<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 2000.
REGISTRATION NO. 333-91353
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MGC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEVADA 4813 88-0360042
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
171 SULLY'S TRAIL, SUITE 202 KENT F. HEYMAN, ESQ.
PITTSFORD, NEW YORK 14534 171 SULLY'S TRAIL, SUITE 202
(716) 218-6550 PITTSFORD, NEW YORK 14534
(ADDRESS, INCLUDING ZIP CODE, (716) 218-6550
AND TELEPHONE NUMBER, INCLUDING (NAME, ADDRESS, INCLUDING ZIP CODE,
AREA CODE, OF REGISTRANT'S AND TELEPHONE NUMBER, INCLUDING
PRINCIPAL EXECUTIVE OFFICES) AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT B. GOLDBERG, ESQ. RALPH J. SUTCLIFFE, ESQ.
ELLIS, FUNK, GOLDBERG, LABOVITZ & DOKSON, P.C. KRONISH LIEB WEINER & HELLMAN LLP
3490 PIEDMONT ROAD, N.E., SUITE 400 1114 AVENUE OF THE AMERICAS, 46TH FLOOR
ATLANTA, GEORGIA 30305 NEW YORK, NEW YORK 10036
(404) 233-2800 (212) 479-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: The sale of
securities under this Registration Statement will begin as soon as practicable
after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered in
connection with dividend or interest reinvestment plans, please check the
following box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _____________
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
------------------------
<TABLE>
<CAPTION>
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE PRICE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value.............. 5,175,000 $54.375 $281,390,625(1)
$15,235.67(2)
- ------------------------------------------------------------------------------------------------------------
Series D Convertible Preferred Stock, $.001
par value................................ 3,450,000 $50.00 $172,500,000
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Excludes $104,591.46 which was previously paid.
------------------------
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 2000
PRELIMINARY PROSPECTUS
4,500,000 SHARES
[MGC LOGO]
MGC COMMUNICATIONS, INC.
COMMON STOCK
------------------
We are selling 4,470,959 shares of common stock and the selling
stockholders named in this prospectus are selling 29,041 shares of common stock.
The common stock is quoted on the Nasdaq National Market under the symbol
"MPWR." The last reported sale price of the common stock on the Nasdaq National
Market, on February 2, 2000, was $54.38 per share.
Concurrently with this offering, and by a separate prospectus, we are
offering to sell 3,000,000 shares of Series D convertible preferred stock. The
completion of this offering and the concurrent offering are not dependent on one
another.
The underwriters named in this prospectus may purchase up to 675,000
additional shares of common stock from us solely to cover over-allotments.
------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------ ------------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to MGC Communications (before expenses) $ $
Proceeds to the Selling Stockholders (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 2000.
------------------
SALOMON SMITH BARNEY BEAR, STEARNS & CO. INC.
------------------
GOLDMAN, SACHS & CO.
ING BARINGS
WARBURG DILLON READ LLC
, 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
How We Intend to Use the Proceeds of this Offering.......... 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Consolidated Financial and Operating Data.......... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 29
Management.................................................. 48
Principal and Selling Stockholders.......................... 52
Description of Securities................................... 54
Description of the Series D Convertible Preferred Stock..... 62
Underwriting................................................ 75
Legal Matters............................................... 77
Experts..................................................... 77
Where You Can Find More Information......................... 77
Index to Consolidated Financial Statements.................. F-1
</TABLE>
<PAGE> 4
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors," our financial statements and the
notes related to our financial statements. Unless otherwise specified, all
information in this prospectus assumes no exercise of the underwriters'
over-allotment option.
MGC COMMUNICATIONS
We are a growing communications company currently offering a single package
of services including Internet access, voice over digital subscriber line or
DSL, local dialtone, long distance and other voice and data services. We market
these services primarily to small and medium size business customers. We have
launched bundled voice and high-speed data services using DSL technology in all
of our current markets. DSL technology allows us to use our existing network to
simultaneously carry up to 24 voice calls or multiple voice calls and high-speed
data traffic on a single standard telephone line. Since launching our services,
we have experienced operating losses and generated negative cash flow from
operations. We expect to continue to generate negative cash flow from operations
for the foreseeable future while we continue to expand our network and develop
our product offerings and customer base.
- By installing our own equipment in space we rent at 288 incumbent carrier
central office sites, we had access to approximately 16 million
addressable lines at the end of third quarter 1999. These 288 incumbent
carrier central office sites represent one of the broadest geographic
service areas of any competitive carrier providing local, long distance
and data products.
- We have developed a sophisticated, proprietary operations support system
designed to manage all aspects of our business, including timely and
accurate provisioning to place our customers on our network. This allows
us to control access to our customers. Our operations support system is
fully integrated and fully capable of accommodating our growth plans.
- We use a capital efficient network consisting of our own switches,
placing our equipment in the central offices of incumbent carriers and
leasing local telephone lines and cables.
- We have an experienced and proven management team led by our president
and chief executive officer, Rolla P. Huff.
- We currently deliver our services in the metropolitan areas of Atlanta,
Chicago, Las Vegas, southern Florida and selected areas of southern
California, including Los Angeles and San Diego.
- We have established working relationships with five incumbent local
exchange carriers: Ameritech, BellSouth, GTE, PacBell and Sprint.
- At the end of the third quarter of 1999, we had 138,400 customer lines
sold, of which 117,210 lines were in service.
- To rollout our network and services on a national basis, during 2000, we
plan to aggressively expand our network to include over 800 incumbent
carrier central office sites providing access to more than 35 million
addressable lines.
- We have announced that we intend to change our name to "Mpower
Communications Corp." in connection with the national rollout of our
services.
- In connection with the expansion of our network, we plan to increase the
size of our sales force from 128 sales personnel at the end of the third
quarter of 1999 to over 350 by the end of 2000.
3
<PAGE> 5
- We plan to build data centers and enter into co-marketing agreements with
"e-commerce" providers.
We were one of the first competitive carriers to implement a strategy of
building and owning the network equipment that controls how voice and data
transmissions originate and terminate, which we refer to as switches, while
leasing the telephone lines and cable over which the voice calls and data
traffic are transmitted, which we refer to as transport, from incumbent
carriers. We believe this strategy has allowed us to serve a broad geographical
area at a comparatively low cost while maintaining control of the access to our
customers. Having executed this strategy, we are well-positioned to serve the
growing demand from small and medium size business customers for communications
services.
By implementing DSL technology and using a single telephone line to deliver
a bundled voice and high-speed data product, we expect to significantly reduce
the per line costs of provisioning customer lines and the associated recurring
costs of leasing telephone lines. These savings should allow us to improve our
cash flow from operations and offer a value-priced package of services to our
customers.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are at 171 Sully's Trail, Suite 202,
Pittsford, New York 14534. Our telephone number is (716) 218-6550.
4
<PAGE> 6
THE OFFERING
Common stock offered by
us(1)......................... 4,470,959 shares
Common stock offered by the
selling stockholders.......... 29,041 shares
Common stock to be outstanding
after this offering(2)...... 28,028,618 shares
Use of proceeds............... Capital expenditures related to the
purchase and installation of DSL and other
communications equipment, market expansion
and for general corporate purposes,
including working capital to fund our
expanding sales, marketing and product
development efforts.
Nasdaq National Market symbol
for common stock effective
January 18, 2000............ MPWR (previously MGCX)
Concurrent offering........... Concurrently with this offering, and by
separate prospectus, we are offering to
sell 3,000,000 shares of Series D
convertible preferred stock. The completion
of this offering and the concurrent
offering are not dependent on one another.
- -------------------------
(1) The underwriters have an over-allotment option to purchase an additional
675,000 shares solely to cover over-allotments.
(2) The number of shares outstanding excludes:
- 3,362,307 shares of common stock which may be issued upon the exercise of
stock options outstanding as of February 2, 2000 with a weighted average
exercise price of $18.94 per share;
- approximately 279,886 shares of common stock which may be issued upon the
exercise of outstanding warrants with an exercise price of approximately
$.02 per share;
- the conversion of the 5,277,779 shares of Series B convertible preferred
stock outstanding and 1,250,000 shares of Series C convertible preferred
stock outstanding, all of which shares may be converted into shares of
common stock on a one-for-one basis;
- the conversion of the shares of the Series D convertible preferred stock
which may be issued in the concurrent offering; and
- any shares which may be issued if the underwriters exercise their
over-allotment option.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues.......................................... $ 1 $ 3,791 $ 18,249 $ 11,772 $ 34,922
Cost of operating revenues, excluding depreciation.......... 305 3,928 17,129 10,575 31,449
Selling, general and administrative expenses................ 841 6,440 17,877 11,250 27,469
Loss from operations........................................ (1,554) (7,851) (21,995) (13,202) (36,402)
Net loss.................................................... (1,491) (10,836) (32,065) (22,293) (44,744)
Basic and diluted loss per share of common stock............ $ (2.11) $ (1.30) $ (2.26) $ (1.69) $ (5.19)
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
----------------------------------------------------
ACTUAL AS ADJUSTED(1) AS FURTHER ADJUSTED(2)
-------- -------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and investments
available-for-sale, excluding restricted investments...... $178,961 $ 438,874 $ 583,979
Restricted investments...................................... 30,375 30,375 30,375
Property and equipment, net................................. 151,159 151,159 151,159
Total assets................................................ 381,814 641,727 786,832
Long-term debt.............................................. 157,677 157,677 157,677
Series B convertible preferred stock........................ 49,452 49,452 49,452
Series C convertible preferred stock........................ -- 29,600 29,600
Series D convertible preferred stock........................ -- -- 145,105
Stockholders' equity........................................ 131,605 361,918 361,918
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(3)................................................... $(1,145) $ (6,577) $(16,757) $(10,053) $(23,996)
Cash flows used in operating activities..................... (942) (4,490) (24,184) (9,073) (29,226)
Cash flows used in investing activities..................... (2,287) (135,491) (77,715) (92,948) (54,784)
Cash flows provided by financing activities................. 11,126 177,138 68,731 68,387 165,348
Capital expenditures........................................ 3,659 22,641 97,101 67,136 47,135
OPERATING DATA AT END OF PERIOD:
Total access lines in service............................... 50 15,590 47,744 35,246 117,210
Central office collocation sites............................ 9 25 207 85 288
Switches in service......................................... 1 3 7 4 7
Number of sales personnel
Field sales............................................... 7 23 50 39 95
Inside sales.............................................. -- -- 31 53 33
------- -------- -------- -------- --------
Total sales personnel............................... 7 23 81 92 128
</TABLE>
- ---------------
(1) Gives effect to the sale of 4,470,959 shares of common stock in this
offering at an assumed price of $54.38 per share, the closing price of our
stock on February 2, 2000, and the sale of 1,250,000 shares of Series C
convertible preferred stock at $28.00 per share in December 1999 for cash
and a $4.9 million promissory note.
(2) Gives effect to the sale of 4,470,959 shares of common stock in this
offering at an assumed price of 54.38 per share, the sale of 1,250,000
shares of Series C convertible preferred stock at $28.00 per share in
December 1999 for cash and a $4.9 million promissory note and the sale of
3,000,000 shares of Series D convertible preferred stock at $50.00 per share
in the concurrent offering. The assumed price of the shares of common stock
is equal to the closing price of our common stock on February 2, 2000. The
price per share paid for the Series C convertible preferred stock was based
on the trading price for our common stock immediately before the purchasers'
commitment to purchase that stock. The price per share to be paid for the
Series D convertible preferred stock has been established at $50.00 with the
conversion price to be based on the market price for our common stock at the
time the Series D convertible preferred stock is issued and negotiations
between our underwriters and us.
