notice of the annual meeting and
to vote the shares of Common Stock that they held on that date at the meeting,
or any postponement or adjournment of the meeting. Each outstanding share
entitles its holder to cast one vote on each matter to be voted upon.
Who can attend the meeting?
All Stockholders as of the record date, or their duly appointed
proxies, may attend the meeting. Seating, however, may be limited. Admission to
the meeting will be on a first-come, first-served basis. Each Stockholder may
be asked to present valid picture identification, such as a driver's license or
passport. Cameras, recording devices and other electronic devices will not be
permitted at the meeting.
Please note that if you hold your shares in "street name" (that is,
through a broker or other nominee), you will need to bring a copy of a
brokerage statement reflecting your stock ownership as of the record date.
<PAGE> 4
What constitutes a quorum?
The presence at the meeting, in person or by proxy, of the holders of
a majority of the shares of Common Stock outstanding on the record date will
constitute a quorum, permitting the meeting to conduct its business. As of the
record date, 17,236,134 shares of Common Stock of the Company were outstanding.
Proxies received but marked as abstentions and broker non-votes will be
included in the calculations of the number of shares considered to be present
at the meeting.
How do I vote?
If you complete and properly sign the accompanying proxy card and
return it to the Company, it will be voted as you direct. If you are a
registered stockholder and attend the meeting, you may deliver your completed
proxy card in person. "Street name" Stockholders who wish to vote at the
meeting will need to obtain a proxy form from the institution that holds their
shares.
Can I change my vote after I return my proxy card?
Yes. Even after you have submitted your proxy, you may change your
vote at any time before the proxy is exercised by filing with the Secretary of
the Company either a notice of revocation or a duly executed proxy bearing a
later date. The powers of the proxy holders will be suspended if you attend the
meeting in person and so request, although attendance at the meeting will not
by itself revoke a previously granted proxy.
What are the Board's recommendations?
Unless you give other instructions on your proxy card, the persons
named as proxy holders on the proxy card will vote in accordance with the
recommendations of the Board of Directors. The Board recommends a vote:
- FOR election of the three nominated Directors (see pages
5-9);
- FOR approval of the amendment to the Company's Stock Option
Plan to increase the number of shares of Common Stock
available for purchase thereunder (see pages 17-19); and
- FOR approval of the issuance of 5,277,779 shares of Series B
Convertible Preferred Stock at $9.00 per share, if such
approval is required by the NASDAQ Stock Market (see pages
20-23).
With respect to any other matter that properly comes before the
meeting, the proxy holders will vote as recommended by the Board of Directors
or, if no recommendation is given, in their own discretion.
What vote is required to approve each item?
Election of Directors. The affirmative vote of a plurality of the
votes cast at the meeting is required for the election of Directors. A properly
executed proxy marked "WITHHOLD AUTHORITY"
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<PAGE> 5
with respect to the election of one or more Directors will not be voted with
respect to the Director or Directors indicated, although it will be counted for
purposes of determining whether there is a quorum.
Amendment of Stock Option Plan. The affirmative vote of a majority of
the shares outstanding as of the record date will be required for approval.
Approval of Issuance of Series B Convertible Preferred Stock; Other
Items. For the approval of the issuance of the shares of Series B Convertible
Preferred Stock and any other item, the affirmative vote of the holders of a
majority of the shares represented in person or by proxy and entitled to vote
on the item will be required for approval. The Company's management knows of no
matter to be brought before the meeting other than those mentioned herein. If,
however, any other matters properly come before the meeting, it is intended
that the proxies will be voted in accordance with the judgment of the person or
persons voting such proxies.
Stockholders owning a majority of the outstanding shares of the Common
Stock of the Company as of the record date have agreed to vote in favor of Paul
J. Salem as a Director of the Company and in favor of the issuance of Series B
Convertible Preferred Stock (if such approval is required) pursuant to a
Securityholders' Agreement entered into with the purchasers of the Series B
Convertible Preferred Stock. Consequently, the election of Paul J. Salem as a
Director and the approval of the issuance of the Series B Convertible Preferred
Stock are assured.
How will proxies be solicited?
Proxies will be solicited by mail. Proxies may also be solicited by
officers and regular employees of the Company personally or by telephone or
facsimile, but such persons will not be specifically compensated for such
services. Banks, brokers, nominees and other custodians and fiduciaries will be
reimbursed for their reasonable out-of-pocket expenses in forwarding soliciting
material to their principals, the beneficial owners of Common Stock of the
Company. The expense of preparing, assembling, printing, mailing and soliciting
proxies will be borne by the Company.
STOCK OWNERSHIP
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of February 28, 1999 (unless
otherwise indicated in the footnotes), certain information with respect to the
Company's Common Stock owned beneficially by each Director, by each Nominee for
election as a Director, by all Executive Officers and Directors as a group and
by each person known by the Company to be a beneficial owner of more than 5% of
the outstanding Common Stock of the Company. Except as noted in the footnotes,
each of the persons listed has sole investment and voting power with respect to
the shares of Common Stock included in the table.
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<PAGE> 6
<TABLE>
<CAPTION>
Number of Shares Percent
Name of Beneficial Owner Beneficially Owned (1) of Ownership (2)
- ------------------------ ---------------------- ----------------
<S> <C> <C>
Maurice J. Gallagher, Jr. (2)........................ 3,274,276 19.0%
David Kronfeld (3)................................... 1,148,371 6.7%
West Highland Capital, Inc. (4)...................... 1,012,100 5.9%
Nield J. Montgomery (5).............................. 952,500 5.5%
Timothy P. Flynn (6)................................. 897,300 5.2%
Robert L. and Carol A. Priddy (7).................... 889,500 5.2%
Thomas Neustaetter (8)............................... 694,514 4.0%
Jack L. Hancock (9).................................. 34,800 *
Paul J. Salem (10)................................... --- ---
All Executive Officers and Directors as a Group
(18 persons) (2)(3)(5)(6)(7)(8)(9)(11)............ 7,759,573 44.0%
</TABLE>
- ---------------------
* Less than 1% of total.
(1) The percent of outstanding Common Stock owned is determined by
assuming that in each case the person only, or group only, exercised
his or its rights to purchase all shares of Common Stock underlying
presently exercisable stock options.
(2) Includes options to purchase 36,000 shares of Common Stock which are
presently exercisable and 3,168,046 shares of Common Stock owned by
the various partnerships, trusts or corporations with respect to which
Mr. Gallagher is a general partner, beneficiary and/or controlling
stockholder. Also includes 47,730 shares owned by a trust for the
benefit of Mr. Gallagher's minor children with respect to which Mr.
Gallagher disclaims any beneficial ownership interest. Mr. Gallagher's
address is 3301 N. Buffalo Drive, Las Vegas, Nevada 89129.
(3) Includes 968,143 shares of Common Stock owned by JK&B Capital, L.P.
("JK&B") or JK&B Capital II, L.P. ("JK&BII"), 171,428 shares of Common
Stock owned by Boston Capital Ventures, L.P. ("BCV") and 3,000 shares
owned by Mr. Kronfeld's daughter over which Mr. Kronfeld exercises
voting and dispositive power. Excludes 555,556 shares of Series B
Convertible Preferred Stock which an affiliate of Mr. Kronfeld has
agreed to purchase from the Company (expected to close in May 1999).
JK&B Management, L.L.C. ("JK&BM") is the general partner of JK&B and
JK&BII. David Kronfeld is the manager of JK&BM. The address of these
beneficial owners is c/o JK&B Management, L.L.C., 205 North Michigan,
Suite 808, Chicago, Illinois 60601. Mr. Kronfeld is a general partner
of BCV.
(4) The address of this beneficial owner is 300 Drakes Landing Road, Suite
290, Greenbrae, California 94904.
(5) Includes options to purchase 216,000 shares which are presently
exercisable. Mr. Montgomery's address is 3301 N. Buffalo Drive, Las
Vegas, Nevada 89129.
