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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 March 31, 1999
Commission file number 0-24059
MGC Communications, Inc.
(Exact name of registrant as specified in its charter)
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<S> <C>
Nevada 88-0360042
(State of incorporation) (IRS Employer Identification Number)
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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 May 17, 1999:
Common stock ($.001 par value) .... 17,505,050 shares outstanding
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MGC COMMUNICATIONS, INC.
INDEX
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Page No.
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PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations -- Three months ended
March 31, 1999 and 1998 (Unaudited) 3
Consolidated Balance Sheets -- March 31, 1999 (Unaudited) and
December 31, 1998 4
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity for the period from December 31, 1997
to March 31, 1999 5
Consolidated Statements of Cash Flows -- Three months ended
March 31, 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 12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</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)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------
1999 1998
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Operating revenues:
Telecommunications services $ 8,401 $ 2,846
Operating expenses:
Cost of operating revenues 8,483 2,371
Selling, general and administrative 7,727 2,562
Depreciation and amortization 3,484 867
-------- --------
19,694 5,800
-------- --------
Loss from operations (11,293) (2,954)
Other income (expense):
Gain on sale of investments 205 --
Interest income 1,500 2,169
Interest expense(net of amounts capitalized) (4,624) (5,505)
-------- --------
Net loss (14,212) (6,290)
Accrued preferred stock dividend -- (444)
======== ========
Net loss applicable to common stockholders (14,212) (6,734)
Basic and diluted loss per share of
common stock $ (.83) $ (.76)
======== ========
Basic and diluted weighted average
shares outstanding 17,204,944 8,892,282
=========== ==========
</TABLE>
See accompanying condensed notes to unaudited interim
consolidated financial statements.
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MGC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 5,972 $ 11,886
Investments available-for-sale............................ 1,867 9,851
Restricted investments.................................... 31,428 20,797
Accounts receivable, less allowance for doubtful
accounts of $363 and $257.............................. 8,988 6,360
Prepaid expenses.......................................... 250 208
-------- --------
Total current assets.............................. 48,505 49,102
Property and equipment, net................................. 128,136 116,380
Investments available-for-sale.............................. 47,468 63,212
Restricted investments...................................... 8,501 18,582
Deferred financing costs, net of amortization of $1,272 and
$1,065.................................................... 4,507 4,714
Other assets................................................ 436 129
-------- --------
Total assets...................................... $237,553 $252,119
======== ========
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 241 $ 332
Accounts payable:
Trade.................................................. 12,133 5,314
Property and equipment................................. 5,683 18,577
Accrued interest.......................................... 10,400 5,200
Accrued other expenses.................................... 3,402 2,473
-------- --------
Total current liabilities......................... 31,859 31,896
Senior Secured Notes, net of unamortized discount of $3,163
and $3,307................................................ 156,837 156,693
Other long-term debt........................................ 208 270
-------- --------
Total liabilities................................. 188,904 188,859
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 50,000,000 shares authorized and unissued -- --
Common stock, $0.001 par value, 60,000,000 shares
authorized, 17,236,134 and 17,190,428 shares issued and
outstanding............................................ 17 17
Additional paid-in capital................................ 109,231 108,991
Accumulated deficit....................................... (58,604) (44,392)
-------- --------
50,644 64,616
Accumulated other comprehensive income 178 817
Notes receivable from stockholders for issuance of common
stock.................................................. (2,173) (2,173)
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Total stockholders' equity........................ 48,649 63,260
-------- --------
Total liabilities, redeemable preferred stock and
stockholders' equity............................ $237,553 $252,119
======== ========
</TABLE>
See accompanying condensed notes to unaudited interim
consolidated financial statements.
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MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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<CAPTION>
REDEEMABLE
PREFERRED STOCK COMMON STOCK
----------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
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BALANCE AT DECEMBER 31, 1997 ..... 5,148,570 $ 16,665 8,799,600 $ 9
Common stock issued for cash ..... -- -- 100,680 --
Common stock issued for notes
receivable ..................... -- -- 189,000 --
Warrants and options exercised
for common stock ............... -- -- 133,309 --
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
Conversion of preferred stock to
common stock .................. (6,571,427) (21,645) 3,942,839 4
Unrealized gain on investments
available-for-sale ............ -- -- -- --
Net loss ......................... -- -- -- --
---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 ..... -- $ -- 17,190,428 $ 17
Unrealized loss on investments
available-for-sale ............ -- -- -- --
Common stock issued .............. -- -- 45,706 --
Net loss ......................... -- -- -- --
---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 1999 ........ -- $ -- 17,236,134 $ 17
(UNAUDITED) .................. ========== ========== ========== ==========
</TABLE>
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NOTES
RECEIVABLE FROM ACCUMULATED
ADDITIONAL STOCKHOLDERS FOR OTHER TOTAL
PAID-IN ACCUMULATED ISSUANCE OF COMPREHENSIVE STOCKHOLDERS'
CAPITAL DEFICIT COMMON STOCK INCOME EQUITY
---------- ---------- ---------- ---------- ----------
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BALANCE AT DECEMBER 31, 1997 ..... $ 22,118 $ (12,463) $ (688) $ -- $ 8,976
Common stock issued for cash ..... 774 -- -- -- 774
Common stock issued for notes
receivable ..................... 1,485 -- (1,485) -- --
Warrants and options exercised
for common stock ............... 14 -- -- -- 14
8% Series A Convertible Preferred
Stock issued for cash .......... -- -- -- -- --
Accrued preferred stock dividend . -- (654) -- -- (654)
Common stock issued for cash (IPO) 62,959 -- -- -- 62,963
Conversion of preferred stock to
common stock .................. 21,641 790 -- -- 22,435
Unrealized gain on investments
available-for-sale ............ -- -- -- 817 817
Net loss ......................... -- (32,065) -- -- (32,065)
---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 ..... $ 108,991 $ (44,392) $ (2,173) $ 817 $ 63,260
Unrealized loss on investments
available-for-sale ............ -- -- -- (639) (639)
Common stock issued .............. 240 -- -- -- 240
Net loss ......................... -- (14,212) -- -- (14,212)
---------- ---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 1999 ........ $ 109,231 $ (58,604) $ (2,173) $ 178 $ 48,649
(UNAUDITED) .................. ========== ========== ========== ========== ==========
</TABLE>
See accompanying condensed notes to unaudited interim
consolidated financial statements.
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MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
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Cash flows from operating activities:
Net loss........................................... $(14,212) $(6,290)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 3,484 867
Gain on sale of investments...................... (205) --
Amortization of debt discount.................... 144 144
Amortization of deferred financing costs......... 207 210
Changes in assets and liabilities:
Increase in accounts receivable, net.......... (2,628) (1,442)
Increase in prepaid expenses.................. (42) (46)
Increase in other assets...................... (307) (52)
Increase in accounts payable -- trade......... 6,819 1,446
Increase in accrued interest and other expenses 6,129 4,981
-------- -------
Net cash used in operating activities....... (611) (182)
-------- -------
Cash flows from investing activities:
Purchase of property and equipment, net of
payables......................................... (15,240) (9,795)
Decrease in accounts payable-property and equipment (12,894) --
Purchase of investments held-to-maturity........... -- (276)
Sale of investments available-for-sale ............ 23,294 --
Increase in restricted investments................. (550) (792)
-------- -------
Net cash used in investing activities....... (5,390) (10,863)
-------- -------
Cash flows from financing activities:
Costs associated with issuance of Senior Secured
Notes and warrants............................... -- (133)
Proceeds from issuance of 8% Series A Convertible
Preferred Stock, net of issuance costs........... -- 4,980
Payments on other long term debt................... (153) (92)
Proceeds from issuance of common stock ............ 240 647
-------- -------
Net cash provided by financing activities... 87 5,402
-------- -------
Net decrease in cash........................ (5,914) (5,643)
Cash and cash equivalents at beginning of period..... 11,886 45,054
-------- -------
Cash and cash equivalents at the end of period....... $ 5,972 $39,411
======== =======
Supplemental schedule of non-cash investing and financing activities:
Increase in property and equipment purchases included
in accounts/notes payable -- property and equipment....... $ -- $ 876
======== =======
Stock issued for notes receivable........................... $ -- $ 1,485
======== =======
Other disclosures:
Cash paid for interest net of amounts capitalized........... $ -- $ 305
======== =======
</TABLE>
See accompanying condensed notes to unaudited
interim consolidated financial statements.
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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 financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's annual report on Form 10-K filed with the Securities and Exchange
Commission.
The balance sheet at December 31, 1998 was derived from the audited
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):
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MARCH 31, DECEMBER 31,
1999 1998
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(UNAUDITED)
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Building and property........................... $ 5,036 $ 2,653
Switching equipment............................. 88,538 57,045
Leasehold improvements.......................... 774 740
Computer hardware and software.................. 2,691 2,218
Office equipment and vehicles................... 1,065 901
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98,104 63,557
Less accumulated depreciation and
amortization.................................. (10,039) (6,555)
------- -------
88,065 57,002
Switching equipment under construction.......... 40,071 59,378
------- -------
Net property and equipment............ $128,136 $116,380
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(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 March 31,
1999 and December 31, 1998, the Company had a total for all vendors of
approximately $19.0 million and $15.4 million, respectively, of remaining
purchase commitments for purchases of switching and other telecommunications
equipment.
(4) RISKS AND UNCERTAINTIES
Certain rates in the interconnection agreements have been established
by the Federal Communications Commission (FCC) and are subject to adjustment
upon final negotiations. The Company has recorded costs of sales related to the
Sprint (Nevada) interconnection agreement at amounts that are management's best
estimates of the probable outcome of the final negotiated rates, which are less
than the FCC established rates. The difference, which totals approximately $2.2
million and $1.7 million at March 31, 1999 and December 31, 1998, respectively,
<PAGE> 8
have not been recorded in the accompanying consolidated financial statements.
Management believes that the resolution of this matter will not have a material
adverse effect on the Company's financial position, results of operations, or
liquidity.
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 three month period ended March 31, 1999 and for the year
ended December 31, 1998, the Company has recognized in operating revenues
switched access revenues of approximately $2,975,000 and $7,378,000,
respectively. Included in trade accounts receivable in the accompanying balance
sheets as of March 31, 1999 and December 31, 1998 are receivables related to
switched access of approximately $5,604,000 and $3,590,000, respectively.
(5) SUBSEQUENT EVENT
In April 1999, the Company entered into a Securities Purchase Agreement
with Providence Equity Partners III L.P. and affiliate ("Providence"), JK&B
Capital III L.P. ("JK&B III") and Wind Point Partners III L.P. and affiliate
("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 issuance of Series B Preferred closed on May
4, 1999. Net proceeds to the Company were approximately $46.5 million.
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. The Series B
Preferred will vote along with the common stock on an as - converted basis.
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 eight directors)
and to have a representative of the Purchasers serve on each committee of the
Company's Board.
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.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MGC began providing competitive local dialtone services to small
business and residential users in December 1996, and in February 1998, began
offering long distance services in its existing markets. Currently, MGC has
switches fully operational in Las Vegas, Atlanta, Chicago, southern Florida,
and in selected areas of southern California, including Los Angeles and San
Diego.
The Company's 1997 revenues were generated from sales of
communications services consisting primarily of local phone service, switched
access billings and non-recurring charges, principally installation charges. In
1998 and first quarter 1999, long distance services also contributed to the
Company's revenue base.
The Company's 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, MGC 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, the Company incurred significant marketing costs to
build the initial base of customers in its new markets.
Building and expanding MGC's business has required and will continue to
require the Company to incur significant capital expenditures primarily
consisting of the costs of purchasing switches and associated equipment, land
for switching sites and constructing buildings or improving leased buildings to
house the Company's switching and collocation facilities. As part of MGC's
"smart build" network strategy, the Company purchased and installed host
switches in each of the its markets while leasing the means of transporting
voice and data traffic from these switches to MGC customers' telephones or other
equipment. The Company believes this facilities-based strategy, while initially
increasing the Company's level of capital expenditures and operating losses,
will enhance long-term financial performance in comparison to a resale strategy.
The Company has experienced operating losses and generated negative
EBITDA since inception and expects to continue to generate negative EBITDA for
a period of time while MGC continues to expand its network and develop product
offerings and a customer base. There can be no assurance the Company's revenue
or customer base will grow or that the Company will be able to achieve or
sustain positive EBITDA.
RESULTS OF OPERATIONS
QUARTERLY COMPARISON - MARCH 31, 1999 VS. MARCH 31, 1998
Total operating revenues increased to $8.4 million for the quarter
ended March 31,1999 as compared to $2.8 million for the quarter ended March 31,
1998. The 200% increase is a result of the increase in the number of lines in
service and increased long distance service revenue. The Company had 65,147
lines in service at the end of the first quarter as compared to 20,924 lines in
service at March 31, 1998, a 211% increase.
Cost of operating revenues for the quarter ended March 31, 1999 was
$8.5 million as compared to $2.4 million for the quarter ended March 31, 1998.
The 254% increase is due to the increased number of lines in service and
installation and operational expenses associated with the expansion of the
Company's network.
For the quarter ended March 31, 1999, selling, general and
administrative expenses totaled $7.7 million, a 196% increase over the $2.6
million for the quarter ended March 31, 1998. The increase is a result of
increased costs attributable to the marketing of the Company's services,
delivery of customer service and to support the Company's continued network
expansion.
<PAGE> 10
For the quarter ended March 31, 1999 depreciation and amortization was
$3.5 million as compared to $0.9 million for the quarter ended March 31, 1998.
This increase is a result of placing additional assets in service in accordance
with the planned build-out of the Company's network.
Gross interest expense for the quarters ended March 31, 1999 and March
31, 1998 totaled $5.6 million in each of the two quarters. Interest capitalized
for the quarter ended March 31, 1999 increased to $1.0 million as compared to
$0.1 million for the quarter ended March 31, 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 issued due 2004 ("the
Senior Secured Notes") by the Company in September 1997.
Interest income was $1.5 million during the quarter ended March 31,
1999 compared to $2.2 million for the quarter ended March 31, 1998. The 32%
decrease is a result of the decrease in cash and investments since March 31,
1998. Cash and investments have been used to purchase switching equipment, pay
interest on the Senior Secured Notes, and fund operating losses.
The Company incurred net losses of $14.2 million during the first
quarter 1999 and $6.3 million during the first quarter 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require substantial capital investment for the
purchase of communications equipment and the development and installation of the
its network. Capital expenditures for the quarter ended March 31, 1999 were
$15.2 million. The Company expects to continue requiring substantial amounts of
capital to fund the purchase of the equipment necessary to continue expanding
the network footprint in the Company's existing markets and to develop new
products and services. In addition, the Company is currently evaluating possible
expansion into new markets during 2000. The Company currently expects capital
expenditures of approximately $400.0 million over the next five years, which
will be funded from cash on hand and public or private debt or equity financing.
In addition, the Company is currently evaluating financing proposals from
vendors and equipment lease financing companies. However, there can be no
assurance the Company will be successful in raising sufficient debt or equity
capital on acceptable terms.
From its inception through September 1997, the Company raised
approximately $17.8 million from private sales of common stock.
In September 1997, the Company 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, the Company 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, the Company granted the
holders of the Senior Secured Notes a security interest in a substantial portion
of MGC's telecommunications equipment.
In November 1997 and January 1998, the Company 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.
The Company completed its initial public offering on May 15, 1998. MGC
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 the initial public offering of
common stock, MGC reduced the number of authorized and outstanding shares of
its common stock by 40%. The outstanding shares of preferred stock were
converted into 3,942,856 shares of common stock upon the Company's initial
public offering.
In May 1999, the Company issued 5,277,779 shares of Series B
Convertible Preferred Stock at $9.00 per share for net proceeds of $46.5
million.
The substantial capital investment required to initiate services and
the funding of the Company's initial operations has exceeded the operating
income cash flow. This negative cash flow from operations results from the need
to establish the network in anticipation of connecting revenue-generating
customers. MGC expects to continue recording negative cash flow from
<PAGE> 11
operations for a period of time because of the Company's continuing network
expansion activities. There can be no assurance the Company will attain
break-even cash flow from operations in subsequent periods. Until sufficient
cash flow from operations is generated, the Company will be required to utilize
its current and future capital resources to meet its cash flow requirements and
may be required to issue additional debt and/or equity securities. The indenture
governing the Senior Secured Notes and the terms of our Series B Convertible
Preferred Stock impose restrictions upon the Company's ability to incur
additional indebtedness or issue preferred stock.
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.
MGC has focused on Year 2000 issues since its inception in 1996. In
recognition of the priority associated with the Year 2000 issue, the Company
established a Year 2000 Project Team at the corporate level to lead the Year
2000 effort. Since the Company is young, much of the hardware and software
currently in place was purchased with Y2K readiness in mind. The Company's Y2K
plans include a number of phases designed to evaluate and prepare for readiness
by June 1999.
MGC recently completed the inventory and assessment of all network and
information systems and has begun the renovation and testing phases. Mission
critical components of the Company's network and operation support system are
targeted for Year 2000 compliance by June 1999. MGC will continue integration
testing throughout the remainder of 1999. Subject to additional compliance
testing, the Company believes its essential processes, systems and business
functions will be ready for the 1999 to 2000 transition. Maintenance or
modification costs associated with making changes, if needed, will be expensed
as incurred.
The Company's significant vendors, including the major
telecommunications equipment suppliers, have assured the Company their
applications are Year 2000 compliant. MGC's business also relies on other third
parties. The ability of third parties upon whom the MGC relies to adequately
address their Year 2000 issues is outside the Company's control. However, MGC is
coordinating efforts with these parties to minimize the extent to which business
will be vulnerable to their failure to remediate their own Year 2000 issues.
There can be no assurance the systems of the third parties will be modified on a
timely basis. MGC's 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.
MGC is currently in the process of developing contingency plans should
mission critical systems fail as a result of Y2K issues. The Company is also
participating in industry wide efforts to address Year 2000 issues with the goal
of developing contingency plans addressing the Company's issues as well as those
of the telecommunications industry as a whole.
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
the Company; widespread disruption of the services provided by common
communications carriers; similar disruption to the means and modes of
transportation for Company employees, contractors, suppliers and customers;
significant disruption to MGC's ability to gain access to, and remain working
in, office buildings and other facilities; the failure of substantial numbers of
the Company's 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 MGC cannot operate effectively after December 31, 1999, the Company
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. The
Company could also experience an inability by customers and others to pay, on a
timely basis or at all, obligations owed to MGC. Under these circumstances, the
adverse effects, although not quantifiable at this time, could be material.
<PAGE> 12
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity sections of a statement of
financial position and is effective for financial statements issued for fiscal
years beginning after December 15, 1997. The Company has adopted SFAS No. 130
for 1998 as reported in the accompanying consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments
of an Enterprise and Related Information. SFAS No. 131 establishes additional
standards for segment reporting in financial statements and is effective for
fiscal years beginning after December 15, 1997. The Company currently operates
as one segment.
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. The Company currently expenses all start-up costs as
incurred and the application of SOP 98-5 will have no material impact on the
Company's financial statements.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Report that state the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. Management wishes to caution the reader
these forward-looking statements such as the Company's plans to expand its
existing network through collocation, statements regarding development,
introduction and acceptance of the Company's products or business, statements
regarding the Company's ability to achieve or exceed its goals or reach
profitability in the future, statements regarding the adequacy or availability
of financing, statements regarding the outcome of regulatory proceeding or
litigation or the effect of government regulations 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 the Company or actual results differing from assumptions
underlying such statements. Such risks and assumptions include, but are not
limited to, the Company's ability to successfully market its 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 its switches,
negotiate and renew suitable interconnect 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
the Company's 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 the Company's long term debt bears fixed interest rates, however,
the fair market value of this debt is sensitive to changes in prevailing
interest rates. The Company runs the risk that market rates will decline and
the required payments will exceed those based on the current market rate. The
Company does not use interest rate derivative instruments to manage its exposure
to interest rate changes.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to numerous state and federal administrative
proceedings. In these proceedings, the Company is seeking to define and/or
enforce ILEC performance requirements related to:
-- the cost and provisioning of UNEs;
-- the establishment of Operations Support Systems;
-- the allocation of subsidies; and
-- collocation costs and procedures.
The outcome of these proceedings will establish the rates and procedures by
which the Company obtains and provides UNEs and could have a material effect on
the Company's operating costs.
MGC is also involved in legal proceedings in which the Company is
seeking to enforce its tariffed rates for originating and terminating switched
access. The outcome of these proceedings is uncertain, and adverse results could
have a material impact on the Company's financial condition.
From time to time, the Company engages in other litigation and
governmental proceedings in the ordinary course of business. The Company does
not believe that any pending litigation or governmental proceedings will have a
material adverse effect on the results of operations or financial condition.
<PAGE> 13
establishment of rates by the respective public utilities commissions could have
a material effect on the Company's cost of revenues.
From time to time, the Company is engaged in other litigation and
governmental proceedings in the ordinary course of its business. The Company
does not believe that any such pending litigation or governmental proceedings
will have a material adverse effect on its results of operation or financial
condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During first quarter 1999, the Company issued 13,985 shares of common
stock pursuant to the exercise of warrants acquired in a private placement. As
the warrants were exercised on a cashless basis, the Company did not receive any
proceeds from the issuance. 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.
On May 4, 1999, the Company issued 5,277,779 shares of Series B
Convertible Preferred Stock at $9.00 per share to Providence, JK&B and Wind
Point for total consideration of $47.5 million. Net proceeds to the Company were
approximately $46.5 million. The Company intends to use the proceeds to fund
further network development.
The Company's Registration Statement No. 333-49085 was declared
effective on May 11, 1998, which was the offering date of common stock
thereunder. During the period from May 11, 1998 until March 31, 1999, the
Company 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 the Company 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 the Company.
During the period from May 11, 1998 until March 31, 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 the Company.
<PAGE> 14
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.
2.1 Merger Agreement between the Company, MGC LJ.Net, Inc. and
LJ.Net, Inc. dated as of March 15, 1999.
4.1 Certificate of Designation of Series B Convertible Preferred
Stock.
4.2 Securityholders Agreement, dated as of April 5, 1999, among
the Company, the purchasers of the Company's Series B
Convertible Preferred Stock and certain stockholders of the
Company.
4.3 Registration Rights Agreement dated as of May 4, 1999, among
the Company and the purchasers of the Series B Convertible
Preferred Stock.
2.7 Financial Data Schedule.
99.1 Securities Purchase Agreement dated as of April 5, 1999, among
the Company and the purchasers of the Series B Convertible
Preferred Stock.
(b) No reports on Form 8-K were filed during the first quarter 1999.
<PAGE> 15
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: May 17, 1999 /s/ Maurice J. Gallagher, Jr.
-----------------------------
Maurice J. Gallagher, Jr.
Chairman of the Board
Date: May 17, 1999 /s/ Linda M. Sunbury
-----------------------------
Linda M. Sunbury
Vice President
Chief Financial Officer
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
AMONG
MGC COMMUNICATIONS, INC.
LJ. NET, INC.
AND
MGC LJ.NET, INC.
THIS AGREEMENT AND PLAN OF MERGER (hereinafter called the "Agreement") is
dated as of the 15th day of March, 1999, by and among MGC COMMUNICATIONS, INC. ,
a Nevada corporation ("MGC"), LJ. NET, INC., a Nevada corporation ("LJ. Net"),
MGC LJ.NET, INC., a Nevada corporation ("MGC Acquisition"), PATRICK CHICAS
("Chicas") and JAMES THOMPSON ("Thompson").
W I T N E S S E T H:
WHEREAS, MGC has formed MGC Acquisition as a wholly-owned subsidiary in
order to effectuate the Merger; and
WHEREAS, Chicas and Thompson own 91.5% of the outstanding stock of LJ.
Net; and
WHEREAS, the Boards of Directors of MGC and LJ. Net, deem it advisable and
in the best interests of MGC and LJ. Net and their respective stockholders that
LJ. Net merge with and into MGC Acquisition pursuant to this Agreement and
applicable provisions of the laws of the State of Nevada (such transaction being
hereinafter called the "Merger"); and
WHEREAS, the parties propose to enter into this Agreement and Plan of
Merger which provides, among other things, for the conversion of each share of
LJ. Net common stock, no par value ("LJ. Net Common Stock"), issued and
outstanding immediately prior to the "Effective Date of the Merger" (as herein
defined), into the "Merger Price" as determined in accordance with Section 6.01
of this Agreement; and
WHEREAS, the Boards of Directors of MGC, LJ. Net and MGC Acquisition, have
approved and adopted this Agreement as a plan of merger under the provisions of
Section 78.451 of the Nevada Revised Statutes; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a tax free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, provisions and covenants herein contained, the parties hereto hereby
agree as follows:
<PAGE> 2
ARTICLE I
The Merger
1.01 The Merger, Effective Time and Conversion Ratio. Subject to Article V
of this Agreement, Articles of Merger shall be executed and acknowledged by each
of MGC Acquisition and LJ. Net and delivered to the Secretary of State of the
State of Nevada for filing as provided in Section 92A.200 of the Nevada Revised
Statutes as of the "Closing Date" (as herein defined). The effective date of the
Merger shall be the date the Articles of Merger or a Certificate of Merger shall
have been duly filed with the Secretary of State of the State of Nevada and the
Merger shall have become effective under Nevada law (the "Effective Date of the
Merger"). On the Effective Date of the Merger, the separate existence of LJ. Net
shall cease and LJ. Net shall be merged with and into MGC Acquisition. MGC
agrees on the Effective Date of the Merger to pay the Merger Price as determined
in accordance with Section 6.01 of this Agreement and pursuant to the terms of
the Plan of Merger.
1.02 Closing. Subject to the terms and conditions hereof, MGC, LJ. Net and
MGC Acquisition shall communicate and consult with each other with respect to
the fulfillment of the various conditions to their obligations under this
Agreement. The exchange of the certificates, opinions and other documents
contemplated in connection with the consummation of the Merger (the "Closing")
shall take place at the offices of MGC, 3301 N. Buffalo Drive, Las Vegas, Nevada
89129 on February 26, 1999 or such earlier or later date as may be agreed upon
by LJ. Net and MGC. Such date and time is herein sometimes referred to as the
"Closing" or "Closing Date." In the event that at the Closing no party exercises
any right it may have to terminate this Agreement and no condition to the
obligations of the parties exists that has not been satisfied or waived, the
parties shall (i) deliver to each other the certificates, opinions and other
documents required to be delivered under this Agreement including, the Articles
of Merger and (ii) at the Closing or as soon thereafter as possible, consummate
the Merger by filing the Articles or Certificate of Merger with the Secretary of
State of the State of Nevada.
ARTICLE II
Representations and Warranties of LJ. Net
LJ. Net, Chicas and Thompson do hereby jointly and severally represent and
warrant to MGC and MGC Acquisition as follows:
2.01 Organization and Standing; Certificate and By-Laws. LJ. Net is
a corporation duly organized and existing under, and by virtue of, the laws of
the State of Nevada and is in good standing under such laws. LJ. Net has the
requisite corporate power and authority to own and operate its properties and
assets, and to carry on its business as presently conducted and as proposed to
be conducted. Except as disclosed on Exhibit 2.01 attached hereto and made a
part hereof, LJ. Net is currently qualified to do business as a foreign
corporation in any jurisdiction in which such qualification is required, except
where the failure to be so qualified will not have a material adverse effect on
LJ. Net's business as now conducted. LJ. Net has furnished MGC or its counsel
with copies of its Certificate of Incorporation and By-Laws, as amended. Said
copies are true, correct and complete and contain all amendments through the
date hereof.
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<PAGE> 3
2.02 Corporate Power. LJ. Net has all requisite legal and corporate power
and authority to execute and deliver this Agreement, to carry out and perform
its obligations under the terms of this Agreement and to consummate the
transactions contemplated hereby.
2.03 Financial Statements.
(a) LJ. Net has previously furnished MGC true and complete copies of
its financial statements as of December 31, 1998. Such financial statements are
true and correct in all material respects and present fairly the financial
condition and results of operations and changes in stockholders' equity and cash
flows as of the dates and for the periods indicated, except as may otherwise be
stated in such financial statements. For purposes of this Agreement, all
financial statements of LJ. Net shall be deemed to include any notes to such
financial statements. The financial statements described in this Section 2.03
are hereinafter referred to as the "Financial Statements".
(b) Since December 31, 1998, there has not been, occurred or arisen
which has not been disclosed on Exhibit 2.03(b) attached hereto and made a part
hereof: (i) any material adverse change in the financial condition or in the
operations of the business of LJ. Net from that shown on the Financial
Statements, or (ii) any event, condition or state of facts (other than the
general state of the national economy and proposed federal legislation or
regulation) of any character which, to the best of the knowledge of LJ. Net,
materially and adversely affects the results of operations, prospects, business
or financial condition or properties of LJ. Net.
(c) As of the date hereof, LJ. Net has no indebtedness which, in
accordance with generally accepted accounting principles, would be included in
determining liabilities as shown on the liability side of the balance sheet of
LJ. Net other than (i) trade payables incurred in the ordinary course of
business, and (ii) liabilities reflected on the Financial Statements. The total
of all such liabilities as of the Closing Date shall not exceed $10,000.
(d) LJ. Net owns all of its assets free and clear of liens, claims
and encumbrances (collectively, "Liens") other than (i) Liens for taxes not yet
due or liens for taxes being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained on the
books of LJ. Net in accordance with generally accepted accounting principles,
(ii) Liens on property or assets of LJ. Net that were incurred in the ordinary
course of business, such as carriers', warehousemen's, landlords' and mechanics'
liens and other similar liens arising in the ordinary course of business and
that (x) do not in the aggregate materially detract from the value of the
property or assets subject thereto or materially impair the use thereof in the
operation of the business of LJ. Net or (y) that are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
preventing the forfeiture or sale of the property or assets subject to such
lien, and (iii) Liens (other than any lien imposed by ERISA or in connection
with any environmental violation), pledges or deposits incurred or made in
connection with workmen's compensation, unemployment insurance and other social
security benefits, or securing the performance of bids, tenders, leases,
contracts (other than for the repayment of borrowed money), statutory
obligations, progress payments, surety and appeal bonds and other obligations of
like nature, in each case incurred in the ordinary course of business.
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<PAGE> 4
2.04 Capitalization. The authorized capital stock of LJ. Net consists of
25,000 shares of common stock, no par value (the "LJ. Net Common Stock"), of
which 2,000 shares are issued and outstanding. The outstanding shares of LJ. Net
Common Stock are owned as set forth on Exhibit 2.04 attached hereto and made a
part hereof. The outstanding shares have been duly authorized and validly
issued, and are fully paid and nonassessable. LJ. Net does not have any stock
option plan and has not reserved any shares of LJ. Net Common Stock for future
issuance.
2.05 Subsidiaries. LJ. Net has no subsidiaries or affiliated companies and
does not otherwise own or control, directly or indirectly, any equity interest
in any corporation, association or business entity.
2.06 Authorization and Enforceability.
(a) All corporate action on the part of LJ. Net, its directors and
stockholders necessary for the authorization, execution, delivery and
performance of this Agreement by LJ. Net, and the performance of all of LJ.
Net's obligations hereunder has been taken. This Agreement, as well as each of
the other documents executed in conjunction with the Merger, when executed and
delivered by LJ. Net, shall constitute a valid and binding obligation of LJ.
Net, enforceable in accordance with its terms.
(b) Chicas and Thompson own, and at all times between the date
hereof and the Closing will own, a majority of the outstanding voting stock and
have voted or hereby agree to vote all of their stock in LJ. Net in favor of the
Merger. The approval of the Merger by Chicas and Thompson as shareholders of LJ.
Net is sufficient for the Merger to be implemented under Nevada law.