(3) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. For the year ended December 31, 1996, EBITDA excludes a charge
of $355,000 related to the one-time write-off of purchased software. EBITDA
does not represent funds available for management's discretionary use and is
not intended to represent cash flow from operations. EBITDA should not be
considered as an alternative to loss from operations as an indicator of our
operating performance or as an alternative to cash flows as a measure of
liquidity. In addition, EBITDA is not a term defined by generally accepted
accounting principles and, as a result, the measure of EBITDA may not be
comparable to similarly titled measures used by other companies. We believe
that EBITDA is often reported and widely used by analysts, investors and
other interested parties in the communications industry. Accordingly, we are
including this information to permit a more complete comparison of our
operating performance relative to other companies in the industry.
Our financial information presented above as of and for the nine month
period ended September 30, 1999 has been restated to reflect the accretion of
anticipated redemption value and beneficial conversion feature with respect to
the Series B convertible preferred stock. See "Notes to Consolidated Financial
Statements -- Note(12)."
6
<PAGE> 8
RISK FACTORS
You should carefully consider the following factors, in addition to other
information in this prospectus, before purchasing the securities being offered.
IT IS DIFFICULT TO PREDICT OUR FUTURE OPERATING RESULTS FROM OUR PREVIOUS
PERFORMANCE SINCE OUR BUSINESS MODEL IS STILL EVOLVING AND WE HAVE A LIMITED
OPERATING HISTORY
Our limited operating history makes predicting future results difficult.
Because some of our services are new, we cannot be sure businesses will buy
them. In addition, we have recently hired a new chief executive officer who may
realign our operations into regional service areas to support our expanding
geographic markets or make other changes which could increase the cost of
providing our services.
WE EXPECT OUR LOSSES TO CONTINUE
We recorded net losses of $44.7 million in the first nine months of 1999,
$32.1 million in 1998, and $10.8 million in 1997. In addition, we had negative
cash flow from operations of $29.2 million in the first nine months of 1999,
$24.2 million in 1998 and $4.5 million in 1997. We expect to record significant
net losses and generate negative cash flow from operations for the foreseeable
future. We cannot assure you we will achieve or sustain profitability or
generate sufficient positive cash flow from operations to meet our planned
capital expenditures, working capital and debt service requirements.
WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS THAT WE MAY NOT BE ABLE TO OBTAIN
We require significant amounts of capital to fund the development and
expansion of our business and services as well as operating costs and debt
service. If we cannot generate or otherwise access sufficient funds, we may be
required to delay or abandon some of our future expansion plans. This would
likely have a negative impact on our growth and our ability to compete in the
communications industry. We expect to fund our capital requirements through
existing resources, debt or equity financing and internally generated funds,
including the proceeds of this offering, the concurrent offering and the
issuance of Series C convertible preferred stock. We cannot assure you we will
be successful in completing the concurrent offering or otherwise raising
sufficient debt or equity financing on acceptable terms.
OUR SUBSTANTIAL DEBT CREATES FINANCIAL AND OPERATING RISK
As of September 30, 1999, we had approximately $157.7 million of total debt
outstanding. Our level of debt could have important consequences to you,
including the following:
- a substantial portion of our cash flow from operations will be dedicated
to paying principal and interest on our debt, thereby reducing funds
available for expansion or other purposes;
- our significant amount of debt could make us more vulnerable to changes
in general economic conditions or increases in prevailing interest rates;
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes
could be impaired;
- our failure to comply with the restrictions contained in any of our
financing agreements could lead to a default which could result in our
being required to repay all of our outstanding debt; and
- we may be more leveraged than some of our competitors, which may result
in a competitive disadvantage.
7
<PAGE> 9
OUR DEBT COVENANTS AND PREFERRED STOCK TERMS COULD LIMIT HOW WE CONDUCT OUR
BUSINESS AND OUR ABILITY TO RAISE ADDITIONAL FUNDS
Our debt indenture contains covenants that restrict our ability to:
- incur additional debt;
- pay dividends and make other distributions;
- prepay subordinated debt;
- make investments and other restricted payments;
- create liens;
- sell assets; and
- engage in transactions with affiliates.
In addition, the terms of our outstanding preferred stock require us to
obtain the approval of the holders before we take specified actions. Please see
"Description of Securities -- Series B Convertible Preferred Stock" and
"Description of Securities -- Series C Convertible Preferred Stock."
Our future financing arrangements will likely contain similar or more
restrictive covenants. As a result of these restrictions, we may be:
- limited in how we conduct our business;
- unable to raise additional debt or equity financing to operate during
general economic or business downturns; and
- unable to compete effectively or to take advantage of new business
opportunities.
These restrictions may affect our ability to grow as we currently plan and our
ability to operate our business in the interests of our stockholders.
OUR SUCCESS DEPENDS ON THE EFFECTIVENESS OF OUR MANAGEMENT AND WE HAVE A NEW
CHIEF EXECUTIVE OFFICER AND ARE SEEKING TO MAKE OTHER CHANGES TO OUR MANAGEMENT
TEAM
Our business is managed by a small number of key management personnel, the
loss of some of whom could impair our ability to carry out our planned
expansion. We believe our future success will depend in large part on our
ability to attract and retain highly skilled and qualified personnel. None of
our key executives other than Rolla P. Huff is a party to a long-term employment
agreement and we do not maintain key man insurance on our officers.
We have recently hired a new chief executive officer, chief financial
officer and other new members of our senior management team. We cannot assure
you that our new senior officers will be effective in managing our company or
will successfully work with our existing management team.
IF OUR EQUIPMENT DOES NOT PERFORM AS WE EXPECT, IT COULD DELAY OUR EXPANSION
INTO NEW MARKETS AND OUR INTRODUCTION OF NEW SERVICES
In implementing our strategy, we may use new or existing technologies to
offer additional services. We also plan to use equipment manufactured by
multiple vendors to offer our current services and future services in each of
our new markets. If we cannot successfully install and integrate the technology
and equipment necessary to deliver our current services and any future services
within the time frame and with the cost effectiveness we currently contemplate,
we could be forced to delay or abandon a portion of our expansion plans or the
introduction of new services. This could also affect our ability to attract and
retain customers.
8
<PAGE> 10
THE FAILURE OF OUR OPERATIONS SUPPORT SYSTEM TO PERFORM AS WE EXPECT COULD
IMPAIR OUR ABILITY TO RETAIN CUSTOMERS AND OBTAIN NEW CUSTOMERS OR RESULT IN
INCREASED CAPITAL EXPENDITURES
We employ a proprietary operations support system which is expected to be
an important factor in our success. If the operations support system fails or is
unable to perform as expected, we could suffer customer dissatisfaction, loss of
business or the inability to add customers on a timely basis, any of which would
adversely affect our revenues. Furthermore, problems may arise with higher
processing volumes or with additional automation features, which could
potentially result in system breakdowns and delays and additional, unanticipated
expense to remedy the defect or to replace the defective system with an
alternative system.
OUR FAILURE TO MANAGE GROWTH COULD RESULT IN INCREASED COSTS AND OUR INABILITY
TO ACHIEVE OUR EXPANSION GOALS
We may be unable to manage our growth effectively. This could increase the
costs of expansion and impair our ability to fully implement our expansion
plans. The development and expansion of our business and our entry into new
markets will depend on, among other things, our ability to achieve the following
goals in a timely manner, at reasonable costs and on satisfactory terms and
conditions:
- purchase, install and operate switches and other equipment, including DSL
equipment;
- accurately assess potential new markets;
- negotiate suitable interconnection agreements with, and arrangements for
installing our equipment at the central offices of, incumbent carriers on
satisfactory terms and conditions, including incumbent carriers in
markets we plan to enter;
- hire and retain qualified personnel;
- lease suitable access to transport networks;
- lease or purchase suitable sites; and
- obtain required government authorizations.
We have experienced rapid growth since our inception, and we believe
sustained growth will place a strain on our operational, human and financial
resources. Our growth will also increase our operating complexity as well as the
level of responsibility for both existing and new management personnel. Our
ability to manage our expansion effectively will depend on the continued
development of plans, systems and controls for our operational, financial and
management needs and on our ability to expand, train and manage our employee
base.
OUR SERVICES MAY NOT ACHIEVE SUFFICIENT MARKET ACCEPTANCE TO BECOME PROFITABLE
To be successful, we must develop and market services that are widely
accepted by businesses at profitable prices. Our success will depend upon the
willingness of our target customers to accept us as an alternative provider of
local, long distance, high-speed data and Internet services. Although we are in
the process of rolling out high-speed data and Internet services and developing
additional products and services, we might not be able to provide the range of
communication services our target business customers need or desire. In
addition, the lack of willingness by e-commerce providers to accept us as a
marketing, sales and distribution partner would have a negative impact on our
ability to deliver additional products and services to our target customers.
9
<PAGE> 11
OUR FAILURE TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE AT DESIRED PRICING LEVELS
COULD IMPAIR OUR ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW
Prices for data communication services have fallen historically, a trend we
expect will continue. Accordingly, we cannot predict to what extent we may need
to reduce our prices to remain competitive or whether we will be able to sustain
future pricing levels as our competitors introduce competing services or similar
services at lower prices. Our ability to meet price competition may depend on
our ability to operate at costs equal to or lower than our competitors or
potential competitors. There is a risk competitors, perceiving us to lack
capital resources, may undercut our rates or increase their services or take
other actions in an effort to force us out of business. Our failure to achieve
or sustain market acceptance at desired pricing levels could impair our ability
to achieve profitability or positive cash flow.
IF WE ARE UNABLE TO NEGOTIATE AND ENFORCE FAVORABLE INTERCONNECTION AGREEMENTS
AND ARRANGEMENTS FOR INSTALLING OUR EQUIPMENT, WE COULD HAVE DIFFICULTY
OPERATING PROFITABLY IN OUR EXISTING MARKETS AND ENTERING NEW MARKETS
We must negotiate and renew favorable interconnection agreements and
arrangements for installing our equipment with other companies, including
incumbent carriers, in markets we plan to enter. The rates charged to us under
the interconnection agreements might not continue to be low enough for us to
attract a sufficient number of customers and to operate the business on a
profitable basis. In addition, our interconnection agreements provide for our
connection and maintenance orders to receive attention on the same basis as the
incumbent carrier's customers and for the incumbent carriers to provide adequate
capacity to keep blockage within industry standards. However, from time to time,
we have experienced excessive blockage in the delivery of calls to and from the
incumbent carriers due to the insufficient number of phone lines installed by
the incumbent carriers between their switches and our switches. Blocked calls
result in customer dissatisfaction which may result in the loss of business.
DELAYS BY THE INCUMBENT CARRIERS IN CONNECTING OUR CUSTOMERS TO OUR NETWORK
COULD RESULT IN CUSTOMER DISSATISFACTION AND LOSS OF BUSINESS
We rely on the timeliness of incumbent carriers and competitive carriers in
processing our orders for customers switching to our service and in maintaining
the customer's standard telephone lines to assure uninterrupted service. The
incumbent carriers have had little experience leasing standard telephone lines
to other companies. Therefore, the incumbent carriers might not be able to
continue to provide and maintain leased standard telephone lines in a prompt and
efficient manner as the number of standard telephone lines requested by
competitive carriers increases.
WE MAY NOT BE ABLE TO SERVICE OUR CUSTOMERS IF WE CANNOT SECURE SUFFICIENT
TELEPHONE LINES AND CABLE TO MEET OUR FUTURE NEEDS
We may not be able to lease sufficient telephone lines and cable in markets
we want to enter or renew our lease arrangements or obtain comparable
arrangements from other carriers in our existing markets. Because we lease
rather than construct telephone lines and cable in each of our markets, we would
be unable to service our customers if we cannot obtain sufficient telephone
lines and cable. Our inability to lease sufficient telephone lines and cable
could result in the loss of customers, the inability to add new customers and
limitations on our ability to enter new markets.