(6) Includes options to purchase 4,800 shares which are presently
exercisable and 102,000 shares of Common Stock owned by various
partnerships or corporations with respect to which Mr. Flynn is a
general partner and/or controlling stockholder. Mr. Flynn's address is
3291 N. Buffalo Drive, Suite 8, Las Vegas, Nevada 89129.
(7) The Priddys' address is 9410 Laguna Niguel Drive, Las Vegas, Nevada
89134.
(8) Includes 342,858 shares of Common Stock held for the account of
Strategic Investment Partners Limited ("SIP"), 214,285 shares of
Common Stock held for the account of S-C Phoenix Holdings, L.L.C.
("SC"), 85,714 shares of Common Stock held for the account of Winston
Partners II LDC ("Winston LDC") and 42,857 shares of Common Stock held
for the account Winston Partners II LLC ("Winston LLC"), entities
associated with Chatterjee Management Company. Mr. Neustaetter is an
officer of Chatterjee Management Company. Mr. Neustaetter disclaims
beneficial ownership of these shares over which he does not exercise
investment or voting power.
(9) Includes options to purchase 4,000 shares which are presently
exercisable.
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<PAGE> 7
(10) Excludes 4,166,667 shares of Series B Convertible Preferred Stock
which Providence Equity Partners III L.P. has agreed to purchase from
the Company (expected to close in May 1999). Mr. Salem disclaims
beneficial ownership of these shares except to the extent of his
pecuniary interest in the general partner of Providence Equity
Partners III L.P.
(11) Includes options to purchase 154,200 shares owned by Executive
Officers not named above which are presently exercisable.
ELECTION OF DIRECTORS
Each year, one-third (1/3) of the Board of Directors of the Company is
to be elected for a term of three years and until their successors are elected
and qualified. The Company's By-laws provide that there shall be not less than
three, nor more than nine, Directors. The Board of Directors has determined
that the Board consist of seven Directors. The terms of the Class II Directors
(Nield J. Montgomery and Timothy P. Flynn) will expire in the year 2000 and the
terms of the Class I Directors (Maurice J. Gallagher, Jr. and David Kronfeld)
will expire in 2001. The terms of the Class III Directors (Jack L. Hancock and
Thomas Neustaetter) expire in 1999. Both Jack L. Hancock and Thomas Neustaetter
have been nominated for reelection to the Board as Class III Directors for a
three-year term to expire in 2002. In addition, Paul J. Salem has been
nominated for election to the Board as a Class III Director for a three-year
term to expire in 2002. It is the intention of the persons named in the
accompanying proxy form to vote for the election of all nominees. If for any
reason any such nominee is not a candidate when the election occurs, which
event is not anticipated, it is the intention of the persons named in the
accompanying proxy form to vote for the remaining nominees named and to vote in
accordance with their best judgment if any substitute nominees are named.
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table contains the name, age and position with the
Company of each Executive Officer and Director of the Company. Their respective
backgrounds are described following the table.
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Maurice J. Gallagher, Jr....... 49 Chairman of the Board of Directors
Nield J. Montgomery............ 54 Chief Executive Officer, President, Director
Timothy P. Flynn (1)........... 48 Director
Jack L. Hancock (2)............ 68 Director
David Kronfield................ 51 Director
Thomas Neustaetter (1) (2)..... 47 Director
Paul J. Salem.................. 35 Nominee for Director
John Boersma................... 38 Vice President--Operations
Michael E. Burke............... 54 Vice President--Network Operations
Patrick J. Chicas.............. 43 Vice President - Data Services
David S. Clark................. 38 Vice President--Marketing
Kent F. Heyman................. 43 Vice President and General Counsel
James J. Hurley, III........... 50 President--Midwest Region
Thomas G. Keough............... 54 Vice President--Sales
James Mitchell................. 38 President--Eastern Region
Carol A. Mittwede.............. 43 Vice President--Human Resources
Mark W. Peterson............... 44 President--Western Region
</TABLE>
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<TABLE>
<S> <C> <C>
David A. Rahm.................. 45 Vice President--Network Development
Walter J. Rusak................ 50 Vice President--Engineering
Linda M. Sunbury............... 37 Vice President--Chief Financial Officer
</TABLE>
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(1) Member of Audit Committee.
(2) Member of Compensation Committee.
MAURICE J. GALLAGHER, JR. has served as the Chairman of the Board of
Directors since its founding. Mr. Gallagher was instrumental in organizing the
Company with Mr. Montgomery. Mr. Gallagher was a founder of ValuJet Airlines,
Inc. ("ValuJet") in 1993 and served as a Director of ValuJet from 1993 until
November 1997. Mr. Gallagher also held prior positions (including Chief
Financial Officer) with ValuJet from 1993 to 1994 and served as Vice Chairman
from 1994 to 1997. Prior to ValuJet, Mr. Gallagher was a founder and President
of WestAir Holding, Inc. ("WestAir"), a commuter airline headquartered in
Fresno, California. WestAir was sold to Mesa Airlines ("Mesa") in June 1992.
Mr. Gallagher was a member of the Mesa Board of Directors from June 1992
through March 1993.
NIELD J. MONTGOMERY has been the Chief Executive Officer and President
and a member of the Board of Directors of the Company since he participated in
its founding. Mr. Montgomery has over 36 years of telephone experience, most
recently serving as a general manager for ICG from April 1994 to June 1995. In
that capacity, he was responsible for developing strategy and deploying
telephone switches nationally to position it to enter the local phone service
business. Prior to that, Mr. Montgomery served as General Marketing and Sales
Manager for Sprint/Centel (successor to Centel Nevada) ("Centel"). During his
13 year Centel career from 1989 to 1993, he served in senior executive
positions directing engineering, operations, business office, sales, and
marketing functions. Before joining Centel, Mr. Montgomery held a variety of
management positions with NYNEX from 1969 to 1980.
TIMOTHY P. FLYNN has served as Member of the Board of Directors of the
Company since 1996. Mr. Flynn served as a member of the Board of Directors of
ValuJet since he participated in its founding in 1993 until November 1997.
Prior to ValuJet, Mr. Flynn was Chairman of the Board and CEO of WestAir
Holding, Inc. He and Mr. Gallagher purchased WestAir in 1983 and operated it
through June 1992 when it was sold to Mesa. Mr. Flynn was a member of the Board
of Directors of Mesa from June 1992 through March 1993. Mr. Flynn and Mr.
Gallagher are affiliated in a number of other transactions.
JACK L. HANCOCK has served as a Member of the Board of Directors of
the Company since 1996. Mr. Hancock was Vice President of Systems Technology
and Executive Vice President, Product and Technology for PacBell (from 1988 to
1993). Prior to joining PacBell, Mr. Hancock was Executive Vice President for
Information Systems, Strategic Planning, and Human Resources at Wells Fargo
Bank (from 1982 to 1987). Before that, he was Senior Vice President for
Management Information Systems at Chemical Bank (from 1978 to 1981). He is a
member of the Boards of Directors of Union Bank of California (from 1994 to
present) and Wittaker Corporation (from 1994 to present).
DAVID KRONFELD was elected to serve as a Director of the Company in
February 1998. Mr. Kronfeld is the founder of JK&B Management, L.L.C., a
venture capital firm, and has managed its affairs since 1995. Since 1989, Mr.
Kronfeld has also been a partner at Boston Capital Ventures, a venture capital
firm where he specialized in the telecommunications and software industries.
From 1984 to 1989, Mr. Kronfeld was Vice President of Acquisitions and Venture
Investments at Ameritech. Mr. Kronfeld was a Senior Manager at Booz, Allen &
Hamilton, an international management consulting firm, from 1977 to 1982 and a
systems analyst at Electronic Data Systems from 1973 to 1975.
THOMAS NEUSTAETTER was elected to service as a Director in February
1998. Since January 1996, Mr. Neustaetter has been a principal of The
Chatterjee Group ("TCG"), an investment firm. Prior to TCG, he was managing
director and founder of Bancroft Capital (financial advisory services) from
January 1996 to December 1996 and was a managing director at Chemical Bank from
1990 to 1995. Mr. Neustaetter serves as a Director of 21st Century Telecom
Group, Inc.