2.07 Absence of Changes. Except as disclosed in Exhibit 2.07 attached
hereto and made a part hereof, since December 31, 1998, (a) there has been no
material adverse change in the condition (financial or otherwise), business,
property, assets, liabilities or prospects of LJ. Net other than changes in the
ordinary course of business, none of which, individually or in the aggregate,
has been materially adverse; (b) there has been no resignation or termination of
employment of any key officer or employee of LJ. Net, and LJ. Net does not know
of the impending resignation or termination of employment of any such officer or
employee that if consummated would have a material adverse effect on its
business; (c) there has been no labor dispute involving LJ. Net or its employees
and none is pending or, to the knowledge of LJ. Net, threatened; (d) there has
not been any change, except in the ordinary course of business, in the
contingent obligations of LJ. Net, by way of guaranty, endorsement, indemnity,
warranty or otherwise; and (e) there has been no other event or condition of any
character pertaining to and materially adversely affecting the assets or
business of LJ. Net.
2.08 Trademarks, Etc. To the knowledge of LJ. Net, LJ. Net owns, possesses
or has the right to exploit, free of any obligation to make any payment (whether
of a royalty, license fee, compensation or otherwise), all trademarks, service
marks, trade names or copyrights (collectively, the "Marks"), all of which are
the only Marks which are necessary to the conduct of its business. Except as
disclosed on Exhibit 2.08, LJ. Net does not have any knowledge, or reason to
know, that LJ. Net's ownership, possession or other use or exploitation of any
of the Marks conflicts with the rights of any person or entity. LJ. Net has used
reasonable efforts to protect the Marks. To the knowledge of LJ. Net, no present
or former shareholder, officer, director, agent or independent contractor of LJ.
Net
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<PAGE> 5
owns or has any other right in or to, or has claimed any ownership or other
right in or to, any Mark which is necessary or desirable in connection with LJ.
Net's business, either as now conducted or as contemplated by management of LJ.
Net.
2.09 Year 2000 Compliance. Exhibit 2.09 attached hereto and made a part
hereof describes, in general, LJ. Net's plan and lists the specific actions
taken by LJ. Net to determine whether, and provide assurance that, LJ. Net's
computer and automated systems will function accurately and without interruption
in processing date-related functions with respect to dates on or after January
1, 2000 ("Year 2000 Compliant"). All computer and automated systems of LJ. Net
that are material to its business and operations as now conducted will be Year
2000 Compliant on a timely basis and without any material additional capital
expenditures. Exhibit 2.09 also sets forth all actions taken by LJ. Net to
determine whether the computer and automated systems of its vendors and
customers are Year 2000 Compliant.
2.10 Taxes. LJ. Net has filed or obtained extensions for all required
federal, state and local tax returns. Each return or report is true and correct
and all taxes, fees and other governmental charges reflected thereon have been
paid or accrued. The balance sheet as of December 31, 1998, contained as a part
of the Financial Statements (the "Current Balance Sheet") reflects an adequate
reserve for any and all taxes relating to the conduct of LJ. Net's business
prior to the date hereof. LJ. Net has appropriately withheld, collected and paid
over all taxes which, under applicable law, it is required to withhold, collect
and pay over.
2.11 Labor Relations, Etc.
(a) LJ. Net is neither a party to nor has any obligations under any
agreement, collective bargaining or otherwise, with any party regarding the
rates of pay or working conditions of any of the employees of LJ. Net. LJ. Net
is not obligated under any agreement to recognize or bargain with any labor
organization or union on behalf of its employees. There is not now any formal
organization activity among any of the employees of LJ. Net, nor has LJ. Net
been charged with, or received notice of, any threatened action with respect to
any unfair labor practice.
(b) LJ. Net has reasonably satisfactory labor relations with its
employees.
(c) LJ. Net has complied with all material applicable federal and
state laws and regulations concerning the employer/employee relationship and
with all of its respective agreements relating to the employment of its
employees, including without limitation provisions thereof relating to wages,
bonuses, hours of work and payment of Social Security taxes. Except as disclosed
on Exhibit 2.11 attached hereto and made a part hereof or reserved for on the
Current Balance Sheet, LJ. Net is not liable for any unpaid wages, bonuses or
commissions, or any tax, penalty, assessment or forfeiture for failure to comply
with any of the foregoing.
2.12 Licenses, Permits, Compliance, Etc. LJ. Net has all material
licenses, franchises, permits and government authorizations (collectively, the
"Permits") necessary for the conduct of its business, none of which will be
terminated or otherwise materially adversely affected by the consummation of the
transactions contemplated by this Agreement. LJ. Net holds each Permit free and
clear of any claims or restrictions. No event has occurred that would allow,
after the giving of notice
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<PAGE> 6
the lapse of time or both, the revocation or termination thereof or that would
result in any other material impairment of the rights of the holder thereof. LJ.
Net currently complies and has complied with all laws, regulations and orders
applicable to it and to LJ. Net's business, the violation of which would have a
material adverse effect on it or its business. The present conduct of LJ. Net's
business does not violate any laws, regulations, ordinances, decrees,
injunctions or orders applicable to health, occupational safety, building codes,
fire codes and consumer protection, in each case, of which LJ. Net is aware.
2.13 Benefit Plans. Except as disclosed in Exhibit 2.13, LJ. Net and each
benefit program are or will be, within the time permitted by law, in compliance
with the provisions of ERISA and the Code applicable to it. No benefit program
which is subject to the minimum funding standards of ERISA or the Code, if any,
has incurred any accumulated funding deficiency within the meaning of ERISA or
the Code. LJ. Net has not incurred any liability to the Pension Benefit Guaranty
Corporation in connection with any benefit program which is subject to Title IV
of ERISA. The assets of each benefit program that is subject to Title IV of
ERISA, if any, are sufficient to provide the benefits under such benefit program
for which the Pension Benefit Guaranty Corporation would guarantee the payment
if such benefit program terminated, and are also sufficient to provide all other
benefits due under the benefit program. No event which constitutes a "reportable
event" (as defined in Section 4043 of ERISA) has occurred and is continuing with
respect to any benefit program covered by ERISA.
2.14 Consents and Approvals. As of the date hereof, LJ. Net has obtained,
in form and substance acceptable to MGC, the waiver, consent and approval (i) of
all persons or entities whose waiver, consent or approval is required and
material for LJ. Net to consummate its obligations with respect to the
transactions contemplated by this Agreement; (ii) of any person or entity which
is required by any material agreement, lease, instrument, arrangement, judgment,
decree, order or license to which LJ. Net is a party or subject as of the date
hereof, and which would prohibit such transactions, or require the waiver,
consent or approval of any person to such transactions; or (iii) under any
material agreement, lease, instrument, arrangement, judgment, decree, order or
license under which, without such waiver, consent or approval, such transactions
would constitute an occurrence of a breach or a default, result in the
acceleration of any material obligation thereunder, or give rise to a right of
any party thereto to terminate its obligations thereunder.
2.15 Compliance with Other Instruments, None Burdensome, etc. LJ. Net is
not in violation of any term of its Certificate of Incorporation or By-Laws, or,
in any material respect, of any term or provision of any mortgage, indebtedness,
indenture, contract, agreement, instrument, judgment or decrees, and is not in
violation of any order, statute, rule or regulation applicable to LJ. Net where
such violation would materially and adversely affect LJ. Net. The execution,
delivery and performance of and compliance with this Agreement have not resulted
and will not result in any violation of, or conflict with, or constitute a
default under, LJ. Net's Certificate or By-laws or, in any material respect, any
of its agreements or result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of LJ. Net; and there
is no such violation or default which materially and adversely affects the
business of LJ. Net or any of its properties or assets.
2.16 Litigation, etc. Except as described in Exhibit 2.16 attached hereto
and made a part hereof, there are no actions, claims, suits, proceedings or
investigations pending against LJ. Net or its properties or stockholders before
any court, governmental agency, arbitration board or other tribunal, nor has LJ.
Net or its stockholders received any written threat thereof.
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<PAGE> 7
2.17 Brokers or Finders. LJ. Net has not incurred, and will not incur,
directly or indirectly, as a result of any action taken by LJ. Net, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this Agreement or the Merger and other transactions
contemplated hereby.
2.18 Bankruptcy. Neither LJ. Net nor any entities affiliated, related or
controlled by LJ. Net, nor Chicas or Thompson has filed a petition or request
for reorganization or protection or relief under the bankruptcy laws of the
United States or any state or territory thereof; made any general assignment for
the benefit of creditors; or consented to the appointment of a receiver or
trustee, including a custodian under the United States bankruptcy laws, whether
such receiver or trustee is appointed in a voluntary or involuntary proceeding
which has not been discharged prior to the date hereof.
2.19 Disclosure. This Agreement, the Exhibits hereto and the other
documents to be executed in connection with the Merger, as well as all other
written materials provided by LJ. Net to MGC, when taken as a whole, do not (as
of the respective dates thereof) contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
contained herein or therein not misleading in light of the circumstances under
which they were made.
2.20 No Impending Material Adverse Event. LJ. Net does not have any
knowledge of any impending material loss of business or of any other condition,
the occurrence of which might have a material adverse effect on the business,
financial condition or prospects of LJ. Net.
ARTICLE III
Representations and Warranties of MGC and MGC Acquisition
MGC and MGC Acquisition represent and warrant to LJ. Net as follows:
3.01 Organization, etc. Each of MGC and MGC Acquisition is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Nevada. Each of MGC and MGC Acquisition has the corporate power to own
its property and to carry on its business as now being conducted; each of MGC
and MGC Acquisition has the corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby.
3.02 Authorization, Execution and Delivery of Agreement. The execution and
delivery and the performance of this Agreement by MGC and MGC Acquisition have
been duly and validly authorized and approved by the Board of Directors of each
of MGC and MGC Acquisition, and each of MGC and MGC Acquisition has taken, or
will use reasonable efforts to take prior to the Effective Date of the Merger,
all other action required by law on the part of MGC and MGC Acquisition, its
respective Articles of Incorporation and bylaws or otherwise to effect the
transactions contemplated by this Agreement.
3.03 SEC Disclosures. MGC has previously furnished LJ. Net true and
complete copies of the following documents which have been filed by MGC with the
SEC pursuant to Sections 13(a),
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<PAGE> 8
14(a), (b) or (c) or 15(d) of the Exchange Act (such documents are hereinafter
collectively called the "MGC SEC Filings"): (i) its Annual Report on Form 10-K
for the year ended December 31, 1997, (ii) quarterly reports on Form 10-Q for
the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998, (iii)
all reports on Form 8-K filed by MGC with the SEC during the period from and
after January 1, 1998, and (iv) MGC's S-1 Registration Statement declared
effective as of May 11, 1998. The MGC SEC Filings constitute all reports MGC was
required to file under Sections 13(a), 14(a), (b) or (c) and 15(d) of the
Exchange Act since January 1, 1998. At the time of filing with the SEC, the MGC
SEC Filings (i) were prepared in all material respects in accordance with the
applicable requirements of the Exchange Act, and the rules and regulations
thereunder, (ii) did not contain any untrue statement of a material fact, and
(iii) did not omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except to the extent information contained in any MGC SEC Filing has
been revised or superseded by a later filed MGC SEC Filing, the audited and
unaudited financial statements contained in the MGC SEC Filings are true and
correct in all material respects and present fairly the consolidated financial
condition and results of operations and changes in stockholders' equity and cash
flows as of the dates and for the periods indicated, except as may otherwise be
stated in such financial statements.
3.04 Status of MGC Common Stock. All shares of MGC's common stock $.001
par value per share ("MGC Common Stock"), when issued to the stockholders of LJ.
Net pursuant to this Agreement, will be duly and validly authorized and issued,
fully paid and nonassessable.
ARTICLE IV
Covenants and Transactions Prior to the Closing Date
4.01. Investigations; Operation of Business of LJ. Net. Between the date
of this Agreement and the Effective Date of the Merger:
(a) LJ. Net agrees to give to MGC full access to all the premises
and books and records of LJ. Net, and to cause its officers to furnish MGC with
such financial and operating data and other information with respect to its
business and properties as MGC shall from time to time request; provided,
however, that any such investigation shall not affect any of the
representations, warranties or covenants of LJ. Net hereunder. In the event of
termination of this Agreement, MGC will return to LJ. Net or destroy any and all
financial statements, agreements, documents, memoranda or other repositories of
information relating to LJ. Net that MGC has obtained or prepared in connection
with its review of LJ. Net and its operations and MGC agrees that any
information relating to LJ. Net, its financial condition, business, operations
and prospects is strictly confidential and shall not be disclosed to any third
party or used by MGC for its benefit or the benefit of any other person. MGC
shall have the right to have a representative present at all meetings of the
Board of Directors of LJ. Net (the "MGC Observation Rights") and there shall be
no meeting of the Board of Directors of LJ. Net unless (i) a representative of
MGC shall be present in person or by conference telephone call, or (ii) MGC
shall have been given notice in accordance with the by-laws of LJ. Net with
respect to such meeting; provided, however, that failure of LJ. Net to comply
with the terms of this Paragraph shall not affect the validity of action taken
by LJ. Net's Board of Directors. In addition, MGC shall have the right to
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review any consent resolutions of LJ. Net's Board of Directors prior to signing.
Exercise of the MGC Observation Rights shall not be, and shall not be construed
as being, participation by MGC on the Board of Directors of LJ. Net.
(b) LJ. Net will, to the extent required for continued operation of
its business without impairment, use its best efforts to preserve substantially
intact the business organization of LJ. Net, to keep available the services of
the present officers and employees of LJ. Net, and to preserve the present
relationships of LJ. Net with persons having significant business relations
therewith such as suppliers, customers, brokers, agents or otherwise.
(c) LJ. Net will conduct its businesses in a manner consistent with
the current operation of its business and only in the ordinary course and, by
way of amplification and not limitation, LJ. Net will not without the prior
written consent of MGC: (i) issue any capital stock, or (ii) declare, set aside
or pay any dividend or distribution with respect to the capital stock of LJ.
Net, or (iii) directly or indirectly redeem, purchase or otherwise acquire any
capital stock of LJ. Net, or (iv) effect a split or reclassification of any
capital stock of LJ. Net or a recapitalization of LJ. Net, or (v) change the
charter or bylaws of LJ. Net, or (vi) grant any increase in the compensation
payable or to become payable by LJ. Net to officers or salaried employees of LJ.
Net or grant any increase regardless of amount, in any bonus, insurance, pension
or other benefit plan, program, payment or arrangement made to, for or with any
officers or employees, or (vii) adopt any employee benefit plans including but
not limited to stock option plans, or (viii) borrow or agree to borrow any funds
or guarantee or agree to guarantee the obligations of others, or (ix) make any
capital improvement, purchase of equipment or furnishings or lease of any
property, or (x) transfer, pledge, hypothecate or otherwise dispose of any
assets, or (xi) acquire direct or indirect ownership or control of voting shares
of any other corporation, or of any interest in any partnership, joint venture,
association or similar organization, or (xii) waive any rights of substantial
value, or (xiii) enter into any material agreement, contract or commitment, or
(xiv) acquire a fee interest in any real property; or (xv) make any other cash
payments. Notwithstanding the foregoing, LJ. Net may pay to Chicas and Thompson,
by way of compensation, expense reimbursement or otherwise, the amounts paid by
MGC to LJ. Net with respect to their respective services pursuant to Section
4.02 of this Agreement, but no other salaries or other distributions shall be
made by LJ. Net to Chicas or Thompson prior to the Effective Date of Merger.
(d) Chicas and Thompson agree to continue providing services to LJ.
Net in accordance with prior practices except that the amount of hours to be
worked by Thompson shall be subject to MGC's approval.
(e) LJ. Net will pay and discharge all taxes, assessments and
governmental charges lawfully imposed upon it, or upon any of its property, or
upon the income and profits thereof to the extent such taxes, assessments and
governmental charges are due and payable on or before the Closing Date.
(f) LJ. Net will maintain its existence as a corporation in good
standing under the laws of the State of Nevada and other states in which LJ. Net
operates and the United States and comply in all material respects with all
laws, governmental regulations, rules and ordinances, and judicial orders,
judgments and decrees applicable to its business or its properties, except while
contesting the validity of any of the foregoing in good faith and by appropriate
proceedings.
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<PAGE> 10
(g) LJ. Net will notify MGC in writing within five (5) days of the
commencement of any litigation against LJ. Net, or against any stockholder of
LJ. Net, or of the existence of any adverse business conditions threatening the
continued, normal business operations of LJ. Net.
(h) LJ. Net shall at all times maintain, preserve and keep its
properties in good repair, working order and condition in all material respects
so that the business carried on in connection therewith may be properly and
advantageously conducted.
(i) LJ. Net will make every reasonable effort to fulfill its
contractual obligations , and to maintain in effect its insurance.
(j) LJ. Net will not enter into or institute any employment
contract, employee policy manual, deferred compensation, non-competition, bonus,
stock option, profit-sharing, pension, retirement, consultation after
retirement, payments upon retirement, incentive, extraordinary vacation accrual,
education payment or benefit, disability insurance (including medical, travel,
group life or other similar insurance plans) agreement, plan or arrangement or
any other similar arrangement or plan, or, except as required by applicable law
or regulation, renew, amend, modify or terminate any such arrangement or plan
now in existence.
(k) LJ. Net will not enter into any agreement, understanding or
commitment, written or oral, with any other person which would be a breach of
the obligations of LJ. Net arising under this Agreement.
(l) LJ. Net will not make any loan, advance or commitment to extend
credit to any of the directors, officers or any affiliated or related persons of
the directors or officers of LJ. Net; renew any outstanding loan or any
outstanding commitment to extend credit to any directors, officers or any
affiliated or related persons of the directors or officers of LJ. Net; increase
any outstanding loan to any of the directors, officers of any affiliated or
related persons of the directors or officers of LJ. Net; or enter into any
agreement, understanding or commitment, written or oral, which obligates LJ. Net
or its successors or assigns to make any loan or advance or payment to any of
the directors or officers or to any affiliated or related persons of any of the
directors or officers of LJ. Net.
4.02. Payments by MGC to LJ. Net. Between November 16, 1998 and the
Effective Date of the Merger, MGC shall pay to LJ. Net $7,500 per month for
Chicas' services and $50 per hour for all services Thompson renders to LJ. Net
during such period with MGC's approval.
4.03 LJ. Net Stockholder Approval. LJ. Net agrees to submit this Agreement
to its stockholders for approval, all as provided by law and its Articles of
Incorporation, at a meeting (the "LJ. Net Special Meeting") which shall be held
prior to the Closing Date. The Board of Directors of LJ. Net will recommend that
the stockholders of LJ. Net vote to adopt and approve the Merger. Chicas and
Thompson hereby agree that they will not dispose of their shares of LJ. Net
Common Stock and will vote in favor of the Merger.
4.04 No Solicitation. From and after the date hereof, LJ. Net will not,
and shall use its reasonable best efforts not to permit, any of its officers,
directors, employees, attorneys, financial
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<PAGE> 11
advisors, agents or other representatives to, directly or indirectly, solicit,
initiate or knowingly encourage (including by way of furnishing information) any
Acquisition Proposal from any person, or engage in or continue discussions or
negotiations relating thereto. As used in this Agreement, an "Acquisition
Proposal" shall mean any proposal or offer, or any expression of interest by any
third party relating to LJ. Net's willingness or ability to receive or discuss a
proposal or offer, in each case made prior to the stockholder vote at the LJ.
Net Special Meeting, other than a proposal or offer by MGC or any of its
Subsidiaries, for a merger, consolidation or other business combination
involving, or any purchase of, all or substantially all of the assets of LJ. Net
or a majority in interest of the voting securities of LJ. Net.
4.05 No Granting of Options. Prior to the Closing Date, LJ. Net will not,
without the prior written consent of MGC, grant any options, warrants or other
rights to purchase or otherwise acquire any shares of its capital stock or issue
any securities convertible into shares of its capital stock or to accelerate the
vesting of any such option, warrant or right.
4.06 Restricted MGC Common Stock. LJ. Net will deliver to MGC not later
than three business days before the Effective Date of the Merger a schedule
listing all LJ. Net shareholders and the amounts of shares held by each, for the
purpose of permitting MGC to imprint appropriate legends on the certificates
representing the shares of MGC Common Stock to be issued pursuant to the Merger
to LJ. Net shareholders.
4.07 Consents. LJ. Net shall use its best efforts to obtain the consent or
approval of each person whose consent or approval shall be required in order to
permit LJ. Net to consummate the Merger without acceleration of indebtedness of
such party or without breaching any contract to which it is subject. LJ. Net may
not, without MGC's prior written consent, pay or agree to pay more than a
mutually agreed amount to obtain any such consent.
4.08 Best Efforts. Upon the terms and subject to the conditions of this
Agreement, each of MGC and LJ. Net agrees to use its respective best efforts to
take, or cause to be taken, and to assist and cooperate with the other party
hereto in doing, all things reasonably necessary, proper or advisable under
applicable laws and regulations to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this Agreement,
including, without limitation, using such best efforts to obtain any necessary
actions, waivers, consents and approvals from governmental agencies.
4.09 Governmental Reports. Between the date of this Agreement and the
Closing Date, LJ. Net shall furnish or make available to MGC any and all
reports, not heretofore delivered to MGC under this Agreement or which are filed
subsequent to the date of this Agreement, to any state or federal government,
agency or department.
4.10 Fees and Expenses. All fees and expenses incurred in connection with
the Merger and the other transactions contemplated hereby shall be paid by the
party incurring such fees or expenses, whether or not the Merger is consummated.
4.11 Piggyback Registrations.
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(a) Right to Piggyback. Whenever MGC proposes to register any of its
securities under the Securities Act of 1933, as amended (the "Securities Act")
(other than pursuant to a registration on Form S-4 or S-8 or any successor or
similar forms) and the registration form to be used may be used for the
registration of the shares of MGC Common Stock issued to the shareholders of LJ.
Net in connection with the Merger (the "Registrable Securities") (any such
registration to be referred to as a "Piggyback Registration"), whether or not
for sale for its own account, MGC will give prompt written notice to all holders
of Registrable Securities of its intention to effect such a registration and
will include in such registration all Registrable Securities with respect to
which MGC has received written requests for inclusion therein within 20 days
after the receipt of MGC's notice; provided, however, that the rights of a
holder of Registrable Securities under this Section 4.11 shall expire upon such
time as the Registrable Securities of such holder are transferable under Rule
144 under the Securities Act.
(b) Priority on Registrations. If a Piggyback Registration is an
underwritten primary registration on behalf of MGC or an underwritten offering
undertaken by MGC pursuant to a demand registration exercised by a securities
holder of MGC (a "Demanding Party"), and the managing underwriters advise MGC in
writing (with a copy to each stockholder of LJ. Net requesting registration of
Registrable Securities) that in their opinion the number of securities requested
to be included in such registration exceeds the number which can be sold in such
offering without adversely affecting the marketability of such offering (the
"Offering Quantity"), MGC will include in such registration securities in the
following priority:
(i) first, the securities MGC proposes to sell and the securities
requested to be included by the Demanding Party in accordance with any
agreement between MGC and the Demanding Party; and
(ii) second, MGC will include all Registrable Securities requested
to be included by any holders thereof and all other holders of registrable
securities, and if the number of such holders' securities requested to be
included exceeds the Offering Quantity, then MGC shall include only each
such requesting holder's pro rata share of the Offering Quantity
(remaining after sales covered by (i) above), based on the amount of
securities held by such holder.
(c) Holdback Agreement. To the extent not inconsistent with
applicable law and as a condition to the grant of the piggyback registration
rights hereunder, each holder of Registrable Securities agrees not to effect any
public sale or distribution (including sales pursuant to Rule 144) of equity
securities of MGC, or any securities, options or rights convertible into or
exchangeable or exercisable for such securities that such person owns prior to
the effective date of any underwritten registration, during the seven days prior
to and the 120-day period beginning on the effective date of any underwritten
registration, unless the underwriters managing the registered public offering
otherwise agree; provided that such restrictions shall not be more restrictive
in duration or scope than restrictions imposed on (i) any person which has been
granted registration rights by MGC, (ii) any officer or director of MGC or (iii)
any more than 5% holder of securities of MGC.
(d) Information from Sellers. MGC may require each seller of
Registrable Securities as to which any registration is being effected to furnish
MGC such information regarding such
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<PAGE> 13
seller and the distribution of such securities as MGC may from time to time
reasonably request in writing.
(e) Registrable Expenses. All expenses incident to MGC's performance
of or compliance with this Section 4.11, including, without limitation, all
registration and filing fees, fees and expenses of compliance with securities or
blue sky laws, printing expenses, messenger and delivery expenses, and fees and
disbursements of counsel for MGC and all independent certified public
accountants, underwriters (excluding discounts and commissions, which will be
paid by the sellers of Registrable Securities) and other persons retained by MGC
(all such expenses being herein called "Registration Expenses"), will be borne
by MGC, and MGC will, in any event, pay its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit or
quarterly review, the expense of any liability insurance and the expenses and
fees for listing the securities to be registered on each securities exchange on
which similar securities issued by MGC are then listed or on the NASD automated
quotation system. In connection with each Piggyback Registration, MGC will
reimburse the holders of the Registrable Securities covered by such registration
for the reasonable fees and disbursements of one counsel chosen by the holders
of a majority of all registrable securities covered by such registration.
(f) Participation in Underwritten Registrations. No person may
participate in any registration hereunder which is underwritten unless such
person (i) agrees to sell such person's securities on the basis provided in any
underwriting arrangements approved by MGC (including, without limitation,
pursuant to the terms of any over allotment or "green shoe" option requested by
the managing underwriter(s), provided that no holder of Registrable Securities
will be required to sell more than the number of Registrable Securities that
such holder has requested MGC to include in any registration) and (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements.
ARTICLE V
Conditions of Merger; Abandonment of Merger
5.01 Conditions of Obligations of MGC. The obligations of MGC to effect
the Merger shall be subject to the following conditions:
(a) LJ. Net Stockholder and Board of Directors Approvals. LJ. Net
shall have furnished MGC with (i) evidence that the stockholders of LJ. Net
shall have approved the Merger, (ii) certified copies of resolutions duly
adopted by the Board of Directors of LJ. Net authorizing all necessary and
proper corporate action to enable LJ. Net to comply with the terms of this
Agreement and approving the execution and delivery to MGC of this Agreement; and
(iii) an Incumbency Certificate for the appropriate officers of LJ. Net.
(b) Representations and Warranties of LJ. Net to be True. Except to
the extent waived hereunder, (i) the representations and warranties of LJ. Net
herein contained shall be true on the Closing Date with the same effect as
though made at such time as if none of such representations and
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<PAGE> 14
warranties contained any qualifications as to materiality or the absence of a
Material Adverse Effect; provided, however, that notwithstanding the foregoing,
this condition shall be deemed to be satisfied if all breaches of such
representations and warranties, do not cumulatively constitute a Material
Adverse Effect; and (ii) LJ. Net shall have performed all obligations and
complied with all covenants required by this Agreement to be performed or
complied with by it prior to the Effective Date of the Merger. LJ. Net shall
also have delivered to MGC a certificate of LJ. Net, dated the Effective Date of
the Merger and signed by its President to both of the aforementioned effects.
Notwithstanding the foregoing, MGC shall not rely on this Section 5.01(b) to
excuse its performance hereunder unless: (i) MGC shall have given LJ. Net
written notice of any breach of covenants and LJ. Net fails to cure such breach
within a reasonable time (but not more than ten days) after receipt of such
notice, and (ii) the breach of representations, warranties or covenants will
constitute a Material Adverse Effect with respect to LJ. Net.
(c) Third Party Consents. LJ. Net shall have obtained consents to
the transactions contemplated by this Agreement to the extent required from
persons which are parties to material contracts with LJ. Net except to the
extent the failure to obtain one or more consents would not materially affect
the continuing business of LJ. Net.
(d) No Material Adverse Effect. LJ. Net shall not have suffered or
incurred any Material Adverse Effect since December 31, 1998.
(e) Performance of Agreement. There shall not have been issued and
be in effect any order of any court or tribunal of competent jurisdiction or
governmental agency which in effect prohibits the performance of this Agreement
or the Merger and the transactions contemplated hereby, or would impose
limitations on the ability of MGC effectively to exercise and possess all the
rights, privileges, immunities and franchises of LJ. Net as of the Closing Date.
(f) Statutory Requirements; Litigation. All statutory requirements
for the valid consummation by MGC and LJ. Net of the transactions contemplated
by this Agreement shall have been fulfilled; all authorizations, consents and
approvals of all federal, state or local governmental agencies and authorities
required to be obtained in order to permit consummation by MGC and LJ. Net of
the transactions contemplated by this Agreement and to permit the business
presently carried on by LJ. Net to continue unimpaired immediately following the
Effective Date of the Merger shall have been obtained; between the date of this
Agreement and the Effective Date of the Merger, no governmental agency, whether
federal, state or local, shall have instituted (or threatened to institute
either orally or in a writing directed to LJ. Net or MGC) an investigation which
is pending on the Effective Date of the Merger relating to the Merger and
between the date of this Agreement and the Effective Date of the Merger no
action or proceeding shall have been instituted or, to the knowledge of MGC,
shall have been threatened before a court or other governmental body or by any
public authority to restrain or prohibit the transaction contemplated by this
Agreement or to obtain damages in respect thereof.
(g) Opinion of Counsel of LJ. Net. MGC shall have received from
James Wright, counsel to LJ. Net, an opinion, dated the Closing Date, in form
and substance satisfactory to MGC's counsel, Ellis, Funk, Goldberg, Labovitz &
Dokson, P.C., to the effect that (i) LJ. Net is a corporation duly organized and
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, (ii) LJ. Net is duly qualified or licensed, as may be required,
as a foreign corporation, and
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in good standing in each jurisdiction where the failure to do so would
constitute a Material Adverse Effect, (iii) LJ. Net has the corporate power to
carry on its business as now being conducted, (iv) the authorized capital stock
of LJ. Net is as set forth in Section 2.04 hereof, and stating the number of
such shares which have been issued, and that such issued shares have been duly
authorized, are validly issued and outstanding, and are fully paid and
nonassessable, (v) LJ. Net is not a party to or bound by any outstanding option
or agreement to sell, issue or otherwise dispose of any capital stock of LJ.
Net, (vi) this Agreement has been duly executed and delivered by LJ. Net, Chicas
and Thompson and is the valid, binding and enforceable obligation of each such
person (subject to equity principles of general application and to applicable
bankruptcy, reorganization, insolvency and moratorium laws and other laws from
time to time in effect affecting the enforcement of creditor's rights
generally), and (vii) all corporate action by the Board of Directors and
stockholders of LJ. Net required to authorize the Merger has been taken, and LJ.
Net has the corporate power to effect the Merger provided for in this Agreement.
In rendering such opinion such counsel may rely, to the extent such counsel
deems such reliance necessary or appropriate, as to matters of fact, upon
certificates of state officials and of corporate officers of LJ. Net, provided
the extent of such reliance is specified in such opinion.
(h) Articles of Merger. LJ. Net shall have delivered to MGC a duly
executed copy of the Articles of Merger.
(i) Employment/Consulting Agreements. Chicas shall have executed an
Employment Agreement in the form attached hereto as Exhibit 5.01(i)-1 and
Thompson shall have executed a Consulting Agreement in the form attached hereto
as Exhibit 5.01(i)-2.
(j) Due Diligence. MGC shall have been satisfied with its due
diligence investigation of LJ. Net and its business.
(k) Minute Books and Stock Ledgers. LJ. Net shall have delivered to
MGC the minute books and stock ledgers for LJ. Net.
5.02 Conditions of Obligation of LJ. Net. The obligation of LJ. Net to
effect the Merger shall be subject to the following conditions:
(a) MGC Boards of Directors Approvals. Each of MGC and MGC
Acquisition shall have furnished LJ. Net with certified copies of resolutions
duly adopted by its Board of Directors authorizing all necessary and proper
corporate action to enable MGC and MGC Acquisition to comply with the terms of
this Agreement and approving the execution and delivery to LJ. Net of this
Agreement.