10
<PAGE> 12
OUR RELIANCE ON A LIMITED NUMBER OF EQUIPMENT SUPPLIERS COULD RESULT IN
ADDITIONAL EXPENSES OR DELAYS IN OUR EXPANSION
We currently rely and expect to continue to rely on a limited number of
third party suppliers to manufacture the equipment we require to implement our
DSL technology. If our suppliers enter into competition with us, or if our
competitors enter into exclusive or restrictive arrangements with our suppliers,
it may materially and adversely affect the availability and pricing of the
equipment we purchase. Our reliance on third-party vendors involves a number of
additional risks, including the absence of guaranteed supply and reduced control
over delivery schedules, quality assurance, production yields and costs.
We cannot assure you that our vendors will be able to meet our needs in a
satisfactory and timely manner in the future or that we will be able to obtain
alternative vendors when and if needed. It could take a significant period of
time to establish relationships with alternative suppliers for critical
technologies and to introduce substitute technologies into our network. As a
result, the use of alternative vendors could delay our expansion plans. In
addition, if we change vendors, we may need to replace all or a portion of the
DSL equipment deployed within our network at significant expense in terms of
equipment costs and loss of revenues in the interim.
BECAUSE WE COMPETE AGAINST ESTABLISHED INDUSTRY COMPETITORS WITH SUBSTANTIALLY
GREATER RESOURCES, WE MAY NOT BE ABLE TO ACHIEVE OUR OPERATING AND FINANCIAL
OBJECTIVES
The market in which we operate is highly competitive and most of our
competitors and potential competitors have substantially greater resources than
we have. Our failure to compete effectively could prevent us from obtaining
sufficient market share to become profitable. For more information regarding the
competitive environment in which we operate, please see
"Business -- Competition."
IF WE ARE NOT ABLE TO OBTAIN OR IMPLEMENT NEW TECHNOLOGIES, WE MAY LOSE BUSINESS
AND LIMIT OUR ABILITY TO ATTRACT NEW CUSTOMERS
We may be unable to obtain access to new technology on acceptable terms or
at all. We may be unable to adapt to new technologies and offer services in a
competitive manner. If these events occur, we may lose customers to competitors
offering more advanced services and our ability to attract new customers would
be hindered. Rapid and significant changes in technology are expected in the
communications industry. We cannot predict the effect of technological changes
on our business. Our future success will depend, in part, on our ability to
anticipate and adapt to technological changes, evolving industry standards and
changing needs of our current and prospective customers.
A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS AND RESULT IN CUSTOMER DISSATISFACTION
Interruptions in service, capacity limitations or security breaches could
have a negative effect on customer acceptance and, therefore, on our revenues
and ability to attract new customers. Our networks may be affected by physical
damage, power loss, capacity limitations, software defects, breaches of security
by computer viruses, break-ins or otherwise and other factors which may cause
interruptions in service or reduced capacity for our customers.
IF WE ARE UNABLE TO EFFECTIVELY DELIVER DSL SERVICES TO A SUBSTANTIAL NUMBER OF
CUSTOMERS, WE MAY NOT ACHIEVE OUR REVENUE GOALS
We cannot guarantee our network will be able to connect and manage a
substantial number of customers at high transmission speeds. If we cannot
achieve and maintain digital transmission speeds that are otherwise available in
the market, we may lose customers to competitors with higher transmission speeds
and we may not be able to attract new customers. While digital transmission
11
<PAGE> 13
speeds of up to 1.5 Mbps are possible on portions of our network, that speed may
not be available over a majority of our network. Actual transmission speeds on
our network will depend on a variety of factors many of which are beyond our
control, including the distance an end user is located from a central office,
the quality of the telephone lines, the presence of interfering transmissions on
nearby lines and other factors.
WE MAY LOSE CUSTOMERS OR POTENTIAL CUSTOMERS BECAUSE THE TELEPHONE LINES WE
REQUIRE MAY BE UNAVAILABLE OR IN POOR CONDITION
Our ability to provide DSL services to potential customers depends on the
quality, physical condition, availability and maintenance of telephone lines
within the control of the incumbent carriers. If the telephone lines are not
adequate, we may not be able to provide DSL services to many of our target
customers and our expected revenues will be diminished. We believe the current
condition of telephone lines in many cases may be inadequate to permit us to
fully implement our DSL services. In addition, the incumbent carriers may not
maintain the telephone lines in a condition that will allow us to implement our
DSL services effectively or may claim they are not of sufficient quality to
allow us to fully implement or operate our DSL services. Further, some customers
use technologies other than copper lines to provide telephone services, and as a
result, DSL services might not be available to these customers.
INTERFERENCE OR CLAIMS OF INTERFERENCE COULD DELAY OUR ROLLOUT OR RESULT IN
CUSTOMER DISSATISFACTION
Interference, or claims of interference by the incumbent carriers, if
widespread, could adversely affect our speed of deployment, reputation, brand
image, service quality and customer satisfaction and retention. Technologies
deployed on copper telephone lines, such as DSL, have the potential to interfere
with other technologies on the copper telephone lines. Interference could
degrade the performance of our services or make us unable to provide service on
selected lines and the customers served by those lines. Although we believe our
DSL technologies, like other technologies, do not interfere with existing voice
services, incumbent carriers may claim the potential for interference permits
them to restrict or delay our deployment of DSL services. The procedures to
resolve interference issues between competitive carriers and incumbent carriers
are still being developed. We may be unable to successfully resolve interference
issues with incumbent carriers.
OUR FUTURE SUCCESS WILL DEPEND ON GROWTH IN THE DEMAND FOR INTERNET ACCESS AND
HIGH-SPEED DATA SERVICES
If the markets for the services we offer, including Internet access and
high-speed data services, fail to develop, grow more slowly than anticipated or
become saturated with competitors, we may not be able to achieve our projected
revenues. The markets for business Internet and high-speed data services are in
the early stages of development. Demand for Internet services is highly
uncertain and depends on a number of factors, including the growth in consumer
and business use of new interactive technologies, the development of
technologies that facilitate interactive communication between organizations and
targeted audiences, security concerns and increases in data transport capacity.
In addition, the market for high-speed data transmission via DSL technology
is relatively new and evolving. Various providers of high-speed digital services
are testing products from various suppliers for various applications, and no
industry standard has been broadly adopted. Critical issues concerning
commercial use of DSL for Internet and high-speed data access, including
security, reliability, ease of use and cost and quality of service, remain
unresolved and may impact the growth of these services.
12
<PAGE> 14
THE DESIRABILITY AND MARKETABILITY OF OUR INTERNET SERVICE MAY BE ADVERSELY
AFFECTED IF WE ARE NOT ABLE TO MAINTAIN RECIPROCAL RELATIONSHIPS WITH OTHER
INTERNET SERVICE PROVIDERS
The Internet is comprised of many Internet service providers and underlying
transport providers who operate their own networks and interconnect with other
Internet service providers at various points. As we commence the operation of
Internet services, connections to the Internet will be provided through
wholesale carriers. We anticipate as our volume increases, we will enter into
reciprocal agreements with other Internet service providers. We cannot assure
you other national Internet service providers will maintain reciprocal
relationships with us. If we are unable to maintain these relationships, our
Internet services may not be attractive to our target customers, which would
impair our ability to retain and attract customers. In addition, the
requirements associated with maintaining relationships with the major national
Internet service providers may change. We cannot assure you we will be able to
expand or adapt our network infrastructure to meet any new requirements on a
timely basis, at a reasonable cost, or at all.
WE MAY INCUR LIABILITIES AS A RESULT OF OUR INTERNET SERVICE OFFERINGS
United States law relating to the liability of on-line service providers
and Internet service providers for information carried on, disseminated through,
or hosted on their systems is currently unsettled. If liability is imposed on
Internet service providers, we would likely implement measures to minimize our
liability exposure. These measures could require us to expend substantial
resources or discontinue some of our product or service offerings. In addition,
increased attention to liability issues, as a result of litigation, legislation
or legislative proposals could adversely affect the growth and use of Internet
services.
CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS COULD RESTRICT THE WAY WE
OPERATE OUR BUSINESS AND NEGATIVELY AFFECT OUR COSTS AND COMPETITIVE POSITION
A significant number of the services we offer are regulated at the federal,
state and/or local levels. If these laws and regulations change or if the
administrative implementation of laws develops in an adverse manner, there could
be an adverse impact on our costs and competitive position. In addition, we may
expend significant financial and managerial resources to participate in
administrative proceedings at either the federal or state level, without
achieving a favorable result. We believe incumbent carriers and others may work
aggressively to modify or restrict the operation of many provisions of the
Telecommunications Act. We expect incumbent carriers and others to continue to
pursue litigation in courts, institute administrative proceedings with the
Federal Communications Commission or FCC and other regulatory agencies and lobby
the United States Congress, all in an effort to affect laws and regulations in a
manner favorable to them and against the interest of competitive carriers. For
more details about our regulatory situation, please see "Business -- Government
Regulations."
WE MAY NOT BE ABLE TO COLLECT ALL OF THE ACCESS CHARGES WE HAVE BILLED TO LONG
DISTANCE CARRIERS
When our facilities are used to originate a customer's long distance call
and deliver it to the long distance carrier designated by the customer, or to
terminate a long distance call received from a long distance carrier by
delivering it to a telephone number connected to our network, the long distance
carrier is required to pay us for access to our network and the use of our
facilities. These charges are called "access charges." Access charges
represented a significant portion of revenues in 1998 and 1999. The long
distance carriers responsible for generating a significant portion of our access
charge revenues have refused to pay the full amount of access charges billed to
them under our tariffs. The law applicable to our disputes with these carriers
is unclear and we may not be able to collect the full amount of the access
charges owed to us. Until these disputes are resolved and access charge
receivables are collected on a timely basis, we cannot rely on these revenues as
a source of cash flow.
13
<PAGE> 15
As a result, we may be required to raise additional capital sooner than we
currently anticipate. See "-- We will need significant additional funds that we
may not be able to obtain," and "Business -- Legal Proceedings."
THE PRICES WE CHARGE FOR OUR SERVICES AND PAY FOR THE USE OF SERVICES OF
INCUMBENT CARRIERS AND OTHER COMPETITIVE CARRIERS MAY BE NEGATIVELY AFFECTED IN
REGULATORY PROCEEDINGS, WHICH COULD RESULT IN DECREASED REVENUES, INCREASED
COSTS AND LOSS OF BUSINESS
If we were required to decrease the prices we charge for our services or to
pay higher prices for services we purchase from incumbent carriers and other
competitive carriers, it would have an adverse effect on our ability to achieve
profitability, our costs and our ability to offer competitively priced services.
We must file tariffs with state and federal regulators which indicate the prices
we charge for our services. In addition, we purchase some tariffed services from
incumbent carriers and/or competitive carriers. The rate we pay for other
services we purchase from incumbent carriers and other competitive carriers are
set by negotiations between the parties. All of the tariffed prices may be
challenged in regulatory proceedings by customers, including incumbent carriers,
competitive carriers and long distance carriers who purchase these services.
These negotiated rates are also subject to regulatory review. In August 1999,
the FCC initiated a proceeding which is considering the reasonableness of
competitive carrier access charges and is seeking comments on whether the FCC
should regulate the access charges set by competitive carriers. While the
outcome of this proceeding cannot be predicted, if we were required to decrease
our access charges it could have an adverse effect on our expected revenues.