PAUL J. SALEM has since 1997 served as a managing director of
Providence Equity Partners, Inc. which provides investment management services
to Providence Equity Partners III L.P. ("PEP") and has since its founding in
1998 served as a member of Providence Equity Partners III LLC, the general
partner of PEP. Mr. Salem also served as a Vice President of Providence
Ventures Inc. ("Providence Ventures") from 1992 to 1996. Prior to joining
Providence Ventures, Mr. Salem worked
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<PAGE> 9
for Morgan Stanley & Co. in corporate finance and mergers and acquisitions from
1990 to 1991. Prior to 1990, Mr. Salem spent four years with Prudential
Investment Corporation, an affiliate of Prudential Insurance. Mr. Salem has
served as a Director of MetroNet Communications Corp. since July 1996 and as a
Director of Verio, Inc. since 1996.
JOHN BOERSMA has served as Vice President -- Operations of the Company
since May 1997. He served as Vice President of Carrier Relations for ICG
Telecom Group, Inc. ("ICG Telecom") from 1996 to 1997. He was responsible for
ICG Telecom's relationship with local exchange carriers and implementation,
purchase agreements and service quality and served as Vice President, Northern
California Operations from April 1994 to September 1996. He joined Bay Area
Teleport, now a part of ICG Telecom, in 1986 and held various positions having
responsibility for overall financial and operational performance, marketing
management, new business development, regulatory affairs, and information
systems development. He served on the CLEC Industry Board of Directors and
served as the chairman of the association's Tariff Committee from 1991 until
1993.
MICHAEL E. BURKE has served as Vice President -- Network Operations of
the Company since 1996. Mr. Burke has over 28 years of engineering and
engineering project management experience in the telecommunications industry,
and served from 1990 to 1995 as a member of the Board of Directors and as Vice
President -- Network Design for Contel of California. Mr. Burke also served in
various engineering management roles with Continental Telephone Company (from
1971 to 1995), California Pacific Utilities (from 1970 to 1971), and General
Telephone Company of California (from 1963 to 1970).
PATRICK J. CHICAS joined the Company as Vice President - Data Services
in March 1999. Mr. Chicas has over 20 years of communications and Internet
industry experience with responsibilities including network and systems
engineering, network and application development and network
operations/management. In September 1998, Mr. Chicas co-founded LJ.Net, a Las
Vegas based Internet Service Company where he worked until it was acquired by
the Company in March 1999. Mr. Chicas served as Vice President - Operations for
Digital Island, Inc. from January 1997 to September 1998, as Chief Information
Officer for Hawaii OnLine from 1993 to 1995 and as Manager - Operations for GTE
Wireless, Hawaii from March 1993 until January 1997.
DAVID S. CLARK has served as Vice President - Marketing of the Company
since May 1997. Mr. Clark has been in the telecommunications industry for 10
years, with responsibilities including engineering, purchasing, product
development, client acquisition and maintenance, marketing and advertising.
From 1989 to 1997, Mr. Clark was employed by North American Telecom, his last
position being Vice President of Communications Services. Prior to that, Mr.
Clark held various management positions with national advertising agencies.
KENT F. HEYMAN has served as Vice President and General Counsel of the
Company since June 1996. Mr. Heyman has 18 years of legal experience, most
recently as chairman of the litigation department and Senior Trial Counsel of
the Dowling, Magarian, Aaron & Heyman Law Firm. Mr. Heyman has served as a
California Superior Court Judge pro tempore presiding over trial, settlement
conference and other proceedings from 1990 to 1996.
JAMES J. HURLEY III has served as President -- Midwest Region of the
Company since March 1998. He previously served as Chief Operating Officer of
Wireless Works, Inc. in Chicago, Illinois from 1996 to 1998. From 1992 to 1996,
Mr. Hurley was President and Chief Executive Officer of Inn Room Systems, Inc.
(a manufacturer of on-line room refreshment centers). From 1976 to 1992, he
held various finance, administration and operations management positions with
Centel Corporation. Mr. Hurley began his career with Arthur Andersen from 1970
to 1976.
THOMAS G. KEOUGH has served as Vice President -- Sales of the Company
since December 1996 and is responsible for all sales of the Company. He has
over 21 years experience as a marketing and sales executive, serving most
recently as Executive Vice President and Director of Sales for Jetstream
Aircraft, a subsidiary of British Aerospace from 1992 to 1996. Mr. Keough also
served in senior marketing and sales management roles with Beech Aircraft (from
1989 to 1992), Bombardier (from 1988 to 1989), Saab Aircraft of America (from
1983 to 1988), and DeHavilland (from 1976 to 1983).
JAMES MITCHELL has served as President - Eastern Region of the Company
since February 1998. Mr. Mitchell has over nine years of telephone industry
experience, serving from 1990 to 1998 in various sales and marketing management
roles with MCI, his last position being Regional Sales and Marketing Manager
for the Southeast Region. Prior to joining MCI, Mr. Mitchell served as General
Partner and Chief Financial Officer of Oak Value Partners (a private money
management firm) from 1987 to 1990. Mr. Mitchell began his career as an
auditing associate with Price Waterhouse in Philadelphia.
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<PAGE> 10
CAROL A. MITTWEDE has served as Vice President - Human Resources since
January 1998. Her responsibilities include all aspects of human resource
management for MGC. Ms. Mittwede spent the previous 18 years working in the
casino industry in both human resources and operations. She was Vice President
of Human Resources for the 2,000 room Flamingo Hilton in Laughlin, Nevada from
1989 to 1994. From 1994 to 1997, she served as the Vice President and General
Manager of the Las Vegas Hilton.
MARK W. PETERSON has served as President -- Western Region of the
Company since March 1997. He previously served as head of corporate affairs for
both WestAir Holding, Inc. operating as United Express in Fresno, California
from 1988 to 1992 and for AirCal Airlines in Newport Beach, California from
1978 to 1982. He also served as a marketing communications manager with Bank of
America in San Francisco, worked as marketing consultant in Northern California
from 1985 to 1986, and was an instructor in business communications at
California State University, Chico.
DAVID A. RAHM has served as Vice President -- Network Development of
the Company since May 1996. Mr. Rahm served as general counsel of Chadmoore
Wireless Group, Inc. from 1995 to 1996. Prior to that, Mr. Rahm served as
Director of Administration, Acting Director of Production and General Counsel
of Sigma Game, Inc. from 1993 to 1994. Mr. Rahm also served as Assistant Vice
President, Manager of Marketing, Credit, Leasing and Administration for
Lodgistix, Inc. from 1980 to 1990.
WALTER J. RUSAK has served as Vice President -- Engineering of the
Company since March 1998. Mr. Rusak served as Chief Technical Officer of United
Digital Network, Inc. from 1996 to 1998. Previously, Mr. Rusak was Senior Vice
President and General Manager of California for ICG Telecom Group, Inc. from
1985 to 1996. From 1991 to 1995, he was Vice President of Operations for U.S.
Long Distance, Inc. Mr. Rusak was Director of Domestic Network Engineering for
MCI Telecommunications, Corp. from 1989 to 1991. From 1970 to 1989, Mr. Rusak
held various engineering management positions with RBOCs and IXCs.
LINDA M. SUNBURY has served as Vice President of the Company since
June 1996 and Chief Financial Officer of the Company since January 1998. Ms.
Sunbury has over 12 years accounting and administrative experience, having held
similar positions in the airline industry. Most recently, Ms. Sunbury was Vice
President of Administration for Business Express, Inc. ("Business Express") dba
the Delta Connection from 1994 to 1996. While Ms. Sunbury was at Business
Express, creditors of Business Express filed an involuntary petition for
bankruptcy in January 1996. Business Express subsequently reorganized and
emerged from bankruptcy in April 1997. Prior to that, Ms. Sunbury served as
Controller for WestAir Holding Inc. operating as United Express from 1988 to
1994. Ms. Sunbury began her career with the accounting firm of KPMG Peat
Marwick LLP where she was employed from 1983 to 1988.