(b) Representations and Warranties of MGC and MGC Acquisition to be
True. Except to the extent waived hereunder, (i) the representations and
warranties of MGC and MGC Acquisition herein contained shall be true on the
Closing Date with the same effect as though made at such time as if none of such
representations and warranties contained any qualifications as to materiality or
the absence of a Material Adverse Effect; provided, however, notwithstanding the
foregoing this condition shall be deemed to be satisfied if all breaches of such
representations and warranties do not cumulatively constitute a Material Adverse
Effect; and (ii) MGC and MGC Acquisition shall have performed all obligations
and complied with all covenants required by this Agreement to be performed or
complied with by them prior to the Effective Date of the Merger. MGC and MGC
Acquisition shall
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also have delivered to LJ. Net a certificate of MGC and MGC Acquisition, dated
the Effective Date of the Merger and signed by its Chairman of the Board or
President as to both of the aforementioned effects. Notwithstanding the
foregoing, LJ. Net shall not rely on this Section 5.02(b) to excuse its
performance hereunder unless: (i) LJ. Net shall have given MGC written notice of
any breach of covenants and MGC fails to cure such breach within a reasonable
time (but not more than ten days) after receipt of such notice, and (ii) the
breach of representations, warranties or covenants will constitute a Material
Adverse Effect with respect to MGC.
(c) Performance of Agreement. There shall not have been issued and
be in effect any order of any court or tribunal of competent jurisdiction or
governmental agency which in effect prohibits the performance of this Agreement
or the Merger and the transactions contemplated hereby.
(d) Opinion of Counsel of MGC. LJ. Net shall have received from
Ellis, Funk, Goldberg, Labovitz & Dokson, P.C., counsel to MGC, an opinion,
dated the Closing Date, in form and substance satisfactory to LJ. Net's counsel,
James Wright, to the effect that (i) each of MGC and MGC Acquisition is a
corporation duly organized and validly existing and in good standing under the
laws of the State of Nevada, (ii) MGC has the corporate power to carry on its
business as now being conducted, (iii) the shares of MGC Common Stock for which
the shares of LJ. Net Common Stock are to be exchanged pursuant to the Merger
have been duly authorized and, immediately after the Effective Date of the
Merger, will be duly and validly issued and will be fully paid and
nonassessable, (iv) this Agreement has been duly executed and delivered by MGC
and MGC Acquisition and this Agreement is the valid, binding and enforceable
(subject to equity principles of general application and to bankruptcy,
reorganization, insolvency and moratorium laws and other laws from time to time
in effect affecting the enforcement of creditors' rights generally and no
opinion shall be required with respect to the enforceability of any liquidated
damage provision contained herein) obligation of MGC and MGC Acquisition, and
(v) all corporate action by the Boards of Directors of MGC and MGC Acquisition
required to authorize the Merger has been taken, and each of MGC and MGC
Acquisition has the corporate power to effect the Merger provided for in this
Agreement. In rendering such opinion such counsel may rely, to the extent such
counsel deems such reliance necessary or appropriate, as to matters of fact,
upon certificates of state officials and of corporate officers of MGC, provided
the extent of such reliance is specified in such opinion.
(e) Employment/Consulting Agreements. MGC shall have executed an
Employment Agreement with Chicas in the form attached hereto as Exhibit 5.01(i)
- - 1 and a Consulting Agreement with Thompson in the form attached hereto as
Exhibit 5.01(i) - 2.
(f) Articles of Merger. MGC Acquisition shall have delivered to LJ.
Net a duly executed copy of the Articles of Merger.
5.03 Termination of Agreement and Abandonment of Merger. Anything herein
to the contrary notwithstanding, this Agreement and the Merger contemplated
hereby may be terminated at any time before the Effective Date of the Merger,
whether before or after approval of this Agreement by the stockholders of LJ.
Net, as follows, and in no other manner:
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(a) Mutual Consent. By mutual consent of the Boards of Directors of
MGC and LJ. Net.
(b) Conditions of LJ. Net Not Met. By the Board of Directors of MGC
if, by February 28, 1999 or such later date as may be determined by mutual
agreement of MGC and LJ. Net, the conditions set forth in Section 5.01 of this
Agreement shall not have been met (or waived as provided in Article XI of this
Agreement).
(c) Conditions of MGC Not Met. By the Board of Directors of LJ. Net
if, by February 28, 1999 or such later date as may be determined by mutual
agreement of MGC and LJ. Net, the conditions set forth in Section 5.02 of this
Agreement shall not have been met (or waived as provided in Article XI of this
Agreement).
ARTICLE VI
The Merger
6.01 The Merger Price. Upon the Effective Date of the Merger, holders of
LJ. Net Common Stock shall be entitled to receive the portion of the Merger
Price to which each is entitled pursuant to Section 6.05 below. The Merger Price
shall be paid in the form of MGC Common Stock. The total number of shares of MGC
Common Stock to be issued to the stockholders of LJ. Net in the Merger (the
"Merger Price") shall be equal to twenty-seven thousand (27,000) shares of MGC
Common Stock.
6.02 Escrow of Portion of Merger Price. Of the Merger Price, sixteen
thousand two hundred (16,200) shares of MGC Common Stock shall be issued as of
the Closing Date, but shall not be delivered by MGC to the LJ. Net stockholders
until the following dates: (i) on the date that is four (4) months after the
Closing Date, 8,100 shares of such MGC Common Stock shall be delivered to the
LJ. Net stockholders if Chicas' employment agreement and Thompson's consulting
agreement either remain in effect on such date or have been terminated prior to
such date as a result of Chicas' or Thompson's death or disability or as a
result of termination by MGC without cause (as defined therein), and (ii) on the
date that is eight (8) months after the Closing Date, the remaining 8,100 shares
of such MGC Common Stock shall be delivered to the LJ. Net stockholders if
Chicas' employment agreement and Thompson's consulting agreement either remain
in effect on such date or have been terminated prior to such date as a result of
Chicas' or Thompson's death or disability or as a result of termination by MGC
without cause (as defined therein). If the above conditions are not met as of
the respective dates indicated, the shares of MGC Common Stock that would
otherwise have been delivered on such date shall be cancelled and the
stockholders of LJ. Net shall have no further rights thereto.
6.03 Merger. LJ. Net and MGC Acquisition (the "Constituent Corporations")
shall be merged into a single corporation by LJ. Net merging into and with MGC
Acquisition, (the "Surviving Corporation"), which shall survive the Merger,
pursuant to the provisions of the Nevada Revised Statutes. Upon such Merger, the
separate corporate existence of LJ. Net shall cease and the Surviving
Corporation shall become the owner, without transfer, of all rights and property
of the Constituent Corporations, and the Surviving Corporation shall become
subject to all the debt and liabilities of the Constituent Corporations in the
same manner as if the Surviving Corporation had itself incurred them.
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<PAGE> 18
6.04 Governance of MGC Acquisition after Merger.
(a) On the Effective Date of the Merger, the Articles of
Incorporation of MGC Acquisition shall be the Articles of Incorporation of the
Surviving Corporation.
(b) On the Effective Date of the Merger, the bylaws of MGC
Acquisition, as in effect on the Effective Date of the Merger, shall remain the
bylaws of the Surviving Corporation. Subsequent to the Effective Date of the
Merger, such bylaws shall be the bylaws of the Surviving Corporation until they
shall thereafter be duly amended.
(c) On the Effective Date of the Merger, the Directors and officers
of MGC Acquisition shall remain the Directors and officers of the Surviving
Corporation until their successors are elected and qualified in accordance with
the terms of the bylaws of the Surviving Corporation.
6.05 Exchange of Shares.
(a) On the Effective Date of the Merger, each of the then issued and
outstanding shares of Common Stock of MGC Acquisition shall continue to be an
issued and outstanding share of Common Stock of the Surviving Corporation.
(b) On the Effective Date of the Merger, each of the then issued and
outstanding shares of LJ. Net Common Stock shall be converted into the right to
receive the Merger Price per share which shall be thirteen and one-half (13.5)
shares of MGC Common Stock for each share of LJ. Net Common Stock outstanding.
(c) After the Effective Date of the Merger and subject to the escrow
of stock referenced in Section 6.02, each holder of shares of certificates
representing LJ. Net Common Stock which have been converted into MGC Common
Stock pursuant to paragraph (b) above shall be entitled to receive upon the
surrender of such certificates a certificate or certificates representing the
number of shares of MGC Common Stock to which such stockholder is entitled as
provided by paragraph (b) above. Until such time as LJ. Net Common Stock
certificates are presented, surrendered and exchanged, each such certificate of
LJ. Net Common Stock shall be deemed for all purposes to evidence ownership of
the number of shares of MGC Common Stock into which they shall have been
converted pursuant to the Merger.
(d) Prior to receipt of any of the MGC Common Stock to which a
stockholder of LJ. Net is entitled, such LJ. Net stockholder shall represent and
warrant to MGC as follows: (i) that he is acquiring the MGC Common Stock for
investment for his own account, not as a nominee or agent, and not with the view
to, or for resale in connection with, any distribution thereof; (ii) that he
understands that the MGC Common Stock has not been, and will not be, registered
under the Securities Act by reason of a specific exemption from the registration
provisions of the Securities Act, the availability of which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
the LJ. Net stockholder's representations as expressed herein; (iii) that he
acknowledges that the MGC Common Stock must be held indefinitely unless
subsequently registered
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under the Securities Act or unless an exemption from such registration is
available; and (iv) that he is aware of the provisions of Rule 144 promulgated
under the Securities Act which permit limited resale of shares purchased in a
private placement subject to the satisfaction of certain conditions, including,
among other things, the existence of a public market for the shares, the
availability of certain current public information about the company, the resale
occurring not less than one (1) year after a party has purchased and paid for
the security to be sold, the sale being effected through a "broker's
transaction" or in transactions directly with a "market maker" and the number of
shares being sold during any three-month period not exceeding specified
limitations.
ARTICLE VII
Other Agreements
7.01 Press Releases. Each party shall consult with the other party hereto
before publishing, releasing or otherwise disseminating to the public any
information, publicity or statements concerning this Agreement, the Merger or
any of the transactions herein contemplated.
7.02 Overby Employment. MGC will enter into an employment agreement with
Kirk Overby upon similar terms and conditions as apply to similarly situated
employees of MGC.
7.03 Tax Treatment. Each of MGC and LJ. Net will use its best efforts to
cause the Merger to qualify as a reorganization under the provisions of Section
368(a) of the Code. Neither party nor any affiliate shall take any action that
would cause the Merger not to qualify as a reorganization under Section 368(a)
except to the extent that such action is specifically contemplated by this
Agreement.
7.04 Margin Loan Support. The parties acknowledge that Chicas may seek to
borrow against the shares of MGC Common Stock to be received by him in
connection with the Merger, but only to the extent not then being held in escrow
pursuant to Section 6.02 hereof. MGC agrees to guarantee such margin debt
incurred by Chicas but only until the date that is one (1) year after the
Closing Date. To secure such guarantee, MGC shall be subrogated to the rights of
the lender with respect to the MGC Common Stock pledged to secure the loan.
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<PAGE> 20
ARTICLE VIII
Noncompetition Agreements
8.01 Definitions. For purposes of this Agreement, the following terms and
provisions shall have the following meanings:
(a) "Prohibited Geographic Area" shall mean those areas in which MGC
does business as of the date of this Agreement (i.e., the Las Vegas, Nevada,
Atlanta, Georgia, Southern California, Chicago, Illinois and Southern Florida
areas).
(b) "Prohibited Time Period" shall mean the period beginning on the
date of execution hereof and ending on the date that is three (3) years after
the Closing Date.
(c) "Prohibited Business" shall mean the business conducted by LJ.
Net, Inc. prior to its acquisition by MGC, including Internet access services.
8.02 Noncompetition Agreement. Chicas agrees that during the Prohibited
Time Period, he shall not, for any reason, without the prior written consent of
MGC, on his own behalf or in the service or on behalf of others, participate,
whether as an owner, stockholder, partner, employee, consultant, agent,
independent contractor or otherwise, in any entity involved in the Prohibited
Business in the Prohibited Geographic Area.
8.03 The parties hereto acknowledge and agree that (i) the covenants
contained in Section 8.02 are reasonably necessary to protect the interest of
MGC in whose favor said covenants are imposed; (ii) the restrictions imposed by
Section 8.02 are not greater than are necessary for the protection of MGC in
light of the substantial harm that MGC will suffer should Chicas breach any such
covenant; (iii) the period of restriction and geographical area of restriction
contained in Section 8.02 are fair and reasonable in that they are reasonably
required for the protection of MGC; (iv) the nature, kind and character of the
activities Chicas is prohibited to engage in as described in Section 8.02 are
reasonable and necessary to protect MGC and shall not be interpreted or
construed as prohibiting Chicas from rendering any other services or performing
any other activities not referenced therein, and (v) the covenants and
agreements of Chicas contained in Section 8.02 have been specifically negotiated
by the parties and are material inducements to MGC to enter into this Agreement,
and, but for such covenants made by Chicas herein, MGC would not have entered
into this Agreement.
8.04 Chicas acknowledges and agrees that the covenants and agreements
contained in Section 8.02 of this Agreement are made by him in consequence of
and as a specific inducement to MGC to enter into this Agreement and to protect
and preserve the benefit of this Agreement to MGC; that each of the covenants
contained in Section 8.02 is reasonable and necessary to protect and preserve
the benefits received by MGC under this Agreement; irreparable loss and damage
will be suffered by MGC should Chicas breach any of such covenants and
agreements; each of such covenants and agreements is separate, distinct and
severable not only from the other of such covenants and agreements but also from
the other and remaining provisions of this Agreement; that the unenforceability
of any such covenant or agreement shall not affect the validity or
enforceability of any other such covenant or agreements or any other provision
or provisions of this Agreement; and that, in addition to other
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<PAGE> 21
remedies available to it, MGC shall be entitled to both temporary and permanent
injunctions to prevent a breach or contemplated breach by Chicas of any of such
covenants or agreements. In the event MGC should seek an injunction hereunder,
Chicas hereby waives any requirement that MGC post a bond or any other security.
8.05 If the provisions of Section 8.02 should ever be adjudicated to
exceed the time, geographic or other limitations permitted by applicable law in
any jurisdiction, then such provisions shall be deemed reformed in such
jurisdiction to the maximum time, geographic or other limitation permitted by
applicable law.
8.06 The covenants and agreements on the part of Chicas contained in
Section 8.02 shall be construed as agreements independent of any other agreement
between MGC and Chicas. The existence of any claim or cause of action of Chicas
against MGC, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by MGC of each of such covenants and
agreements.
8.07 Nothing contained in this Item shall restrict Chicas from being a
stockholder of any corporation that directly or indirectly competes with MGC
provided the stock of such competing corporation is publicly held and listed on
a regional or national stock exchange.
8.08 The provisions of this Item shall survive the termination of this
Agreement for any reason whatsoever.
ARTICLE IX
Indemnification By Chicas And Thompson
9.01 Agreement to Indemnify. Subject to the terms and conditions of this
Article IX, Chicas and Thompson jointly and severally (hereinafter sometimes
referred to in this Article IX collectively as the "Indemnitors" and
individually as an "Indemnitor"), agree to indemnify, defend and hold MGC
harmless, on demand from and against any and all demands, claims, actions,
causes of action, assessments, losses, damages, liabilities, costs and expenses,
including without limitation interest, penalties and reasonable attorneys' fees
and expenses, asserted against, imposed upon or incurred by MGC by reason of, or
resulting from or in connection with:
(a) a breach of any representation or warranty made by, or covenant
of, or other agreements or obligations of LJ. Net or any Indemnitor which is
contained in, or made pursuant to, this Agreement; or
(b) any Undisclosed Liabilities (as hereinafter defined),
(hereinafter referred to in this Article IX individually, as a "Claim" and,
collectively, as "Claims").
As used in this Agreement, "Undisclosed Liabilities" means any liability,
debt or obligation of any nature of LJ. Net, whether liquidated, contingent,
accrued, absolute or otherwise, that is not
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<PAGE> 22
specifically set forth on the LJ. Net Financial Statements, elsewhere in this
Agreement or on the Exhibits to this Agreement or, if so set forth, the amount
by which such liabilities, debts or obligations, as finally determined, exceeds
the amount thereof so disclosed.
9.02 Amount Uncertain. The fact that the amount of indemnification cannot
be determined or established at the time written notice or demand is given
hereunder to an Indemnitor shall not limit or affect the right of MGC to obtain
full indemnification to the extent provided herein.
9.04 Condition to Indemnification. As a condition to indemnification
hereunder, MGC shall be required to provide the Indemnitors with written notice
of the circumstances resulting in the claim for indemnification, which notice
shall be given promptly after first obtaining actual knowledge thereof and in no
event may MGC initiate a claim for indemnification more than six (6) months
after first obtaining actual knowledge thereof.
ARTICLE X
Survival
Any implication in this Agreement to the contrary notwithstanding, all
written statements contained in any Exhibit, document, certificate, memorandum
or other instrument delivered by or on behalf of LJ. Net, Chicas or Thompson, as
the case may be, pursuant hereto, or in connection with the transactions
contemplated hereby, shall be deemed representations and warranties hereunder by
LJ. Net, Chicas or Thompson (as the case may be). The representations,
warranties and agreements made by the parties hereto shall survive consummation
of the transactions contemplated hereby. Any inspection or audit by MGC of the
properties, financial condition, books, records or other matters relating to LJ.
Net or its business shall not limit, affect or impair the ability of MGC to
rely, before or after the date hereof, upon the representations, warranties and
agreements of LJ. Net, Chicas or Thompson (as the case may be) set forth herein.
ARTICLE XI
Termination of Obligations and Waiver of Conditions
11.01 Termination. In the event that this Agreement shall be terminated
pursuant to Section 5.03 hereof, all further obligations of the parties hereto
under this Agreement shall terminate without further liability of any party to
another and each party hereto will pay all costs and expenses incident to its
negotiation and preparation of this Agreement and to its performance and
compliance with all agreements and conditions contained herein on its part to be
performed or complied with, including the fees, expenses and disbursements of
its counsel.
11.02 Waiver. If any of the conditions specified in Section 5.01 hereof
has not been satisfied, MGC may nevertheless, at the election of MGC, proceed
with the transactions contemplated hereby and, if any of the conditions
specified in Section 5.02 hereof has not been satisfied, LJ. Net may
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<PAGE> 23
nevertheless, at its election, proceed with the transactions contemplated
hereby. Any such election to proceed shall be evidenced by a certificate
executed on behalf of the electing party by its Chairman of the Board or
President.
11.03 Confidentiality. In the event of the termination of the transactions
contemplated by this Agreement, all information acquired by either MGC or LJ.
Net shall be held in the strictest of confidence if not public information, and
neither party shall use such information to the disadvantage of the other.
ARTICLE XII
General
12.01 Amendments. This Agreement and the form of any exhibit attached
hereto may be amended in writing by the parties hereto before or after the
meeting of stockholders referred to in Section 4.03 hereof at any time prior to
the Effective Date of the Merger.
12.02 "Knowledge". Wherever in this Agreement any representation or
warranty is expressed in the terms of "knowledge" or "to the best of its
knowledge" of LJ. Net or MGC, such knowledge shall be deemed to refer to matters
which the respective officers and directors of LJ. Net or MGC, as the case may
be, knew or should have known after diligent inquiry.
12.03 "Material Adverse Effect". With respect to any person or entity
shall mean any event, condition, development or effect which, individually or in
the aggregate, shall have had, or insofar as can reasonably be foreseen will
have, a material adverse effect on the business, operations, assets, liabilities
or condition (financial or otherwise) or prospects of a person and its
subsidiaries (if applicable) taken as a whole.
12.04 Schedules. Each Disclosure Statement described in this Agreement has
been delivered simultaneously with the execution and pursuant to the terms of
this Agreement. Any information supplied to either party in writing between the
date hereof and the Closing Date if accepted by either party shall be made a
part of the Schedules hereto and be deemed to have been disclosed to the other
party for all purposes of this Agreement.
12.05 Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Nevada.
12.06 Notices. All notices hereunder shall be deemed given if in writing
and delivered personally or sent by telecopy (with written evidence of receipt),
telegram, registered mail or certified mail (return receipt requested) to the
parties at the following addresses (or at such other addresses as shall be
specified by like notice):
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<PAGE> 24
(a) If to MGC or
MGC Acquisition, to: 3301 N. Buffalo Drive
Las Vegas, Nevada 89129
Attn: Maurice J. Gallagher, Jr.
Fax: (702) 310-5715
With a copy to: Ellis, Funk, Goldberg, Labovitz &
Dokson, P.C.
3490 Piedmont Road
Suite 400
Atlanta, Georgia 30305
Attn: Robert B. Goldberg
Fax: (404) 233-2188
(b) If to LJ. Net or
Chicas, to: 7500 W. Lake Mead Boulevard
#9-173
Las Vegas, Nevada 89128
Attn: Patrick Chicas
Fax:
(c) If to LJ. Net or
Thompson, to: 7500 W. Lake Mead Boulevard
#9-173
Las Vegas, Nevada 89128
Attn: Patrick Chicas
Any such notice or communication shall be deemed to have been given as of three
days after posting, one day after next day delivery service or upon personal
delivery or confirmed telecopy.
12.07 No Assignment. This Agreement may not be assigned by operation of
law or otherwise without the express written consent of the other parties.
12.08 Headings. The descriptive headings of the several Articles, Sections
and paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
12.09 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto.
12.10 Entire Agreement. This Agreement and the exhibits hereto and other
documents delivered or to be delivered pursuant hereto or incorporated by
reference herein, taken together contain the entire agreement between the
parties hereto concerning the transactions contemplated hereby and supersede all
prior agreements or understandings, written or oral, between the parties hereto
relating to
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<PAGE> 25
the subject matter hereof. No oral representation, agreement or understanding
made by any party hereto shall be valid or binding upon such party or any other
party hereto.
12.11 Severability. The parties intend for this Agreement to be severable.
It is mutually agreed that in the event any paragraph, subparagraph, section,
subsection, sentence, clause or phrase hereof shall be construed as illegal,
invalid or unenforceable for any reason, such determination shall in no manner
affect the other paragraphs, subparagraphs, sections, subsections, sentences,
clauses or phrases hereof which shall remain in full force and effect, as if the
said paragraph, subparagraph, section, subsection, sentence, clause or phrase so
construed as illegal, invalid or unenforceable were not originally a part
hereof, and the enforceability hereof as a whole will not be affected. The
parties hereby declare that they would have agreed to the remaining parts hereof
if they had known that such parts hereof would be construed as illegal, invalid
or unenforceable.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed on its behalf by its officers thereunto duly authorized, all as
of the day and year first above written.
MGC COMMUNICATIONS, INC.
By:
-----------------------------------
MGC LJ.NET, INC.
By:
-----------------------------------
LJ. NET, INC.
By:
-----------------------------------
--------------------------------------
PATRICK CHICAS
--------------------------------------
JAMES THOMPSON
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<PAGE> 26
Defined Terms
Defined Term Section Reference
Acquisition Proposal Section 4.04
Chicas Introductory Paragraph
Claim Section 9.01
Closing Date or Closing Section 1.02
Code Recitals
Constituent Corporations Section 6.03
Current Balance Sheet Section 2.10
Demanding Party Section 4.11(b)
Effective Date of the Merger Section 1.01
Financial Statements Section 2.03(a)
Indemnitors Section 9.01
Knowledge Section 12.02
Liens Section 2.03(d)
LJ. Net Introductory Paragraph
LJ. Net Common Stock Section 2.04
LJ. Net Special Meeting Section 4.03
Marks Section 2.08
Material Adverse Effect Section 12.03
Merger Recitals
Merger Price Section 6.01
MGC Introductory Paragraph
MGC Acquisition Introductory Paragraph
MGC Common Stock Section 3.04
MGC Observation Rights Section 4.01(a)
MGC SEC Filings Section 3.03
Offering Quantity Section 4.11(b)
Permits Section 2.12
Piggyback Registration Section 4.11(a)
Prohibited Business Section 8.01(c)
Prohibited Geographic Area Section 8.01(a)
Prohibited Time Period Section 8.01(b)
Registrable Securities Section 4.11(a)
Registration Expenses Section 4.11(e)
Securities Act Section 4.11(a)
Surviving Corporation Section 6.03
Thompson Introductory Paragraph
Undisclosed Liabilities Section 9.01
Year 2000 Compliant Section 2.09
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EXHIBIT 2.04
OUTSTANDING STOCK
Stockholder Number of Shares
----------- ----------------
Patrick J. Chicas 915
James H. Thompson 915
Kirk Overby 170
-----
Total 2,000
----- =====
<PAGE> 1
EXHIBIT 4.1
MGC COMMUNICATIONS, INC.
SERIES B CONVERTIBLE PREFERRED STOCK
CERTIFICATE OF DESIGNATION
-------------------------
Pursuant to Sections 78.195 and 78.1955 of the
General Corporation Law of the State of Nevada
-------------------------
MGC Communications, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Nevada, does hereby
certify that pursuant to the authority vested in the Board of Directors of the
Corporation by its Articles of Incorporation, as amended, and pursuant to the
provisions of Sections 78.195 and 78.1955 of the General Corporation Law of the
State of Nevada, said Board of Directors, by unanimous written consent or at a
meeting duly called and held, adopted the following resolution which remains in
full force and effect as of the date hereof:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation (the "Board of Directors") by its Articles of Incorporation,
as amended (hereinafter referred to as the "Articles of Incorporation"), the
Board of Directors does hereby create, authorize and provide for the issuance of
Series B Convertible Preferred Stock, par value $.001 per share, consisting of
5,278,000 shares, having the following designations, preferences and relative
and other special rights, qualifications, limitations and restrictions:
1. Designation. The designation of such series is "Series B Convertible
Preferred Stock" (hereinafter in this Certificate of Designation called the
"Series B Preferred") and the number of shares constituting such series shall be
5,278,000, which number may be decreased (but not increased) by the Board of
Directors without a vote of stockholders; provided, however, that such number
may not be decreased below the number of then currently outstanding shares of
Series B Preferred, plus shares issuable upon the exercise of any then
outstanding options, warrants or rights to acquire Series B Preferred. All
capitalized terms used in this Certificate of Designation and not otherwise
defined shall have the meaning given to such terms in Section 12 hereof.
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<PAGE> 2
2. Dividend Rights.
(a) Holders of Series B Preferred, prior to and in preference to the
holders of Junior Securities, will be entitled to receive, out of funds legally
available for such purpose, cumulative dividends as provided in this Section 2.
Dividends on each share of Series B Preferred shall accrue at the rate of 10%
per annum on the sum of (i) the Series B Liquidation Value and (ii) all accrued
and unpaid dividends on such share of Series B Preferred from the date of
issuance. Such dividends will be calculated and compounded annually on December
31 of each year (each a "dividend date") in respect of the prior twelve month
period (the initial such calculation to be made at the same rate for the number
of days elapsed from the date of issue of Series B Preferred to and including
the 31st day of December, 1999). Such dividends shall commence to accrue on each
share of Series B Preferred from the date of issuance thereof whether or not
declared by the Board of Directors, and whether or not there are profits,
surplus or other funds of the Corporation legally available for the payment of
dividends, and shall continue to accrue thereon until the earlier of (x) the
date the Series B Liquidation Value of such share (plus all accrued and unpaid
dividends thereon) is paid in full and (y) a proper election of the Board of
Directors pursuant to Section 2(b) below. For purposes of determining the amount
of dividends accrued on the Series B Preferred pursuant to this Section 2(a) in
connection with the sale, conversion, redemption or repurchase of any Series B
Preferred which may occur between two dividend dates, the applicable dividend
rate for such period shall be multiplied by a fraction, the numerator of which
is the actual number of days elapsed in the then current annual period and the
denominator of which is the total number of days comprising such annual period.
Except as otherwise provided herein, if at any time the Corporation pays less
than the total amount of dividends then accrued with respect to the Series B
Preferred Stock, such payment shall be distributed ratably among the holders of
Series B Preferred Stock based upon the aggregate accrued but unpaid dividends
on the Series B Preferred Stock held by each holder.
(b) At any time commencing 201 days after the Original Issue Date,
upon the written election of the Board of Directors, written notice of which
shall be sent to each holder of Series B Preferred within two (2) business days
after the date of such election, dividends will no longer accrue on the Series B
Preferred (but those dividends which had accumulated to the date of such
election will be preserved) if the average closing sales price of the Common
Stock on the Nasdaq Stock Market or the New York Stock Exchange for the twenty
(20) trading days immediately preceding the Corporation's written election has
exceeded the amount which equals 3.0 times the Series B Liquidation Value (the
"Market Threshold"). In the written notice provided to the holders of Series B
Preferred pursuant to the foregoing sentence, the Board shall certify its
calculation of the Market Threshold, and provide each holder with such
supporting documentation as such holder may reasonably request.
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<PAGE> 3
3. Voting Rights.
(a) Voting Generally. Except as otherwise required by law or as
provided in this Section 3, the Series B Preferred will vote together with the
Common Stock, and not as a separate class, at any annual or special meeting of
stockholders, and may act by written consent in the same manner as the Common
Stock. In either case, each holder of shares of Series B Preferred will be
entitled to such number of votes as will be equal to the number of whole shares
of Common Stock into which such holder's aggregate number of shares of Series B
Preferred are convertible pursuant to Section 5 hereof (assuming only for
purposes of this calculation that accrued and unpaid dividends on such shares
are not subject to conversion) immediately after the close of business on the
record date fixed for such meeting or the effective date of such written
consent.
(b) Separate Vote of Series B Preferred. So long as (i) not less
than one-third of the number of shares of Series B Preferred initially issued
remain outstanding or (ii) the number of shares of Series B Preferred
outstanding represents not less than five percent (5%) of the outstanding Common
Stock, assuming conversion of all outstanding shares of Series B Preferred, the
vote or written consent of a Majority of the Series B Holders shall be necessary
for effecting or validating the following actions (each a "Restricted Action"):
(i) increase or decrease (other than by redemption or conversion)
the total number of authorized shares of, or issue any series of,
Preferred Stock which is senior in respect of dividends, liquidation or
otherwise to or on a pari passu basis with the Series B Preferred;
(ii) permit the Corporation or any Subsidiary to sell, convey or
otherwise dispose of assets having a value in excess of $5,000,000; or
merge into or consolidate with any other Person (other than the
Corporation or a Subsidiary); or effect a Sale of the Company;
(iii) voluntarily liquidate, dissolve or wind up the Corporation;
(iv) alter or change the rights, preferences or privileges of the
shares of Series B Preferred so as to affect adversely such shares;
(v) declare or pay any dividends or make other distribution on any
Junior Securities except for the repurchase of any Common Stock subject to
a repurchase right for terminated employees or independent contractors;
(vi) permit the Corporation or any Subsidiary to enter into any
transaction or series of related transactions with any Affiliate of the
Corporation, other than those directly related to (1) pay or benefits
(including stock options) provided to Affiliates who are employees or
Directors in accordance with existing agreements or past
3
<PAGE> 4
practices or approved with Required Board Approval; (2) the lease of
additional office space in the Las Vegas metropolitan area on terms
consistent with the existing leases to which the Corporation is a party,
and as approved by the Required Board Approval; or (3) any other
arms-length, commercially reasonable transactions approved by the
disinterested Directors in an amount not to exceed $100,000 in any year;
(vii) permit the Corporation or any Subsidiary to acquire the assets
or securities of any Person except for acquisitions involving cash,
securities or other property with an aggregate Fair Market Value of less
than (x) $10 million for any single acquisition and (y) $20 million in the
aggregate for all such acquisitions during any 12-month period;
(viii) permit the Corporation or any Subsidiary to incur additional
Indebtedness (other than Indebtedness incurred as a result of the
refinancing of existing Indebtedness, provided the total outstanding
Indebtedness does not increase as a result of such refinancing) in excess
of (x) an aggregate at any one time outstanding for the Corporation and
its Subsidiaries of up to $100,000,000 during the 12 months after the
Original Issue Date, and (y) thereafter any Indebtedness in addition to
the highest amount outstanding during the 12 months after the Original
Issue Date of an aggregate at any one time outstanding in excess of
$20,000,000 for the Corporation and its Subsidiaries, provided that for
the purposes of this Section 3(b)(viii), Indebtedness shall not be deemed
to include purchase money financing for capital expenditures in a budget
approved by the Required Board Approval;
(ix) make any material changes to the Corporation's then current
business plan;
(x) hire a chief executive officer of the Corporation;
(xi) organize any new direct or indirect Subsidiaries of the
Corporation other than wholly-owned Subsidiaries or any joint ventures
between the Corporation and a third party that involve the diversion of
assets or business of the Corporation to the joint venture entity, amend
or modify any such joint venture or partnership agreement to which the
Corporation or any Subsidiary is a party or restructure any Subsidiary,
partnership or such joint venture involving the Corporation or any
Subsidiary; or
(xii) issue Additional Shares of Common Stock (or issue other rights
that, pursuant to Section 5(k), are deemed to constitute Additional Shares
of Common Stock) to the extent that as a result of such issuance (or
deemed issuance) the Series B Conversion Price would be reduced to a price
less than the Series B Liquidation Value.