ONE OF OUR INTERCONNECTION AGREEMENTS REQUIRES A RETROACTIVE ADJUSTMENT TO THE
RATE WE PAY FOR CERTAIN SERVICES WHICH MAY INCREASE OUR LOSSES
One of our interconnection agreements requires a retroactive adjustment to
the rates we pay for leased telephone lines and installation services when the
state regulatory commission makes a final determination of the appropriate
rates. The state regulatory commission has recently released its determination
of the appropriate rates. The final rate for leased telephone lines, a recurring
expense, was below the rate we previously estimated. The final rate for
non-recurring installation services was above the rate we previously estimated.
We are in the process of determining the aggregate impact to our cost of
operating revenues. Our best estimate of the probable outcome is that it may be
necessary to expense approximately $1.2 million of additional cost of operating
revenues in 1999.
WE WILL FACE ADDITIONAL RISKS IF WE ACQUIRE OTHER BUSINESSES
We may acquire other businesses as a means of expanding into new markets or
developing new services. We are unable to predict whether or when any
prospective acquisitions will occur or the likelihood of any acquisition being
completed on favorable terms and conditions. Acquisitions of other businesses
involve risks including:
- difficulties assimilating acquired operations and personnel;
- potential disruptions of our ongoing business;
- the diversion of resources and management time;
- the possibility uniform standards, controls, procedures and policies may
not be maintained;
- risks associated with entering new markets in which we have little or no
experience; and
- the potential impairment of relationships with employees or customers as
a result of changes in management.
Any business we might acquire might not perform as expected.
14
<PAGE> 16
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could fluctuate widely in response to a variety of
factors, including:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- significant acquisitions, strategic partnerships, joint ventures or
capital commitments;
- additions or departures of key personnel;
- sales of common stock; and
- other events or factors that may be beyond our control.
In addition, the Nasdaq National Market, where many publicly held
communications companies like us are traded, has recently experienced extreme
price and volume fluctuations. These fluctuations often have been unrelated or
disproportionate to the operating performance of these companies. Broad market
and industry factors may materially adversely affect the market price of our
common stock, regardless of our actual operating performance.
BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS, YOUR ABILITY TO MAKE A PROFIT FROM AN
INVESTMENT IN OUR STOCK WILL DEPEND SOLELY ON AN INCREASE IN ITS MARKET PRICE
We have never paid and do not intend to pay any dividends on our common
stock. Payment of any future dividends on our common stock will depend upon our
earnings and capital requirements, our debt facilities and other factors our
board of directors considers appropriate. Our ability to declare and pay cash
dividends on our common stock is restricted by covenants in our debt indenture
and the terms of our outstanding preferred stock.
FUTURE SALES OF OUR STOCK BY EXISTING STOCKHOLDERS MAY ADVERSELY AFFECT OUR
STOCK PRICE
Our stock price will likely decline if the supply of our stock being sold
in the open market exceeds the demand for our stock. Substantially all of our
common stock is currently eligible for sale in the open market. The shares of
common stock which may be issued upon conversion of or as dividends on the
Series D convertible preferred stock which may be issued in the concurrent
offering will also be freely tradeable. In addition, shares of our common stock
issued upon exercise of stock options are freely tradeable under a currently
effective registration statement. See "Description of Securities -- Shares
Eligible for Future Sale."
The holders of some of our outstanding shares of common stock and
convertible securities have demand registration rights which if exercised could
result in a registration statement covering shares of common stock being filed
by us. These holders also have the right to have shares of common stock included
in any registration statement filed by us in the future. See "Description of
Securities -- Registration Rights of Security Holders."
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<PAGE> 17
INVESTORS IN THIS OFFERING WILL PAY MORE PER SHARE THAN THE NET ASSET VALUE OF
OUR STOCK
Investors who purchase shares in this offering will:
- pay a price that substantially exceeds the per share value of our assets
less liabilities
- contribute 50% of the total amount we have received for our common stock
but will only own approximately 16% of our outstanding shares of common
stock. See "Dilution."
OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
CAUSE US TO LOSE CUSTOMERS
We may lose customers if service interruptions are caused by our failure or
the failure of third parties to be Year 2000 compliant. For a discussion of
risks presented by our ability and the ability of others on whom we rely to
successfully make computer systems and other technology Year 2000 compliant, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of Year 2000" in this prospectus.
INVESTORS IN THIS OFFERING WILL NOT BE ABLE TO CONTROL DECISIONS MADE BY US
SINCE OUR MANAGEMENT OWNS A SIGNIFICANT PERCENTAGE OF OUR COMPANY AND WILL BE
ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR ACTIONS
We are controlled by our officers and directors, who in the aggregate
directly or indirectly control before this offering 39.5% of our outstanding
common stock and voting power assuming conversion of all Series B convertible
preferred stock and Series C convertible preferred stock. After this offering,
these stockholders collectively will likely be able to continue to control our
management policy, decide all fundamental corporate actions, including mergers,
substantial acquisitions and dispositions and elect our board of directors.
SOME PROVISIONS OF NEVADA LAW AND OUR ARTICLES OF INCORPORATION AND BY-LAWS
COULD DISCOURAGE A TAKEOVER OF OUR COMPANY AND ADVERSELY AFFECT THE PRICE OF OUR
STOCK
After completion of this offering and the concurrent offering, our board of
directors will have the authority to issue up to 39,222,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of our capital stock
may be adversely affected by the rights of the holders of any class of preferred
stock that may be issued in the future. The issuance of future classes of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock. Other than the
Series D convertible preferred stock, we have no current plans to issue shares
of preferred stock.
We are also subject to provisions of Nevada law which could have the effect
of delaying, deterring or preventing a change of control of our company. In
addition, our articles of incorporation and by-laws contain provisions that
could discourage potential takeover attempts and make attempts by stockholders
to change management more difficult. See "Description of Securities -- Control
Share Acquisitions," "-- Anti-Takeover Provisions of Articles of Incorporation,"
"-- Board of Directors," and "-- Stockholder Action and Special Meetings."
OUR FORWARD-LOOKING STATEMENTS MAY MATERIALLY DIFFER FROM ACTUAL EVENTS OR
RESULTS
This prospectus contains "forward-looking statements," which you can
generally identify by our use of forward-looking words including "believe,"
"expect," "intend," "may," "will," "should," "could," "anticipate" or "plan" or
the negative or other variations of these terms or comparable
16
<PAGE> 18
terminology, or by discussion of strategies that involve risks and
uncertainties. We often use these types of statements when discussing
- our plans and strategies;
- our anticipation of profitability or cash flow from operations;
- the development of our business;
- the expected market for our services and products;
- our anticipated capital expenditures;
- changes in regulatory requirements; and
- other statements contained in this prospectus regarding matters that are
not historical facts.
We caution you these forward-looking statements are only predictions and
estimates regarding future events and circumstances. We cannot assure you we
will achieve the future results reflected in these statements.
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<PAGE> 19
HOW WE INTEND TO USE THE PROCEEDS OF THIS OFFERING
The net proceeds we receive from the sale of the 4,470,959 shares of common
stock we are offering are estimated to be approximately $230.3 million, based on
an assumed offering price of $54.38 per share, the closing price of our common
stock on February 2, 2000, and after deducting estimated underwriting discounts
and other offering expenses payable by us. We will receive approximately $265.2
million if the over-allotment option granted to the underwriters is exercised in
full. We will not receive any proceeds from the sale of any shares sold by the
selling stockholders.
The net proceeds we receive from the sale of the Series D convertible
preferred stock being offered concurrently with this offering are estimated to
be approximately $145.1 million after deducting estimated underwriting discounts
and other offering expenses payable by us. We will receive $166.9 million if the
over-allotment granted to the underwriters with respect to the Series D
convertible preferred stock is exercised in full.
Neither this offering nor the concurrent offering of Series D convertible
preferred stock are conditioned on the other and one offering may be completed
without the other.
We intend to use the net proceeds from both offerings as follows:
<TABLE>
<S> <C>
Capital expenditures related to the purchase and
installation of DSL and other communications equipment $157.0 million
--------------
Market expansion and general corporate purposes, including
working capital to fund expanded sales, marketing and
product development efforts $218.4 million
--------------
</TABLE>
However, management will have broad discretion in determining the uses and
exact amounts for each use of the net proceeds. In addition, we may use a
portion of the net proceeds for acquisitions, although we are not involved in
any acquisition negotiations at this time. See "Risk Factors -- We will face
additional risks if we acquire other businesses."
Pending use of the net proceeds as described above, we intend to invest
them in short-term, investment grade securities.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock and we do not
anticipate paying cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will depend on our financial condition, results of operations,
capital requirements and other factors our board of directors considers
relevant. In addition, the terms of our outstanding indebtedness and preferred
stock restrict our ability to pay cash dividends on our common stock and
preferred stock.
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<PAGE> 20
CAPITALIZATION
The following table shows our capitalization as of September 30, 1999, (A)
on an actual basis, (B) as adjusted to reflect the sale of the 4,470,959 shares
of common stock we are offering by means of this prospectus and the sale of
1,250,000 shares of Series C convertible preferred stock in December 1999, and
(C) as further adjusted to reflect the sale of the 4,470,959 shares of common
stock we are offering by means of this prospectus, the sale of 1,250,000 shares
of Series C convertible preferred stock in December 1999, and the sale of the
3,000,000 shares of Series D convertible preferred stock in the concurrent
offering.
You should read this table with our financial statements and the related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------------------------
ACTUAL AS ADJUSTED(1) AS FURTHER ADJUSTED(2)
-------- -------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents and investments
available-for-sale, excluding restricted
investments............................... $178,961 $ 438,874 $ 583,979
Restricted investments...................... 30,375 30,375 30,375
-------- --------- ---------
Total cash and cash equivalents,
investments available-for-sale and
restricted investments................. $209,336 $ 469,249 $ 614,354
======== ========= =========
13% senior secured notes due 2004........... $157,125 $ 157,125 $ 157,125
Other long-term debt........................ 552 552 552
Series B convertible preferred stock........ 49,452 49,452 49,452
Series C convertible preferred stock........ -- 34,500 34,500
Note receivable from stockholder for
issuance of Series C convertible preferred
stock..................................... -- (4,900) (4,900)
Series D convertible preferred stock........ -- -- 145,105
Stockholders' equity:
Common stock, $0.001 par value, 60,000,000
shares authorized, 22,800,920
outstanding and 27,239,514 outstanding
as adjusted and as further adjusted.... 23 27 27
Additional paid-in-capital................ 223,240 453,549 453,549
Accumulated deficit....................... (89,136) (89,136) (89,136)
Less: treasury stock...................... (76) (76) (76)
Accumulated other comprehensive income.... (360) (360) (360)
Notes receivable from stockholders for
issuance of common stock............... (2,086) (2,086) (2,086)
-------- --------- ---------
Total stockholders' equity................ 131,605 361,918 361,918
-------- --------- ---------
Total capitalization........................ $338,734 $ 598,647 $ 743,752
======== ========= =========
</TABLE>
- -------------------------
(1) Gives effect to the sale of 4,470,959 shares of common stock in this
offering and the sale of 1,250,000 shares of Series C convertible preferred
stock in December 1999 for cash and a $4.9 million promissory note due in
March 2000 and bearing interest at 7.5% per year. Also gives effect to a
$47.5 million beneficial conversion feature recognized at the date of
issuance for the Series B convertible preferred stock and a $25.0 million
beneficial conversion feature recognized at the date of issuance for the
Series C convertible preferred stock.
(2) Gives effect to the sale of 4,470,959 shares of common stock in this
offering, the sale of 1,250,000 shares of Series C convertible preferred
stock in December 1999 for cash and a $4.9 million promissory note due in
March 2000 and bearing interest at 7.5% per year, and the sale of 3,000,000
shares of Series D convertible preferred stock in the concurrent offering.
Also gives effect to a $47.5 million beneficial conversion feature
recognized at the date of issuance for the Series B convertible preferred
stock and a $25.0 million beneficial conversion feature recognized at the
date of issuance for the Series C convertible preferred stock.