Messrs. Kronfeld and Neustaetter were initially selected to serve on
the Board of Directors by holders of the Company's Series A Convertible
Preferred Stock in accordance with the terms of such Series A Convertible
Preferred Stock. The Series A Convertible Preferred Stock was automatically
converted into Common Stock upon the Company's initial public offering.
Mr. Salem has been nominated to the Board of Directors by the persons
who have agreed to purchase the shares of the Series B Convertible Preferred
Stock of the Company (see "Proposed Issuance of Series B Convertible Preferred
Stock" below).
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has a standing Audit Committee and Compensation Committee.
The Audit Committee consists of Timothy P. Flynn and Thomas Neustaetter. The
Audit Committee did not meet during the 1998 fiscal year, since it was
initially constituted in February 1998. The Audit Committee is empowered to:
(i) recommend the appointment or removal of the Company's auditors; (ii) review
and
-8-
<PAGE> 11
recommend approval of the scope and results of the independent audit of the
Company; (iii) review audit fees; and (iv) review changes in accounting
policies that have a significant effect on the Company's financial reports.
The Compensation Committee consists of Jack L. Hancock and Thomas
Neustaetter. The Compensation Committee did not meet separately from the entire
Board during 1998. The Compensation Committee is empowered to: (i) approve
compensation levels for each Executive Officer who also serves as a member of
the Board of Directors and for any other officer or employee of the Company
whose annual base salary is in excess of $150,000; (ii) approve all incentive
payments to each Executive Officer who also serves as a member of the Board of
Directors; (iii) administer the Company's Stock Option Plan; and (iv) undertake
administration, upon specific direction of the Board of Directors, of any other
employee benefit plans.
MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors met four times during the Company's 1998 fiscal
year and took action on other occasions by unanimous consent. Each incumbent
Director attended at least 75% of the total of all Board and Committee meetings
he was entitled to attend during the 1998 year.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's Directors and
Executive Officers, and persons who own more than 10% of the Company's equity
securities, to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission. Such persons are
required by the Exchange Act to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by it
with respect to transactions during 1998, or written representations from
certain reporting persons, the Company believes that all filing requirements
applicable to its Directors, Executive Officers and persons who own more than
10% of the Company's equity securities have been complied with except that the
initial filings of all Directors and Executive Officers were late in that they
were not filed until several days after the Company's initial public offering,
one filing on behalf of each of Mr. Gallagher and Mr. Keough was filed less
than 10 days late and certain filings reporting open market purchases of the
Company's Common Stock on behalf of Mr. Kronfeld were filed late.
-9-
<PAGE> 12
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal years ended December 31,
1996, December 31, 1997, and December 31, 1998, the cash compensation paid by
the Company, as well as certain other compensation paid or accrued for such
year, for the Company's Chief Executive Officer and four most highly
compensated Executive Officers other than the Chief Executive Officer. Such
table also indicates all capacities in which they served.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------- ------------
All
Name and other
Principal Options Compen-
Position Year Salary ($) Bonus ($) (#) sation ($)
- ------------------- ---- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Nield J. Montgomery, President 1998 158,707 20,000 (1) 45,000 0
and Chief Executive Officer 1997 139,424 0 None 0
1996 45,077 (2) 0 360,000 0
James Mitchell 1998 88,275 45,000 48,000 0
President - Eastern Region (3)
Thomas G. Keough 1998 116,342 10,000 (1) None 0
Vice President 1997 105,769 0 None 21,713 (4)
1996 0 0 48,000 0
James J. Hurley, III 1998 93,991 30,000 48,000 0
President-Midwest Region (5)
Walter J. Rusak 1998 85,326 20,000 60,000 15,000 (4)
Vice President (6)
</TABLE>
- -------------------
(1) A portion of these bonuses was paid in the form of Common Stock in the
Company.
(2) $2,000 of such compensation was paid in April 1996, prior to the
Company's operations in the form of 480,000 shares of Common Stock in
the Company.
(3) Mr. Mitchell commenced employment with the Company in February 1998,
and therefore, the compensation shown for him for 1998 is for the
period from February 1998 through December 1998.
(4) The amounts indicated were paid for reimbursement of moving and
related expenses.
(5) Mr. Hurley commenced employment with the Company in March 1998, and
therefore, the compensation shown for him for 1998 is for the period
from March 1998 through December 1998.
(6) Mr. Rusak commenced employment with the Company in March 1998, and
therefore, the salary shown for him for 1998 is for the period from
March 1998 through December 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Jack L. Hancock and Thomas
Neustaetter, neither of whom are officers or employees of the Company.
-10-
<PAGE> 13
EMPLOYMENT AGREEMENTS
Nield J. Montgomery. The Company's employment agreement with Mr.
Montgomery provides for a base salary of $150,000 per year. Mr. Montgomery is
required to devote his full time and efforts to the business of the Company
during the term of his employment agreement which expires in September 2001. Mr
Montgomery's employment may be terminated by either the Company or Mr.
Montgomery at any time. Mr. Montgomery has agreed not to participate in a
business offering local, long distance and related telephone services in Nevada
during the term of his employment and for a period of six months following
termination. If Mr. Montgomery's employment is terminated by the Company
without cause, he will be entitled to severance pay of $75,000 payable over a
period of six months.
Other Executive Officers. The Company has entered into
Employment/Stock Repurchase Agreements with several of its Executive Officers
(John Boersma, Michael E. Burke, Patrick J. Chicas, David S. Clark, Kent F.
Heyman, James J. Hurley III, Thomas G. Keough, James Mitchell, Carol A.
Mittwede, Mark W. Peterson, David A. Rahm, Walter J. Rusak and Linda M.
Sunbury). These agreements establish base salaries and provide that each
employee may earn a bonus of up to 50% of his or her base salary based on the
employee's and the Company's performance. Each employee's employment may be
terminated at any time by either the Company or the employee. Each of these
Executive Officers has agreed not to participate in a business offering local,
long distance and related telephone services in the area of his or her
employment during the term of employment and for a period of six months
following termination. Each of these Executive Officers, other than Patrick J.
Chicas, has exercised rights to acquire Common Stock at $5.83 to $8.33 per
share. All or a portion of such shares are subject to repurchase at their cost
if the Executive Officer's employment with the Company is terminated within a
three year period. The Company has financed the purchase price of certain of
these shares over a period of three years. See "Certain Transactions."
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth information regarding all stock options
granted in the 1998 fiscal year under the Company's Stock Option Plans to those
Executive Officers of the Company named in the Compensation Table above.
<TABLE>
<CAPTION>
% of
Total Market
Number of Options Price
Securities Granted to or Fair Potential Realized Value at
Underlying Employees Value Assumed Annual Rates of
Options in Fiscal Exercise on Date Expiration Stock Price Appreciation (1)
Granted Year Price of Grant Date 5% 10%
---------- ---------- -------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Nield J. Montgomery 45,000 5.2% $8.00 $8.00 9/04/08 $226,402 $573,747
James Mitchell 48,000 5.5% $5.83 $5.83 2/15/08 $175,990 $445,993
Thomas G. Keough None N/A N/A N/A N/A N/A N/A
James J. Hurley, III 48,000 5.5% $8.33 $8.33 3/09/08 $251,457 $637,242
Walter J. Rusak 60,000 6.9% $8.33 $8.33 3/23/08 $314,322 $796,552
</TABLE>
- ----------------
(1) The dollar amounts under these columns are the result of calculations
at the 5% and 10% rates set by the Securities and Exchange Commission
and therefore are not intended to forecast possible future
appreciation, if any, of the price of the Company's stock.