(c) The holders of the requisite percentage of Series B Preferred
shall either approve or reject a Restricted Action described in Section
3(b)(vii)-(xii) (a "Special Restricted
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<PAGE> 5
Action") within twenty (20) business days of receipt by the holders of Series B
Preferred of written notice and a reasonably detailed description of the
proposed Restricted Action; provided that the failure of the holders of Series B
Preferred to approve or reject the Special Restricted Action within such time
period shall not be deemed to be an approval thereof.
(d) In the event the Series B Holders shall reject a Special
Restricted Action, the Corporation shall have the right, at the written election
of the Board, notice of which (the "Company Redemption Notice") shall be
promptly sent to the Series B Holders, to initiate an Optional Redemption, which
will be subject to the terms and conditions contained in Section 6. In the
Company Redemption Notice, the Corporation shall specify the Optional Redemption
Date for purposes of Section 6, which Optional Redemption Date shall not be more
than sixty (60) days from the date of the Company Redemption Notice. Within ten
(10) business days of the receipt of the Company Redemption Notice by the Series
B Holders, a Majority of the Series B Holders shall either (i) acknowledge and
agree in writing to the Optional Redemption or (ii) approve the Special
Restricted Action that is the subject of the Optional Redemption, in which event
the Optional Redemption shall be terminated. In the event the Special Restricted
Action is rejected by the Series B Holders but such Special Restricted Action is
not effected by the Corporation within ninety (90) days of the delivery of the
Company Redemption Notice, and the Optional Redemption has not yet been
consummated, a Majority of the Series B Holders may elect in writing to void the
Optional Redemption and return to the status quo ante.
(e) In the event the Corporation takes any Restricted Action without
obtaining the approval of the holders of the Series B Preferred as required by
Section 3(b) (an "Event of Non-Compliance") and a Majority of the Series B
Holders gives written notice to the Board of Directors of the Corporation of
such an Event of Non-Compliance, the Corporation shall then have thirty (30)
days to take such action as is necessary to cure such default to the
satisfaction of a Majority of the Series B Holders. If the Corporation is unable
to cure the Event of Non-Compliance, a Majority of the Series B Holders may then
elect to initiate a Sale of the Company by submitting written notice of that
election to the Board of Directors of the Corporation (a "Sale Notice"). The
Board of Directors will then have an obligation to use its best efforts to
effect a Sale of the Company; provided that within twenty (20) business days of
its receipt of a Sale Notice electing a Sale of the Company, the Board may elect
to initiate an Optional Redemption pursuant to and subject to the terms and
conditions of Section 6 hereof in lieu of a Sale of the Company by providing a
Company Redemption Notice to the Series B Holders. In the Company Redemption
Notice, the Corporation shall specify the Optional Redemption Date for purposes
of Section 6, which Optional Redemption Date shall not be more than sixty (60)
days from the date of the Company Redemption Notice.
(f) In the event a Sale of the Company has not been consummated
within six (6) months of a Sale Notice electing a Sale of the Company (and the
Corporation had not elected to initiate an Optional Redemption in lieu of a Sale
of the Company within the time period set forth in Section 3(e)), the Series B
Holders, voting as a separate class, will then have the right to elect that
number of the directors of the Corporation as shall constitute a majority of the
total
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<PAGE> 6
number of directors of the Corporation as shall from time to time constitute the
Board. A special meeting of the stockholders shall be called by the Corporation
from time to time at the written instruction of a Majority of the Series B
Holders for the purpose of electing such directors.
4. Liquidation Rights. Upon any liquidation, dissolution or winding up
of the Corporation, voluntary or involuntary:
(a) The holders of Series B Preferred will be entitled to receive,
prior and in preference to any distribution of any of the assets or surplus
funds of the Corporation to the holders of the Junior Securities by reason of
their ownership thereof, but subsequent to the repurchase or payment in full or
other satisfaction of the Senior Secured Notes, (i) an amount in cash equal to,
or (ii) Freely Tradeable Securities with a Fair Market Value equal to, or (iii)
in a transaction to which paragraph (f) applies, assets with a Fair Market Value
equal to the greater of (A) the Series B Liquidation Value plus accrued but
unpaid dividends on each share of Series B Preferred then held by such holder or
(B) the amount such holder would have received in such liquidation, dissolution,
winding up, merger or Sale of the Company if each share of Series B Preferred
had been converted to Common Stock pursuant to Section 5 immediately prior to
such event; provided, however, that all or a portion of accrued but unpaid
dividends shall be extinguished and shall not be payable upon any liquidation,
dissolution or winding up if, and to the extent that, (i) such liquidation,
dissolution or winding up occurs on or before the third anniversary of the
Original Issue Date, and (ii) the payment of dividends would result in each
holder of Series B Preferred receiving cash and/or Freely Tradeable Securities
with a Fair Market Value in an amount that exceeds on a per share basis 2.5
times the Series B Liquidation Value (a "Qualified Return"). If the assets of
the Corporation are insufficient to make payment in full to all holders of
Series B Preferred, then such assets will be distributed among the holders of
Series B Preferred at the time outstanding, ratably in proportion to the full
amount to which they would otherwise be respectively entitled.
(b) At the written election of the holders of a Majority of the
Series B Preferred, a Sale of the Company shall be deemed to be a liquidation,
dissolution or winding up of the Corporation, as those terms are used in this
Section 4. In the event a Majority of the Series B Holders elect to treat such
Sale of the Company as a liquidation, dissolution or winding up of the
Corporation, the holders of shares of Series B Preferred shall have the right to
preference upon the distribution of assets or the proceeds to be received as
provided in this Section 4.
(c) After setting apart or paying in full the preferential amounts
due pursuant to subparagraph (a) of this Section 4, the remaining assets of the
Corporation available for distribution to shareholders, if any, shall be
distributed to the other stockholders of the Corporation as their respective
interests may appear.
(d) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the Corporation shall, within ten
(10) days after the date the
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<PAGE> 7
Board of Directors approves such action, or twenty (20) days prior to any
shareholders' meeting called to approve such action, or twenty (20) days after
the commencement of an involuntary proceeding, whichever is earlier, give each
holder of shares of Series B Preferred initial written notice of the proposed
action, including a description of the stock, cash and property to be received
by the holders of shares of Series B Preferred upon consummation of the proposed
action and the date of delivery thereof.
(e) The Corporation shall not consummate any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation before the
expiration of thirty (30) days after the mailing of the initial notice or ten
(10) days after the mailing of any subsequent written notice, whichever is
later.
(f) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation (other than a deemed liquidation
upon a Sale of the Company pursuant to Section 4(b)) which will involve the
distribution of assets other than cash, the Corporation shall promptly determine
the Fair Market Value of the assets to be distributed to the holders of shares
of Series B Preferred and the holders of shares of Common Stock.
5. Conversion Rights.
The holders of the Series B Preferred will have the following rights
with respect to the conversion of the Series B Preferred into shares of Common
Stock:
(a) Optional Conversion. Subject to and in compliance with the
provisions of this Section 5, any shares of Series B Preferred may, at the
option of the holder, be converted at any time into fully-paid and nonassessable
shares of Common Stock (an "Optional Conversion"). The number of shares of
Common Stock to which a holder of Series B Preferred will be entitled upon
conversion will be the product obtained by multiplying the "Series B Conversion
Rate" then in effect (determined as provided in Section 5(c)), by the number of
shares of Series B Preferred being converted.
(b) Mandatory Conversion.
(1) At any time commencing on the earlier of (i) the date that
is 386 days after the Original Issue Date, or (ii) the date on which the
Series B Holders exercise demand registration rights under that certain
Registration Rights Agreement dated the Original Issue Date, upon the
written election of the Board of Directors of the Corporation, each share
of Series B Preferred shall be automatically converted into shares of
Common Stock at the then-effective Series B Conversion Rate if the Market
Threshold has been achieved, provided the Board makes this election and
provides written notice of its election to the Series B Holders within 60
days of the first day as of which the Market Threshold had been achieved
(a "Mandatory Conversion"). In the written notice provided to the holders
of Series B Preferred pursuant to the foregoing sentence, the Board shall
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<PAGE> 8
certify its calculation of the Market Threshold, and provide each holder
with such supporting documentation as such holder may reasonably request.
(2) Upon the occurrence of the events specified in paragraph
(1) above, the outstanding shares of Series B Preferred will be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered
to the Corporation or its transfer agent; provided, however, that the
Corporation will not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless the
certificates evidencing such shares of Series B Preferred are either
delivered to the Corporation or its transfer agent as provided in Section
5(e) below.
(c) Conversion Rate. The conversion rate in effect at any time for
conversion of the Series B Preferred (the "Series B Conversion Rate") will be
the quotient obtained by dividing Nine Dollars ($9.00) by the "Series B
Conversion Price," calculated as provide in Section 5(d).
(d) Series B Conversion Price. (i) The conversion price for the
Series B Preferred will initially be Nine Dollars ($9.00) (the "Series B
Conversion Price"). Such initial Series B Conversion Price will be adjusted from
time to time in accordance with this Section 5. All references to the Series B
Conversion Price herein will mean the Series B Conversion Price, as so adjusted.
(e) Mechanics of Conversion. Each holder of Series B Preferred who
desires to convert the same into shares of Common Stock pursuant to this Section
5 will surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or any transfer agent for the Series B Preferred and
will give written notice to the Corporation at such office that such holder
elects to convert the same. Such notice will state the number of shares of
Series B Preferred being converted. Thereupon, the Corporation will promptly
issue and deliver at such office to such holder a certificate or certificates
for the number of shares of Common Stock which equals the number of shares of
Common Stock to which such holder is entitled under the then-effective Series B
Conversion Rate. In addition, upon any such conversion the holder of the shares
of Series B Preferred being converted shall be issued that number of shares of
Common Stock as is equal to the greater of (i) the number of shares of Common
Stock whose Fair Market Value equals the amount of all accrued but unpaid
dividends on the shares of Series B Preferred being converted and (ii) the
number of shares of Common Stock obtained by dividing the aggregate amount of
accrued but unpaid dividends on the shares of Series B Preferred being converted
by the Series B Conversion Price then in effect; provided, however, that (A) all
of the accrued but unpaid dividends shall be extinguished and shall not be
payable with respect to shares of Series B Preferred in the event such shares
are being converted on or before the third anniversary of the Original Issue
Date pursuant to (x) a Mandatory Conversion or (y) an Optional Conversion within
60 days of the first day as of which the Market Threshold had been achieved; and
(B) the accrued but unpaid dividends shall be extinguished and shall not be
payable in an
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<PAGE> 9
Optional Conversion that takes place on or before the third anniversary of the
Original Issue Date as part of a Sale of the Company if, and to the extent that,
the payment of dividends would result in each holder receiving an amount of cash
and/or Freely Tradeable Securities with a Fair Market Value that exceeds a
Qualified Return. In addition, the Corporation shall promptly deliver to the
holder of Series B Preferred being converted a certificate representing those
shares of Series B Preferred, if any, that were not converted. Such conversion
will be deemed to have been made at the close of business on the date of such
surrender of the certificates representing the shares of Series B Preferred to
be converted, and the Person entitled to receive the shares of Common Stock
issuable upon such conversion will be treated for all purposes as the record
holder of such shares of Common Stock on such date.
(f) Adjustment for Stock Splits and Combinations. If the Corporation
at any time or from time after the date that the Original Issue Date effects a
subdivision of the outstanding Common Stock, the Series B Conversion Price, in
effect immediately before that subdivision will be proportionately decreased.
Conversely, if the Corporation at any time or from time to time after the
Original Issue Date combines the outstanding shares of Common Stock into a
smaller number of shares, the Series B Conversion Price in effect immediately
before the combination will be proportionately increased. Any adjustment under
this Section 5(f) will become effective at the close of business on the date the
subdivision or combination becomes effective.
(g) Adjustment for Common Stock Dividends and Distributions. If the
Corporation at any time or from time to time after the Original Issue Date
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, in each such event the Series B Conversion Price that is
then in effect will be decreased as of the time of such issuance or, in the
event such record date is fixed, as of the close of business on such record
date, by multiplying the Series B Conversion Price then in effect by a fraction
(1) the numerator of which is the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date, and (2) the denominator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Series B Conversion Price will be recomputed accordingly as
of the close of business on such record date and thereafter the Series B
Conversion Price will be adjusted pursuant to this Section 5(g) to reflect the
actual payment of such dividend or distribution.
(h) Adjustments for Other Dividends and Distributions. If the
Corporation at any time or from time to time after the Original Issue Date
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Corporation other than shares of Common Stock, in each such event
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<PAGE> 10
provision will be made so that the holders of the Series B Preferred will
receive upon conversion thereof, in addition to the number of shares of Common
Stock receivable thereupon, the amount of the other securities of the
Corporation which they would have received had their Series B Preferred been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the conversion
date, retained such securities receivable by them as aforesaid during such
period, subject to all other adjustments called for during such period under
this Section 5 with respect to the rights of the holders of the Series B
Preferred or with respect to such other securities by their terms.
(i) Adjustment for Reclassification, Exchange and Substitution. If
at any time or from time to time after the Original Issue Date the Common Stock
issuable upon the conversion of the Series B Preferred is changed into the same
or a different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section 5), in
any such event each holder of Series B Preferred will have the right thereafter
to convert such stock into the kind and amount of stock and other securities and
property receivable upon such recapitalization, reclassification or the change
by holders of the maximum number of shares of Common Stock into which such
shares of Series B Preferred could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to such other securities or property by the
terms thereof.
(j) Reorganizations, Mergers, Consolidations or Sales of Assets. If
at any time or from time to time after the Original Issue Date there is a
merger, consolidation, recapitalization, reclassification, sale of all or
substantially all of the Corporation's assets or reorganization involving the
Common Stock (collectively, a "capital reorganization") (other than a Sale of
the Company provided for in Section 4(b) or a merger, consolidation, sale of
assets, recapitalization, subdivision, combination, reclassification, exchange
or substitution of shares provided for elsewhere in this Section 5), as a part
of such capital reorganization, provision will be made so that the holders of
the Series B Preferred will thereafter be entitled to receive upon conversion of
the Series B Preferred the number of shares of stock or other securities or
property of the Corporation to which a holder of the number of shares of Common
Stock deliverable upon conversion would have been entitled on such capital
reorganization, subject to adjustment in respect of such stock or securities by
the terms thereof. In any such case, appropriate adjustment will be made in the
application of the provisions of this Section 5 with respect to the rights of
the holders of Series B Preferred after the capital reorganization to the end
that the provisions of this Section 5 (including adjustment of the Series B
Conversion Price then in effect and the number of shares issuable upon
conversion of the Series B Preferred) will be applicable after that event and be
as nearly equivalent as practicable.
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(k) Sale of Shares Below Series B Conversion Price.
(1) If at any time or from time to time after the Original
Issue Date, the Corporation issues or sells, or is deemed by the
provisions of this Section 5(k) to have issued or sold, Additional Shares
of Common Stock (as hereinafter defined), other than as a dividend or
other distribution on any class of stock as provided in Section 5(g)
above, and other than a subdivision or combination of shares of Common
Stock as provided in Section 5(f) above for an Effective Price (as
hereinafter defined) less than the then effective Series B Conversion
Price, then and in each such case the then existing Series B Conversion
Price will be reduced, as of the opening of business on the date of such
issue or sale, to a price (but in no event to a price less than the Series
B Liquidation Value) determined by dividing (a) the sum of (1) the product
derived by multiplying (i) the Series B Conversion Price in effect
immediately prior to such issue or sale times (ii) the number of shares of
Common Stock deemed outstanding (as defined below) immediately prior to
such issue or sale, plus (2) the consideration, if any, received (or
deemed received pursuant to subsection (k)(2)) by the Corporation upon
such issue or sale, by (b) the number of shares of Common Stock deemed
outstanding (as defined below) immediately after such issue or sale. For
the purposes of the preceding sentence, the number of shares of Common
Stock deemed to be outstanding as of a given date will be the sum of (a)
the number of shares of Common Stock actually outstanding, (b) the number
of shares of Common Stock into which the then outstanding Series B
Preferred could be converted if fully converted on the day immediately
preceding the given date, and (c) the number of shares of Common Stock
that could be obtained through the exercise or conversion in full of all
other rights, options, warrants and convertible securities on the day
immediately preceding the given date, regardless of whether or not such
securities are fully exercisable for or convertible into Common Stock at
such time.
(2) For the purpose of making any adjustment required under
this Section 5(k), the consideration received by the Corporation for any
issue or sale of securities will (a) to the extent it consists of cash, be
computed at the net amount of cash received by the Corporation after
deduction of any underwriting or similar commissions, compensation or
concessions paid or allowed by the Corporation in connection with such
issue or sale but without deduction of any expenses payable by the
Corporation, (b) to the extent it consists of property other than cash, be
computed at the Fair Market Value of that property, and (c) if Additional
Shares of Common Stock, Convertible Securities (as hereinafter defined) or
rights or options to purchase either Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the Corporation for a consideration that
covers both, be computed as the portion of the consideration so received
that may be reasonably determined in good faith by the Board of Directors
with Required Board Approval to be allocable to such Additional Shares of
Common Stock, Convertible Securities or rights or options.
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(3) For the purpose of the adjustment required under this
Section 5(k), if the Corporation issues or sells any rights or options for
the purchase of, or stock or other securities exchangeable for or
convertible into, Additional Shares of Common Stock (such exchangeable or
convertible stock or securities being herein referred to as "Convertible
Securities") and if the Effective Price of such Additional Shares of
Common Stock is less than the Series B Conversion Price in effect, the
Corporation will be deemed to have issued at the time of the issuance of
such rights or options or Convertible Securities the maximum number of
Additional Shares of Common Stock issuable upon exercise or conversion or
exchange thereof and to have received consideration for the issuance of
such shares an amount equal to the total amount of consideration, if any,
received by the Corporation for the issuance of such rights or options or
Convertible Securities, plus, in the case of such rights or options, the
minimum amounts of consideration, if any, payable to the Corporation upon
the exercise of such rights or options, plus in the case of Convertible
Securities, the minimum amounts of consideration, if any, payable to the
Corporation (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) upon the conversion or exchange
thereof; provided that if in the case of Convertible Securities the
minimum amount of such consideration cannot be ascertained, but are a
function of antidilution or similar protective clauses, the Corporation
shall be deemed to have received the minimum amounts of consideration
without references to such clauses; provided further that if the minimum
amount of consideration payable to the Corporation upon the exercise or
conversion of rights, options or Convertible Securities is reduced over
time or on the occurrence or non-occurrence of specified events, including
by reason of antidilution adjustments, the Effective Price will be
recalculated using the figure to which such minimum amount of
consideration is reduced; provided further that if the minimum amount of
consideration payable to the Corporation upon the exercise or conversion
of such rights, options or Convertible Securities is subsequently
increased, the Effective Price will be again recalculated using the
increased minimum amount of consideration payable to the Corporation upon
the exercise or conversion of such rights, options or Convertible
Securities. No further adjustment of the Series B Conversion Price, as
adjusted in each case upon the issuance of such rights, options or
Convertible Securities, will be made as a result of the actual issuance of
Additional Shares of Common Stock on the exercise of any such rights or
options or the exchange or conversion of any such Convertible Securities.
If any such rights or options or the conversion privilege represented by
any such Convertible Securities shall expire without having been
exercised, the Series B Conversion Price, as adjusted upon the issuance of
such rights, options or Convertible Securities, will be readjusted to the
Series B Conversion Price that would have been in effect had an adjustment
been made on the basis that the only Additional Shares of Common Stock so
issued were the Additional Shares of Common Stock, if any, actually issued
or sold on the exercise of such rights or options or upon such conversion
and that such Additional Shares of Common Stock, if any, were issued or
sold for the consideration, if any, actually received by the Corporation
for the granting of all such rights or options, whether or not exercised,
plus the consideration received for
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issuing or selling the Convertible Securities actually converted, plus the
consideration, if any, actually received by the Corporation (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) on the conversion of such Convertible Securities, provided
that such readjustment shall not apply to prior conversions of Series B
Preferred.
(4) "Additional Shares of Common Stock" means all shares of
Common Stock issued by the Corporation or deemed to be issued pursuant to
this Section 5(k) whether or not subsequently reacquired or retired by the
Corporation other than (A) shares of Common Stock issued upon conversion
of Series B Preferred, (B) options to purchase up to Two Million Six
Hundred Forty Thousand (2,640,000) shares of Common Stock granted to
employees, officers or directors of or consultants or advisors to the
Corporation or any Subsidiary pursuant to the Stock Option Plan and the
shares of Common Stock issuable upon exercise of such options, or such
increased number of shares of Common Stock as has been approved by the
Required Board Approval, and (C) Convertible Securities outstanding as of
the Original Issue Date and the shares of Common Stock issuable upon
exercise or conversion of such Convertible Securities. The "Effective
Price" of Additional Shares of Common Stock means the quotient determined
by dividing (i) the aggregate consideration received, or deemed to have
been received by the Corporation under this Section 5(k), for the issuance
of such Additional Shares of Common Stock, by (ii) the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been
issued or sold, by the Corporation under this Section 5(k).
(l) Accountants' Certificate of Adjustment. In each case of an
adjustment or readjustment of the Series B Conversion Price for the number of
shares of Common Stock or other securities issuable upon conversion of the
Series B Preferred, the Corporation, at its expense, will compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and will mail such
certificate, by first class mail, postage prepared, to each registered holder of
Series B Preferred at the holder's address as shown in the Corporation's books.
The certificate will set forth such adjustment or readjustment, showing in
detail the facts upon which such adjustment or readjustment is based, including
a statement of (1) the Series B Conversion Price at the time in effect, and (2)
the type and amount, if any, of other property that at the time would be
received upon conversion of the Series B Preferred.
(m) Notices of Record Date. Upon (1) any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (2) any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the Corporation,
any merger or consolidation of the Corporation with or into any other
Corporation, or any other Sale of the Company, or any voluntary or involuntary
dissolution, liquidation or winding up of the Corporation, the Corporation will
mail to each holder of Series B Preferred at least twenty
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(20) days prior to the record date specified therein a notice specifying (1) the
date on which any such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution, (2) the date on
which any such reorganization, reclassification, transfer, consolidation,
merger, Sale of the Company, dissolution, liquidation or winding up is expected
to become effective, and (3) the date, if any, that is to be fixed as to when
the holders of record of Common Stock (or other securities) will be entitled to
exchange their shares of Common Stock (or other securities) for securities or
other property deliverable upon such reorganization, reclassification, transfer,
consolidation, merger, Sale of the Company, dissolution, liquidation or winding
up.
(n) Fractional Shares. No fractional shares of Common Stock will be
issued upon conversion of Series B Preferred. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
Series B Preferred by a holder thereof will be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional shares. If, after the aforementioned aggregation, the conversion
would result in the issuance of any fractional share, the Corporation will, in
lieu of issuing any fractional share, pay cash equal to the product of such
fraction multiplied by the Common Stock's Fair Market Value on the date of
conversion.
(o) Reservation of Stock Issuable Upon Conversion. The Corporation
will at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series B Preferred, such number of its shares of Common Stock
as will from time to time be sufficient to effect the conversion of all
outstanding shares of Series B Preferred. If at any time the number of
authorized but unissued shares of Common Stock is not sufficient to effect the
conversion of all then outstanding shares of Series B Preferred, the Corporation
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as will be sufficient for such purpose.
(p) Notices. Any notice required by the provisions of this
Certificate of Designation to be given to the holders of shares of the Series B
Preferred will be deemed given upon the earlier of actual receipt or seventy-two
(72) hours after the same has been deposited in the United States mail, by
certified or registered mail, return receipt requested, postage prepaid, and
addressed to each holder of record at the address of such holder appearing on
the books of the Corporation.
(q) Payment of Taxes. The Corporation will pay all taxes (other than
taxes based upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of Series B Preferred excluding any tax or other charge imposed in
connection with any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of Series B Preferred
so converted were registered.
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<PAGE> 15
6. Optional Redemption.
(a) At any time after the sixth anniversary of the Original Issue
Date, or upon a Sale of the Company (but in no event prior to the Corporation's
repurchase or payment or satisfaction in full of the Senior Secured Notes), a
Majority of the Series B Holders may require the Corporation to redeem all, but
not less than all, of the outstanding shares of Series B Preferred (an "Optional
Redemption") by notifying the Corporation in writing of their intent to exercise
the rights afforded by this Section 6(a) and specifying a date not less than 90
nor more than 120 days from the date of such notice on which the outstanding
shares of Series B Preferred shall be redeemed (the "Optional Redemption Date").
Upon receipt of such notice the Corporation shall promptly notify the remaining
holders of Series B Preferred of the Optional Redemption Date. The recipients of
such notice shall be required to participate in the Optional Redemption. The
Corporation shall redeem on the Optional Redemption Date all the shares of
Series B Preferred. Each share of Series B Preferred to be redeemed shall be
redeemed for (i) an amount in cash equal to, or (ii) Freely Tradeable Securities
with a Fair Market Value equal to, the greater of (A) the sum of the Series B
Liquidation Value and all accrued dividends (provided that all or a portion of
the accrued but unpaid dividends shall be extinguished and shall not be payable
if, and to the extent that (x) the redemption occurs on or before the third
anniversary of the Original Issue Date and (y) the payment of dividends would
result in each holder of Series B Preferred receiving in cash an amount that
exceeds a Qualified Return), and (B) the Fair Market Value of the Common Stock
into which the Series B Preferred is then convertible pursuant to Section 5
hereof (the "Optional Redemption Price").
(b) In the event the Optional Redemption is occurring pursuant to
Section 3(d) or Section 3(e), each share of Series B Preferred to be redeemed
shall be redeemed for an amount in cash equal to, or Freely Tradeable Securities
with a Fair Market Value equal to, the greater of (i) the Optional Redemption
Price and (ii) the price per share set forth in the table below, based on the
year during which the redemption occurs (the year number being the time period
prior to an anniversary of the Original Issue Date) and calculated as a multiple
of the Series B Liquidation Value:
Year Price
---- -----
1 2.5
2 2.5
3 3
4 3.5
5 4
6 4.5
Notwithstanding anything herein to the contrary, an Optional Redemption
pursuant to Section 3(d) or Section 3(e) shall not take place prior to the
Corporation's repurchase or payment or satisfaction in full of the Senior
Secured Notes, or the Corporation's compliance
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<PAGE> 16
with, or its receipt of the requisite consent from the holders of the Senior
Secured Notes under, the Indenture.
(c) If the funds of the Corporation legally available for redemption
of shares of Series B Preferred on an Optional Redemption Date are insufficient
to redeem the total number of outstanding shares of Series B Preferred entitled
to redemption, the holders of shares of Series B Preferred entitled to
redemption shall share ratably in any funds legally available for redemption of
such shares according to the respective amounts that would be payable with
respect to the full number of shares owned by them if all such outstanding
shares were redeemed in full. At any time thereafter when additional funds of
the Corporation are legally available for the redemption of such shares of
Series B Preferred, such funds will be used at the earliest permissible time, to
redeem the balance of such shares, or such portion thereof for which funds are
then legally available. The Corporation shall be obligated to use its best
efforts to take such actions as may be necessary (including, without limitation,
the issuance of additional equity securities, the revaluation or
recapitalization of the Corporation or the consummation of a Sale of the
Company) in order to permit the full and timely redemption of the shares of
Series B Preferred entitled to redemption.
(d) If, for any reason, the Corporation fails to redeem all shares
of Series B Preferred entitled to redemption on an Optional Redemption Date, and
such failure continues for a period of six (6) months from the Optional
Redemption Date, then the Series B Holders, as a class, shall have the right to
elect that number of directors of the Corporation as shall constitute a majority
of the total number of directors of the Corporation as shall from time to time
constitute the Board. A special meeting of the stockholders shall be called by
the Corporation from time to time at the written instruction of a Majority of
the Series B Holders for the purpose of electing such directors.
(e) Shares of Series B Preferred that have been issued and
reacquired in any manner, including shares purchased or redeemed or exchanged or
converted, shall (upon compliance with any applicable provisions of the General
Corporation Law of the State of Nevada) have the status of authorized but
unissued shares of Preferred Stock of the Corporation undesignated as to series
and may, subject to the requirements of Section 3(b), be designated or
redesignated and issued or reissued, as the case may, as part of any series of
Preferred Stock of the Corporation, other than as Series B Preferred.
7. Exclusion of Other Rights. Except as may otherwise be required by law,
the shares of Series B Preferred shall not have any preferences or relative,
participating, optional or other special rights, other than those specifically
set forth in this Certificate of Designation. The shares of Series B Preferred
shall have no preemptive or subscription rights pursuant to this Certificate of
Designation.
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<PAGE> 17
8. Rank. The Series B Preferred shall rank senior in right as to dividends
and upon liquidation, dissolution or winding up to all Junior Securities,
whenever issued.
9. Identical Rights. Each share of the Series B Preferred shall have the
same relative rights and preferences as, and shall be identical in all respects
with, all other shares of the Series B Preferred.
10. Certificates. So long as any shares of the Series B Preferred are
outstanding, there shall be set forth on the face or back of each stock
certificate issued by the Corporation a statement that the Corporation shall
furnish without charge to each shareholder who so requests, a full statement of
the designation and relative rights, preferences and limitations of each class
of stock or series thereof that the Corporation is authorized to issue and of
the authority of the Board of Directors to designate and fix the relative
rights, preferences and limitations of each series.
11. Amendments. Any provision of these terms of the Series B Preferred
Stock may be amended, modified or waived if and only if a Majority of the Series
B Holders have consented in writing or by an affirmative vote to such amendment,
modification or waiver of any such provision of this Certificate of Designation.
12. Definitions.
"Additional Shares of Common Stock" shall have the meaning given such term
in Section 5(k)(4) of this Certificate of Designation.
"Affiliate" or "Affiliates" shall mean with respect to any Person, any
other Person that would be considered to be an affiliate of such Person under
Rule 144(a) of the Rules of Regulations of the Securities and Exchange
Commission, as in effect on the date hereof, if the Corporation were issuing
securities.
"Articles of Incorporation" shall have the meaning given such term on the
cover page of this Certificate of Designation.
"Board" or "Board of Directors" means the Board of Directors of the
Corporation.