Our financial information presented above as of and for the nine month
period ended September 30, 1999 has been restated to reflect the accretion
anticipated redemption value and beneficial conversion feature with respect to
the Series B convertible preferred stock. See "Notes to Consolidated Financial
Statements -- Note(12)."
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<PAGE> 21
DILUTION
The net tangible book value of a share of our common stock is the
difference between our tangible assets and our liabilities, divided by the
number of shares of common stock outstanding. For investors in the common stock,
dilution is the difference between the assumed $54.38 per share offering price
of the common stock and the net tangible book value per share of common stock
immediately after completing this offering. Dilution in this case results from
the fact that the per share offering price of the common stock is substantially
higher than the per share price paid by our existing stockholders for our
presently outstanding stock.
On September 30, 1999, our net tangible book value was approximately $206.4
million after giving effect to the sale of 1,250,000 shares of Series C
convertible preferred stock in December 1999, and the per share net tangible
book value of each of the assumed outstanding shares of common stock, assuming
the outstanding Series B convertible preferred stock had been converted into
5,277,779 shares of common stock and the outstanding Series C convertible
preferred stock had been converted into 1,250,000 shares of common stock, was
approximately $7.04 per share.
As of September 30, 1999, without taking into account any changes in our
net tangible book value after that date other than to give effect to the sale of
the Series C convertible preferred stock and the sale of the common stock
offered in this offering, based on an assumed offering price of $54.38 per
share, and the estimated offering expenses, including the underwriting discount,
the net tangible book value of each of the assumed outstanding shares of common
stock would have been $12.92 per share. Therefore, you would have paid $54.38
for a share of common stock having a net tangible book value of approximately
$12.92 per share; that is, your investment would have been diluted by
approximately $41.46 per share. At the same time, existing stockholders would
have realized an increase in net tangible book value of $5.88 per share without
further cost or risk to themselves. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed price per share of common stock in this
offering........................................... $54.38
Net tangible book value per share of common stock
before this offering(1)......................... $7.04
Increase in net tangible book value per share of
common stock attributable to investors in this
offering(2)(3).................................. $5.88
-----
Net tangible book value per share of common stock
after this offering(2)(3)....................... 12.92
------
Dilution to new investors in common stock(3)(4)...... $41.46
</TABLE>
- -------------------------
(1) After giving effect to the sale of 1,250,000 shares of Series C convertible
preferred stock in December 1999, assuming conversion to common stock on a
one-for-one basis.
(2) After deducting the estimated offering expenses payable by us, including the
underwriting discount.
(3) Assumes that none of our outstanding options or warrants are exercised,
assumes the conversion of 5,277,779 shares of Series B convertible preferred
stock which are convertible into shares of common stock on a one-for-one
basis and assumes the conversion of 1,250,000 shares of Series C convertible
preferred stock which are convertible into shares of common stock on a
one-for-one basis.
(4) If we were to give effect to the sale of the Series D convertible preferred
stock concurrently herewith and the conversion of all shares of Series D
convertible preferred stock into common stock, the dilution to new investors
in common stock would have been $ and the increase in net tangible book
value per share of common stock attributable to investors in this offering
would have been $ .
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<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
You should read the following selected consolidated financial and operating
data with our consolidated financial statements and the related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," each of which can be found elsewhere in this prospectus. The
selected consolidated statement of operations data presented below for the years
ended December 31, 1996, 1997 and 1998 are derived from our consolidated
financial statements, which have been audited by KPMG LLP (1996) and Arthur
Andersen LLP (1997 and 1998), independent auditors.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1996(1) 1997 1998 1998 1999
------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues........................................ $ 1 $ 3,791 $ 18,249 $ 11,772 $ 34,922
Cost of operating revenues, excluding depreciation........ 305 3,928 17,129 10,575 31,449
Selling, general and administrative expenses.............. 841 6,440 17,877 11,250 27,469
Loss from operations...................................... (1,554) (7,851) (21,995) (13,202) (36,402)
Net loss.................................................. (1,491) (10,836) (32,065) (22,293) (44,744)
Basic and diluted loss per share of common stock.......... $ (2.11) $ (1.30) $ (2.26) $ (1.69) $ (5.19)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1999
----------------------------- --------------------------------------------------
1996(1) 1997 1998 ACTUAL AS ADJUSTED(2) AS FURTHER ADJUSTED(3)
------- -------- -------- -------- -------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and investments,
excluding restricted investments........ $ 7,897 $102,764 $ 84,949 $178,961 $ 438,874 $ 583,979
Restricted investments.................... -- 57,574 39,379 30,375 30,375 30,375
Property and equipment, net............... 3,250 24,617 116,380 151,159 151,159 151,159
Total assets.............................. 12,339 191,977 252,119 381,814 641,727 786,832
Long-term debt............................ -- 156,637 157,295 157,677 157,677 157,677
Series A convertible preferred stock...... -- 16,665 -- -- -- --
Series B convertible preferred stock...... -- -- -- 49,452 49,452 49,452
Series C convertible preferred stock...... -- -- -- -- 29,600 29,600
Series D convertible preferred stock...... -- -- -- -- -- 145,105
Stockholders' equity...................... 10,792 8,976 63,260 131,605 361,918 361,918
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1996(1) 1997 1998 1998 1999
------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(4)................................................. $(1,145) $ (6,577) $(16,757) $(10,053) $(23,996)
Cash flows used in operating activities................... (942) (4,490) (24,184) (9,073) (29,226)
Cash flows used in investing activities................... (2,287) (135,491) (77,715) (92,948) (54,784)
Cash flows provided by financing activities............... 11,126 177,138 68,731 68,387 165,348
Capital expenditures...................................... 3,659 22,641 97,101 67,136 47,135
OPERATING DATA AT END OF PERIOD:
Total access lines in service............................. 50 15,590 47,744 35,246 117,210
Central office collocation sites.......................... 9 25 207 85 288
Switches in service....................................... 1 3 7 4 7
Number of sales personnel
Field sales........................................... 7 23 50 39 95
Inside sales.......................................... -- -- 31 53 33
------- --------- -------- -------- --------
Total............................................. 7 23 81 92 128
</TABLE>
- -------------------------
(1) No data is presented for periods before 1996 since we commenced our
operations in December 1996 and no revenues or expenses were recognized and
no cash transactions occurred between our inception on October 16, 1995 and
December 31, 1995.
(2) Gives effect to the sale of 4,470,959 shares of common stock in this
offering at an assumed price of $54.38 per share, the closing price of our
stock on February 2, 2000, and the sale of 1,250,000 shares of Series C
convertible preferred stock at $28.00 per share in December 1999 for cash
and a $4.9 million promissory note.
(3) Gives effect to the sale of 4,470,959 shares of common stock in this
offering at an assumed price of $54.38 per share, the sale of 1,250,000
shares of Series C convertible preferred stock at $28.00 per share in
December 1999 for cash and a $4.9 million promissory note, and the sale of
3,000,000 shares of Series D convertible preferred stock at $50.00 per share
in the concurrent offering. The assumed price of the shares of common stock
is equal to the closing price of our common stock on February 2, 2000. The
price per share paid for the Series C convertible preferred stock was based
on the trading price for our common stock immediately before the purchasers'
commitment to purchase that stock.
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<PAGE> 23
The price per share to be paid for the Series D convertible preferred stock has
been established at $50.00 with the conversion price to be based on the market
price for our common stock at the time the Series D convertible preferred stock
is issued and negotiations between our underwriters and us.
(4) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. For the year ended December 31, 1996, EBITDA excludes a charge
of $355,000 related to the one-time write-off of purchased software. EBITDA
does not represent funds available for management's discretionary use and is
not intended to represent cash flow from operations. EBITDA should not be
considered as an alternative to loss from operations as an indicator of our
operating performance or to cash flows as a measure of liquidity. In
addition, EBITDA is not a term defined by generally accepted accounting
principles and, as a result, the measure of EBITDA may not be comparable to
similarly titled measures used by other companies. We believe that EBITDA is
often reported and widely used by analysts, investors and other interested
parties in the communications industry. Accordingly, we are including this
information to permit a more complete comparison of our operating
performance relative to other companies in the industry.
Our financial information presented above as of and for the nine month
period ended September 30, 1999 has been restated to reflect the accretion of
anticipated redemption value and beneficial conversion feature with respect to
the Series B convertible preferred stock. See "Notes to Consolidated Financial
Statements -- Note(12)."
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<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our financial
statements and the notes related to our financial statements, each of which can
be found elsewhere in this prospectus.
OVERVIEW
We began providing competitive local dialtone services to small business
and residential customers in December 1996 and began offering long distance
services by February 1998. In third quarter 1999, we began to offer high-speed
data and Internet services in our Las Vegas market. Currently, we have switches
fully operational in Las Vegas, Atlanta, Chicago, southern Florida, and in
selected areas of southern California, including Los Angeles and San Diego.
Our 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 the first
nine months of 1999, long distance services also contributed to our revenue
base. Local services and long distance services are generally provided and
billed as a bundled offering under which customers pay a fixed amount for a
package of combined local and long distance services. As a result, the portion
of our revenues attributable to each kind of service is not identifiable and,
therefore, we do not record or report these amounts separately.
Our principal operating expenses consist of cost of operating revenues,
selling, general and administrative expenses 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 lease expenses for our "collocation"
sites, the space we rent from the incumbent carriers for the purpose of
installing our equipment to deliver our services to our customers. Selling,
general and administrative expenses consist primarily of compensation expenses,
advertising, provision for bad debts, professional fees and office rentals.
Depreciation and amortization expense includes depreciation of switching and
collocation equipment as well as general property and equipment.
During 1998, we expanded significantly with the installation of four
additional switches and the build-out of 182 additional collocation sites.
During the first nine months of 1999, we have continued this expansion with the
build-out of 81 additional collocation sites. As expected, both cost of
operating revenues and selling, general and administrative expenses increased as
many of the fixed costs of providing service in new markets are incurred before
significant revenue can be generated from those markets. In addition, we
incurred significant marketing costs to build our initial base of customers in
our new markets.
Building and expanding our business has required and will continue to
require us to incur significant capital expenditures primarily consisting of the
costs of purchasing switches, associated equipment and land for switching sites
and constructing buildings or improving leased buildings to house our switching
and collocation facilities. As part of our network growth strategy, we purchased
and installed host switches in each of our markets while leasing the means of
transporting voice and data traffic from these switches to our customers'
telephones or other equipment. We believe this facilities-based strategy, while
initially increasing our level of capital expenditures and operating losses,
will enhance our long-term financial performance in comparison to a resale
strategy.
We have experienced operating losses and generated negative cash flow from
operations since inception and expect to continue to generate negative cash flow
from operations for the foreseeable future while we continue to expand our
network and develop our product offerings and customer base. There can be no
assurance our revenue or customer base will grow or that we will be able to
achieve or sustain positive cash flow from operations. See "Risk Factors -- We
expect our losses to continue."
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<PAGE> 25
RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 VS. SEPTEMBER 30, 1998
Total operating revenues increased to $34.9 million for the nine months
ended September 30, 1999 as compared to $11.8 million for the nine months ended
September 30, 1998. The 196% increase was primarily the result of the increase
in the number of lines in service. Total lines in service increased 233% from
35,246 at September 30, 1998 to 117,210 at September 30, 1999. In addition, long
distance service, which was added to our product offerings in February 1998,
contributed to the revenue base for the full nine month period in 1999, but only
for seven full months in the similar period in 1998. Our switched access
revenues, which represented 35% of our total operating revenues for the nine
months ended September 30, 1999, increased $7.4 million or 157% from the nine
month period ended September 30, 1998 to the nine month period ended September
30, 1999. As of September 30, 1999, 46% of our switched access receivable
balances are subject to dispute. Until these disputes are resolved and our
access charge receivables are collected, we cannot rely on these revenues as a
source of cash flow.