-11-
<PAGE> 14
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table shows aggregate exercises of options during 1998
and the values of options held as of December 31, 1998 by those Executive
Officers of the Company named in the Compensation Table above.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-The-Money Options
December 31, 1998 (#) December 31, 1998 (1)
Shares Acquired Value Exercisable (E)/ Exercisable (E)/
Name on Exercise (#) Realized Unexercisable (U) Unexercisable (U)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nield J. Montgomery -- -- 144,000 E $888,000 E
Nield J. Montgomery -- -- 261,000 U $1,332,000 U
James Mitchell -- -- 48,000 U $56,000 U
Thomas J. Keough -- -- 19,200 E $70,400 E
Thomas J. Keough -- -- 28,800 U $105,600 U
James J. Hurley, III -- -- 48,000 U None
Walter J. Rusak -- -- 60,000 U None
</TABLE>
- -------------
(1) Amounts shown are based upon the closing sale price for the Company's
Common Stock on December 31, 1998, which was $7.00 per share.
DIRECTOR COMPENSATION
The Company's outside Directors (Messrs. Flynn, Hancock, Kronfeld and
Neustaetter) receive meeting fees of $500 per meeting of the Board of Directors
or Committee attended in person in addition to reimbursement of their expenses
in attending meetings of the Board of Directors.
-12-
<PAGE> 15
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") is comprised of Messrs.
Hancock and Neustaetter, each of whom is a non-employee director. The role of
the Committee is to approve compensation levels of Executive Officers of the
Company who also serve on the Board of Directors and other officers or
employees with an annual base salary in excess of $150,000, to approve
incentive payments to each Executive Officer who serves on the Board of
Directors and to administer the Company's stock option plan.
The Company's executive compensation programs are designed to enhance
the value of the Company to its stockholders. This is accomplished through
policies and practices that facilitate the achievement of the Company's
performance objectives, provide compensation that will attract and retain the
talent required to achieve the Company's goals and align the Executive Officers'
interests with the interests of the Company's stockholders.
The Company's approach to executive compensation has been designed to
provide a competitive compensation program that will enable the Company to
attract, motivate, reward and retain individuals who possess the skills,
experience and talents necessary to advance the growth and financial
performance of the Company. The Company's compensation policies are based on
the principle that each executive's financial rewards should be aligned with
the financial interests of the stockholders of the Company. The Compensation
Committee also believes that the potential for equity ownership by management
is beneficial in aligning management's and stockholders' interest in the
enhancement of stockholder value. The Company's executive compensation policy
has three key elements: (i) a long-term component consisting of stock options
and stock purchases, (ii) an annual component (base salary), and (iii)
performance-based compensation consisting of stock options and/or cash
compensation.
Under federal tax law, certain non-performance based executive
compensation, which is in excess of $1.0 million, is not deductible by the
Company. During 1998, no Executive Officer of the Company received compensation
in excess of this limit, and, at this time, the Board of Directors does not
expect that any Executive Officer of the Company will receive compensation in
excess of this limit during 1999. Accordingly, no formal policy with respect to
the tax deductibility of executive compensation has been adopted by the
Company.
Base Salary. The base salaries of Executive Officers are initially
determined by evaluating the responsibilities of the position held and the
experience of the individual, with reference to the competitive marketplace for
executive talent. Mr. Montgomery's base salary was negotiated within the
context of the employment agreement executed between Mr. Montgomery and the
Company. The base salaries of the other officers also were negotiated within
the context of employment agreements between them and the Company.
Stock Options. Under the Company's Stock Option Plan, stock options
are granted to Executive Officers and all other employees of the Company. Upon
joining the Company, an individual's initial option grant is based on the
individual's responsibilities and position. Subsequent stock option awards are
based primarily on an individual's performance and responsibilities. Because of
the competitive nature of the Company's business, the Committee believes stock
option grants are an effective method of incentivising executives to take a
longer term view of the Company's performance and to ensure that the
executive's and the stockholders' interests are in alignment. In addition,
during 1998, stock options were granted to certain Executive Officers in lieu
of base salary increases.
-13-
<PAGE> 16
The exercise price of each option has generally been the market price
(or estimated fair value before the Company was public) of the Common Stock on
the date of grant. Option grants given in lieu of a cash bonus typically
provide for vesting after one year. Other option grants generally provide for
delayed vesting over a period of three to five years. All options have a term
of ten years. The Committee believes that stock options give the Executive
Officers greater incentive throughout the term of the options to strive to
operate the Company in the manner that directly affects the financial interests
of the stockholders both on a long term, as well as a short term, basis.
In determining the number of option shares to grant to Executive
Officers, the Committee considers on a subjective basis the same factors as it
does in determining the other components of compensation, with no single factor
accorded special weight. The recommendations of the Chairman of the Board and
President are of paramount importance in determining stock option awards.
All of the Company's Executive Officers (other than the Company's
President) have also been provided the right to purchase additional shares of
the Company's Common Stock, with a portion of the purchase price being financed
by the Company. This stock purchase program is designed to further align the
Executive Officers' interests with those of the stockholders.
Bonuses. Prior to generating positive EBITDA, all bonuses are
discretionary. Management input is given considerable weight in making these
discretionary determinations. After positive EBITDA is generated, all Executive
Officers will be eligible for a bonus each year based on individual and Company
performance. In such event, a bonus pool equal to a percentage of the Company's
EBITDA will be established for each such year with each such Executive Officer
being entitled to a bonus not to exceed 50% of his or her base salary.
Submitted by
COMPENSATION COMMITTEE
Jack L. Hancock Thomas Neustaetter
The foregoing report should not be deemed incorporated by reference by
any general statement incorporating by reference this Proxy Statement into any
filing under the Securities Act of 1933 or under the Securities Exchange Act of
1934, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
-14-
<PAGE> 17
STOCK PRICE PERFORMANCE GRAPH
The following stock price performance graph compares the Company's
performance to the CRSP Total Return Index for The NASDAQ Stock Market (US) and
the NASDAQ Telecommunications Index. The stock price performance graph assumes
an investment of $100 in the Company and the two indexes, respectively, on May
11, 1998, and further assumes the reinvestment of all dividends. Stock price
performance, presented for the period from May 11, 1998 (the date upon which
the Common Stock of the Company was first traded) through December 31, 1998 is
not necessarily indicative of future results. The May 11, 1998 stock price used
for the Company's stock is the initial public offering price.
<TABLE>
<CAPTION>
5/11/98 6/30/98 9/30/98 12/31/98
------- ------- ------- --------
<S> <C> <C> <C> <C>
MGC Communications, Inc. $100.00 $89.71 $53.31 $41.18
NASDAQ Telecommunications Index $100.00 $107.93 $95.98 $130.44
NASDAQ Stock Market Index (US) $100.00 $102.35 $92.65 $119.50
</TABLE>
The stock price performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.
-15-
<PAGE> 18
CERTAIN TRANSACTIONS
The Company has entered into an agreement to lease approximately
35,800 square feet of office space from a limited liability company which is
principally owned by two of the Company's Directors and principal stockholders,
Maurice J. Gallagher, Jr. and Timothy P. Flynn. The rental rate is $1.69 per
square foot per month which includes common area maintenance charges of $.20
per square foot per month. Management believes that the terms and conditions of
this lease arrangement are at least as favorable to the Company as those which
the Company could have received from an unaffiliated third party. During 1998,
the Company paid $614,000 in lease payments under this arrangement.
The following persons or entities purchased Series A Convertible
Preferred Stock in the Company for cash in a private placement of securities of
the Company in January 1998: (i) a corporation owned by Timothy P. Flynn -
45,000 shares for $157,500, (ii) a corporation owned by Maurice J. Gallagher,
Jr. - 41,500 shares for $145,250, (iii) Thomas Keough - 21,429 shares for
$75,000 and (iv) Robert L. Priddy - 45,000 shares for $157,500.