"Company Redemption Notice" shall have the meaning given to such term in
Section 3(d) of this Certificate of Designation.
"Convertible Securities" shall have the meaning given such term in Section
5(k)(3) of this Certificate of Designation.
"Corporation" means MGC Communications, Inc., a Nevada corporation.
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<PAGE> 18
"Common Stock" means the Corporation's Common Stock, $.001 par value.
"Effective Price" shall have the meaning given such term in Section
5(k)(4) of this Certificate of Designation.
"Event of Non-Compliance" shall have the meaning given such term in
Section 3(e) of this Certificate of Designation.
"Fair Market Value" of the assets or shares of capital stock at issue
shall mean the price that would be paid by a willing buyer of all of the assets
or shares of capital stock of the Corporation, as applicable, in a sale process
designed to attract all possible participants and to maximize value in an arm's
length transaction, such price to include a control premium and to exclude any
minority, illiquidity or other discounts. The determination of Fair Market Value
shall be made by (i) the Board of Directors of the Corporation, or (ii) if at
the written election of a Majority of the Series B Holders after presentation of
the Board's determination of Fair Market Value, by a nationally recognized
investment banking firm mutually agreeable to the Corporation and a Majority of
the Series B Holders, provided, however, in the event a firm cannot be agreed
upon such amount shall be determined by a nationally recognized investment
banking firm selected by two other such firms, one selected by the Corporation
and the other by a Majority of the Series B Holders. The determination of Fair
Market Value by such investment banking firm shall be final and binding on the
parties. The fees and expenses of such firm shall be paid for by the
Corporation.
"Freely Tradeable Securities" shall mean shares of a common stock of a
public company listed for trading on the New York Stock Exchange or Nasdaq
National Market that are free of any and all restrictions on sale, including
under Rule 144 or 145 under the Securities Act of 1933, as amended.
"GAAP" shall mean generally accepted accounting principles applied on a
consistent basis.
"Indebtedness" shall mean all obligations, contingent (to the extent
required to be reflected in financial statements prepared in accordance with
GAAP) and otherwise, which in accordance with GAAP should be classified on the
obligor's balance sheet as liabilities, including, without limitation, in any
event and whether or not so classified: (i) all debt and similar monetary
obligations, whether direct or indirect; (ii) all liabilities secured by any
mortgage, pledge, security interest, lien, charge or other encumbrance existing
on property owned or acquired subject thereto, whether or not the liability
secured thereby shall have been assumed; (iii) all guarantees, endorsements and
other contingent obligations whether direct or indirect in respect of
Indebtedness or performance of others, including any obligation to supply funds
to or in any manner to invest in, directly or indirectly, the debtor, to
purchase Indebtedness, or to assure the owner of Indebtedness against loss,
through an
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<PAGE> 19
agreement to purchase goods, supplies or services for the purpose of enabling
the debtor to make payment of the Indebtedness held by such owner or otherwise;
(iv) obligations to reimburse issuers of any letters of credit; and (v) purchase
money financing for capital expenditures.
"Indenture" shall mean that Indenture dated as of September 29, 1997
pursuant to which the Senior Secured Notes have been issued.
"Junior Securities" shall mean any of the Corporation's Common Stock and
all other equity securities of the Corporation other than the Series B Preferred
and any other shares of the Corporation's preferred stock (a) which by their
terms, state that they are not Junior Securities or provide the holders thereof
with rights pari passu with or senior to those of the holders of Series B
Preferred and (b) are approved for issuance in accordance with Section 3 hereof.
"Majority of the Series B Holders" shall mean the holders of more than
fifty percent (50%) of the then outstanding Series B Preferred.
"Mandatory Conversion" shall have the meaning given such term in Section
5(b) of this Certificate of Designation.
"Market Threshold" shall have the meaning given such term in Section 2(b)
of this Certificate of Designation.
"Optional Conversion" shall have the meaning given such term in Section
5(a) of this Certificate of Designation.
"Optional Redemption" shall have the meaning given such term in Section
6(a) of this Certificate of Designation.
"Optional Redemption Date" shall have the meaning given such term in
Section 6(a) of this Certificate of Designation.
"Optional Redemption Price" shall have the meaning given such term in
Section 6(a) of this Certificate of Designation.
"Original Issue Date" means __________________, 1999.
"Person" shall mean an individual, partnership, corporation, association,
trust, joint venture, unincorporated organization and any government,
governmental department or agency or political subdivision thereof.
"Qualified Return" shall have the meaning given to such term in Section
4(a).
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<PAGE> 20
"Required Board Approval" shall mean the majority vote or written consent
of a majority of the Board of Directors of the Corporation or a Subsidiary, as
applicable, including that member designated by a Majority of the Series B
Holders (the "Investor Designee"), or, if there is more than one Investor
Designee, that Investor Designee that has been designated in writing by a
Majority of the Series B Holders as the person whose approval is necessary for
purposes of this definition.
"Restricted Action" shall have the meaning given such term in Section 3(b)
of this Certificate of Designation.
"Sale Notice" shall have the meaning given such term in Section 3(e) of
the Certificate of Designation.
"Sale of the Company" shall mean a single transaction or series of
transactions between the Corporation and/or its stockholders and any Person or
group of Persons (as such term is used in Sections 13(d)(3) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended) pursuant to which such Person or
group of Persons will (i) acquire shares of capital stock of the Corporation
possessing more than 50% of the voting power of the Corporation, including by
way of merger or consolidation or otherwise, or (ii) acquire all or
substantially all of the assets of the Corporation and its Subsidiaries
(determined on a consolidated basis); notwithstanding the foregoing definition,
a single transaction or series of transactions shall not be deemed a Sale of the
Company unless such transaction or series of transactions is also deemed a
"Change of Control", as defined in the Indenture.
"Senior Secured Notes" means the $160,000,000 principal amount of 13%
Senior Secured Notes due 2004 that have been issued pursuant to the Indenture.
"Series B Conversion Price" shall have the meaning given such term in
Section 5(d) of this Certificate of Designation.
"Series B Conversion Rate" shall have the meaning given such term in
Section 5(c) of this Certificate of Designation.
"Series B Holders" shall mean the holders of Series B Preferred.
"Series B Liquidation Value" means Nine Dollars ($9.00), provided if the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) the Series B Preferred into a greater number of
shares or if the Corporation at any time combines (by reverse stock split or
otherwise) the outstanding shares of the Series B Preferred into a smaller
number of shares, then the Series B Liquidation Value in effect immediately
prior to such subdivision or combination shall be proportionately adjusted.
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<PAGE> 21
"Series B Preferred" shall have the meaning given such term in Section 1
of this Certificate of Designation.
"Special Restricted Action" shall have the meaning given such term in
Section 3(c) of this Certificate of Designation.
"Stock Option Plan" shall mean the Corporation's Stock Option Plan, as
adopted by the Board of Directors on June 30, 1996, and as amended to date.
"Subsidiary" shall mean any Person as to which the Corporation owns,
directly or indirectly, either (a) 50% or more of such Person's stock (or
similar voting interests) entitled to vote generally in the election of
directors (or other governing body) or (b) 50% or more of the capital or profits
interest of such Person.
13. Severability of Provisions. If any right, preference or limitation of
the Series B Preferred set forth in this Certificate of Designation (as such
Certificate of Designation may be amended from time to time) is invalid,
unlawful or incapable of being enforced by reason of any rule, law or public
policy, all other rights preferences and limitations set forth in this
Certificate of Designation (as so amended) which can be given effect without
implicating the invalid, unlawful or unenforceable right preference or
limitation shall, nevertheless, remain in full force and effect, and no right,
preference or limitation herein set forth shall be deemed dependent upon any
other right, preference or limitation unless so expressed herein.
[Signatures are on the following page.]
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<PAGE> 22
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its President, and attested to by its Secretary, on
____________________________, 1999.
MGC COMMUNICATIONS, INC.
By:
-------------------------------
Name: Nield J. Montgomery
Title: President
Attest:
---------------------------
Name:
Title: Secretary
STATE OF NEVADA )
ss.: )
COUNTY OF CLARK )
On the ___ day of _____________, 1999, before me personally came Nield J.
Montgomery to me known, who, being by me duly sworn, did depose and say he
resides at 8825 LaMadre, Las Vegas, Nevada 89129 and that he is the President of
MGC Communications, Inc., the corporation described in and which executed the
above instrument; and that he acknowledged said instrument to be the free act
and deed of said corporation.
_____________________________________
Notary Public
My Commission Expires:_______________
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<PAGE> 1
EXHIBIT 4.2
SECURITYHOLDERS' AGREEMENT
THIS SECURITYHOLDERS' AGREEMENT is made as of April 5, 1999, by and
among MGC Communications, Inc., a Nevada corporation (the "Company"), the
Institutional Investors (as defined herein), and each of the securityholders
from time to time a party hereto (the "Securityholders") (as amended from time
to time, this "Agreement"). Capitalized terms used but not otherwise defined
herein shall have the meaning given to such terms in the Purchase Agreement
referred to below.
The execution and delivery of this Agreement is a condition to the
Institutional Investors' purchase of the Purchased Securities pursuant to that
certain Securities Purchase Agreement dated the date hereof among the Company
and the Institutional Investors (as amended from time to time, the "Purchase
Agreement").
NOW THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement, intending to be
legally bound, hereby agree as follows:
Section 1. Certain Definitions.
"Board" means the Company's Board of Directors.
"Institutional Investors" means those persons holding Purchased
Securities.
"Investor Designees" means those member(s) of the Board or Sub Board that
have been designated by the Required Investor Approval.
"Purchase Agreement" has the meaning given such term in the recitals.
"Required Board Approval" means the majority vote or written consent of a
majority of the directors of the Board or the Sub Board, as applicable,
including the approval of the Investor Designee, or, if there is more than one
Investor Designee, that Investor Designee that has been designated in writing by
the Required Investor Approval as the person whose approval is necessary for
purposes of this definition.
"Required Investor Approval" means, at any time, the affirmative vote of
the holders of more than fifty percent (50%) of the outstanding Purchased
Securities held by the Institutional Investors at such time.
"Subject Securities" has the meaning given to such term in Section 2
hereof.
<PAGE> 2
Section 2. Board Composition.
(a) From and after the date hereof, and until the provisions
of this Section 2 cease to be effective, each Securityholder and Institutional
Investor shall vote all of its Common Stock and other voting securities of the
Company over which such holder has voting control ("Subject Securities") and
shall take all other necessary or desirable actions within its control (in its
capacity as a securityholder or stockholder and, subject to any fiduciary
obligation owed by such Securityholder or Institutional Investor to the Company,
in its capacity as a director, member of a board committee or officer of the
Company or otherwise, and including, without limitation, attendance at meetings
in person or by proxy for purposes of obtaining a quorum and execution of
written consents in lieu of meetings), and the Company shall take all necessary
or desirable actions within its control (including, without limitation, calling
special Board and stockholder meetings), so that the following shall occur:
(i) one representative designated by the Required Investor
Approval (who shall initially be Paul Salem) shall be elected
to the Board for a three-year term, and reelected for
subsequent terms so long as this Agreement is in effect;
(ii) subject to the limitation contained in Section
2(a)(viii), if the authorized number of directors on the Board
has been increased to eight (8), then commencing on the date
which is six (6) months after the effective date of such
expansion of the Board, one additional representative
designated by the Required Investor Approval and reasonably
acceptable to the Company shall be elected to the Board;
(iii) subject to the limitations contained in Section
2(a)(viii), if the authorized number of directors on the Board
has been increased (A) to nine (9) prior to the election of
the additional Investor Designee pursuant to Section 2(a)(ii)
above, or (B) to ten (10) or higher at any time after the
election of the additional Investor Designee pursuant to
Section 2(a)(ii) above, there shall be elected to the Board
such number of additional Investor Designees (who must be
reasonably acceptable to the Company), if any, as are
necessary to result in the percentage representation by
Investor Designees on the Board equaling at least the
Institutional Investors' percentage ownership of outstanding
Common Stock of the Company arising out of their ownership of
(x) shares of Series B Preferred (assuming the conversion of
all outstanding shares of Series B Preferred) and (y) shares
of Common Stock that have been issued on conversion of shares
of Series B Preferred; provided, in no event shall the number
of Investor Designees to the Board be less than one (1);
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<PAGE> 3
(iv) the governing body of each of the Company's Subsidiaries
(each a "Sub Board") shall have at least one Investor
Designee;
(v) any committees of the Board or a Sub Board (to the extent
not yet created) shall be created only upon Required Board
Approval and each committee shall have at least one Investor
Designee;
(vi) the removal from the Board or a Sub Board or any
committee thereof without cause of any Investor Designee shall
be conditional on the Required Investor Approval;
(vii) in the event that any Investor Designee ceases to serve
as a member of the Board or a Sub Board or any committee
thereof during his term of office, the resulting vacancy on
the Board or the Sub Board, and on each committee thereof,
shall be filled by an Investor Designee;
(viii) notwithstanding the provisions of Section 2(a)(ii) or
(iii), an Investor Designee shall not be added to the Board if
the number of Investor Designees on the Board resulting from
such addition would exceed the whole number obtained by
multiplying the Institutional Investors' percentage ownership
of outstanding Common Stock of the Company arising out of
their ownership of (x) shares of Series B Preferred (assuming
the conversion of all outstanding Series B Preferred) and (y)
shares of Common Stock that have been issued on conversion of
shares of Series B Preferred by the total number of directors
on the Board which would result from the addition of such
Investor Designee (it being understood that for purposes of
determining the whole number, any decimal beginning with 0-4
shall be rounded down to the nearest whole number and any
decimal beginning with 5-9 shall be rounded up to the nearest
whole number); and
(ix) in no event shall the number of directors on the Board be
less than five (5).
(b) The Company shall pay the reasonable out-of-pocket
expenses incurred by each director in connection with attending (i) the meetings
of the Board, any Sub Board and any committee thereof and (ii) any other
meetings at the request of any Company or any of its Subsidiaries. So long as
any Investor Designee serves on the Board or a Sub Board and for six years
thereafter, the Company shall maintain directors and officers indemnity
insurance coverage as currently in place or as otherwise approved by the
Required Investor Approval, and the constituent documents of the Company and
each of its Subsidiaries, as appropriate, shall provide for indemnification and
exculpation of directors to the fullest extent permitted under applicable
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<PAGE> 4
law.
(c) If any party or parties fail(s) (but is otherwise
entitled) to designate a representative to fill a directorship pursuant to the
terms of this Section 2, the election of an individual to such directorship
shall be accomplished in accordance with the Company's or the applicable
Subsidiary's constituent documents and applicable law; provided that the parties
shall take all necessary actions to remove such individual if the party or
parties which failed (and are otherwise entitled) to designate such director so
directs.
Section 3. Approval of Transaction. In the event a meeting of the Company's
stockholders is required under the General Corporation Law of the State of
Nevada or otherwise, including under the regulations of the Nasdaq Stock Market
(the "Nasdaq Rules"), for the approval of any aspect of the transactions
contemplated by the Purchase Agreement, including the issuance of the Purchased
Securities (the "Stockholder Approval"), (i) the Company shall promptly take all
action necessary to convene a meeting of its stockholders in accordance with the
Nevada General Corporation Law and the Company's Articles of Incorporation and
By-laws, and shall provide to its stockholders all proxy materials required by
the Nasdaq Rules and the regulations under the Securities Exchange Act of 1934,
as amended, in order to obtain the Stockholder Approval and (ii) each
Securityholder shall promptly take all necessary or desirable action within such
Securityholder's control (including, without limitation, attendance at
stockholders' meetings in person or by proxy for the purposes of obtaining a
quorum and the execution of written consents in lieu of meetings) to ensure that
all voting securities of the Company (including the Common Stock) over which
such Securityholder has control shall be voted in favor of the Stockholder
Approval.
Section 4. Amendment and Waiver. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against the Company or any of the Institutional Investors unless such
modification, amendment or waiver is approved in writing by the Company and the
Required Investor Approval. The failure of any party to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of such party thereafter to enforce
each and every provision of this Agreement in accordance with its terms.
Section 5. Representations and Warranties of the Securityholders. Each
Securityholder represents and warrants to each Institutional Investor (as to
itself but not as to any other party) upon becoming a party hereto as follows:
(a) Authorization; No Breach. The execution, delivery and
performance by such Securityholder of this Agreement has been duly authorized by
or on behalf of such Securityholder. This Agreement constitutes a valid and
binding obligation of such Securityholder, enforceable in accordance with its
terms. The execution and delivery by such
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<PAGE> 5
Securityholder of this Agreement, and the fulfillment of and compliance with the
terms hereof by such Securityholder, do not and will not (a) conflict with or
result in a breach of the terms, conditions or provisions of, (b) result in a
violation of, or (c) require any consent that has not been obtained or made of,
from, with or to, any Person pursuant to, the constituent documents of such
Securityholder, or any material agreement, instrument or other documents, or any
applicable material requirement of law to which such Securityholder or any
Affiliate is bound or to which any of such Persons or its assets is subject.
(b) Record Owner; Proxy. Such Securityholder (i) is the record
owner of the number of Subject Securities set forth opposite its name on
Schedule A attached to this Agreement and (ii) is not a party to any proxy,
voting trust or other agreement which is inconsistent with, conflicts with or
violates any provision of this Agreement. No Securityholder shall grant any
proxy or become party to any voting trust or other agreement which is
inconsistent with, conflicts with or violates any provision of this Agreement.
Section 6. Representations and Warranties of the Company. The Company
represents and warrants to each Institutional Investor as follows:
(a) Authorization; No Breach. The execution, delivery and
performance of this Agreement has been duly authorized by or on behalf of the
Company. This Agreement constitutes a legal, valid and binding obligation of the
Company, enforceable in accordance with its terms. The execution and delivery by
the Company of this Agreement, and the fulfillment of and compliance with the
terms hereof by the Company, does not and will not (a) conflict with or result
in a breach of the terms, conditions or provisions of, (b) result in a violation
of, or, (c) require any consent that has not been obtained or made of, from,
with or to, any Person pursuant to, the constituent documents of the Company or
any or its Subsidiaries, or any agreement, instrument or other document, or any
applicable material requirement of law to which the Company or any of its
Subsidiaries or any of its Affiliates is bound or to which any of such Persons
or its assets is subject.
Section 7. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this
Agreement in such jurisdiction or affect the validity, legality or
enforceability of any provision in any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had not been contained herein.
Section 8. Successors and Assigns. Except as otherwise provided herein,
this Agreement shall bind and inure to the benefit of and be enforceable by the
Company and the Institutional
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<PAGE> 6
Investors and their respective successors and assigns; provided, that the
Company may not assign any of its obligations under this Agreement without the
Required Investor Approval. This Agreement shall be binding upon the
Securityholders and Institutional Investors so long as they hold Subject
Securities.
Section 9. Counterparts; Fax Signatures. This Agreement may be executed in
multiple counterparts, each of which shall be an original and all of which taken
together shall constitute one and the same agreement. Signatures sent by
telecopy shall be deemed to constitute original signatures.
Section 10. Remedies. Each party to this Agreement shall be entitled to
enforce its rights under this Agreement specifically, to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in its favor. The parties hereto agree and acknowledge
that money damages would not be an adequate remedy for any breach of the
provisions of the Agreement and that the Company or any Institutional Investor
may in its sole discretion apply to any court of law or equity or competent
jurisdiction for specific performance and/or injunctive relief (without posting
a bond or other security) in order to enforce or prevent any violation of the
provisions of this Agreement.
Section 11. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed first class mail
(postage prepaid) or sent by reputable overnight courier service (charges
prepaid) or sent by telecopy to the Company at the address set forth below and
to any other recipient at the address indicated on the Schedule attached hereto
or at such address or to the attention of such other Person as the recipient
party has specified by prior written notice to the sending party. Notices shall
be deemed to have been given hereunder when delivered personally, when delivery
is confirmed by telecopy, three days after deposit in the U.S. mail and one day
after deposit with a reputable overnight courier service.
MGC Communications, Inc.
3301 North Buffalo Drive
Las Vegas, Nevada 89129
Attention: Maurice J. Gallagher, Jr.
Facsimile: (702) 310-5715
Telephone: (702) 310-1000
Section 12. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Rhode Island, without
giving effect to any choice of law or conflict of law rules or provisions
(whether of the State of Rhode Island or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
Rhode Island; provided that the General Corporation Law of the State of Nevada
shall govern all issues concerning the voting of the Subject Securities.
- 6 -
<PAGE> 7
Section 13. Descriptive Headings; Interpretation. The descriptive headings
of this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. Reference to any agreement, document or
instrument means such agreement, document or instrument as amended or otherwise
modified from time to time in accordance with the terms thereof and, if
applicable, hereof. The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement. Unless otherwise
specified herein, the term "or" has the inclusive meaning represented by the
term "and/or" and the term "including" is not limiting. All references as to
"Sections", "Subsections", "Articles", "Schedules" and "Exhibits" shall be to
Section, Subsections, Articles, Schedules and Exhibits, respectively, of this
Agreement unless otherwise specifically provided.
Section 14. No Strict Construction. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
Section 15. No Third Party Beneficiaries. This Agreement is not intended to
confer any rights or remedies upon any Person other than the parties hereto and
their successors and permitted assigns.
Section 16. Complete Agreement. This Agreement embodies the complete
agreement and understanding among the parties and supersedes and preempts any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
Section 17. Termination. This Agreement shall terminate upon the earlier to
occur of (i) seven (7) years from the date hereof or (ii) the date upon which
(A) less than one-third (1/3) of the number of shares of Series B Preferred
initially issued remains outstanding and (B) the number of shares of Series B
Preferred outstanding represents less than five percent (5%) of the outstanding
Common Stock, assuming conversion of all outstanding shares of Series B
Preferred.
[THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY.]
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
MGC COMMUNICATIONS, INC.
By:
Name:
Title:
PROVIDENCE EQUITY PARTNERS III L.P.
By: Providence Equity Partners III L.L.C.,
its general partner
By:
Name:
Title:
J K & B CAPITAL III L.P.
By:
Name:
Title:
WIND POINT PARTNERS III, L.P.
By:
Name:
Title:
[SIGNATURE PAGE TO SECURITYHOLDERS' AGREEMENT]
- 8 -
<PAGE> 9
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
- 9 -
<PAGE> 10
Title:
[SIGNATURE PAGE TO SECURITYHOLDERS' AGREEMENT]
- 10 -
<PAGE> 11
SCHEDULE A TO SECURITYHOLDERS' AGREEMENT
<TABLE>
<CAPTION>
TOTAL NUMBER OF
SHARES OF COMMON
STOCKHOLDER DETAIL STOCK OWNED
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maurice Gallagher Direct ownership - 22,500 3,190,546
Various trusts (1) - 1,478,146
Gallagher Family Investments,
LP - 1,650,000
Gallagher Corp. - 39,900
Nield Montgomery 736,500
Timothy Flynn Direct ownership - 790,500 892,500
Flynn Family Investments, LP
- 60,000
Flynn Corp. - 42,000
David Kronfeld JK&B Capital (2) - 968,143 1,145,371
Boston Capital Ventures III,
L.P. - 171,428
Direct ownership - 5,800
Thomas Neustaetter Strategic Investment Partners 694,512
Limited - 342,856
S-C Phoenix Holdings, LLC -
214,285
Winston Partners II LDC -
85,714
Winston Partners II LLC -
42,857
Direct Ownership - 8,800
Wind Point Partners III 685,714
(Jim TenBroek)
Robert L./Carol A. Priddy 889,500
Hayden & Ladonna Fleming 140,369
Revocable Trust
</TABLE>
- 11 -
<PAGE> 12
<TABLE>
<CAPTION>
<S> <C>
Hayden Fleming IRA 4,000
Ladonna Fleming IRA 6,500
Circle F Ventures, LLC 664,400
Mitch Allee 470,500
John Boersma 64,000
</TABLE>
- 12 -
<PAGE> 13
<TABLE>
<CAPTION>
TOTAL NUMBER OF
SHARES OF COMMON
STOCKHOLDER DETAIL STOCK OWNED
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dave Clark 13,620
TOTAL: 9,598,032
TOTAL OUTSTANDING: 17,205,614
PERCENTAGE: 55.78%
(1) Gallagher Stock Trust dated 4/2/94
Gallagher Trust dated 10/20/92
(2) JK&B Capital, L.P. JK&B Capital II, L.P.
</TABLE>
A-2
<PAGE> 1
EXHIBIT 4.3
SERIES B PREFERRED STOCK
REGISTRATION RIGHTS AGREEMENT
THIS SERIES B PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT (the
"Agreement"), entered into this ___ day of _____________, 1999 is made by and
among (i) MGC Communications, Inc., a Nevada corporation (the "Company") and
(ii) each person listed on Exhibit A hereto (collectively, the "Investors").
WHEREAS, pursuant to the Securities Purchase Agreement, dated as of the
date hereof (the "Purchase Agreement"), among the Company and the Investors, the
Company shall issue on the date hereof to the Investors 5,277,779 shares of the
Company's Series B Convertible Preferred Stock, par value $.001 per share (the
"Series B Preferred Stock"); and
WHEREAS, as a condition to the Investors' consummation of the transactions
contemplated by the Purchase Agreement (the "Closing"), the Company has agreed
to provide the Investors with registration rights with respect to the shares of
Common Stock, par value $.001 per share (the "Common Stock");
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the receipt and sufficiency of which are
acknowledged, the parties hereto, each intending to be legally bound hereby,
agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1 Definitions.
As used herein, the following terms shall have the respective meanings set
forth below:
"Common Stock" means the Company's Common Stock, par value $.001 per
share.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holders" means the Investors, for so long as the Investors own any Series
B Preferred Stock or any Registrable Securities, and their successors, assigns
and direct and indirect transferees who become registered owners of Series B
Preferred Stock or Registrable Securities.
"Person" means an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
"Registrable Securities" means (i) any Common Stock issued or issuable to
the Investors, whether directly or by conversion of securities convertible into
Common Stock, and (ii) any
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<PAGE> 2
other securities issued or issuable directly or indirectly with respect to the
securities referred to in clause (i) above by way of stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
conversion, consolidation or other reorganization. As to any particular shares
constituting Registrable Securities, such shares will cease to be Registrable
Securities when they have been (x) effectively registered under the Securities
Act and disposed of in accordance with a registration statement covering them,
or (y) sold to the public pursuant to Rule 144 or a similar provision under the
Securities Act. For purposes of this Agreement, a Person will be deemed to be a
holder of Registrable Securities whenever such Person has the right to acquire
directly or indirectly such Registrable Securities (upon conversion or exercise
in connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
ARTICLE II.
REGISTRATION RIGHTS
SECTION 2.1 Demand Registrations.
(a) Requests for Registration. Any Holder or number of Holders may
request, at any time after 90 days following the Closing, registration under the
Securities Act of all or part of their Registrable Securities on Form S-1, or
any similar long-form registration ("Long-Form Registration"), or, if available,
at the Company's option, on Form S-2 or S-3 or any similar short-form
registration ("Short-Form Registration"); provided that the aggregate offer
price of all such Registrable Securities being registered is at least
$1,000,000. Each request for a Demand Registration shall specify the number of
Registrable Securities requested to be registered, and the proposed underwriter.
Within ten days after receipt of any such request, the Company will give written
notice of such requested registration to all other holders (if any) of
Registrable Securities and, subject to Section 2.1(e) below, will include in
such registration all Registrable Securities with respect to which the Company
has received written requests for inclusion therein within 15 days after the
receipt of the Company's notice. All registrations requested pursuant to this
Section 2.1 are referred to herein as "Demand Registrations."
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<PAGE> 3
(b) Long-Form Registrations. The Holders will be entitled to request two
(2) Long-Form Registrations in which the Company will pay all Registration
Expenses. A registration will not count as one of such two (2) Long-Form
Registrations until it has become effective or the demanding Holders withdraw
their request (unless such withdrawal is due to a material adverse change in the
business, operations, prospects or condition (financial or otherwise) of the
Company since the date of such demand). The Company will pay all Registration
Expenses in connection with any initiated registration whether or not it has
become effective unless the respective Investors withdraw their request (unless
such withdrawal is pursuant to the provisions of Section 2.1(e) hereunder or due
to a material adverse change in the business, operations, prospects or condition
(financial or otherwise) of the Company since the date of such demand).
(c) Short-Form Registrations. In addition to the Long-Form Registrations
provided pursuant to Section 2.1(b), the Holders will be entitled to request
unlimited Short-Form Registration, provided that the aggregate offering value of
the Registrable Securities requested to be registered in any Short-Form
Registration must equal at least $1,000,000 and that the Holders may only
request two (2) Short-Form Registrations in any 12-month period. After the
Company has become subject to the reporting requirements of the Exchange Act,
the Company will use its best efforts to make Short-Form Registrations available
for the sale of Registrable Securities. The Company will pay all Registration
Expenses with respect to Short-Form Registrations. The rights of a holder of
Registrable Securities under this Section 2.1(c) shall expire at such time as
the Registrable Securities of such holder are transferable without restriction
as to volume under Rule 144 under the Securities Act.
(d) Priority on Demand Registrations. If a Demand Registration is an
underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and, if
permitted hereunder, other securities requested to be included in such offering
exceeds the number of Registrable Securities and other securities, if any, which
can be sold therein without adversely affecting the marketability of the
offering (the "Offering Quantity"), the Company will include in such
registration securities in the following priority:
(i) first, before including any securities which are not Registrable
Securities held by the Holders, the Company will include all of the
Registrable Securities requested to be included by such Holders, and if
the number of Registrable Securities requested to be included exceeds the
Offering Quantity, then the Company shall include only each such
requesting Holder's pro rata share of the Offering Quantity, based on the
amount of Registrable Securities held by such Holder (provided that any
Registrable Securities thereby allocated to any such Holder that exceed
such Holder's request shall be reallocated among the remaining requesting
Holders in like manner); and
(ii) second, to the extent (and only to the extent) that the
Offering Quantity exceeds the aggregate amount of Registrable Securities
which are
3
<PAGE> 4
requested to be included in such registration, the Company shall include
in such registration any other securities requested to be included in the
offering.
Any Persons other than holders of Registrable Securities who participate in
Demand Registrations which are not at the Company's expense must pay their share
of the Registration Expenses as set forth in Section 2.5 hereof.
(e) Restrictions on Demand Registrations. The Company will not be
obligated to effect any Demand Registration within 90 days after the effective
date of a previous Demand Registration. The Company may postpone upon one
occasion in any 365 day period for up to 120 days the filing or the
effectiveness of a registration statement for a Demand Registration if the
Company determines in its good faith judgment that such Demand Registration
would reasonably be expected to have a material adverse effect on any proposal
or plan by the Company or any of its subsidiaries to engage in any acquisition
of assets or shares of unrelated companies (other than in the ordinary course of
business) or any merger, consolidation, tender offer or similar transaction. In
such event, the holders of a majority of Registrable Securities requesting such
Demand Registration will be entitled to withdraw such request and, if such
request is withdrawn, such Demand Registration will not count as one of the
permitted, Demand Registrations hereunder and the Company will pay all
Registration Expenses in connection with such registration.
(f) Selection of Underwriters. The holders of a majority of the
Registrable Securities initiating any Demand Registration will have the right to
select the investment banker(s) and manager(s) to administer the offering,
subject to the Company's approval which will not be unreasonably withheld.
(g) Other Registration Rights. Except as provided in this Agreement, the
Company will not grant to any Person the right to request the Company to
register any equity securities of the Company, or any securities convertible or
exchangeable into or exercisable for such securities, which contains terms or
conditions more favorable than the terms or conditions contained in this
Agreement, without the prior written consent of the Holders of a majority of the
Registrable Securities.