Cost of operating revenues for the nine months ended September 30, 1999 was
$31.4 million as compared to $10.6 million for the nine months ended September
30, 1998. The 196% increase is due to the increased number of lines in service
and installation and operational expenses associated with the expansion of our
network.
For the nine months ended September 30, 1999, selling, general and
administrative expenses totaled $27.5 million, a 143% increase over the $11.3
million for the nine months ended September 30, 1998. The increase is a result
of increased costs attributable to marketing and delivering our service and
supporting our continued network expansion.
For the nine months ended September 30, 1999, depreciation and amortization
was $12.4 million as compared to $3.1 million for the nine months ended
September 30, 1998. This increase is a result of placing additional assets in
service in accordance with the planned build-out of our network.
Gross interest expense during each nine month period ended September 30,
1999 and 1998 totaled $16.7 million. Interest capitalized for the nine months
ended September 30, 1999 increased to $2.9 million as compared to $0.6 million
for the nine months ended September 30, 1998. The increase in interest
capitalized is due to the increase in switching equipment under construction.
Gross interest expense is primarily attributable to the 13% Senior Secured Notes
due 2004 we issued in September 1997.
Interest income was $5.2 million during the nine months ended September 30,
1999 compared to $7.0 million for the nine months ended September 30, 1998. The
26% decrease is a result of the decrease in cash and investments since September
30, 1998. Cash and investments have been used to purchase switching equipment,
pay interest on the senior secured notes and fund operating losses.
We incurred net losses of $44.7 million and $22.3 million for the nine
month periods ended September 30, 1999 and 1998, respectively.
For the nine months ended September 30, 1999, we recognized an accrued
preferred stock dividend of $1.9 million, a beneficial conversion feature of
$47.5 million, and an accretion of preferred stock to redemption value of $2.8
million, all in accordance with the issuance of the Series B preferred stock
issued in May 1999. See "Note 12 -- Notes to Consolidated Financial Statements."
YEAR ENDED DECEMBER 31, 1998 VS. 1997
Total operating revenues for the year ended December 31, 1998 were $18.2
million as compared to $3.8 million for the year ended December 31, 1997. The
381% increase is a result of the installation of four additional switches, an
increase in the number of lines in service and the
24
<PAGE> 26
introduction of long distance service in early 1998. We provided communications
services in only Las Vegas until December 1997 when we initiated service in
Atlanta and southern California. As a result of our network expansion, during
1998 we began to offer service in Chicago and additional areas of southern
California, including Los Angeles and San Diego. We had 47,744 lines in service
as of December 31, 1998 as compared to 15,590 lines in service as of December
31, 1997, a 206% increase.
Cost of operating revenues for the year ended December 31, 1998 was $17.1
million as compared to $3.9 million for the year ended December 31, 1997. The
336% increase is due to the increased number of lines in service during 1998,
network expenses associated with initiation of long distance service in February
1998, and installation and operational expenses associated with the significant
expansion of our network.
For the year ended December 31, 1998, selling, general and administrative
expenses totaled $17.9 million, a 178% increase over the $6.4 million for the
year ended December 31, 1997. The increase in expenses resulted from increased
costs attributable to marketing of services, delivering our service and
supporting our continued network expansion.
For the year ended December 31, 1998, depreciation and amortization was
$5.2 million as compared to $1.3 million for the year ended December 31, 1997.
This increase is a result of placing additional assets in service during the
period to support our planned build-out of our network. As of December 31, 1998
we had seven operational switches and 207 collocation sites built out as
compared to three switches and 25 collocation sites as of December 31, 1997.
Interest expense for fiscal 1998 totaled $19.1 million as compared to $5.5
million for fiscal 1997. The increase is primarily attributable to a full year
of interest incurred on the senior secured notes we issued in September 1997.
Interest income was $8.8 million for the year ended December 31, 1998
compared to $2.5 million for the year ended December 31, 1997. The income is
attributable to earnings on investments made with the proceeds from the issuance
of the senior secured notes and with the proceeds from the sale of our common
and preferred stock.
We incurred net losses of $32.1 million during 1998 and $10.8 million
during 1997.
YEAR ENDED DECEMBER 31, 1996
Our operations before December 1996 were limited to start-up activities
and, as a result, our revenues and expenditures for the period were not
indicative of anticipated revenues which may be attained or expenditures which
may be incurred by us in future periods. We did not begin revenue-generating
operations until December 1996. As a result, any comparison of the year ended
December 31, 1997 with the year ended December 31, 1996 would not be meaningful.
During the year ended December 31, 1996, we generated $1,000 in operating
revenues as a result of commencing service during the month of December. We had
cost of operating revenues of $0.3 million which represents primarily fixed
costs. In addition, we incurred other operating expenses, including depreciation
and amortization, of $1.3 million in connection with the commencement of
operations and the build-out of our network. These expenses consisted primarily
of payroll expenses, professional fees, expenses related to the introduction of
initial service and a one-time write-off of purchased software.
We earned interest income in the period of $0.1 million.
As a result, we incurred a net loss in the period of $1.5 million. This
loss is primarily attributable to the expenses incurred in connection with the
initial development of our business.
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<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
Our operations require substantial capital investment for the purchase of
communications equipment and the development and installation of our network.
Capital expenditures were $47.1 million for the nine months ended September 30,
1999, $97.1 million for the year ended December 31, 1998 and $22.6 million for
the year ended December 31, 1997. We expect we will continue to require
substantial amounts of capital to fund the purchase of the equipment necessary
to continue expanding the geographic coverage of our network in our existing
markets and to develop new products and services. In addition, we expect to
enter new markets during 2000. We expect capital expenditures of approximately
$550 million over the next five years. We anticipate that the proceeds from the
sale of the Series C convertible preferred stock, this offering and the
concurrent offering and our cash currently on hand will fully fund our projected
capital expenditures over the next five years.
We continually evaluate our capital expenditure plan in light of
developments in the telecommunications industry and market acceptance of our
service offerings. As a result of this evaluation, we may decide to accelerate
or expand our capital expenditure plan. To fund an accelerated or expanded
capital expenditure plan, we would have to issue additional debt and/or equity
securities. We cannot assure you we would be successful in raising additional
capital on terms acceptable to us or at all. If we were unable to raise the
additional capital to fund an accelerated capital plan, we would be required to
delay or modify our revised plan.
From our inception through September 1997, we raised approximately $17.8
million from private sales of common stock.
In September 1997, we completed a $160.0 million offering of senior secured
notes and warrants to purchase 862,923 shares of common stock after giving
effect to anti-dilution adjustments. At the closing of the sale of the senior
secured notes, we used approximately $56.8 million of the net proceeds from the
sale of the senior secured notes to purchase a portfolio of securities that has
been pledged as security to cover the first six interest payments on the senior
secured notes. In addition, we have granted the holders of the senior secured
notes a security interest in a significant portion of our communications
equipment.
In November 1997 and January 1998, we issued an aggregate of 6,571,427
shares of Series A convertible preferred stock at $3.50 per share for net
proceeds of $21.6 million.
We completed our initial public offering of common stock on May 15, 1998.
We sold a total of 4,025,000 shares of our common stock to the public and
received net proceeds of $63.0 million. In connection with the initial public
offering of our common stock, we reduced the number of authorized and
outstanding shares of our common stock by 40%. Our outstanding shares of
preferred stock were converted into 3,942,856 shares of common stock upon our
initial public offering.
In May 1999, we issued 5,277,779 shares of Series B convertible preferred
stock at $9.00 per share for net proceeds of approximately $46.7 million.
In July 1999, we issued 5,000,000 shares of common stock and received net
proceeds, after expenses, of approximately $118.1 million. In the offering,
existing stockholders sold an additional 587,695 shares of common stock for
which we did not receive any proceeds.
In November 1999, we entered into an agreement with Providence Equity
Partners III, L.P., JK&B Capital III, L.P. and their affiliates under which we
agreed to sell 1,250,000 shares of newly issued Series C convertible preferred
stock at $28.00 per share for a total consideration of $35.0 million. The Series
C convertible preferred stock was issued in December 1999. Of the total
consideration, $4.9 million was paid by an interest bearing promissory note due
in March 2000. The
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<PAGE> 28
Series C convertible preferred stock may be converted into common stock on a
one-to-one basis. See "Description of Securities -- Series C Convertible
Preferred Stock."
As of September 30, 1999, we had outstanding receivables of approximately
$12.3 million attributable to access charges billed to AT&T, Sprint, MCI
WorldCom and other long distance carriers. AT&T, Sprint and MCI WorldCom refused
to pay the full amount of the access charges billed to them. We have since
settled our dispute with MCI WorldCom; however, our disputes with AT&T and
Sprint have yet to be resolved. Of our outstanding access charge receivables as
of September 30, 1999, 46% remains in dispute. Our failure to collect from these
long distance carriers could have a material impact on our financial condition.
See "Business -- Legal Proceedings" and "Risk Factors -- We may not be able to
collect all of the access charges we have billed to long distance carriers."
The substantial capital investment required to initiate services and fund
our initial operations has exceeded our operating cash flow. This negative cash
flow from operations results from the need to establish our network in
anticipation of connecting revenue-generating customers. We expect to continue
recording negative cash flow from operations for a period of time because we are
continuing network expansion activities. We cannot assure you we will attain
break-even cash flow from operations in subsequent periods. Until sufficient
cash flow from operations is generated, we will need to use our current and
future capital resources to meet our cash flow requirements and may be required
to issue additional debt and/or equity securities. We expect our available cash
and the proceeds of the issuance of Series C convertible preferred stock, this
offering and the concurrent offering as well as future cash flow from operations
should be adequate to fund our operations and planned capital expenditures. We
cannot assure you that we will be successful in completing the concurrent
offering. If the concurrent offering is not successful or if future cash flow
from operations is not sufficient, management intends to consider alternate
forms of financing or to delay or modify some of our expansion plans.
Depending on market conditions, we may raise additional capital at any
time. However, we cannot assure you that we will be successful in raising
additional debt or equity financing on terms acceptable to us, if at all. The
indenture governing the senior secured notes and the terms of our preferred
stock impose restrictions upon our ability to incur additional debt 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." At the end of the century, those same systems should reflect 01/01/00
as being "January 1, 2000." However, a non-compliant system would read 01/01/00
as January 1, 1900.
We have been focused on year 2000 issues since our inception in 1996. Since
we are young, much of the hardware and software currently in place was purchased
with Y2K readiness in mind. However, in most cases, we have relied on
representations of our vendors as to the Y2K compliance of the hardware and
software we have purchased. Although we have not experienced any significant
year 2000 problems to date, we cannot assure you the vendor representations we
relied upon are accurate or complete or that we will have recourse against any
vendors whose representations prove misleading.
Our significant vendors, including our major communications equipment
suppliers, have assured us their applications are year 2000 compliant. Our
business also relies on other third parties. The ability of third parties upon
whom we rely to adequately address their year 2000 issues is outside our
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<PAGE> 29
control. However, we are coordinating efforts with these parties to minimize the
extent to which our business will be vulnerable to their failure to remediate
their own year 2000 issues. We cannot assure you the systems of the third
parties will be modified on a timely basis. Our business, financial condition
and results of operations could be materially adversely affected by the failure
of the systems and applications of third parties to properly operate after 1999.
As of November 30, 1999, we had incurred less than $100,000 of expenses in
connection with our preparation for Y2K issues and we do not expect to incur any
significant additional expenses.