During March 1998, the following Executive Officers purchased shares
of Common Stock from the Company for cash and a promissory note as follows:
<TABLE>
<CAPTION>
Promissory Note
Shares By Promissory Balance as of
Executive Officer Purchased In Cash Note February 12, 1999*
- ----------------- --------- ------- ------------- ------------------
<S> <C> <C> <C> <C>
Michael E. Burke.............................. 12,000 -- $100,000 $107,336
David S. Clark................................ 13,200 $10,000 $100,000 $107,336
Kent F. Heyman................................ 18,000 $50,000 $100,000 $107,336
James J. Hurley, III.......................... 18,000 $50,000 $100,000 $106,986
Thomas G. Keough.............................. 18,600 $55,000 $100,000 $107,336
James Mitchell................................ 45,000 $87,500 $175,000 $187,981
Carol A. Mittwede............................. 18,000 $50,000 $100,000 $107,336
Mark W. Peterson.............................. 12,000 -- $100,000 $107,336
David A. Rahm................................. 12,000 -- $100,000 $107,336
Walter J. Rusak............................... 75,000 $250,000 $375,000 $403,202
Linda M. Sunbury.............................. 13,200 $10,000 $100,000 $107,336
</TABLE>
*This amount represents the highest amount of the debt since its
incurrence.
The purchase price for all purchases was $8.33 per share except that
James Mitchell's shares were purchased at $5.83 per share. In each case, the
promissory note is payable within three years, bears interest at 7.5% per annum
and is secured by the pledge of the shares of Common Stock purchased with such
promissory note. In each case, all or a portion of such shares are subject to
repurchase at their cost if the officer's employment with the Company is
terminated within three years.
In September 1997, John Boersma purchased 60,000 shares of Common
Stock from the Company for a promissory note in the amount of $250,000. The
promissory note is payable on or before September 30, 2000, bears interest at
the rate of 7.5% per annum and is secured by the pledge of the shares of Common
Stock purchased with such promissory note. As of February 12, 1999, the
promissory note had an outstanding balance of $271,824 (principal plus accrued
interest), which represents the highest amount of such debt since its
incurrence.
-16-
<PAGE> 19
PROPOSED AMENDMENT TO STOCK OPTION PLAN
GENERAL
On April 16, 1999, the Board of Directors of the Company adopted an
amendment to the Company's Stock Option Plan, subject to approval of the
Stockholders under which the number of shares of Common Stock available for
purchase under the Stock Option Plan will be increased from 2,640,000 to
4,640,000.
The Board of Directors believes that Stockholder approval of the
proposed amendment to the Stock Option Plan is desirable since the Company's
ability to attract qualified executive employees and the Company's compensation
policy rely to a significant degree on the ability of the Company to grant
stock options and since the number of options that may still be granted under
the Stock Option Plan is limited. The Company believes that the granting of
stock options increases the incentive for employees, consultants and Directors
to contribute to the future success and prosperity of the Company and,
therefore, enhance the value of the Company's stock for the benefit of
Stockholders. Furthermore, the availability and offering of stock options
strengthens the ability of the Company to attract and retain quality personnel.
The following is a summary of the material features of the Company's
Stock Option Plan.
STOCK OPTION PLAN ADMINISTRATION
Subject to the provisions of the Stock Option Plan, the Stock Option
Plan is administered by the Compensation Committee of the Board of Directors
which is composed of non-employee Directors of the Company. The Compensation
Committee has the authority to grant options and set the terms and conditions
of such grants.
ELIGIBILITY
In general, all employees, consultants and Directors of the Company
are eligible to receive options under the Company's Stock Option Plan. Stock
options are granted to all employees of the Company upon joining the Company.
Each employee's initial option grant is based on his or her responsibilities
and position. As of March 31, 1999, the Company has 469 employees, all of whom
have been granted or are eligible to receive stock options. Subsequent stock
option awards are based primarily on an employee's performance and
responsibilities.
Although the Company's Executive Officers are eligible for future
grants of stock options under the Plan, it is not determinable at this time the
number of options that may be granted to the Company's Executive Officers from
the proposed increase in number of shares available under the Stock Option
Plan.
SHARES SUBJECT TO THE STOCK OPTION PLAN
Currently, a maximum of 2,640,000 shares of the Company's Common Stock
are authorized for issuance upon exercise of stock options under the Stock
Option Plan, subject to adjustment by the Compensation Committee upon stock
splits, stock dividends or the occurrence of certain other events set forth in
the Stock Option Plan. The proposed amendment to the Stock Option Plan will
increase that number to 4,640,000. The shares to be used may be either treasury
or authorized but unissued shares. As of December 31, 1998, 7,380 options had
been exercised, there were 1,826,200 options outstanding at an average exercise
price of $5.18 per share and there were 806,420 shares available for future
grant under the
-17-
<PAGE> 20
Stock Option Plan. The closing price of the Company's Common Stock in the
NASDAQ Stock Market on April 16, 1999, was $35.50 per share.
The actual value of the securities issued under the Stock Option Plan
will be determined by the fair market value of the underlying securities on the
dates such securities are issued. The actual aggregate amount to be received by
the Company upon issuance of such shares will be determined by the exercise
price of options granted.
OPTION FEATURES
The types of stock options that may be granted under the Stock Option
Plan are nonqualified stock options, incentive stock options or any combination
of the two. The option price per share is determined by the Compensation
Committee, in its discretion.
A stock option may not be granted which expires more than ten years
from the date of grant. The Compensation Committee may establish vesting
provisions for a stock option so that the option becomes fully vested to the
optionee over a period of time. Options granted in lieu of a cash bonus
typically provide for vesting after one year. Other options have been granted
with three to five year vesting schedules. The Compensation Committee may also
accelerate the vesting of any stock option or portion thereof.
No stock option granted under the Stock Option Plan is assignable or
transferable except by will or the laws of descent and distribution.
AMENDMENT AND TERMINATION
The Board of Directors may terminate or from time to time suspend or
amend the Stock Option Plan without Stockholder approval, except that (i) no
modification may, without the participant's consent, alter or impair any of the
rights or obligations under any stock option theretofore granted, and (ii) no
modification, without Stockholder approval, shall materially modify the
eligibility requirements for receiving stock options, change the class or
persons eligible to participate in the Stock Option Plan, increase the maximum
number of shares for which options may be granted under the Stock Option Plan,
extend the period of granting stock options or materially increase in any other
way the benefits accruing to participants.
No stock options may be granted under the Stock Option Plan after June
30, 2006.
FEDERAL INCOME TAX ASPECTS OF STOCK OPTION PLAN
The following general summary is based upon the Internal Revenue Code
of 1986, as amended (the "Code") and does not include a discussion of any state
or local tax consequences.
Incentive Stock Options. An optionee does not realize taxable income
upon the grant or exercise of an incentive stock option. Although an optionee
will not realize ordinary income upon his exercise of an incentive stock
option, the excess of the fair market value of the Common Stock acquired at the
time of exercise over the option price may constitute an adjustment in
computing alternative minimum taxable income under Section 56 of the Code and,
thus, may result in the imposition of the "alternative minimum tax" pursuant to
Section 55 of the Code.
The income tax treatment of any gain or loss realized upon an
optionee's disposition of shares of Common Stock received upon exercise of an
incentive stock option depends on the timing of the disposition. If the
optionee holds the shares received upon exercise of an incentive stock option
for at least two years
-18-
<PAGE> 21
from the date such incentive stock option was granted and one year from the
date of exercise, the difference between the amount realized from the sale of
such shares and the optionee's tax basis will be taxed as long-term capital
gain or loss.
If an optionee disposes of the shares of Common Stock before the end
of the applicable holding periods described above (i.e., he makes a
"disqualifying disposition"), such optionee may have taxable income in the year
of the disqualifying disposition, depending on the selling price. If the
selling price exceeds the fair market value of the incentive stock option on
the date of exercise, the excess of that fair market value over the exercise
price is taxable to the optionee as ordinary income, and the excess of the
selling price over the fair market value is taxable to the optionee as capital
gain. If the selling price exceeds the exercise price but not the fair market
value on the date of exercise, the excess of the selling price over the
exercise price is taxable to the optionee as ordinary income. If the selling
price is less than the exercise price, the difference is treated as capital
loss.