(h) Limitation on Exercise of Demand Rights. Notwithstanding anything to
the contrary herein, prior to the first anniversary of the Closing Date, the
holders of the Registrable Securities shall not have the right to make a Demand
Registration unless the Market Threshold (as defined in the Certificate of
Designation for the Series B Preferred) has been reached.
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<PAGE> 5
SECTION 2.2 Piggyback Registrations.
(a) Right to Piggyback. Whenever the Company proposes to register any of
its securities under the Securities Act (other than pursuant to a Demand
Registration or a registration on Form S-4 or S-8 or any successor or similar
forms) and the registration form to be used may be used for the registration of
Registrable Securities (a "Piggyback Registration"), whether or not for sale for
its own account, the Company will give prompt written notice to all holders of
Registrable Securities of its intention to effect such a registration and will
include in such registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within 20 days
after the receipt of the Company's notice. The rights of a holder of Registrable
Securities under this Section 2.2 shall expire at such time as the Registrable
Securities of such holder are transferable without restriction as to volume
under Rule 144 under the Securities Act.
(b) Piggyback Expenses. The Registration Expenses of the holders of
Registrable Securities will be paid by the Company in all Piggyback
Registrations.
(c) Priority on Registrations. If a Piggyback Registration is an
underwritten primary registration on behalf of the Company or an underwritten
offering undertaken by the Company pursuant to a demand registration exercised
by a Person other than the Investors (a "Demanding Party"), and the managing
underwriters advise the Company in writing (with a copy to each party hereto
requesting registration of Registrable Securities) that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in such offering without adversely affecting the
marketability of such offering (the "Company Offering Quantity"), the Company
will include in such registration securities in the following priority:
(i) first, the securities the Company proposes to sell and the
securities requested to be included by the Demanding Party in accordance
with any agreement between the Company and the Demanding Party; and
(ii) second, the Company will include all Registrable Securities
requested to be included by any holders thereof and all other holders of
registrable securities, and if the number of such holders' securities
requested to be included exceeds the Company Offering Quantity, then the
Company shall include only each such requesting holder's pro rata share of
the Company Offering Quantity, based on the amount of securities held by
such holder.
(d) Other Registrations. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to
Section 2.1 or pursuant to this Section 2.2, and if such previous registration
has not been withdrawn or abandoned, the Company will not file or cause to be
effected any other registration of any of its equity securities or securities
convertible or exchangeable into or exercisable for its equity securities under
the Securities Act (except on Form S-4 or S-8 or any successor form), whether on
its own behalf or at the request of any holder
5
<PAGE> 6
or holders of such securities, until a period of at least 90 days has elapsed
from the effective date of such previous registration statement.
SECTION 2.3 Holdback Agreements.
(a) To the extent not inconsistent with applicable law, each Investor
agrees not to effect any public sale or distribution (including sales pursuant
to Rule 144) of equity securities of the Company, or any securities, options or
rights convertible into or exchangeable or exercisable for such securities that
such Investor owns prior to the effective date of any underwritten registration,
during the seven days prior to and the 120-day period beginning on the effective
date of any underwritten registration, unless the underwriters managing the
registered public offering otherwise agree; provided that such restrictions
shall not be more restrictive in duration or scope than restrictions imposed on
(i) any Person which has been granted registration rights by the Company, (ii)
any officer or director of the Company or (iii) any 5% holder of securities of
the Company.
(b) The Company agrees (i) not to effect any public sale or distribution
of its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
120-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration (except as part of such
underwritten registration or pursuant to registrations on Form S-4 or S-8 or any
successor form), unless the underwriters managing the registered public offering
otherwise agree, and (ii) to cause each holder of its Common Stock, or any
securities convertible into or exchangeable or exercisable for Common Stock,
purchased from the Company at any time after the date of this Agreement (other
than in a registered public offering or pursuant to a stock option plan adopted
by the Company or upon the exercise of warrants outstanding as of the date of
this Agreement unless such holder is a party to this Agreement) to agree not to
effect any public sale or distribution (including sales pursuant to Rule 144) of
any such securities during such period (except as part of such underwritten
registration, if otherwise permitted), unless the underwriters managing the
registered public offering otherwise agree.
SECTION 2.4 Registration Procedures. Whenever Holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company will as
expeditiously as possible:
(a) prepare and within 60 days (or 45 days with respect to any Short-Form
Registration) after the end of the period within which requests for registration
may be given to the Company and file with the Securities and Exchange Commission
a registration statement with respect to such Registrable Securities and
thereafter use its best efforts to cause such registration statement to become
effective (provided that before filing a registration statement or prospectus or
any amendments or supplements thereto, the Company will furnish to the counsel
selected by the
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<PAGE> 7
holders of a majority of the Registrable Securities initiating such registration
statement copies of all such documents proposed to be filed, which documents
will be subject to review of such counsel);
(b) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a period of either (i) not less than 180 days (subject
to extension pursuant to Section 2.7(b)) or, if such registration statement
relates to an underwritten offering, such longer period as in the opinion of
counsel for the underwriters a prospectus is required by law to be delivered in
connection with sales of Registrable Securities by an underwriter or dealer or
(ii) such shorter period as will terminate when all of the securities covered by
such registration statement have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof set forth in
such registration statement (but in any event not before the expiration of any
longer period required under the Securities Act), and to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement until such time as all of such
securities have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such registration
statement;
(c) furnish to each seller of Registrable Securities such number of copies
of such registration statement, each amendment and supplement thereto, the
prospectus included in such registration statement (including each preliminary
prospectus) and such other documents as such seller may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by such
seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company will not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction);
(e) notify each seller of such Registrable Securities, and the Managing
Underwriters, if any, promptly (1)(A) when a prospectus or any prospectus
supplement or post-effective amendment is proposed to be filed, and (B) with
respect to a registration statement or any post-effective amendment, when the
same has become effective, (2) of any request by the SEC or any other Federal or
state governmental authority for amendments or supplements to a registration
statement or related prospectus or for additional information, (3) of the
issuance by the SEC, any state securities commission, any other governmental
agency or any court of any stop order, order or injunction suspending or
enjoining the use of a prospectus or the effectiveness of a registration
statement or the initiation of any proceedings for that purpose, (4) of the
receipt by the Company
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<PAGE> 8
of any notification with respect to the suspension of the qualification or
exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction, or the initiation or threatening of any proceeding for such
purpose, and (5) of the happening of any event (a "Changing Event") as a result
of which, the prospectus included in such registration statement contains an
untrue statement of a material fact or omits any fact necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made, and, at the request of any such seller, the Company will as soon
as possible prepare and furnish to such seller (a "Correction Event") a
reasonable number of copies of a supplement or amendment to such Prospectus so
that, as thereafter delivered to the purchasers of such Registrable Securities,
such Prospectus will not contain an untrue statement of a material fact or omit
to state any fact necessary to make the statements therein not misleading in the
light of the circumstances under which they were made;
(f) use its best efforts to cause all such Registrable Securities to be
listed on each securities exchange on which similar securities issued by the
Company are then listed and, if not so listed, to be listed on the NASD
automated quotation system;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities;
(i) make available for inspection by any seller of Registrable Securities,
any underwriter participating in any disposition pursuant to such registration
statement, any accountant or other agent retained by any such seller or
underwriter and one firm of attorneys representing the holders of Registrable
Securities, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors,
employees and independent accountants to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or agent in
connection with such registration statement;
(j) otherwise use its best efforts to comply with all applicable rules and
regulations of the Securities and Exchange Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any securities included in such registration statement for sale
8
<PAGE> 9
in any jurisdiction, the Company will use its reasonable best efforts promptly
to obtain the withdrawal of such order;
(l) use its best efforts to obtain one or more comfort letters, dated the
effective date of such registration statement (and, if such registration
includes an underwritten public offering, dated the date of the closing under
the underwriting agreement), signed by the Company's independent public
accountants in customary form and covering such matters of the type customarily
covered by comfort letters as the holders of a majority of the Registrable
Securities being sold reasonably request;
(m) use its best efforts to provide a legal opinion of the Company's
outside counsel, dated the effective date of such registration statement (or, if
such registration includes an underwritten public offering, dated the date of
the closing under the underwriting agreement), with respect to the registration
statement, each amendment and supplement thereto, the prospectus included
therein (including the preliminary prospectus) and such other documents relating
thereto in customary form and covering such matters of the type customarily
covered by legal opinions of such nature.
(n) in connection with any sale or transfer of Registrable Securities that
will result in such securities no longer being Registrable Securities, cooperate
with the Holders thereof and the managing underwriters, if any, to facilitate
the timely preparation and delivery of certificates representing Registrable
Securities to be sold, which certificates shall not bear any restrictive legends
and shall be in a form eligible for deposit with The Depository Trust Company
and to enable such Registrable Securities to be in such denominations and
registered in such names as the managing underwriters, if any, or such Holders
may request at least two business days prior to any sale of Registrable
Securities;
(o) make available for inspection by a representative of any underwriter
participating in any such disposition of Registrable Securities, and any
attorney, consultant or accountant retained by such selling Holders or
underwriter, at the offices where normally kept, during reasonable business
hours, all pertinent financial and other records, corporate documents and
properties of the Company and its subsidiaries (including with respect to
businesses and assets acquired or to be acquired to the extent that such
information is available to the Company), and cause the officers, directors,
agents and employees of the Company and its subsidiaries (including with respect
to businesses and assets acquired or to be acquired to the extent that such
information is available to the Company) to supply all information in each case
reasonably requested by any such representative, underwriter, attorney,
consultant or accountant in connection with such Registration Statement;
(p) cooperate with each seller of Registrable Securities covered by any
Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Securities and their respective counsel in
connection with any filings required to be made with the NASD; and
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<PAGE> 10
(q) if requested by the selling Holders or the managing underwriters, if
any, (x) promptly incorporate in a prospectus supplement or post-effective
amendment such information as the selling Holders or the managing underwriters,
if any, reasonably believe is required to be included therein, and (y) make all
required filings of such prospectus supplement or such post-effective amendment
under the Act as soon as practicable after the Company has received notification
of the matters to be incorporated in such prospectus supplement or
post-effective amendment.
The Company may require each seller of Registrable Securities as to which any
registration is being effected to furnish the Company such information regarding
such seller and the distribution of such securities as the Company may from time
to time reasonably request in writing.
SECTION 2.5 Registration Expenses.
(a) All expenses incident to the Company's performance of or compliance
with this Agreement, including, without limitation, all registration and filing
fees, fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, and fees and disbursements of counsel
for the Company and all independent certified public accountants, underwriters
(excluding discounts and commissions, which will be paid by the sellers of
Registrable Securities) and other Persons retained by the Company (all such
expenses being herein called "Registration Expenses"), will be borne as provided
in this Agreement, and the Company will, in any event, pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit or quarterly review, the expense of any liability insurance and the
expenses and fees for listing the securities to be registered on each securities
exchange on which similar securities issued by the Company are then listed or on
the NASD automated quotation system.
(b) In connection with each Demand Registration and each Piggyback
Registration, the Company will reimburse the Holders covered by such
registration for the reasonable fees and disbursements of one counsel chosen by
the holders of a majority of the Registrable Securities initiating such
registration.
SECTION 2.6 Indemnification.
(a) The Company agrees to indemnify and hold harmless, to the extent
permitted by law, each Holder and each Person who controls such Holder within
the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act and the respective officers, directors, partners, employees, representatives
and agents of any such party or any controlling Person to the fullest extent
lawful, from and against any and all losses, liabilities, claims, damages and
expenses whatsoever, joint or several, to which they or any of them may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based
10
<PAGE> 11
upon (i) any untrue or alleged untrue statement of material fact contained in
any registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or, (ii) any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein not misleading, and the Company will reimburse such
Holder and each such director, officer and controlling person for any legal or
any other expenses incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability (or action or proceeding in respect
thereof) or expense arises out of or is based upon an untrue statement or
alleged untrue statement, or omission or alleged omission, made in such
registration statement, any such prospectus or preliminary prospectus or any
amendment or supplement thereto, or in any application, in reliance upon, and in
conformity with, written information prepared and furnished to the Company by
such Holder expressly for use therein or by such Holder's failure to deliver a
copy of the registration statement or prospectus or any amendments or
supplements thereto after the Company has furnished such Holder with a
sufficient number of copies of the same. In connection with an underwritten
offering, the Company will indemnify such underwriters, their officers and
directors and each Person who controls such underwriters (within the meaning of
the Securities Act) to the same extent as provided above with respect to the
indemnification of the Holders.
(b) In connection with any registration statement in which a Holder is
participating, each such Holder will furnish to the Company in writing such
information and affidavits as the Company reasonably requests for use in
connection with any such registration statement or prospectus and, to the extent
permitted by law each such Holder, severally, for itself only, will indemnify
and hold harmless the Company and each other Person who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20(a) of the
Exchange Act and the respective officers, directors, partners, employees,
representatives and agents of any such party or any controlling Person to the
fullest extent lawful, from and against any and all losses, liabilities, claims,
damages and expenses whatsoever, joint or several, to which they or any of them
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) or expenses arise out of or are
based upon (i) the purchase or sale of Registrable Securities during any period
beginning upon a Changing Event (as defined in Section 2.4(e)) and ending on a
Correction Event (as defined in Section 2.4(e)), provided such Holder received
proper written notice of such Changing Event pursuant to Section 2.4(e), (ii)
any untrue or alleged untrue statement of material fact contained in the
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or in any application, or (iii) any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statement therein not misleading, but, with respect to clauses (ii)
and (iii) above, only to the extent that such untrue statement or omission is
made in such registration statement, any such prospectus or preliminary
prospectus or any amendment or supplement thereto, or in any application, in
reliance upon and in conformity with written information prepared and
11
<PAGE> 12
furnished to the Company by such Holder expressly for use therein, and such
Holder will reimburse the Company and each such director, officer and
controlling Person for any legal or any other expenses incurred by them in
connection with investigating or defending any such loss, claim, liability,
action or proceeding; provided, however, that the obligation to indemnify will
be individual to each Holder and will be limited to the net amount of proceeds
received by such Holder from the sale of Registrable Securities pursuant to such
registration statement.
(c) Any Person entitled to indemnification hereunder will (i) give prompt
written notice to the indemnifying party of any claim with respect to which it
seeks indemnification (provided that the failure to give prompt notice shall not
impair any Person's right to indemnification hereunder to the extent such
failure has not materially prejudiced the indemnifying party) and (ii) unless in
such indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. Such indemnifying party shall
not, however, enter into any settlement with a party without obtaining an
unconditional release of each indemnified party by such party with respect to
any and all claims against each indemnified party. If such defense is assumed,
the indemnifying party will not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) The indemnification provided for under this Agreement will remain in
full force and effect regardless of any investigation made by or on behalf of
the indemnified party or controlling Person of such indemnified party or any of
the respective officers, directors, partners, employees, representatives and
agents of any such party or any controlling Person, and will survive the
transfer of securities. The Company also agrees to make such provisions, as are
reasonably requested by any indemnified party, for contribution to such party in
the event the Company's indemnification is unavailable for any reason.
12
<PAGE> 13
SECTION 2.7 Participation in Underwritten Registrations.
(a) No Person may participate in any registration hereunder which is
underwritten unless such Person (i) agrees to sell such Person's securities on
the basis provided in any underwriting arrangements approved by the Person or
Persons entitled hereunder to approve such arrangements (including, without
limitation, pursuant to the terms of any overallotment or "green shoe" option
requested by the managing underwriter(s), provided that no Investor will be
required to sell more than the number of Registrable Securities that such holder
has requested the Company to include in any registration) and (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements.
(b) Each Person that is participating in any registration hereunder agrees
that, upon receipt of any notice from the Company of a Changing Event (as
defined in Section 2.4(e)), such Person will forthwith discontinue the
disposition of its Registrable Securities pursuant to the registration statement
until such Person's receipt of the copies of a supplemented or amended
prospectus as contemplated by such Section 2.4(e). In the event the Company
shall give any such notice of a Changing Event, the applicable time period
mentioned in Section 2.4(b) during which a Registration Statement is to remain
effective shall be extended by the number of days during the period from and
including the date of the giving of such notice pursuant to this paragraph to
and including the date when each seller of a Registrable Security covered by
such registration statement shall have received the copies of the supplemented
or amended prospectus contemplated by Section 2.4(e).
SECTION 2.8 Current Public Information. At all times after the Company has
filed a registration statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Securities
Exchange Act, the Company will file all reports required to be filed by it under
the Securities Act and the Securities Exchange Act and the rules and regulations
adopted by the Securities and Exchange Commission thereunder, and will use
commercially reasonable best efforts to take such further action as any Holder
may reasonably request, all to the extent required to enable such Holders to
sell Registrable Securities pursuant to Rule 144 adopted by the Securities and
Exchange Commission under the Securities Act (as such rule may be amended from
time to time) or any similar rule or regulation hereafter adopted by the
Securities and Exchange Commission.
SECTION 2.9 Adjustment Affecting Registrable Securities. Except as
otherwise provided herein, the Company will not take any action, or permit any
change to occur, with respect to its securities which would materially and
adversely affect the ability of the Holders to include such Registrable
Securities in a registration undertaken pursuant to this Agreement or which
would adversely affect the marketability of such Registrable Securities in any
such registration.
13
<PAGE> 14
ARTICLE III.
MISCELLANEOUS
SECTION 3.1 Amendment and Waiver. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against any party hereto unless such modification, amendment or waiver
is approved in writing by Holders holding a majority of the Registrable
Securities.
SECTION 3.2 Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or the effectiveness or validity of such provision in any
other jurisdiction, and this Agreement shall be reformed, construed and enforced
in such jurisdiction as if such invalid, illegal or unenforceable provision had
never been contained herein.
SECTION 3.3 Entire Agreement. Except as otherwise expressly set forth
herein, this Agreement embodies the complete agreement and understanding among
the parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way.
SECTION 3.4 Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, and to the extent applicable heirs,
executors, administrators and legal representatives and any subsequent holders
of Registrable Securities and the respective successors and assigns of each of
them, so long as they hold Registrable Securities.
SECTION 3.5 Counterparts. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
SECTION 3.6 Remedies. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that the parties hereto shall have the right to injunctive relief,
in addition to all of its rights and remedies at law or in equity, to enforce
the provisions of this Agreement. Nothing contained in this Agreement shall be
construed to confer upon any Person who is not a signatory hereto any rights or
benefits, as a third party beneficiary or otherwise.
SECTION 3.7 Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when personally delivered
or received by certified mail, return receipt requested, confirmed telecopy or
sent by guaranteed overnight courier service. Such
14
<PAGE> 15
notices, demands and other communications will be sent to the parties at the
addresses set forth in the Purchase Agreement, or to any party (including any
new party) at such address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
SECTION 3.8 Governing Law. The General Corporation Law of the State of
Nevada will govern all issues concerning the relative rights of the Company and
its stockholders. All other issues concerning this Agreement shall be governed
by and construed in accordance with the laws of the State of Rhode Island,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of Rhode Island or any other jurisdiction) that would
cause the application of the law of any jurisdiction other than the State of
Rhode Island.
SECTION 3.9 Descriptive Headings. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
[The rest of the page is left blank intentionally]
15
<PAGE> 16
IN WITNESS WHEREOF, the parties, by their respective officers duly
authorized, have caused this Agreement to be duly executed and delivered as of
the date hereof.
MGC COMMUNICATIONS, INC.
By:
Name:
Title:
PROVIDENCE EQUITY PARTNERS III L.P.
By: Providence Equity Partners III
L.L.C., its general partner
By:
Name:
Title:
J K & B CAPITAL III L.P.
By:
Name:
Title:
WIND POINT PARTNERS III, L.P.
By:
Name:
Title:
16
<PAGE> 17
EXHIBIT A
INVESTORS
Number of Shares of
Series B Preferred Stock
Name held by such Investor
---- ---------------------
Providence Equity Partners III L.P. 4,166,667
901 Fleet Center
50 Kennedy Plaza
Providence, RI 02903
Attention: Mark Masiello
JK&B Capital III L.P. 555,556
205 N. Michigan Avenue
Suite 808
Chicago, IL 60601
Wind Point Partners III, L.P. 555,556
One Towne Square
Suite 780
Southfield, MI 48076
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,972
<SECURITIES> 89,264
<RECEIVABLES> 9,351
<ALLOWANCES> 363
<INVENTORY> 0
<CURRENT-ASSETS> 48,505
<PP&E> 131,620
<DEPRECIATION> 3,484
<TOTAL-ASSETS> 237,553
<CURRENT-LIABILITIES> 31,859
<BONDS> 156,837
0
0
<COMMON> 17
<OTHER-SE> 50,626
<TOTAL-LIABILITY-AND-EQUITY> 237,553
<SALES> 8,401
<TOTAL-REVENUES> 8,401
<CGS> 8,483
<TOTAL-COSTS> 19,694
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,624
<INCOME-PRETAX> (14,212)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,212)
<EPS-PRIMARY> (.83)
<EPS-DILUTED> (.83)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SECURITIES PURCHASE AGREEMENT
BY AND BETWEEN
PROVIDENCE EQUITY PARTNERS III L.P.
J K & B CAPITAL III L.P.
WIND POINT PARTNERS III, L.P.
AND
MGC COMMUNICATIONS, INC.
DATED AS OF APRIL 5, 1999
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE I - DEFINITIONS .........................................................................................1
SECTION 1.1. DEFINITIONS..........................................................................................1
SECTION 1.2. HEREOF, HEREIN, ETC..................................................................................6
SECTION 1.3. COMPUTATION OF TIME PERIODS..........................................................................6
ARTICLE II - SALE AND PURCHASE OF PURCHASED SECURITIES............................................................7
SECTION 2.1. SALE AND PURCHASE OF THE PURCHASED SECURITIES........................................................7
SECTION 2.2. CLOSING..............................................................................................7
SECTION 2.3. USE OF PROCEEDS......................................................................................7
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................................7
SECTION 3.1. ORGANIZATION AND EXISTENCE...........................................................................7
SECTION 3.2. AUTHORIZATION; NO CONFLICTS..........................................................................8
SECTION 3.3. ENFORCEABILITY.......................................................................................8
SECTION 3.4. CAPITALIZATION.......................................................................................9
SECTION 3.5. SUBSIDIARIES; OTHER OWNERSHIP INTERESTS..............................................................9
SECTION 3.6. REPORTS AND FINANCIAL STATEMENTS.....................................................................9
SECTION 3.7. INDEBTEDNESS AND LIENS.............................................................................10
SECTION 3.8. ACCOUNTS RECEIVABLE AND BAD DEBTS...................................................................10
SECTION 3.9. TAXES...............................................................................................11
SECTION 3.10. TITLE TO ASSETS.....................................................................................11
SECTION 3.11. MATERIAL CONTRACTS AND OBLIGATIONS..................................................................11
SECTION 3.12. PROPRIETARY RIGHTS..................................................................................13
SECTION 3.13. NECESSARY PROPERTY..................................................................................14
SECTION 3.14. NECESSARY LICENSES..................................................................................14
SECTION 3.15 COMPLIANCE WITH LAW.................................................................................14
SECTION 3.16. ENVIRONMENTAL COMPLIANCE............................................................................16
SECTION 3.17. NO MATERIAL ADVERSE CHANGES.........................................................................17
SECTION 3.18. NO BROKERS..........................................................................................17
SECTION 3.19. NETWORK.............................................................................................18
SECTION 3.20. CUSTOMERS AND SUPPLIERS.............................................................................18
SECTION 3.21. YEAR 2000 COMPLIANCE................................................................................18
SECTION 3.22. FINANCIAL REPORTS AND SEC DOCUMENTS.................................................................18
SECTION 3.23. DISCLOSURE..........................................................................................19
ARTICLE IV - PURCHASERS' REPRESENTATIONS.........................................................................19
SECTION 4.1. ORGANIZATION AND GOOD STANDING......................................................................19
SECTION 4.2. AUTHORIZATION.......................................................................................19
SECTION 4.3. ENFORCEABILITY......................................................................................20
SECTION 4.4. INVESTMENT INTENT...................................................................................20
ARTICLE V - CONDITIONS TO PURCHASERS' OBLIGATION TO PURCHASE AND THE COMPANY'S OBLIGATION TO SELL...............20
SECTION 5.1. PURCHASERS' CLOSING CONDITIONS......................................................................20
SECTION 5.2 COMPANY'S CLOSING CONDITIONS........................................................................22
ARTICLE VI - COVENANTS APPLICABLE TO THE COMPANY WHILE ANY PURCHASED SECURITIES ARE OUTSTANDING..................22
SECTION 6.1. FURTHER ASSURANCES..................................................................................23
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
ARTICLE VII - DELIVERY OF FINANCIAL AND OTHER REPORTS WHILE ANY PURCHASED SECURITIES ARE OUTSTANDING..............23
SECTION 7.1. MONTHLY STATEMENTS..................................................................................23
SECTION 7.2. OTHER FINANCIAL INFORMATION.........................................................................23
SECTION 7.5. OFFICERS' CERTIFICATES..............................................................................24
SECTION 7.6. NOTICE OF LITIGATION, DEFAULTS, ETC.................................................................24
SECTION 7.7. OTHER INFORMATION...................................................................................24
ARTICLE VIII - EXPENSES; INDEMNITY................................................................................25
SECTION 8.1. EXPENSES...........................................................................................25
SECTION 8.2. INDEMNIFICATION....................................................................................25
SECTION 8.3. BROKERS' FEES......................................................................................26
ARTICLE IX - NOTICES............................................................................................26
ARTICLE X - SURVIVAL OF COVENANTS, AGREEMENTS, REPRESENTATIONS AND WARRANTIES, TRANSFER........................27
ARTICLE XI - AMENDMENTS AND WAIVERS.............................................................................27
ARTICLE XII - WAIVER OF JURY TRIAL...............................................................................28
ARTICLE XIII - GOVERNING LAW......................................................................................28
ARTICLE XIV - PUBLIC ANNOUNCEMENTS...............................................................................28
ARTICLE XV - TIME OF THE ESSENCE................................................................................29
ARTICLE XVI - ENTIRE AGREEMENT; COUNTERPARTS; SECTION HEADINGS...................................................29
</TABLE>
- 3 -
<PAGE> 4
LIST OF EXHIBITS AND SCHEDULES
Exhibit A Certificate of Designation
Exhibit B Form of Registration Rights Agreement
Exhibit C Form of Securityholders' Agreement
Exhibit D Form of Opinion of Counsel to the Company
Exhibit E Form of Opinion of Regulatory Counsel to the
Company
Schedule 2.1:List of Purchasers
Schedule 3.1(a): Company's Foreign Qualification
Schedule 3.1(b): Subsidiaries' Qualification
Schedule 3.4(a): Capitalization
Schedule 3.4(b): Options, Etc.
Schedule 3.4(c): Registration Rights
Schedule 3.5: Subsidiaries; Other Interests
Schedule 3.6(a)(i): Historical Financial Statements
Schedule 3.6(a)(ii) February Balance Sheet
Schedule 3.6(a)(iii) Projections
Schedule 3.8: Accounts Receivable
Schedule 3.9: Taxes
Schedule 3.10: Title to Assets
Schedule 3.11(a): Material Contracts
Schedule 3.11(b): Material Contracts Exceptions
Schedule 3.12(a): Proprietary Rights
Schedule 3.12(c): Proprietary Rights Exceptions
Schedule 3.13: Necessary Property
Schedule 3.14: Licenses
Schedule 3.15: Compliance with Law
- 4 -
<PAGE> 5
Schedule 3.17: No Material Adverse Change
Schedule 3.18: Brokers
Schedule 3.19: Network
Schedule 3.20: Customers and Suppliers
Schedule 3.21: Year 2000 Compliance Plan
- 5 -
<PAGE> 6
SECURITIES PURCHASE AGREEMENT
MGC COMMUNICATIONS, INC.
3301 North Buffalo Drive
Las Vegas, Nevada 89129
As of April 5, 1999
Providence Equity Partners III L.P.
901 Fleet Center
50 Kennedy Plaza
Providence, Rhode Island 02903
JK&B Capital III L.P.
205 N. Michigan Avenue, Suite 808
Chicago, Illinois 60601
Wind Point Partners III, L.P.
One Town Square, Suite 780
Southfield, Michigan 48076
Ladies and Gentlemen:
The undersigned, MGC Communications, Inc., a Nevada corporation (the
"Company"), hereby agrees with you as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITIONS. Capitalized terms used herein and not otherwise
defined herein shall have the meanings set forth in this Article I:
Affiliate. The term "Affiliate" shall mean with respect to any Person, any
other Person that would be considered to be an affiliate of such Person under
Rule 144(a) of the Rules and Regulations of SEC, as in effect on the date
hereof.
February Balance Sheet. The term "February Balance Sheet" shall have the
meaning specified in Section 3.6(a)(ii).
Balance Sheet Date. The term "Balance Sheet Date" shall have the meaning
specified in Section 3.6(a)(i).
- 6 -
<PAGE> 7
Business Day. The term "Business Day" shall mean any day other than
Saturday, Sunday, a federal holiday or other day on which commercial banks in
the State of Rhode Island or Las Vegas, Nevada are required or permitted to
close by law.
Capital Expenditures. The term "capital expenditures" means capital
expenditures determined in accordance with GAAP, including in any event capital
lease obligations.
Charter. The term "Charter" means the certificate or articles of
incorporation, by-laws, statute, constitution, joint venture, certificate of
limited partnership, partnership agreement, articles of organization, limited
liability company operating agreement or other organizational document of any
Person other than an individual, each as from time to time amended or modified.
Closing Date. The term "Closing Date" shall have the meaning specified in
Section 2.2 or such other date as the Company and the Purchasers may agree upon.
Code. The term "Code" shall mean the Internal Revenue Code of 1986, as
amended.
Common Stock. The term "Common Stock" shall mean the Common Stock, $.001
par value, of the Company.
Company. The term "Company" shall mean MGC Communications, Inc., a Nevada
corporation.
Current Financial Statements. The term "Current Financial Statements" shall
have the meaning specified in Section 3.6(a)(ii).
Environment. The term "Environment" shall mean soil, surface waters,
groundwater, land, stream sediments, surface or subsurface strata, ambient air
and any environmental medium, whether indoors or outdoors.
Environmental Laws. The term "Environmental Laws" shall mean all federal,
foreign, state, local or municipal environmental, health or safety-related laws,
regulations, by-laws, rules, ordinances, judicial or administrative decrees or
decisions, orders or requirements applicable to the Company or any of its
Subsidiaries relating to the physical or environmental condition or use of their
respective properties, their respective businesses or pollution or protection of
human health or the Environment, including, without limitation, the
Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.,
Section 9601, et seq., as amended ("CERCLA"), the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901, et seq., as amended, the Clean Air Act, 42
U.S.C. Section 7401 et seq., as amended, the Clean Water Act, 33 U.S.C
Section 1251, et seq., the
- 7 -
<PAGE> 8
Toxic Substance Control Act, 15 U.S.C Section 2601 et seq., the Occupational
Safety and Health Act, laws relating to Releases or threatened Releases of
Hazardous Substances into the Environment or otherwise relating to the
manufacture, generation, processing, distribution, use, treatment, storage,
abatement, existence, holding, Release, transport or handling of Hazardous
Substances, and all laws and regulations with regard to recordkeeping,
notification, disclosure and reporting requirements respecting Hazardous
Substances.
Environmental Permit. The term "Environmental Permit" shall have the
meaning specified in Section 3.15(a).
Equity Securities. The term "Equity Securities" means all shares of capital
stock of the Company, including (i) all classes of shares of capital stock,
voting and non-voting (including, without limitation, the Purchased Securities),
(ii) any warrants, options or other rights to subscribe for or to acquire,
directly or indirectly, whether pursuant to any division or split of any class
of shares of capital stock of the Company or in connection with a combination,
exchange, reorganization, recapitalization, reclassification, merger,
consolidation or similar business combination transaction involving the Company
or otherwise, (iii) any other equity interests in the Company or any bonds,
notes, debentures, or other securities convertible into or exchangeable for,
directly or indirectly, any shares of capital stock or equity interests of the
Company and (iv) any interests in any of the foregoing in each case outstanding
at any time.