If we cannot operate effectively after December 31, 1999, we could, among
other things, face substantial claims by customers or loss of revenue due to
service interruptions, inability to fulfill contractual obligations or to bill
customers accurately and on a timely basis, as well as increased expenses
associated with litigation, stabilization of operations following critical
system failures and the execution of contingency plans. We could also experience
an inability by customers and others to pay, on a timely basis or at all,
obligations owed to us. Under these circumstances, the adverse effects, although
not quantifiable at this time, could be material.
As of the date of this prospectus, we have not experienced any material
year 2000 problems, either in our systems or in the systems of third parties
with whom we deal.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of our long-term debt bears fixed interest rates. However, the fair
market value of this debt is sensitive to changes in prevailing interest rates.
We run the risk that market rates will decline and the required payments on our
outstanding debt will exceed those based on the current market rate. We do not
use interest rate derivative instruments to manage our exposure to interest rate
changes.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants recently issued
Statement of Position or SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires start-up costs, as defined, to be expensed as
incurred and is effective for financial statements for fiscal years beginning
after December 15, 1998. We currently expense all start-up costs as incurred and
consequently, the application of SOP 98-5 will have no material impact on our
financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that all derivatives be recognized at fair value as either assets or
liabilities. SFAS No. 133 also requires an entity that elects to apply hedge
accounting to establish the method to be used in measuring the effectiveness of
the hedging derivatives and the measurement approach for determining the
ineffectiveness of the hedge at the inception of the hedge. The methods chosen
must be consistent with the entity's approach to managing risk. The standard is
effective for our 2000 fiscal year. We have adopted SFAS No. 133 during 1999.
Adoption of SFAS No. 133 has not had a material effect on us since we do not
currently use derivatives or participate in hedging activities.
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BUSINESS
MGC COMMUNICATIONS
We are a growing communications company currently offering Internet access,
voice over DSL, local dialtone, long distance and other voice and data services
primarily to small and medium size business customers. We have launched bundled
voice and high-speed data services using DSL technology in all of our current
markets. We have one of the broadest geographic service areas of any competitive
carrier providing local, long distance and data services, with 288 central
office collocation sites providing us access to approximately 16 million
addressable lines at the end of third quarter 1999. Over 200 of our central
office collocation sites are DSL capable. We currently deliver our services in
the metropolitan areas of Atlanta, Chicago, Las Vegas, southern Florida and
selected areas of southern California, including Los Angeles and San Diego. We
have interconnection agreements with five incumbent carriers: Ameritech,
BellSouth, GTE, PacBell and Sprint. At the end of the third quarter of 1999, we
had 138,400 customer lines sold, of which 117,210 lines were in service. To
rollout our network and services on a national basis, during 2000, we plan to
aggressively expand our network to include over 800 central office collocation
sites providing access to more than 35 million addressable lines.
We have announced that we plan to change our name to "Mpower Communications
Corp." in connection with our national rollout. We have commenced doing business
under the name "Mpower Communications," however, the name change is subject to
formal approval by our stockholders.
We were one of the first competitive carriers to implement a strategy of
building and owning the network equipment that controls how voice and data
transmissions originate and terminate, which we refer to as switches, while
leasing the telephone lines and cable over which the voice and data traffic are
transmitted, which we refer to as transport, from incumbent carriers. We install
our network equipment at the site of the incumbent carrier from whom we rent
standard telephone lines. These sites are referred to as collocation sites
within the telecommunications industry. We believe this strategy has allowed us
to serve a broad geographic area at a comparatively low cost while maintaining
control of the access to our customers. Having executed our strategy in the
markets we currently serve, we are well-positioned to serve the growing demand
from small and medium size business customers for communications services. For
an explanation of terms used in this prospectus to describe our network and its
components, please read the section entitled "-- Network Architecture and
Technology."
The rapid growth of the Internet has fueled demand from small and medium
size businesses for access to high-speed data services. To meet this growing
demand, we are using our current network infrastructure and DSL technology to
offer a bundled voice and high-speed data product over a single standard
telephone line. On average, DSL technology increases the transport capacity of
standard telephone lines by 24 times. By using a single standard telephone line
which we lease from the incumbent carrier to deliver a bundled voice and
high-speed data product, we expect to significantly reduce the per line costs of
providing our services. These savings should allow us to offer a value-priced
package of services to our customers.
MARKET OPPORTUNITY
We believe we have a significant market opportunity as a result of the
following factors:
Impact of the Telecommunications Act of 1996
The Telecommunications Act of 1996 allows competitive carriers to use the
existing infrastructure established by incumbent carriers, as opposed to
building a competing infrastructure at significant cost. The Telecommunications
Act requires all incumbent carriers to allow competitive
29
<PAGE> 31
carriers to collocate their equipment in the incumbent carrier's central
offices. This enables competitive carriers to access customers through existing
telephone line connections. The Telecommunications Act creates an incentive for
incumbent carriers that were formerly part of the Bell system to cooperate with
competitive carriers by precluding each of these incumbent carriers from
providing long distance service in its region until regulators determine there
is a significant level of competition in the incumbent carrier's local market.
See "-- Government Regulations."
Needs of Small and Medium Size Businesses for Integrated Communications
Solutions
Many small and medium size businesses have no cost-effective alternative to
dial-up modems for Internet access. As a result, these businesses must contend
with productivity limitations associated with slow transmission speeds. In
addition, to meet their communications needs, small and medium size businesses
are subject to the cost and complexity of using multiple service providers:
local dialtone providers, long distance carriers, Internet service providers and
equipment integrators. We believe these businesses can benefit significantly
from an integrated cost-effective communications solution delivered by a single
provider.
Growing Market Demand for High-Speed Data Services and E-commerce Solutions
The popularity of the Internet with consumers and the development of the
Internet as a commercial medium have driven the demand for high-speed data
services. Businesses are increasingly establishing Web sites and corporate
intranets and extranets to expand their customer reach and improve their
communications efficiency. To remain competitive, small and medium size
businesses increasingly need high-speed data and Internet connections to access
critical business information and communicate more effectively with employees,
customers, vendors and business partners. This is commonly referred to as
"e-commerce". High-speed digital connections are also becoming increasingly
important to businesses and consumers as more information and applications
become available on the Internet.
Emergence of DSL Technology
DSL technology emerged in the early 1990's and is now commercially
available. DSL technology dramatically increases the data, voice and video
carrying capacity of standard copper telephone lines. Because DSL technology
uses existing copper telephone lines, a broad network deployment can be
implemented rapidly and requires a lower initial fixed investment than some
existing alternative technologies. In addition, since a significant portion of
the expense associated with a DSL network is incurred only when a new customer
is added to the network, capital is efficiently deployed.
THE MGC SOLUTION
We believe we offer an attractive communications solution to small and
medium size business customers. In developing our solution, we have attempted to
include elements intended to create customer loyalty. Key aspects of our
solution include:
Complete Communications Solutions. We offer a value-priced complete
communications solution, including voice over DSL and high-speed Internet access
services, all on a single bill. We offer this package in all of our markets and
we plan to offer additional Internet-based e-commerce products in 2000. Our
customers have a single point of contact for a complete package of services,
eliminating the need for our customers to manage multiple vendors.
Service Reliability. We are able to offer our customers a high degree of
service reliability through efficient, timely execution of provisioning
telephone lines due to our mature relationships with five incumbent carriers in
the markets we currently serve. We believe our continued rollout of DSL
technology will enable us to further improve our service reliability by
simplifying the provisioning
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process. Moreover, our customer service center is staffed to respond promptly to
customer inquiries 24 hours a day, seven days a week. See "-- Network
Architecture and Technology."
BUSINESS STRATEGY
Rapid National Service Rollout. Our strategy is to address the greatest
percentage of our targeted customers as quickly as possible and gain market
share. To create a national presence during 2000, we plan to aggressively expand
our network to include over 800 central office collocation sites. Our central
office collocation build-out program is designed to allow us extensive coverage
in all the markets we enter. By positioning ourselves to be the first provider
of bundled voice and data services targeted to small and medium size business
customers in our markets, we expect to attract many "early adopter" customers
that are interested in high-speed Internet access and data services. See
"-- Markets."
Focused Sales and Marketing Effort. To date, we have demonstrated an
ability to sell and provision our services to small and medium size business
customers. We achieved this through a direct sales force, vendor programs,
telemarketing and targeted advertising. We plan to significantly increase our
direct sales force to provide sales coverage for our expanding geographic
market. We plan to grow our direct sales force from 128 at September 30, 1999 to
over 350 by year end 2000. Additionally, we will continue developing
relationships with third party agents or vendors as a complement to our direct
sales channels. Our simplified, packaged product set enables us to easily train
our sales force and decreases the time required to market and sell our services.
With our bundled voice and data solution, our sales force can target the small
and medium size business market segment with our total communications solution.
Completion of DSL Deployment. We are in the process of deploying our
high-speed data solution within our existing network. We have over 200 central
office collocations equipped to offer DSL services. In addition, all of our new
collocation sites will be equipped with DSL technology upon implementation. Our
physical presence in incumbent carriers' facilities allows us access to
telephone lines which is critical to deploying our DSL product set. The
integration of DSL into our existing network is accomplished by installing
advanced equipment in our host switch sites, collocation sites and customer
sites.
Targeting Small and Medium Size Businesses. Based on telephone lines in
service, we believe the small and medium size business customer base is a large
and rapidly growing segment of the communications market in the United States.
We target suburban areas of large metropolitan markets because these areas have
high concentrations of small and medium size businesses. By introducing a
package of voice and data services and focusing on small and medium size
business sales, we believe we will gain a competitive advantage over the
incumbent carrier, our primary competitor for these customers.
Customer Access Control. By connecting the standard telephone line
originating at our customer's site to our central office collocation, we
effectively place the customer on our network. This connection serves as the
platform for delivering our current and future communications services to our
customers. Any future changes our customers want to make to their services,
including purchasing more services from us, are under our direct control. The
one exception is for repairs, which are infrequent but may require the
participation of the incumbent carrier's network maintenance staff.
Capital Efficient Network. We were one of the first competitive local
exchange carriers to implement a network strategy of purchasing and installing
switches, collocating in the central offices
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of the incumbent carrier and leasing local telephone lines and cable. We believe
this network deployment strategy provides a capital efficient build-out plan and
an attractive return on our invested capital. We have installed DSL technology
across a substantial portion of our existing network which will allow us to
reduce significantly the number of telephone lines we lease. We are currently
evaluating alternative switching devices which are significantly smaller and
less expensive than the switches we have deployed to date. We believe these
switches may permit us to move the intelligence that determines where to route
traffic closer to our customers. We expect this decentralized switching approach
will allow us greater efficiencies in our network.
Sophisticated Operations Support System. We have developed a
comprehensive, proprietary operations support system to manage our business. Our
proprietary system provides integrated features addressing substantially all
aspects of our business, including customer care, billing and collections,
general ledger, payroll, fixed asset tracking, and personnel management. We
believe our system is adaptable to changing circumstances and multiple incumbent
carrier provisioning systems, and can be enhanced to support our operations
throughout our planned growth.
Timely and Accurate Provisioning for Our Customers. We believe one of the
keys to our success is effectively managing the provisioning process for new
customers. Towards this goal, we have committed significant time and resources
to designing more efficient provisioning processes, both internally and with
each of the incumbent carriers. We are in final testing of our internal
automation process whereby all new orders are provisioned through our operations
support system on a real-time basis. Since 1998, we have been developing and
implementing electronic order interfaces with all of the incumbent carriers with
which we work designed to improve provisioning performance by eliminating manual
keying of information and the need to fax paper orders back and forth. As an
illustration, we are currently provisioning the majority of our orders in Las
Vegas through an electronic interface with Sprint. This type of interface, also
known as "electronic bonding," substantially reduces the time, number of steps
and duplication of work typically involved in the provisioning process,
substantially lowering our costs and providing a more attractive solution to our
customers.