The Company is not entitled to a deduction for federal income tax
purposes with respect to the grant or exercise of an incentive stock option or
the disposition of shares of Common Stock acquired upon exercise (if the
applicable holding periods have been met). In the event of a disqualifying
disposition, however, the Company is entitled to a federal income tax deduction
in an amount equal to the ordinary income recognized by the optionee.
Nonqualified Stock Options. An optionee will not recognize any taxable
income upon the grant of a nonqualified option. However, upon exercise of a
nonqualified option, an optionee must recognize ordinary income in an amount
equal to the excess of the fair market value of the shares of Common Stock at
the time of exercise over the exercise price. Upon the subsequent disposition
of the shares, the optionee will realize a capital gain or loss, depending or
whether the selling price exceeds the fair market value of shares on the date
of exercise.
An optionee's tax basis in the shares of Common Stock received on
exercise of a nonqualified option will be equal to the amount of consideration
paid by the optionee on exercise, plus the amount of ordinary income recognized
as a result of the receipt of such shares. The Company will be entitled to a
deduction for federal income tax purposes at the same time and in the same
amount as the optionee recognizes taxable income.
The summary of federal income tax consequences set forth above is for
general information only and may not be applicable to or complete with respect
to all individuals. Individuals to whom options are granted should consult
their own tax advisors for a determination as to the specific tax consequences
applicable to them.
VOTE REQUIRED FOR ADOPTION OF THE AMENDMENT TO THE STOCK OPTION PLAN
The affirmative vote of the holders of a majority of the shares of
Common Stock of the Company outstanding as of the record date is required for
approval of the amendment to the Stock Option Plan. The Board of Directors
recommends a vote "FOR" the amendment to the Stock Option Plan and the enclosed
proxy will be so voted unless the Stockholder executing the proxy specifically
votes against the amendment or abstains from voting by marking the
appropriately designated block on the proxy.
-19-
<PAGE> 22
PROPOSED ISSUANCE OF SERIES B CONVERTIBLE
PREFERRED STOCK
GENERAL
On April 5, 1999, the Company entered into a Securities Purchase
Agreement with Providence Equity Partners III L.P. ("Providence"), JK&B Capital
III L.P. ("JK&B III") and Wind Point Partners III L.P. ("Wind Point") under
which Providence, JK&B III and Wind Point (the "Purchasers") agreed to purchase
5,277,779 shares of newly issued Series B Convertible Preferred Stock at $9.00
per share (the "Transaction") for a total consideration of $47.5 million. The
Purchasers are to receive a $500,000 fee in connection with the Transaction.
The issuance of the Series B Convertible Preferred Stock may require
approval of the Company's Stockholders under the rules of the NASDAQ Stock
Market ("NASDAQ"). As such, this matter will be presented to the Stockholders
for approval unless NASDAQ confirms that Stockholder approval is not required.
Stockholders owning more than 50% of the outstanding shares of Common Stock of
the Company as of the record date have agreed to vote in favor of the
Transaction pursuant to a Securityholders' Agreement between such Stockholders
and the Purchasers. Therefore, approval of the Transaction is assured.
In considering the advisability of the Transaction, the Board of
Directors considered the average closing price of the Company's Common Stock on
NASDAQ over the 30 and five trading days prior to the date of the agreement
($7.46 per share and $8.39 per share, respectively) among other factors. The
Board of Directors has approved the Transaction because the capital to be
raised is expected to allow the Company to accelerate implementation of its
business plan and new product offerings and because the significant investment
by the Purchasers in the Company is expected to be favorably received in the
public market. The rights of existing Stockholders of the Company will be
affected to the extent certain rights and preferences are granted to the
holders of the Series B Convertible Preferred Stock as indicated below.
The following reflects the stock ownership of the Purchasers before
and after the Transaction, based on the number of shares presently outstanding
and the number of shares issuable in the Transaction (assuming immediate
conversion into Common Stock on a one-for-one basis):
<TABLE>
<CAPTION>
Shares of Percentage Ownership
Number of Series B ---------------------------------
Shares Preferred To Be Before After
Stockholder Owned Purchased Transaction Transaction
- ----------- --------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Providence -- 4,166,667 -- 18.5%
JK&B III (1) 1,148,371 555,556 6.7% 7.6%
Wind Point (1) 685,714 555,556 4.0% 5.5%
</TABLE>
(1) Includes affiliated entities.
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<PAGE> 23
TERMS OF SERIES B CONVERTIBLE PREFERRED STOCK
The Series B Convertible Preferred Stock ("Series B Preferred") will
have the following rights and preferences:
Dividends. 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 201 days after the closing,
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") within three years after the
closing.
Voting Rights. The Series B Preferred will vote along with the Common
Stock on an as - converted basis. In addition, the Series B Preferred will have
the right to approve (i.e., veto power over) actions taken by the Company to:
(i) issue preferred stock on a pari passu basis or senior to the Series B
Preferred Stock; (ii) dispose of assets in excess of a certain dollar amount,
enter into a merger or consolidation or sell the Company; (iii) liquidate the
Company; (iv) alter the terms of the Series B Preferred; (v) pay dividends on
Common Stock or other securities junior to the Series B Preferred; (vi) enter
into certain transactions with affiliates; (vii) make acquisitions in excess of
a certain dollar amount; (viii) incur additional indebtedness in excess of
certain amounts; (ix) make material changes to the Company's business plan; (x)
hire a chief executive officer; (xi) organize subsidiaries or enter into joint
ventures; or (xii) issue additional Common Stock that would result in certain
reductions of the Series B Preferred conversion price.
If the Company were to default by taking one of these restricted
actions without approval of the Series B Preferred, the Series B Preferred
would have the right to require the Company to seek a sale of the Company and
if the sale is not effected within six months, then the Series B Preferred
would be entitled to elect a majority of the Board of Directors of the Company.
The Company has the right to redeem the Series B Preferred in the event one of
the restricted actions described in (vii) - (xii) above is not approved or in
order to avoid having to sell the Company.
The approval (veto) rights of the Series B Preferred will terminate if
there are less than 1,759,260 shares of Series B Preferred remaining
outstanding and the shares of Series B Preferred outstanding constitute less
than 5% of the outstanding Common Stock assuming conversion of all outstanding
shares of Series B Preferred (such 5% number currently would be approximately
1,125,520 shares).
Board Representation. Under the Securityholders' Agreement, the
Purchasers will have the right to nominate one (if there are seven Directors),
two (if there would otherwise be eight Directors) or a number proportionate to
the Purchasers' percentage stock ownership of the Company (if there are more
than eight Directors) and to have a representative of the Purchasers serve on
each committee of the Company's Board. Stockholders currently owning a majority
of the Company's outstanding Common Stock have agreed to vote their stock in
favor of the Purchasers' nominees and to vote to approve this Transaction.
Since the Company currently has six Directors, the Purchasers' Board
representation will initially be one out of seven. The Company has a staggered
Board with each member being subject to election for a three-year term every
third year. The Securityholders' Agreement also contains a provision limiting
the Purchasers' Board representation to the number (not less than one)
determined by multiplying the number of members on the Board of Directors by
the percentage stock ownership in the Company represented by the Purchasers'
Series B Preferred and Common Stock into which any Series B Preferred has been
converted, with fractions rounded to the nearest whole number.
-21-
<PAGE> 24
The Securityholders' Agreement will terminate if there are less than
1,759,260 shares of Series B Preferred remaining outstanding and the shares of
Series B Preferred outstanding constitute less than 5% of the outstanding
Common Stock assuming conversion of all outstanding shares of Series B
Preferred.