Family Members. The term "Family Members" shall mean, as applied to any
individual, a spouse, child, grandchild, parent, brother or sister thereof or
any spouse of any of the foregoing, and each trust created for the benefit of
one or more of such Persons and each custodian of a property of one or more such
Persons.
FCC. The term "FCC" shall mean the Federal Communications Commission.
GAAP. The term "GAAP" shall mean generally accepted accounting principles
applied on a basis consistent with prior periods and such that a chartered
accountant would, insofar as the use of accounting principles is pertinent, be
in a position to deliver an unqualified opinion as to financial statements in
which such principles have been properly applied.
Governmental Authority. The term "Governmental
Authority" shall mean any government or any agency, bureau, board,
commission, court, department, official, political subdivision,
tribunal or other instrumentality of any government (foreign, federal,
local or otherwise) and shall include any international regulatory or
trade body or organization and the FCC and any State Regulatory Agency.
Hazardous Substances. The term "Hazardous Substances" means any
- 8 -
<PAGE> 9
pollutant, contaminant, toxic substance, hazardous waste, hazardous
material, or hazardous substance, or any oil, petroleum or petroleum
product, each as defined or listed in, or classified pursuant to, any
Environmental Laws.
Historical Financial Statements. The term "Historical
Financial Statements" shall have the meaning specified in Section
3.6(a)(i).
Income Statement. The term "Income Statement" shall have the
meaning specified in Section 3.6(a)(ii).
Indebtedness. The term "Indebtedness" shall mean all
obligations, contingent (to the extent required to be reflected in
financial statements prepared in accordance with GAAP) and otherwise,
which in accordance with GAAP should be classified on the obligor's
balance sheet as liabilities, including without limitation, in any
event and whether or not so classified: (i) all debt and similar
monetary obligations, whether direct or indirect; (ii) all liabilities
secured by any mortgage, pledge, security interest, lien, charge or
other encumbrance existing on property owned or acquired subject
thereto, whether or not the liability secured thereby shall have been
assumed; (iii) all guarantees, endorsements and other contingent
obligations whether direct or indirect in respect of Indebtedness or
performance of others, including any obligation to supply funds to or
in any manner to invest in, directly or indirectly, the debtor, to
purchase Indebtedness, or to assure the owner of Indebtedness against
loss, through an agreement to purchase goods, supplies or services for
the purpose of enabling the debtor to make payment of the Indebtedness
held by such owner or otherwise and (iv) obligations to reimburse
issuers of any letters of credit.
Intellectual Property Rights. The term "Intellectual Property
Rights" shall mean all right, title and interest of the Company or any
of its Subsidiaries in and to all licenses (other than licenses with
respect to the Company's or any of its Subsidiaries' use of
off-the-shelf software programs), trademarks, tradenames, service
marks, patents, copyrights, processes of every kind and description,
manufacturing and technical know-how and information, production and
technical data, computer data, printouts and software, trade names,
logos, trade secrets and similar properties (including, without
limitation, all registrations, renewals or applications for
registration or renewal of any of them, in each case whether completed,
pending or in the process of preparation), and all licenses, royalty
agreements, permits and authorizations with respect to any of the
foregoing, in the United States or anywhere else in the world, now or
previously used, acquired or developed by or for the Company or any of
its Subsidiaries, together with the goodwill of the Company's or any of
its Subsidiaries' business associated with the
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foregoing.
IRU. The term "IRU" shall mean the right to use a
telecommunications system with most of the rights and duties of
ownership but without the right to control or manage the facility.
Leased Real Property. The term "Leased Real Property" shall
have the meaning specified in Section 3.11(a)(iii).
Licenses. The term "Licenses" shall mean all licenses,
permits, consents, approvals, concessions and authorizations of all
Governmental Authorities, whether foreign, federal, state or local,
including, without limitation, the Federal Communications Commission
and any State Regulatory Agency and their equivalents in foreign
countries.
Lien. The term "Lien" shall mean (a) any encumbrance,
mortgage, pledge, lien, charge or other security interest of any kind
upon any property or assets of any character, or upon the income or
profits therefrom; (b) any acquisition of or agreement to have an
option to acquire any property or assets upon conditional sale or other
title retention agreement, device or arrangement (including a
capitalized lease); or (c) any sale, assignment, pledge or other
transfer for security of any accounts, general intangibles or chattel
paper, with or without recourse.
Majority Purchasers. The term "Majority Purchasers" shall
mean, at any time, the holders of more than fifty percent (50%) of the
outstanding Purchased Securities.
Material Adverse Effect. The term "Material Adverse
Effect" shall mean, with respect to any Person, any effect
that is, or series of related effects that are, in the
aggregate, materially adverse to the business, assets,
properties, condition (financial or otherwise) or prospects of
such Person.
Person. The term "Person" shall mean an individual,
partnership, limited liability company, corporation, association,
trust, joint venture, unincorporated organization and any Governmental
Authority.
Purchased Securities. The term "Purchased Securities" shall mean
the Series B Preferred being purchased by the Purchasers pursuant to
Section 2.1 of this Agreement, the Common Stock issuable upon
conversion of the Series B Preferred or otherwise and any capital stock
or other securities of the Company issued or issuable in exchange
therefor upon an exchange, conversion,
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reorganization, reclassification, recapitalization, merger,
consolidation or other similar business transaction involving the
Company, its Subsidiaries or otherwise.
Purchaser. The term "Purchaser" shall mean the several
purchasers named in Schedule 2.1 (individually, a "Purchaser" and
collectively, the "Purchasers") and their respective successors and
assigns.
Related Agreements. The term "Related Agreements" shall mean
the Securityholders' Agreement and the Registration Rights Agreement.
Release. The term "Release" shall mean a "Release" as defined
in any Environmental Laws, including, but not limited to, any
releasing, spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, disposing or dumping into
the Environment in violation of any Environmental Laws.
Registration Rights Agreement. The term "Registration Rights
Agreement" shall mean that certain Registration Rights Agreement, dated
the Closing Date, by and among the Company, and the Purchasers, in the
form of Exhibit B attached hereto, as the same may be amended, modified
or supplemented from time to time.
Securities Act. The term "Securities Act" shall mean all
applicable securities laws, rules, regulations, notices and policies in
force in the United States, as amended, modified or supplemented from
time to time.
SEC. The term "SEC" shall mean the Securities and Exchange
Commission.
Securityholders' Agreement. The term "Securityholders'
Agreement" shall mean that certain Securityholders' Agreement among the
Company, the Purchasers and certain holders of the Company's
outstanding Common Stock, in the form of Exhibit C attached hereto, as
the same may be amended, modified or supplemented from time to time.
Series B Preferred. The term "Series B Preferred" shall mean
the Series B Preferred Stock, $.001 par value, of the Company.
Senior Secured Notes. The term "Senior Secured Notes" shall
mean the $160,000,000 principal amount of 13% Senior Secured Notes due
2004 that have been issued pursuant to an Indenture dated as of
September 29, 1997.
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State Regulatory Agencies. The term "State Regulatory
Agencies" means any of the various state regulatory agencies with
primary regulatory jurisdiction over telecommunications matters.
Subsidiary. The term "Subsidiary" shall mean any Person of
which the Company or other specified Person now or hereafter shall at
the time own, directly or indirectly through a Subsidiary, at least a
majority of the outstanding Equity Securities (or other shares of
beneficial interest) entitled to vote generally.
"Tax" or "Taxes". The term "Tax" or "Taxes" shall mean all
taxes, charges, fees, levies, imposts and other assessments, including
all income, sales, use, goods and services, value added, capital,
capital gains, alternative net worth, transfer, profits, withholding,
payroll, employer health, excise, real property and personal property
taxes, and any other taxes, customs duties, fees, assessments or
similar charges in the nature of a tax, including, without limitation,
pension plan contributions and workers compensation premiums, together
with any interest, fines and penalties imposed by any Governmental
Authority, and whether disputed or not.
SECTION 1.2. HEREOF, HEREIN, ETC. The words "hereof", "herein"
and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular
provision of this Agreement. Unless otherwise specified herein, the
term "or" has the inclusive meaning represented by the term "and/or"
and the term "including" is not limiting. All references as to
"Sections", "Subsections", "Articles", "Schedules" and "Exhibits" shall
be to Section, Subsections, Articles, Schedules and Exhibits,
respectively, of this Agreement unless otherwise specifically provided.
SECTION 1.3. COMPUTATION OF TIME PERIODS. In the computation
of periods of time from a specified date to a later specified date,
unless otherwise specified herein the words "commencing on" mean
"commencing on and including", the word "from" means "from and
including" and the words "to" and "until" each means "to and
including".
ARTICLE II
SALE AND PURCHASE OF PURCHASED SECURITIES
SECTION 2.1. SALE AND PURCHASE OF THE PURCHASED SECURITIES.
Subject to all of the terms and conditions hereof and in reliance on
the representations and warranties set forth or referred to herein, the
Company agrees to issue and sell to
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each Purchaser and each Purchaser agrees to purchase, on the Closing
Date, the number of Purchased Securities set forth opposite the name of
such Purchaser on Schedule 2.1, at a purchase price per share equal to
$9.00.
SECTION 2.2. CLOSING. The closing of the purchase and sale of the
Purchased Securities contemplated by Section 2.1 (the "Closing") will
take place at the offices of Edwards & Angell, 2800 BankBoston Plaza,
Providence, Rhode Island 02903 at 10:00 a.m. on a mutually agreeable
date within five (5) business days of satisfaction of the Conditions to
Closing contained in Article V (the "Closing Date"). Subject to the
satisfaction of the conditions to Closing set forth in Article V, as
payment in full for the Purchased Securities being purchased by the
Purchasers under this Agreement on the Closing Date, each Purchaser
shall deliver to the Company, in immediately available funds, the
amount set forth opposite such Purchaser's name under the heading
"Aggregate Purchase Price of the Purchased Securities" on Schedule 2.1.
SECTION 2.3. USE OF PROCEEDS. Proceeds from the sale of the
Purchased Securities hereunder shall be used for the expansion of the
Company's telecommunications network and sales and marketing program
and for working capital and general corporate purposes, as determined
from time to time by the Company's Board of Directors and consistent
with the Company's business plan in effect at such time.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Purchasers to enter into this Agreement and
to purchase the Purchased Securities, the Company hereby represents and warrants
that:
SECTION 3.1. ORGANIZATION AND EXISTENCE. (a) The Company is
duly organized, validly existing and in good standing in its
jurisdiction of organization and is duly qualified as a foreign
corporation and authorized to do business in all other jurisdictions in
which the nature of its business or property makes such qualification
necessary except where the failure to so qualify would not have a
Material Adverse Effect. Schedule 3.1(a) lists all of the jurisdictions
in which the Company is qualified as a foreign corporation and the
dates of such qualifications. The Company has the power to own its
properties and to carry on its business as now conducted and as
proposed to be conducted. The corporate headquarters, chief executive
office and principal place of business of the Company is located in the
United States.
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<PAGE> 14
(b) Each of the Company's Subsidiaries is duly organized,
validly existing and in good standing in its jurisdiction of
incorporation and is duly qualified as a foreign entity and authorized
to do business in all other jurisdictions in which the nature of its
business or property makes such qualification necessary and where the
failure to so qualify would not have a Material Adverse Effect.
Schedule 3.1(b) lists all of Company's Subsidiaries and their states of
incorporation. Each of the Subsidiaries has the power to own its
properties and to carry on its business as now conducted and as
proposed to be conducted. The Company holds of record all outstanding
shares of each Subsidiary.
SECTION 3.2. AUTHORIZATION; NO CONFLICTS. The execution,
delivery and performance by the Company of this Agreement and of each
Related Agreement, and the issuance and sale by the Company of the
Purchased Securities hereunder, (a) are within its power and authority,
and (b) have been duly authorized by all necessary action of the
Company and its stockholders and by all other requisite proceedings.
Neither the execution and delivery by the Company of this Agreement or
any Related Agreement nor the consummation by the Company of the
transactions contemplated thereby (including, without limitation, the
purchase and sale of the Purchased Securities hereunder) (a) will
violate any provision of the Charter of the Company or any of its
Subsidiaries, (b) will violate or conflict with any applicable statute,
law, ordinance, rule, regulation, order, judgment, writ, injunction,
license, permit or decree applicable to the Company or any of its
Subsidiaries, (c) will conflict with or constitute a violation of or a
default (or an event which with notice or lapse of time or both, would
constitute a default) under, or will result in the termination of, or
accelerate performance required by, any Contract to which the Company
or any of its Subsidiaries is a party or to which any of the assets or
properties of the Company or any of its Subsidiaries are subject, (d)
will result in the creation of any Lien upon any of the Equity
Securities of the Company or any of its Subsidiaries or upon any of the
property or assets of the Company or any of its Subsidiaries, or (e)
will require the consent, authorization or approval of, or notice to or
filing or registration with, any Person, other than the filing under
the Hart-Scott Act, as described in Section 5.1(h) and stockholder
approval, if required by Nasdaq.
SECTION 3.3. ENFORCEABILITY. The execution and delivery by the
Company of this Agreement and of each of the Related Agreements, and
the issuance and sale by the Company of the Purchased Securities
hereunder, will result in legally binding obligations of the Company
enforceable against the Company in accordance with the respective terms
and provisions hereof and thereof, subject, however, to limitations
with respect to enforcement imposed by law in connection with
bankruptcy or similar proceedings, or to the extent that equitable
remedies
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<PAGE> 15
such as specific performance and injunction are in the discretion of
the court from which they are sought.
SECTION 3.4. CAPITALIZATION.
(a) Schedule 3.4(a) accurately sets forth the number, type and
class of Equity Securities the Company is authorized to issue, the name
and address of those Persons owning 5% or more of the Company's
outstanding Equity Securities immediately prior to giving effect to the
transactions contemplated hereby and the number and class of Equity
Securities owned by each such record owner. All of the Company's issued
Equity Securities have been duly authorized, validly issued and
outstanding and are fully paid and non-assessable.
(b) Options, Etc. Except as set forth on Schedule 3.4(b) and
except for the rights of the Purchasers hereunder, no Person has any
rights (either pre-emptive or otherwise) or options to subscribe for or
purchase from the Company, or any warrants or other agreements
providing for or requiring the issuance by the Company of, any Equity
Securities or other securities convertible into or exchangeable for, or
exercisable into Equity Securities of the Company, or any voting
trusts, proxies or agreements relating to the voting of the Company's
or any Subsidiary's Equity Securities. The number of shares of Common
Stock available for issuance under the Company's Stock Option Plan is
2,640,000. Schedule 3.4(b) sets forth the (i) name of each Person
holding such convertible or exchangeable securities, (ii) the type of
security, (iii) the amount of shares of Common Stock issuable upon
exercise of such securities, and (iv) the exercise price of such
securities.
(c) Registration Rights. Except as set forth on Schedule 3.4(c)
and as provided under the Registration Rights Agreement, no other
holder of Equity Securities has registration rights with respect to
such Equity Securities.
SECTION 3.5. SUBSIDIARIES; OTHER OWNERSHIP INTERESTS. Except as
set forth on Schedule 3.5 hereto, the Company does not have any
Subsidiaries (foreign or domestic) and does not own or hold of record
and/or beneficially own or hold, directly or through a Subsidiary, any
Equity Securities of any corporation, general or limited partnership,
limited liability company, business trust or joint venture or in any
other unincorporated trade or business enterprise. Except as set forth
on Schedule 3.5 hereto, all outstanding Equity Securities of each such
Subsidiary and such other business enterprises is owned by the Company
or another Subsidiary of the Company as set forth on such Schedule 3.5,
free and clear of any Lien, is validly issued and outstanding, and is
fully paid and non-
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assessable, and there are no commitments for the purchase or sale of,
and no options, warrants or other rights to subscribe for or purchase,
any Equity Securities of any such Subsidiary.
SECTION 3.6. REPORTS AND FINANCIAL STATEMENTS.
(a) Each Purchaser has heretofore been furnished with the
following:
(i) true and complete copies of the audited
consolidated balance sheet of the Company as of December 31,
1998 (the "Balance Sheet Date"), December 31, 1997 and
December 31, 1996 and the related audited statements of
earnings, retained earnings and cash flows for the years then
ended prepared by Arthur Andersen LLP (with the exception of
the financial statements for 1996, which were audited by KPMG
LLP) and certified without qualification by such accounting
firm to have been prepared in accordance with GAAP, such
balance sheets and income statements being attached hereto as
Schedule 3.6(a)(i) (collectively, the "Historical Financial
Statements");
(ii) the consolidated balance sheet and statement of
income and cash flow of the Company and its subsidiaries as of
February 28, 1999 (the "February Balance Sheet") and statement
of income for the two-month period ended February 28, 1999
(the "Income Statement", and together with the February
Balance Sheet, the "Current Financial Statements"), such
February Balance Sheet being attached hereto as Schedule
3.6(a)(ii); and
(iii) the budget for the Company and its Subsidiaries
for 1999 and the projections of the future performance of the
Company and its Subsidiaries, on a consolidated basis,
including annual income, net profits and cash flows for each
year of the three-year period ending 2001 and attached hereto
as Schedule 3.6(a)(iii) (collectively, the "Projections").
(b) The Projections have been prepared in good faith and are based on what
the Company and its management believe to be a reasonable assessment of the
future performance of the Company and its Subsidiaries. All material assumptions
used in the preparation of the Projections are set forth in the notes thereto.
Notwithstanding the foregoing, no representation is made that the projections
will be attained.
SECTION 3.7. INDEBTEDNESS AND LIENS. Neither the Company nor any of its
Subsidiaries has Indebtedness or Liens upon any of their properties other than
those which are reflected on the
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February Balance Sheet and Indebtedness incurred in the ordinary course of
business since February 28, 1999.
SECTION 3.8. ACCOUNTS RECEIVABLE AND BAD DEBTS. All notes and accounts
receivable of the Company and its Subsidiaries shown on the February Balance
Sheet were generated for valid consideration in the ordinary course of business.
Attached as Schedule 3.8 is a true, complete and accurate list as of February
28, 1999 of (i) the amount of accounts receivable of the Company and its
Subsidiaries which had not been paid within sixty (60) days of the date due and
the amount thereof and which had not been paid within ninety (90) days of the
date due and the amount thereof, (ii) the aggregate amount of accounts
receivable of the Company and its Subsidiaries that were written off in each of
fiscal year 1997 and fiscal year 1998 and (iii) the aggregate amount of
obligations owed to the Company or any of its Subsidiaries which have been
classified as bad debts, and with respect to each such obligation in excess of
$1,000, the name of each debtor and the total amount due from each such debtor.
SECTION 3.9. TAXES.
(a) Each of the Company and its Subsidiaries has prepared and filed on time
with all appropriate Governmental Authorities all Tax returns and other material
documents that it has been required to file in respect of any Taxes for all
fiscal periods ending on or prior to the Closing Date and all such returns or
other material documents are correct and complete in all material respects.
(b) Each of the Company and its Subsidiaries has paid in full all Taxes due
on or before the date hereof and, in the case of such Taxes accruing on or
before such date that are not due on or before such date, the Company has made
adequate provision in its books and records and financial statements including
the February Balance Sheet referred to in Section 3.6(a)(ii) for such payment.
(c) Each of the Company and its Subsidiaries has withheld from each payment
made to any of its present or former employees, officers, directors and managers
all amounts required by law to be withheld or remitted. Each of the Company and
its Subsidiaries has remitted all pension plan and social security contributions
and other Taxes payable by it in respect of its employees. Each of the Company
and its Subsidiaries has charged, collected and remitted all Taxes as required
under applicable legislation on any sale, supply or delivery whatsoever, made by
the Company or any of its Subsidiaries.
(d) Except as set out in Schedule 3.9, there are no material reassessments
of Taxes of the Company or any of its Subsidiaries that have been issued and are
outstanding. No Governmental Authority has challenged, disputed or questioned
the Company or any of its Subsidiaries in
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respect of any Taxes or of any Tax returns, filings or other reports filed under
any statute providing for such Taxes.
SECTION 3.10. TITLE TO ASSETS. Except as disclosed on Schedule 3.10, the
Company and its Subsidiaries own all of their assets, and have good and
marketable title with respect thereto, reflected in the February Balance Sheet,
subject to no Liens.
SECTION 3.11. MATERIAL CONTRACTS AND OBLIGATIONS. (a) Attached hereto as
Schedule 3.11(a) is a true, complete and accurate list, categorized by subject
matter, of all of the following material outstanding contracts, plans, leases,
and commitments and other agreements (collectively "Contracts") entered into by
the Company or any of its Subsidiaries which are in writing or have been orally
agreed to by the Company or any of its Subsidiaries:
(i) each operating agreement with a long-distance provider or
local exchange carrier providing for the carriage and/or
exchange of telecommunications traffic;
(ii) each Contract relating to the lease of or right to use, either
as lessor or lessee, (x) fiber optic cable, (y) collocating
equipment and (z) switches, setting forth the names of the
lessor and lessee and a description of the property and
property interest leased, in each case involving an amount in
excess of $50,000 for a given year;
(iii) each Contract relating to the lease of real property (the
"Leased Real Property"), either as lessor or lessee setting
forth the names of the lessor and lessee, the location of the
real property, and its use;
(iv) all Contracts for the purchase or sale of services, materials,
products or supplies which involve aggregate payments by the
Company or any of its Subsidiaries of more than $100,000 or
involve aggregate payments to the Company or any of its
Subsidiaries of more than $100,000, or which were entered into
other than in the ordinary course of business of the Company
or any of its Subsidiaries;
(v) all Contracts or arrangements providing for stock options or
stock purchases, bonuses, pensions, deferred or incentive
compensation, retirement or severance payments,
profit-sharing, insurance or other benefit plans or programs
for any officer, consultant, director or employee of the
Company or any of its Subsidiaries;
(vi) all Contracts for construction or for the purchase of real
estate,
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improvements, fixtures, equipment, machinery and other items
which under GAAP constitute capital expenditures and which
individually or in the aggregate for any related group of
items involve expenditures of the Company or any of its
Subsidiaries in excess of $100,000;
(vii) all Contracts relating in any way to Indebtedness of the
Company or its Subsidiaries, except for contracts individually
involving less than $100,000;
(viii) all Contracts substantially restricting the Company or any of
its Subsidiaries from engaging in any line of business or
competing with any Person or in any geographical area, or from
using or disclosing any information in its possession (other
than routine supplier and customer confidentiality
agreements);
(ix) all joint venture Contracts and other Contracts involving a
sharing of profits, revenue or cash flow, including any such
Contracts related to the sharing of revenue, profit or cash
flow from the lease of towers or space on towers;
(x) all other Contracts, except those which are (A) cancelable on
30 days' or less notice without any penalty or other financial
obligation or (B) if not so cancelable, involve annual
aggregate payments by or to the Company or any of its
Subsidiaries of $100,000 or less;
(xi) all written Contracts of employment with any officer,
consultant, director or employee and any such oral Contracts
which are not terminable at will by the Company or any of its
Subsidiaries; and
(xii) all other "material contracts" within the meaning of Item 601
of the SEC's Regulation S-K.
(b) Except as set forth on Schedule 3.11(b) hereto, all Contracts required
to be disclosed to the Purchaser pursuant to this Section 3.11 are valid,
binding and in full force and effect as to the Company or its Subsidiaries, and
neither the Company nor, to the Company's knowledge after inquiring of its
officers and employees, any other party thereto, is in breach or violation of,
or default under, nor is there any reasonable basis for a claim of such breach
or violation by the Company or its Subsidiaries or such default by the Company
or its Subsidiaries under, the terms of any such Contract, and no event has
occurred which constitutes or, with the lapse of time or the giving of notice or
both, would constitute, such a breach, violation or default by the Company or
its Subsidiaries thereunder. None of the rights of the Company or its
Subsidiaries under any of the Contracts is subject to termination or
modification as a result of the transactions contemplated by any Purchase
Document.
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<PAGE> 20
SECTION 3.12. PROPRIETARY RIGHTS.
(a) Schedule 3.12(a) lists: (i) all registered Intellectual Property
Rights, together with applications therefor that are pending or in the process
of preparation specifying (A) the owner thereof, and (B) the date of expiration,
if any, thereof; (ii) all licenses (other than licenses with respect to the
Company's or its Subsidiaries' use of off-the-shelf software programs) and other
agreements allowing the Company to use the Intellectual Property Rights; (iii)
all unregistered Intellectual Property Rights which are material to the business
of the Company or any of its Subsidiaries; and (iv) all royalty agreements
relating to any Intellectual Property Rights and to which the Company or any of
its Subsidiaries is a party.
(b) To the knowledge of the Company, each of the Company and its
Subsidiaries is the sole and exclusive owner of the Intellectual Property Rights
listed on Schedule 3.12(a) set forth opposite its name, free and clear of any
claims or Liens, other than as set forth on such Schedule 3.12(a). To the
knowledge of the Company, none of the Intellectual Property Rights infringes
upon the rights of any third party nor does any use by any third party of any of
the Intellectual Property Rights infringe upon any of the rights of the Company
of any of its Subsidiaries therein, and there are no claims pending or
threatened in connection with any such infringement with respect to any of the
Intellectual Property Rights.
(c) Except as listed on Schedule 3.12(c), neither the Company nor any
Subsidiary pays any royalty to any Person with respect to any of the
Intellectual Property Rights or any of the expertise relating thereto, nor does
the Company or any of its Subsidiaries receive royalties with respect thereto.
Neither the Company nor any of its Subsidiaries has licensed or sublicensed any
of the Intellectual Property Rights to any Person except as set forth on
Schedule 3.12(c).
SECTION 3.13. NECESSARY PROPERTY. Except as may be set forth in
Schedule 3.13 and the other Schedules hereto, the properties and assets owned,
leased by or licensed to the Company or any of its Subsidiaries and reflected in
the Current Financial Statements and any properties or assets acquired since
February 28, 1999, constitute all of the material real and personal properties,
tangible and intangible, which are necessary, used or useful in the conduct of
its business in the manner and to the extent presently conducted by them.
SECTION 3.14. NECESSARY LICENSES. (a) Schedule 3.14 sets forth a list of
each License used by the Company or any of its Subsidiaries in the conduct of
its business. True and correct copies of each License set forth on Schedule
3.14, and all amendments thereto to the date hereof, have been delivered by the
Company to the Purchasers. Except as set forth on Schedule 3.14, the Company and
its Subsidiaries holds all necessary Licenses which are required in connection
with the ownership and operation of its business, except for such Licenses, the
lack of which would not have a Material Adverse Effect. All Licenses are in full
force and effect. The Company and its Subsidiaries have complied in all material
respects with the terms of the Licenses which they
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<PAGE> 21
hold and there are no pending modifications, amendments or revocations of the
Licenses which would adversely affect the ownership or the operation of its
business. All fees due and payable from the Company or any of its Subsidiaries
to Governmental Authorities pursuant to the Licenses have been paid. All reports
required of the Company or any of its Subsidiaries to be filed in connection
with the Licenses have been timely filed and are accurate and complete.
(b) Except as specified in Schedule 3.14, no registrations, filings,
applications, notices, transfers, consents, approvals, audits, qualifications,
waivers or other action of any kind is required by virtue of the execution and
delivery of this Agreement or any Related Agreement, or of the consummation of
the transactions contemplated hereby or thereby (a) to avoid the loss of any
License or any asset, property or right pursuant to the terms thereof or the
violation or breach of any law applicable thereto, or (b) to enable the Company
and its Subsidiaries to hold and enjoy the same after the Closing Date in the
conduct of its business as conducted immediately prior to the Closing Date. In
particular, except as set forth in Schedule 3.14, execution and delivery of this
Agreement and the Related Agreements, and consummation of the transactions
contemplated therein, will not constitute a change of control in the Company or
its Subsidiaries, or otherwise require authorization, approval, consent, or
filing of registration with any Governmental Authority, and will not violate or
conflict with any applicable provision of the laws, rules, and regulations
administered by any Governmental Authority.
SECTION 3.15. COMPLIANCE WITH LAW.
(a) Except as may be set forth in Schedule 3.15, neither the Company nor
any Subsidiary is in default under, or in violation of, any laws, rules or
regulations (including, without limitation, foreign, federal, state or local
laws, rules or regulations relating to the issuance or sale of securities,
telecommunications, anti-trust, occupational safety, the protection of the
environment, transportation, storage or disposal of hazardous waste,
anti-pollution and air and water quality laws), or any Licenses, granted by, or
any judgment, decree, writ, injunction or order of, any Governmental Authority,
applicable to its business or any of its properties or assets, which defaults
and violations would in the aggregate expose the Company and its Subsidiaries to
liabilities in excess of an aggregate of $250,000 or otherwise materially
adversely affect the assets or properties or business or operations of the
Company and its Subsidiaries or requiring or prohibiting future activities.
Neither the Company nor any Subsidiary has received any notification alleging
any violations of any of the foregoing with respect to which adequate corrective
action has not been taken.
(b) Except as set forth on Schedule 3.15, There are no proceedings or
investigations pending or threatened, before the FCC or any State Regulatory
Agency directed specifically at the Company or, in the case of matters of
general applicability to the telecommunications industry, in which the Company
is identified for possible disparate treatment or whose outcome may have a
disparate impact on the Company in which any of the following matters are being
considered
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which are reasonably likely to have a material adverse effect on the Company,
nor has the Company or any of its Subsidiaries received written notice or
inquiry from the FCC or any State Regulatory Agency, indicating that any of such
matters should be considered or may become the object of consideration or
investigation specifically regarding the Company which are reasonably likely to
have a material adverse effect on the Company or, in the case of matters of
general applicability to the telecommunications industry, in which the Company
is identified for possible disparate treatment or whose outcome may have a
disparate impact on the Company: (a) increases or reductions in access charges,
universal service contributions or the like; (b) traffic routing restrictions or
restrictions on use of facilities; (c) reduction or restriction of rates charged
to customers; (d) reduction of earnings; (e) refunds or other forfeitures of
amounts previously charged to customers; (f) use of NXX codes; or (g) failure to
meet any expense, infrastructure, service quality or other commitments
previously made to or imposed by the FCC or any State Regulatory Agency.
(c) Except as set forth on Schedule 3.15, neither the Company nor any of
its Subsidiaries has any outstanding commitments made in the context of a matter
or proceeding related specifically to the Company or, in the case of matters of
general applicability to the telecommunications industry, in which the Company
is identified for possible disparate treatment or whose outcome may have a
disparate impact on the Company (and no such obligations have been imposed upon
the Company and remain outstanding), regarding: (a) increases or reductions in
access charges, universal service contributions or the like; (b) traffic routing
restrictions or restrictions on use of facilities; (c) reduction or restriction
of rates charged to customers; (d) reduction of earnings; (e) refunds or other
forfeitures of amounts previously charged to customers; (f) use of NXX codes; or
(g) expenses, infrastructure expenditures, service quality or other regulatory
requirements, to or by the FCC or any State Regulatory Agency, in each case
which are reasonably likely to have a material adverse effect on the Company.
SECTION 3.16. ENVIRONMENTAL COMPLIANCE.
(a) All Licenses which are required under Environmental Laws (each an
"Environmental Permit") for the conduct of the Company's and its Subsidiaries'
business or the operation of any property owned, leased or occupied by the
Company or any of its Subsidiaries which are required to be obtained or applied
for by the Company or any of its Subsidiaries have been so obtained or applied
for.
(b) Neither the Company nor any Subsidiary has failed to comply with
any Environmental Laws or any Environmental Permit and neither the Company nor
any Subsidiary has been notified by any Governmental Authority of any such
non-compliance and, to the best knowledge of the Company after inquiring of its
officers and employees, there are no facts indicating, that any Environmental
Permit will be modified, suspended, canceled or revoked or cannot be renewed in
the ordinary course of business.
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(c) No Hazardous Substance is presently or has been in the past
generated, stored, handled, treated, transported to or from or disposed of on
any property currently or formerly owned by the Company or any of its
Subsidiaries, or operated or leased by the Company or any of its Subsidiaries
(during the period of such operation or lease) and, to the best knowledge of the
Company after inquiring of its officers and employees, no property currently or
formerly owned, operated or leased by the Company or any of its Subsidiaries has
been used by others, including but not limited to prior owners, lessees and
operators, for the generation, storage, handling, treatment, transportation or
disposal of any Hazardous Substance. Neither the Company nor any Subsidiary has
generated, disposed of, transported or arranged for the transportation (directly
or indirectly) of any Hazardous Substances to any location that is listed or, to
the best knowledge of the Company after inquiring of its officers and employees,
proposed for listing on the National Properties List or the CERCLA Information
System under CERCLA, or under any similar state, local or foreign list, or where
there has been a Release or suspected Release of a Hazardous Substance. To the
best knowledge of the Company after inquiring of its officers and employees, no
part of any property owned, operated or leased by the Company or any of its
Subsidiaries ever was used as (i) a gasoline service station or for the purpose
of selling, dispensing, storing, transferring or handling petroleum or petroleum
products, or (ii) as a dry-cleaning establishment.
(d) Neither the Company nor any Subsidiary has received any notice or
order from any Person advising it that it is responsible for or potentially
responsible for cleanup or remediation of any Hazardous Substances and neither
the Company nor any Subsidiary has entered into any agreements concerning such
cleanup. No work, repair, construction or capital expenditure is planned or
required in respect of the assets of the Company or any of its Subsidiaries
pursuant to or to comply with any Environmental Law, nor has the Company or any
of its Subsidiaries received any notice of any such requirement.
(e) There is no Environmental claim pending or, to the best knowledge
of the Company after inquiring of its officers and employees, threatened against
the Company or any of its Subsidiaries or pending or, to the best knowledge of
the Company after inquiring of its officers and employees, threatened against
any other Person whose liability for any Environmental claim the Company or any
of its Subsidiaries has or may have retained or assumed either contractually or
by operation of law. No real property currently or formerly owned by the Company
or any of its Subsidiaries, or operated or leased by the Company or any of its
Subsidiaries (during the period of such operation or lease) has been impacted by
any Release or threatened Release of any Hazardous Substance and no condition
exists which may result in a claim, right of action, or recovery by any Person
under any Environmental Law.
(f) Each of the Company and its Subsidiaries has delivered or otherwise
made available for inspection to the Purchasers true, accurate and complete
copies and results of any reports, studies, analyses, tests or monitoring
possessed or initiated by the Company or any of its
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Subsidiaries pertaining to Hazardous Substances in, on, beneath or adjacent to
any property or regarding compliance by the Company or any of its Subsidiaries
with applicable Environmental Laws.
(g) No transfers of permits or other governmental authorizations under
Environmental Laws, and no additional permits or other governmental
authorizations under Environmental Laws, will be required to permit the Company
and its Subsidiaries to conduct the business of the Company and its Subsidiaries
in full compliance with all applicable Environmental Laws immediately following
the Closing, as conducted by the Company and its Subsidiaries immediately prior
to the Closing.
(h) There are no underground or above-ground storage tanks (whether or
not currently in use) located on or under any real property currently owned or
operated by the Company or any of its Subsidiaries, and no underground tank
previously located on any real property currently owned or operated by the
Company or any of its Subsidiaries has been removed from that property. To the
best of the Company's knowledge, there are no underground or above-ground
storage tanks (whether or not currently in use) located on or under any Leased
Real Property.
(i) Neither the Company nor any Subsidiary nor any of the currently or
formerly owned or operated property used by the Company or any Subsidiary is the
subject of any pending or, to the best knowledge of the Company after inquiring
of its officers and employees, threatened federal, state or local enforcement
action, investigation, remedial action, litigation, claim or notice by any
Person under any Environmental Laws.
SECTION 3.17. NO MATERIAL ADVERSE CHANGES. Except as set forth on Schedule
3.17, since the Balance Sheet Date, there has occurred no material adverse
change in the business, assets, properties, prospects, operations, or condition
(financial or otherwise) of the Company or any of its Subsidiaries, whether or
not in the ordinary course of business, whether separately or in the aggregate
with other occurrences or developments, and whether insured against or not.
SECTION 3.18. NO BROKERS. Except as set forth on Schedule 3.18, the Company
has not employed any broker, finder, advisor or intermediary in connection with
the transactions contemplated hereby which would be entitled to a broker's,
finder's or similar fee or commission in connection therewith or upon the
consummation of the transactions contemplated by this Agreement or any Related
Agreement.
SECTION 3.19. NETWORK.
(a) Schedule 3.19 sets forth, as of February 28, 1999 (i) the location of
each switch owned by the Company and the switch's make and model and (ii) the
location of all of the Company's colocation sites.
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(b) The Company's switches are (i) fully installed, (ii) interconnected to
the incumbent telephone company's local network and (iii) capable of carrying
commercial traffic.
(c) The Company's colocation sites possess all of the necessary equipment
to carry commercial traffic and are linked via leased or owned transmission
cable to a switch owned by the Company.
SECTION 3.20. CUSTOMERS AND SUPPLIERS.
(a) Schedule 3.20(a) sets forth the ten largest telecommunications
customers of the Company and its Subsidiaries for the Las Vegas, Atlanta and
Southern California markets and the gross revenues and percentage of
consolidated net sales for each such customer for 1998.
(b) Schedule 3.20(b) sets forth as of February 28, 1999 (i) the total
number of lines sold and (ii) the total number of lines in service.
(c) Less than three percent (3%) of the Company's consolidated revenues is
derived from local resale of telecommunications services.
SECTION 3.21. YEAR 2000 COMPLIANCE. The Company has performed an audit to
determine if the material hardware and software systems used by the Company and
the Company's key vendors and suppliers are Year 2000 Compliant or will be Year
2000 Compliant by December 31, 1999, and, based on that, has formulated a plan
to make such systems Year 2000 Compliant, as more particularly described on
Schedule 3.21 (the "Year 2000 Compliance Plan"). The term "Year 2000 Compliant"
as used herein means that the computer systems at issue will accurately process,
provide, and receive date data from, into, and between the twentieth and
twenty-first centuries, including the years 1999 and 2000, and leap year
calculations. The Company represents that it is using its best efforts to
achieve the goals set forth in its Year 2000 Compliance Plan, and that if such
goals are achieved, the material hardware and software systems used by the
Company will be Year 2000 Compliant by December 31, 1999.
SECTION 3.22. FINANCIAL REPORTS AND SEC DOCUMENTS. The Company's Annual
Reports on Form 10-K for the fiscal years ended December 31, 1998 and December
31, 1997, and all other reports, registration statements, definitive proxy
statements or information statements filed or to be filed by it under the
Securities Act, or under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act,
in the form filed or to be filed with the SEC (collectively, "SEC Documents"),
as of the date filed, (A) complied or will comply as to form with the applicable
requirements under the Securities Act or the Exchange Act, as the case may be,
and (B) did not and will not contain any 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 the light of the circumstances under which they were
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made, not misleading; and each of the balance sheets contained in or
incorporated by reference into any of the Company's SEC Documents (including the
related notes and schedules thereto) fairly presents, or will fairly present,
the financial position of the Company and its Subsidiaries as of its date, and
each of the statements of income and changes in stockholders' equity and cash
flows or equivalent statements in the Company's SEC Documents (including any
related notes and schedules thereto) fairly presents, or will fairly present,
the results of operations, changes in stockholders' equity and changes in cash
flows, as the case may be, of the Company and its Subsidiaries for the period to
which they relate, in each case, in compliance with applicable accounting
requirements and with the published rules of the SEC with respect thereto and in
accordance with GAAP consistently applied during the periods involved, except,
in each case, as may be noted herein, subject to normal year-end audit
adjustments in the case of unaudited statements.
SECTION 3.23. DISCLOSURE. No representation, warranty or statement made in
this Agreement, any Purchased Security, any Related Agreement or any agreement,
certificate, statement or document furnished by or on behalf of the Company in
connection herewith or therewith when considered as a whole contains any untrue
statement of material fact or omits to state a material fact necessary in order
to make the statements contained herein or therein, in light of the
circumstances in which they were made, not misleading.
ARTICLE IV
PURCHASERS' REPRESENTATIONS
Each of the Purchasers hereby, severally and not jointly, represents and
warrants to the Company as follows:
SECTION 4.1. ORGANIZATION AND GOOD STANDING. Such Purchaser is validly
existing and in good standing under the laws of the state of its formation.
SECTION 4.2. AUTHORIZATION. This Agreement and the Related Agreements to
which such Purchaser is a party have been executed by a duly authorized Person
on its behalf and the execution, delivery and performance hereof and thereof (a)
have been duly authorized by all appropriate action, and (b) will not violate
the provision of any material law or regulation of any Governmental Authority
applicable to it or constitute a violation of any material agreement or
instrument by which it is bound.
SECTION 4.3. ENFORCEABILITY. The execution and delivery of this Agreement
and the Related Agreements and the transactions contemplated thereunder will
result in legally binding obligations of such Purchaser enforceable against such
Purchaser in accordance with the respective terms and provisions hereof and
thereof, subject, however, to limitations with respect
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to enforcement imposed by law in connection with bankruptcy or similar
proceedings or to the extent that equitable remedies such as specific
performance and injunction are in the discretion of the court from which they
are sought.
SECTION 4.4. INVESTMENT INTENT. Such Purchaser (i) is an "accredited
investor" as defined in Regulation D of the Securities Act, (ii) is acquiring
the Purchased Securities to be purchased by such Purchaser pursuant to Section
2.1 hereof for investment and not with a view to the distribution thereof, and
(iii) has not engaged any broker, agent or finder who may claim a fee in
connection with the acquisition of the Purchased Securities.
ARTICLE V
CONDITIONS TO PURCHASERS' OBLIGATION TO PURCHASE AND THE
COMPANY'S OBLIGATION TO SELL
SECTION 5.1. PURCHASERS' CLOSING CONDITIONS. Each Purchaser's obligation to
purchase the Purchased Securities pursuant to Section 2.1 is subject to
compliance by the Company with its agreements herein contained, and to the
satisfaction, on or prior to the Closing Date of the following conditions:
(a) Related Agreements. Each of the Related Agreements shall have been
executed and delivered in the form attached hereto or in such other form
satisfactory to the Purchasers. All covenants, agreements and conditions
contained in the Related Agreements which are to be performed or complied with
on or prior to the Closing Date shall have been performed or complied with in
all material respects.
(b) Charter Documents. The Purchasers shall have received from the Company
a copy, certified by the appropriate Governmental Authority to be true and
complete as of a date no more than twenty (20) days prior to the Closing Date,
of (a) the certificate of incorporation of the Company and each of its
Subsidiaries and (b) a certificate, dated not more than twenty (20) days prior
to the Closing Date, of the relevant Governmental Authority or other appropriate
official of each State in which each of the Company and its Subsidiaries is
incorporated or qualified to do business, as to such Person's good standing in
such State or qualification to do business, as the case may be.
(c) Proof of Action. The Purchasers shall have received from the Company
copies, certified by a duly authorized officer thereof to be true and complete
as of the Closing Date, of the records of all action taken to authorize the
execution, delivery and performance of this Agreement and each of the Related
Agreements to which the Company is a party.
(d) Incumbency Certificate. The Purchasers shall have received from the
Company an
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incumbency certificate, dated the Closing Date, signed by a duly authorized
officer thereof and giving the name and bearing a specimen signature of each
individual who shall be authorized to sign, in the name and on behalf of the
Company, this Agreement and each of the Related Agreements to which the Company
is or is to become a party, and to give notices and to take other action on
behalf of the Company under each of such documents.
(e) Legal Opinion. The Purchasers shall have received from Ellis, Funk,
Goldberg, Labovitz & Dokson, P.C., counsel to the Company, an opinion
substantially in the form of Exhibit D attached hereto.
(f) Regulatory Opinion. The Purchasers shall have received from Kelley Drye
& Warren LLP, regulatory counsel to the Company, an opinion reasonably
satisfactory to the Purchasers, or otherwise substantially in the form of
Exhibit E attached hereto.
(g) Representations and Warranties; Covenants; Officers' Certificates. The
representations and warranties contained or incorporated by reference herein
shall be true and correct in all material respects (except those representations
and warranties qualified by materiality, which shall be true and correct in all
respects) on and as of the Closing Date. The Company shall have performed and
complied with all conditions and agreements required to be performed or complied
with by it prior to the Closing. The Purchasers shall have received on the
Closing Date a certificate with respect to the foregoing executed by an
authorized officer of the Company.
(h) Legality; Governmental and Other Authorizations. The purchase of the
Purchased Securities shall not be prohibited by any law or governmental order or
regulation, and shall not subject any Purchaser to any penalty, special Tax, or
other onerous condition. All necessary consents, approvals, Licenses, orders and
authorizations of, and registrations, declarations and filings with, any
Governmental Authority (including the FCC and any State Regulatory Agency) or
any other Person, with respect to any of the transactions contemplated by this
Agreement or any of the Related Agreements, shall have been duly obtained or
made and shall be in full force and effect. The applicable waiting periods shall
have expired or been terminated and no objection shall have been made by the
Federal Trade Commission ("FTC"), the United States Department of Justice
("DOJ") or other applicable governmental agency with respect to the
Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended (the
"Hart-Scott Act"). The Nasdaq Stock Market ("Nasdaq") shall have issued written
confirmation to the Company satisfactory to the Purchasers stating that
stockholder approval of the transactions contemplated hereby is not required by
Nasdaq's rules and regulations.
(i) Filing of Certificate of Designation. The Purchasers shall have
received satisfactory evidence of the filing of the Certificate of Designation
with the Secretary of State of Nevada.
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(j) Payment of Certain Fees and Disbursements. The Purchasers shall have
been paid their pro rata portion of the $500,000 investment fee and shall have
been reimbursed for all reasonable costs and expenses (including, but not
limited to, legal, consulting and accounting) incurred by them through the
Closing Date in connection with the transactions contemplated by this Agreement.
(k) Registration Rights Agreement. The Company and the Purchasers shall
have executed the Registration Rights Agreement in the form of Exhibit B hereto.
(l) General. All instruments and corporate proceedings in connection with
the transactions contemplated by this Agreement and the Related Agreements shall
be satisfactory in form and substance to the Purchasers and their counsel, and
the Purchasers shall have received copies of all documents, including, without
limitation, records of corporate or other proceedings, opinions of counsel and
consents which the Purchaser may have reasonably requested in connection
therewith.
The agreements, certificates, documents, other evidence of compliance and
opinions described in this Section 5.1 shall be in form and substance reasonably
acceptable to each Purchaser, and shall, except as otherwise provided, be
delivered to the Purchasers at the Closing; provided, however, any one or more
of the foregoing conditions may be waived with the prior written consent of each
Purchaser.
SECTION 5.2. COMPANY'S CLOSING CONDITIONS. The Company's obligation to sell
the Purchased Securities pursuant to Section 2.1 is subject to the satisfaction,
on or prior to the Closing Date, of the following conditions:
a. Hart-Scott Act. The applicable waiting periods shall have expired or
been terminated and no objection shall have been made by the FTC, DOJ or other
applicable governmental agency with respect to the Hart-Scott Act.
b. Representations and Warranties. The representations and warranties of
the Purchasers contained herein shall be true and correct in all material
respects (except those representations and warranties qualified by materiality,
which shall be true and correct in all respects) on and as of the Closing Date.
(c) Sufficient Investment. The Purchasers shall be prepared to purchase at
least $40,000,000 of Purchased Securities pursuant to Section 2.1.
ARTICLE VI
COVENANTS APPLICABLE TO THE COMPANY WHILE ANY
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PURCHASED SECURITIES ARE OUTSTANDING
The Company covenants that while any of the Purchased Securities are held
by any of the Purchasers or an assignee thereof, other than a transferee
pursuant to a public sale, the Company will comply with the following provisions
unless otherwise consented to in writing by the Purchasers:
SECTION 6.1. FURTHER ASSURANCES. The Company will cooperate with the
Purchasers and will execute, acknowledge and deliver, or cause to be executed,
acknowledged or delivered, all such further acts, deeds, documents, assignments,
transfers, conveyances, powers of attorney and assurances as the Purchasers
shall reasonably request to carry out to the satisfaction of the Purchasers the
transactions contemplated by this Agreement and the Related Agreements.
ARTICLE VII
DELIVERY OF FINANCIAL AND OTHER REPORTS WHILE ANY
PURCHASED SECURITIES ARE OUTSTANDING
The Company hereby agrees that so long as 500,000 shares of Series B
Preferred are outstanding (subject to adjustment for stock splits, stock
dividends and similar events) it will provide to each Purchaser holding at least
500,000 shares of Series B Preferred and/or Common Stock (subject to adjustment
for stock splits, stock dividends and similar events) (a "Qualified Purchaser")
the information called for by the following provisions, so long as such
Qualified Purchaser has acknowledged in writing that it will be precluded from
trading in the Company's stock while in possession of material information
concerning the Company that has not been disclosed to the public:
SECTION 7.1. MONTHLY STATEMENTS. Within thirty (30) days after the end of
each month, commencing with the month ending March 31, 1999, the Company will
deliver to each Qualified Purchaser internal, unaudited consolidated balance
sheet and statement of income and retained earnings and of cash flow of the
Company and its Subsidiaries as of the end of each such month, together with
comparative information to the results for the same month of the prior year, and
to the budget for such month and year to date results with a comparison of such
year-to-date information to budget and to the comparable period of the prior
year.
SECTION 7.2. OTHER FINANCIAL INFORMATION. The Company will deliver to each
Qualified Purchaser prior to the commencement of each fiscal year, an annual
budget and projected monthly balance sheets and statements of income and
quarterly statements of cash flow for such fiscal year, prepared on a
comparative basis to the Projections and as soon as practical after preparation
thereof, complete copies of all quarterly (if any) or annual budgetary analyses
or forecasts of the Company and its Subsidiaries in the form customarily
prepared by management
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for its own internal use or the use of the Board of Directors of the Company.
SECTION 7.3. OFFICERS' CERTIFICATES. Together with delivery of the
financial statements of the Company and its Subsidiaries pursuant to Sections
7.1 and 7.2, the Company shall deliver to each Qualified Purchaser a certificate
of the President, chief financial officer or Treasurer of the Company to the
effect that (a) such statements have been prepared in accordance with GAAP and
present fairly the financial position of the Company and its Subsidiaries as of
the dates specified and the results of its operations and cash flow with respect
to the periods specified (subject in the case of interim financial statements
and the year-end financials, when delivered prior to their having been audited,
only to normal year-end audit adjustments), and (b) such officers have caused
the provisions of this Agreement and the Purchased Securities to be reviewed and
have no knowledge of any default, or if either such officer has such knowledge,
specifying such default and the nature thereof, and what action the Company has
taken, is taking or proposes to take with respect thereto.
SECTION 7.4. NOTICE OF LITIGATION, DEFAULTS, ETC. The Company will promptly
give notice to each Qualified Purchaser of any litigation or any administrative
proceeding to which the Company or any of its Subsidiaries may hereafter become
a party which may result in a Material Adverse Effect on the Company or any of
its Subsidiaries. Forthwith upon any officer of the Company obtaining knowledge
of any material default under a material agreement or any default or event of
default under this Agreement or any Related Agreement, the Company will furnish
a notice specifying the nature and period of existence thereof, what action the
Company has taken, is taking or proposes to take with respect thereto. Promptly
after the receipt thereof, the Company will provide copies of any reports as to
adequacies in accounting controls submitted by independent accountants with
respect to the Company and its Subsidiaries.
SECTION 7.5. OTHER INFORMATION. The Company will deliver to each Qualified
Purchaser copies of all papers distributed from time to time to the members or
stockholders of the Company at such time as such papers are so distributed to
them. In addition, from time to time upon the request of a Qualified Purchaser,
the Company will furnish such information regarding the business, affairs,
prospects and financial condition of the Company and its Subsidiaries as the
representatives or officers of a Qualified Purchaser may reasonably request.
Each such representative and officers shall have the right during normal
business hours to examine the books and records of the Company or any of its
Subsidiaries to make copies, notes and abstracts therefrom, and to make an
independent examination, at such Qualified Purchaser's cost, of the books and
records of the Company or any of its Subsidiaries, all at such reasonable times
and intervals as the applicable Qualified Purchaser may reasonably request.
ARTICLE VIII
EXPENSES; INDEMNITY
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SECTION 8.1. EXPENSES. The Company hereby agrees to pay at the Closing all
reasonable fees, costs and expenses incurred by the Purchasers in connection
with the transactions hereunder and in connection with any amendments or waivers
(whether or not the same become effective) hereof and all reasonable expenses
incurred by the Purchasers in connection with the enforcement of any rights
hereunder or with respect to any Purchased Security, including without
limitation (i) the cost and expenses of preparing and duplicating this
Agreement, each Related Agreement and the Purchased Securities; (ii) the cost of
delivering to each Purchaser's principal office, insured to such Purchaser's
satisfaction, the Purchased Securities sold to such Purchaser hereunder and any
securities delivered to such Purchaser in exchange therefor or upon any
exercise, conversion or substitution thereof; (iii) the reasonable fees,
expenses and disbursements of one corporate and one regulatory counsel for the
Purchasers, in connection with the preparation, administration or interpretation
of this Agreement and the Related Agreements and other agreements, documents and
instruments mentioned herein or therein, the Closing, any amendments,
modifications, approvals, consents or waivers hereto, thereto, hereunder or
thereunder; (iv) the out-of-pocket fees, expenses and costs incurred by the
Purchasers in connection with the Purchasers' due diligence investigation of the
Company and its Subsidiaries; and (v) all Taxes (other than Taxes determined
with respect to income and Taxes relating to any transfer of the Purchased
Securities to any Person other than to the Company) including, without
limitation, any recording fees, filing fees and documentary stamp and similar
Taxes at any time payable in respect of this Agreement or any Related Agreement
or the issuance of any of the Purchased Securities and any securities issued in
exchange therefor or upon any exercise, conversion or substitution thereof.
Further, the Company agrees to pay all reasonable legal, consulting, accounting,
appraisal and investment banking fees and charges incurred by any holder of the
Purchased Securities or their representatives in connection with the enforcement
of or preservation of rights under this Agreement or any Related Agreement in
the event of a breach or reasonably alleged breach by the Company of its
obligations hereunder or thereunder.
SECTION 8.2. INDEMNIFICATION. The Company hereby further agrees to
indemnify, exonerate and hold each Purchaser and its (if applicable) general and
limited partners and their respective shareholders, officers, directors,
employees and agents free and harmless from and against any and all actions,
causes of action, suits, losses, liabilities, damages and expenses, including,
without limitation, reasonable attorneys' fees and disbursements, incurred in
any capacity by any of the indemnitees as a result of or relating to (i) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with proceeds from the sale of any of the Purchased Securities, (ii)
the execution, delivery, performance or enforcement of this Agreement, the
Related Agreements or any agreement, document or instrument contemplated hereby
or thereby (including, without limitation, any failure by the Company to comply
with any of the covenants thereunder), or (iii) any breach of any representation
or warranty of the Company in this Agreement or any Related Agreement.
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SECTION 8.3. BROKERS' FEES. The Company hereby indemnifies each Purchaser
against and agrees that it will hold it harmless from any claim, demand or
liability for any broker's, finder's or similar fee or commission alleged to
have been incurred by the Company (and not by a Purchaser) in connection with
the transactions contemplated by this Agreement or any Related Agreement.
ARTICLE IX
NOTICES
Any notices or other communications required to be given pursuant to this
Agreement shall be in writing and shall be deemed given: (i) upon delivery, if
by hand; (ii) three (3) Business Days after mailing, if sent by registered or
certified mail, postage prepaid, return receipt requested; (iii) one (1)
Business Day after mailing, if sent via overnight courier; or (iv) upon
transmission, if sent by telex or facsimile except that if such notice or other
communication is received by telex or facsimile after 5:00 p.m. on a Business
Day at the place of receipt, it shall be effective as of the following Business
Day. All notices and other communications hereunder shall be given as follows:
(a) If to the Company, to it at:
MGC Communications, Inc.
3301 North Buffalo Drive
Las Vegas, Nevada 89129
Attention: Maurice J. Gallagher, Jr.
Facsimile: (702) 310-5715
Telephone: (702) 310-1000
with a copy to:
Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
Attention: Robert B. Goldberg, Esq.
Facsimile: 404-233-2188
Telephone: 404-233-2800 X222
(b) If to Providence Equity Partners III L.P., to it at:
c/o Providence Equity Partners L.L.C.
901 Fleet Center
50 Kennedy Plaza
Providence, Rhode Island 02903
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<PAGE> 34
Attention: Mark Masiello
Facsimile: (401) 751-1790
Telephone: (401) 751-1700
with a copy to:
Edwards & Angell, LLP
2800 BankBoston Plaza
Providence, Rhode Island 02903
Attention: David K. Duffell, Esq.
Facsimile: 401-276-6602
Telephone: 401-274-9200
(c) If to another Purchaser, to it at the address set forth on Schedule
2.1.
Any party may change its address for receiving notice by written notice given to
the other names above in the manner provided above.
ARTICLE X
SURVIVAL OF COVENANTS, AGREEMENTS,
REPRESENTATIONS AND WARRANTIES, TRANSFER
All covenants, agreements, representations and warranties made herein to
the Purchasers or the Company or in any other document referred to herein or
delivered to the Purchasers or the Company pursuant hereto shall be deemed to
have been relied on by each of the Purchasers and the Company, notwithstanding
any investigation made by any of the Purchasers or on their behalf, or by the
Company, and shall survive the execution and delivery of this Agreement and
other such documents and the delivery to the Purchasers of the Purchased
Securities for a period of eighteen (18) months after the Closing Date, except
for the representations and warranties contained in Sections 3.1, 3.2, 3.3, 3.9
and 3.16, which shall survive the Closing and continue in full force and effect
forever thereafter (subject to any applicable statute of limitations). Whether
or not any express assignment has been made in this Agreement, the provisions of
this Agreement that are for the benefit of any Purchaser as the holder of any
Purchased Securities are also for the benefit of, and enforceable by, all
subsequent holders of the Purchased Securities, and the provisions of this
Agreement that subject any Purchaser to obligations as the holder of any
Purchased Securities also subject all subsequent holders of Purchased Securities
thereto.
ARTICLE XI
AMENDMENTS AND WAIVERS
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<PAGE> 35
No modification to or amendment of any provision of this Agreement shall be
effective against the Company or any Purchaser unless such modification or
amendment is approved in writing by the Majority Purchasers and the Company. No
waiver of the rights and obligations hereunder of any party hereto shall be
effective unless such waiver is in writing and duly executed and delivered by
(a) the Majority Purchasers (in the event such waiver is sought by the Company),
or (b) the Company (in the event such waiver is sought by any Purchaser). The
failure of any party hereto to enforce any of provision of this Agreement shall
in no way be construed as a waiver of such provision and shall not affect the
right of such party thereafter to enforce each and every provision of this
Agreement in accordance with its terms. Any amendment or waiver effected in
accordance with this Article XI shall be binding upon the Company and each
holder of any Purchased Security sold pursuant to this Agreement.
ARTICLE XII
WAIVER OF JURY TRIAL
EACH OF THE COMPANY AND THE PURCHASERS HEREBY EXPRESSLY WAIVES ANY RIGHT IT
MAY HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING EXISTING UNDER OR
RELATING TO THIS AGREEMENT, THE PURCHASED SECURITIES OR ANY OF THE RELATED
AGREEMENTS.
ARTICLE XIII
GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF RHODE ISLAND WITHOUT GIVING EFFECT TO ANY CHOICE OR
CONFLICT OF LAW PROVISION OR RULE THAT WOULD CAUSE THE APPLICATION OF THE
SUBSTANTIVE LAWS OF ANY OTHER STATE, AND SHALL BIND AND INURE TO THE BENEFIT OF
THE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS.
ARTICLE XIV
PUBLIC ANNOUNCEMENTS
The Company hereby acknowledges that each Purchaser will have the right to
publicize its investment in the Company as contemplated hereby by means of a
press release reasonably acceptable to the Company, a tombstone advertisement or
other customary advertisement in
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<PAGE> 36
newspapers and other periodicals. The Majority Purchasers shall have the right
to reasonably approve in advance the content of any public announcement by the
Company regarding the transactions contemplated hereby.
ARTICLE XV
TIME OF THE ESSENCE
Time shall be of the essence of this Agreement.
ARTICLE XVI
ENTIRE AGREEMENT; COUNTERPARTS; SECTION HEADINGS
This Agreement, the Purchased Securities and the Related Agreements set
forth the entire understanding of the parties hereto with respect to the
transactions contemplated hereby and supersede any prior written or oral
understandings with respect thereto. This Agreement may be executed
simultaneously in one or more counterparts thereof, each of which shall be
deemed an original but all of which together shall constitute one and the same
instrument. Signatures sent by telecopy shall be deemed to constitute original
signatures. The headings in this Agreement are for convenience of reference only
and shall not alter or otherwise affect the meaning hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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<PAGE> 37
If the foregoing corresponds with your understanding of our agreement,
kindly sign this letter and the accompanying copies thereof in the appropriate
space below.
Very truly yours,
MGC COMMUNICATIONS, INC.
By:
Name:
Title:
Accepted and agreed to:
PROVIDENCE EQUITY PARTNERS III L.P.
By: Providence Equity Partners III L.L.C., its general partner
By:
Name:
Title:
J K & B CAPITAL III L.P.
By:
Name:
Title:
WIND POINT PARTNERS III, L.P.
By:
Name:
Title:
37
<PAGE> 38
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
38
<PAGE> 39
SCHEDULE 2.1
LIST OF PURCHASERS
<TABLE>
<CAPTION>
Aggregate Purchase
Number of Purchased Price of the Purchased
Securities to be Securities
Name and Address Purchased
---------------- ---------
<S> <C> <C>
1. Providence Equity 4,166,667 shares of Series $37,500,003
Partners III L.P. B Convertible Preferred
Suite 900, Fleet Center Stock
50 Kennedy Plaza
Providence, RI 02903
2. JK&B Capital III L.P. 555,556 shares of Series B
205 N. Michigan Avenue Convertible Preferred Stock $5,000,004
Suite 808
Chicago, IL 60601
3. Wind Point Partners III, L.P. 555,556 shares of Series B
One Towne Square Convertible Preferred Stock $5,000,004
Suite 780
Southfield, MI 48076
</TABLE>
39
<PAGE> 40
EXHIBIT A
TO
SECURITIES PURCHASE AGREEMENT
DATED AS OF APRIL 5, 1999
CERTIFICATE OF DESIGNATION
40
<PAGE> 41
EXHIBIT B
TO
SECURITIES PURCHASE AGREEMENT
DATED AS OF APRIL 5, 1999
FORM OF REGISTRATION RIGHTS AGREEMENT
41
<PAGE> 42
EXHIBIT C
TO
SECURITIES PURCHASE AGREEMENT
DATED AS OF APRIL 5, 1999
FORM OF SECURITYHOLDERS' AGREEMENT
42
<PAGE> 43
EXHIBIT D
TO
SECURITIES PURCHASE AGREEMENT
DATED AS OF APRIL 5, 1999
FORM OF COMPANY CORPORATE OPINION
43
<PAGE> 44
EXHIBIT E
TO
SECURITIES PURCHASE AGREEMENT
DATED AS OF APRIL 5, 1999
FORM OF COMPANY REGULATORY OPINION
44