Liquidation Rights. Upon a liquidation of the Company, the Series B
Preferred will be entitled to receive its liquidation amount in preference to
any amounts payable with respect to the Company's Common Stock or other junior
securities. The liquidation amount will be the greater of (i) $9.00 per share
plus accrued, unpaid dividends, or (ii) the amount the holders of Series B
Preferred would have received if the Series B Preferred had been converted into
Common Stock. The holders of the Series B Preferred have the right to elect
that a sale of the Company be treated as a liquidation for these purposes. If
the liquidation (or sale of the Company) occurs within three years of the
closing, the accrued dividends will not be paid to the extent the holder of
Series B Preferred will receive more than 2.5 times its initial investment.
Conversion Rights. The Series B Preferred will be convertible into
Common Stock at any time at the option of the holder. Initially, each share of
Series B Preferred will be 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. The weighted average
anti-dilution provisions relating to issuance of additional shares can in no
event, however, result in the conversion price being reduced below $9.00 per
share.
Beginning after a period of time (not more than 386 days), the Company
has the right to require the conversion of the Series B Preferred if the
Company's stock price exceeds the Market Threshold referenced above within three
years after closing, in which case, no accrued dividends will be paid.
Redemption Rights. The holders of Series B Preferred will have the
right to require the Company to redeem the Series B Preferred after the sixth
anniversary of the closing or upon a sale of the Company. The redemption price
will be equal to the greater of (i) $9.00 per share plus accrued, unpaid
dividends, or (ii) the value of the Common Stock into which the Series B
Preferred is then convertible (but subject to the limitation on payment of
accrued dividends discussed in "Liquidation Rights" above). In the event the
Company initiates the redemption as discussed under "Voting Rights" above,
certain minimum redemption prices will apply. If the Company defaults by
failing to redeem all shares of Series B Preferred within six months, then the
Series B Preferred will have the right to elect a majority of the Board of
Directors of the Company.
Registration Rights. The holders of Series B Preferred have "demand"
and "piggyback" registration rights, although a demand registration may not be
initiated by the holders of the Series B Preferred prior to the first
anniversary of the closing unless the above-referenced Market Threshold has
been reached.
Copies of the Securities Purchase Agreement and Securityholders'
Agreement are available from the Company upon request.
INCORPORATION OF INFORMATION BY REFERENCE
In accordance with the proxy rules under the Securities Exchange Act
of 1934, as amended, certain information is incorporated by reference herein
from the Company's Annual Report for the year ended December 31, 1998. See page
24 for a list of the information incorporated by reference.
-22-
<PAGE> 25
VOTE REQUIRED TO APPROVE THE TRANSACTION
The affirmative vote of the holders of a majority of the shares of
Common Stock of the Company present at the meeting (in person or by proxy) is
required to approve the Transaction. The Board of Directors recommends a vote
"FOR" the Transaction and the enclosed proxy will be so voted unless the
Stockholder executing the proxy specifically votes against the Transaction or
abstains from voting by marking the appropriately designated block on the
proxy.
RELATIONSHIP WITH INDEPENDENT AUDITORS
The Board of Directors has selected Arthur Andersen LLP as the
Company's independent auditors for the ensuing fiscal year. Arthur Andersen LLP
has served as the Company's independent auditors since February 1998.
Representatives of Arthur Andersen LLP are expected to be present at the Annual
Meeting with the opportunity to make a statement if they desire to do so and to
respond to appropriate questions.
The Company did not re-elect KPMG LLP ("KPMG") as its independent
accountants on February 6, 1998. KPMG's report on the Company's financial
statements for the years ended December 31, 1996 and 1995, did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles. The decision to change
accountants was approved by the Company's Board of Directors. During KPMG's
engagement with the Company, there were no disagreements with KPMG on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which were not resolved to KPMG's satisfaction.
During KPMG's engagement with the Company, there were no reportable events (as
defined in Item 304(a)(1)(v) of Regulation S-K issued under the Securities Act
of 1933, as amended).
As of February 6, 1998, Arthur Andersen LLP has been retained by the
Company as its principal accountants to audit the Company's financial
statements for the years ended December 31, 1998 and 1997. The Company had not
consulted Arthur Andersen LLP prior to its engagement regarding the application
of accounting principles to a specified transaction, either completed or
proposed, the type of audit opinion that might be rendered on the Company's
financial statements or any matter that was either the subject of a
disagreement with KPMG or a reportable event.
OTHER MATTERS
STOCKHOLDERS' PROPOSALS FOR ANNUAL MEETING TO BE HELD IN 2000
The Company plans to hold its 2000 Annual Meeting of Stockholders
during the month of May. Any proposal of a Stockholder intended to be presented
at said Annual Meeting of Stockholders must be received by the Company for
inclusion in the proxy statement and form of proxy for that meeting no later
than December 30, 1999.
-23-
<PAGE> 26
ACTION ON OTHER MATTERS AT THE ANNUAL MEETING
At this time, the Company does not know of any other matters to be
presented for action at the Annual Meeting other than those mentioned in the
Notice of Annual Meeting of Stockholders and referred to in this proxy
statement. If any other matter comes before the meeting, it is intended that
the proxies will be voted in respect thereof in accordance with the judgment of
the persons voting the proxies.
INCORPORATION OF INFORMATION BY REFERENCE
The following information is incorporated by reference herein from the
Company's Annual Report for the year ended December 31, 1998, being sent
concurrently herewith to each Stockholder of record: (i) the Company's
financial statements for the years ended December 31, 1996, 1997 and 1998, (ii)
supplementary financial information, (iii) management's discussion and analysis
of financial condition and results of operations, and (iv) quantitative and
qualitative disclosures about market risk.
STOCKHOLDERS ARE URGED TO DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED
PROXY IN THE ACCOMPANYING ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. YOUR COOPERATION WILL BE APPRECIATED. YOUR PROXY WILL BE VOTED,
WITH RESPECT TO THE MATTERS IDENTIFIED THEREON, IN ACCORDANCE WITH ANY
SPECIFICATIONS ON THE PROXY.
BY ORDER OF THE BOARD OF DIRECTORS,
Kent F. Heyman
Secretary
-24-
<PAGE> 27
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 21, 1999
MGC COMMUNICATIONS, INC.
The undersigned hereby appoints Nield J. Montgomery and Kent F. Heyman, or
either of them, as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated below, all the
shares of common stock held of record on March 31, 1999, at the Annual Meeting
of the Stockholders to be held on May 21, 1999, at 10:00 a.m. (local time) at
the Desert Vista Community Center, 10360 Sun City Boulevard, Las Vegas, Nevada
89134, or any adjournment thereof.
1. Election of Directors
[ ] FOR all nominees listed below (except as marked to the contrary below)
[ ] WITHHOLD authority to vote for all nominees listed below
(Instruction: To withhold authority to vote for any individual nominee strike a
line through the nominee's name in the list below).
Jack L. Hancock Thomas Neustaetter Paul J. Salem
2. Proposal to approve an amendment to the Company's Stock Option Plan to
increase the number of shares available for purchase to 4,640,000 shares.
[ ] For [ ] Against [ ] Abstain
3. Proposal to approve issuance of Series B Convertible Preferred Stock.
[ ] For [ ] Against [ ] Abstain
4. In their discretion, the Proxies are authorized to vote upon such other
business as may come before the meeting or adjournment thereof.
THIS PROXY, DULY EXECUTED, WILL BE VOTED AS SPECIFIED.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.
(continued on other side)
(continued from other side)
The undersigned hereby acknowledges receipt of the Proxy Statement and Notice of
Annual Meeting to be held May 21, 1999.
Dated: , 1999
--------------------
--------------------------------
(SEAL)
--------------------------------
(SEAL)
(Please sign exactly as your
name appears hereon. If stock is
registered in more than one
name, each holder should sign.
When signing as an attorney,
administrator, executor,
guardian or trustee, please add
your title as such. If executed
by a corporation, the proxy
should be signed by a duly
authorized officer).
PLEASE SIGN, DATE AND PROMPTLY
RETURN THIS PROXY IN THE
ENCLOSED ENVELOPE. NO POSTAGE IS
REQUIRED IF MAILED IN THE UNITED
STATES.
I PLAN TO ATTEND
------------------------