As we deploy DSL technology throughout our network, we expect the
provisioning process will become easier for us and more transparent for our
customers. With DSL technology in place, one standard telephone line will
provide enough capacity for multiple voice and data connections at the
customer's premises. Therefore, we will be provisioning fewer lines per
customer, making us significantly less dependent on the incumbent carrier for
placing our customers in service.
Co-marketing Arrangements with E-commerce Providers. To expand our product
offerings, we have begun to partner with e-commerce providers. We recently
entered into an agreement to co-market PurchasePro.com's e-business solution to
our small and medium size business customers. We believe co-marketing
arrangements will allow us to further solidify our position as a single source
provider of communications services.
Develop E-commerce Data Centers. We believe we will be able to provide an
attractive opportunity for e-commerce providers to use our network facilities to
access our customer base. To exploit this opportunity, we plan to build regional
data centers to host the servers used by e-commerce providers. To support these
data centers, we expect to offer basic security and monitoring services. We
believe by offering these services we will be able to attract e-commerce
partners and enhance the service offerings available to our customers.
Quality Customer Service. We believe providing quality customer service is
essential to offering a superior product to our customers and creating customer
loyalty. A service representative is assigned to each business customer to
coordinate conversion of service and handle any post-installation issues. In
addition, we have a centralized call service center operating 24 hours a day,
seven days a week which handles general billing, customer care and related
issues for all of our
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customers. The service representatives use our proprietary operations support
system to gain immediate access to our customers' data, enabling quick responses
to customer requests and needs at any time. This system allows us to present our
customers with one fully integrated monthly billing statement for all
communication services.
PRODUCTS AND SERVICES
To date, we have focused on offering basic telephone and data services to
our small business and residential customers. These services include our
Internet access portal known as MGCi.com, switched local dialtone, long distance
services and custom calling features such as voice mail, call waiting and call
forwarding. To capitalize on the growing demand of small and medium size
business customers for Internet and data services, we have recently introduced
our "Total Solution" package, a bundled offering of high-speed data access using
DSL technology, in all of our markets. The chart below shows the component
features of our "Total Solution" package for small and medium size business
customers:
<TABLE>
<CAPTION>
"TOTAL SOLUTION" PACKAGE
------------------------
<S> <C>
8 voice lines MGC Long Distance
Internet access at speeds up to 1.5 Mbps 500 minute increments
Unlimited custom calling features Free local calling
MGCi.com Customer premise equipment
Web Hosting Single bill and single point of contact
10 e-mail boxes
</TABLE>
MARKETS
We currently operate in Las Vegas, Atlanta, Chicago, southern Florida and
selected areas of southern California, including Los Angeles and San Diego. As
of September 30, 1999, we had 288 central office collocation sites providing
access to approximately 16 million addressable lines in these markets. The table
below shows the distribution of our central office collocation sites within
these markets.
<TABLE>
<CAPTION>
MARKET AREA COLLOCATION SITES ADDRESSABLE LINES
- ----------- ----------------- -----------------
<S> <C> <C>
Southern California.................... 147 8.3 Million
Atlanta................................ 37 2.0 Million
Chicago................................ 50 2.5 Million
Southern Florida....................... 36 2.2 Million
Las Vegas.............................. 18 1.0 Million
--- ------------
TOTALS....................... 288 16.0 MILLION
</TABLE>
To achieve a national presence, we plan to collocate in over 450 incumbent
carrier central offices during 2000. All of these collocations will be located
within the 50 largest metropolitan areas of the country, primarily in the
surrounding suburban areas. When evaluating new markets, we consider:
- The importance of the geographic area to our national presence; and
- The demographics of the market, specifically the presence of clusters of
incumbent carrier central offices with high concentrations of small and
medium size business lines.
Based on the criteria outlined above, the table below indicates the number
of collocated central office sites and approximate addressable lines we have
identified for expansion during 2000. The
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timing of our entering into new markets will depend on market conditions,
incumbent carrier cooperation and other factors. We cannot assure you we will be
able to add collocation sites at the times indicated below.
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL ADDRESSABLE PLANNED
COLLOCATION SITES LINES OPERATIONAL DATE
- -------------------- ----------- ----------------
<C> <C> <S>
50 2.0 million First Quarter 2000
60 2.4 million Second Quarter 2000
70 2.8 million Third Quarter 2000
270 10.8 million Fourth Quarter 2000
--- ------------
450 18.0 million
</TABLE>
SALES AND MARKETING
Our highly focused marketing efforts seek to generate well-managed,
profitable growth through increased market share with minimal customer turnover.
Our current sales programs include direct sales efforts, programs with agents
and vendors, telemarketing and targeted advertising directed at the small and
medium size business customer. Due to the simplicity of our bundled voice and
data solution, we will not need to incur extensive costs to train our expanding
sales force.
As of September 30, 1999, we employed 95 field sales personnel and 33
inside sales personnel. We expect the size of our sales force to increase
substantially during 2000 as we expand the geographic coverage of our network to
a national scale. During the fourth quarter of 1998, we implemented a "team"
sales approach in our Las Vegas market. We are in the process of implementing
this approach in each of our local markets. Each team consists of two field
sales representatives, one business service representative, one inside sales
representative and one field technician. The field sales representatives work
from lead lists which specifically identify small and medium size business
prospects located within our geographic service area. The inside sales
representative solicits leads and schedule appointments and, when practical,
close sales over the phone. Our business service representative acts as the
liaison between the small business customer and our operational personnel to
effect a coordinated transfer of service from the incumbent carrier's network to
our network. The field technician is responsible for the installation of the
customer premise equipment. These teams report to the city managers and
ultimately the presidents of their respective regions.
To complement our sales force, we use established telephone equipment
vendors to market our services in conjunction with equipment sales to business
customers. We believe this distribution channel will become more productive for
us in the near future with the continued rollout of our bundled voice and
high-speed data solution.
NETWORK ARCHITECTURE AND TECHNOLOGY
In building our network we have implemented a strategy where we own the
hardware that routes voice calls and data traffic, which we refer to as
switches, while leasing the telephone lines and cable over which the voice calls
and data traffic are actually transmitted, which we refer to as transport. We
use three basic types of transport to transmit our voice calls and data traffic.
First, we lease the standard telephone line from the incumbent carrier. This
allows us to move voice calls and data traffic from a customer's location to the
nearest central office owned by the incumbent carrier. Inside these central
offices, we have installed equipment that allows us to deliver the services we
sell to our customers. Second, we lease cable from other communications
companies which connect the equipment we have installed in the central office of
the incumbent carrier to our switches. Third, we
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lease additional cable from other communications companies, which connect our
switches to each other and allow us to complete our customers' long distance
calls to national and international destinations. We believe this network
strategy provides us an efficient capital deployment plan and an attractive
return on our invested capital.
We believe that leasing the standard telephone line from the incumbent
carrier's central office to the end-user provides a cost-efficient solution for
gaining control of access to our customers. Leasing costs are not incurred until
we have acquired a customer and revenue can be generated. It is our experience
that the cable required to connect our collocation equipment located at an
incumbent carriers' central office to our switching hardware and the cable
required to connect our customers' voice calls and data traffic to the Internet
and other telephones is available at reasonable prices in all of our current and
planned markets. Because the cable required to transport voice calls and data
traffic has become a readily available service from numerous other
communications companies, we have focused our efforts on owning and installing
the hardware that determines where to route voice calls and data traffic and on
selling and delivering our services to our customers.
In 1996, we installed our first switch in Las Vegas. By the end of 1998, we
had seven operational switches. All of our current switches are DMS-500 switches
manufactured by Northern Telecom. These switches offer a flexible and cost
efficient way for us to provide local and long distance services to our
customers. We are currently testing smaller and less expensive switches that
would allow us to move the hardware that determines where to route voice calls
and data traffic closer to our customers. This decentralized approach to
determining where to route voice calls and data traffic should allow us to make
more efficient use of the cable we lease to transport voice calls and data
traffic. We envision our planned expansion in the second half of 2000 and beyond
to utilize these smaller and less expensive switches which will be installed in
the central office space we rent from the incumbent carrier and will interact
fully with the DSL equipment we are currently installing.
Once we have installed equipment in the collocation sites we rent from the
incumbent carrier, we initiate service to a customer by arranging for the
incumbent carrier to physically disconnect a standard telephone line from their
equipment and reconnect the same standard telephone line to our equipment. When
the standard telephone line has been connected to our equipment, we have direct
access to the customer and can deliver our current voice and data services. Any
future changes the customer wishes to make, such as purchasing more services
from us, are under our direct control. The one exception is for certain types of
repairs, which are infrequent, but which may require the participation of the
incumbent carrier's maintenance staff.
We have increased the number of collocation sites where we have installed
equipment from nine as of December 31, 1996 to 288 as of September 30, 1999. We
believe the expertise we have developed in successfully applying for space in
these central offices, installing our equipment and maintaining the equipment
once it is installed will allow us to efficiently handle our planned expansion.
Our seven switches are connected to each other by cable which allows us to
transmit voice calls and data traffic using asynchronous transfer mode
technology. Asynchronous transfer mode technology allows both voice calls and
data traffic to be transported in digital form over a single cable connection at
high speeds and reasonable costs. The introduction of DSL technology into our
network will allow us to transport both voice calls and data traffic in digital
form on a single telephone line from a customer's location to one of our
switches.
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The diagram below depicts how our network is configured with DSL technology
in our existing markets.
[DSL technology Flow Chart]
We install DSL equipment at our collocation sites, at our switch sites and
at our customers' locations. The DSL equipment we use is manufactured by Copper
Mountain, Turnstone and Tollbridge Technologies. Where installed, this equipment
allows us to deliver multiple voice calls and data traffic over a single,
standard telephone line and is expected to provide us with substantial cost
savings. Using DSL technology, we can increase the amount of information we
carry on a standard telephone line, which we refer to as bandwidth, to up to 1.5
million bits per second or "Mbps". This bandwidth is the equivalent of 24
regular voice telephone lines. Our DSL equipment is programmed to allocate the
available bandwidth. For example, voice calls are carried at 64 thousand bits
per second or "Kbps"; if a customer has eight phone lines and all are in use at
the same time, then 512 Kbps (eight phone lines multiplied by 64 Kbps each) of
the total 1.5 Mbps are allocated for the voice calls. The remaining bandwidth,
988 Kbps, is available to carry the data traffic.
We believe this technology, when fully implemented, will significantly
reduce our customers' potential for service outages when the incumbent carrier
moves the standard telephone line from their equipment to ours. Additionally, we
believe this technology will reduce our costs since we will lease a reduced
number of standard telephone lines per customer from the incumbent carrier. For
example, if a customer today has eight voice lines, we must order from and
provision through the incumbent carrier eight individual standard telephone
lines. If the same customer were to buy our service offering which uses DSL
technology, we would only order and provision one standard telephone line from
the incumbent carrier. Also, we expect that future products and services
designed to take advantage of the increased bandwidth provided by DSL technology
will allow us to generate incremental revenue with attractive margins.
Interconnection Agreements and Competitive Carrier Certifications. We have
interconnection agreements with Sprint for Nevada, BellSouth for Georgia and
Florida, GTE and PacBell for California, Ameritech for Illinois, Bell Atlantic
for Massachusetts, New York and Pennsylvania and SBC for Texas. These agreements
expire on various dates through July 2000. In some cases, one or both parties
may be entitled to demand renegotiation of particular provisions in an existing
interconnection agreement based on intervening changes in the law. We are
certified as a competitive carrier in Illinois, Georgia, Nevada, California,
Florida and Massachusetts and have applied for competitive carrier certification
in Ohio, Texas, Michigan, Wisconsin, Indiana, North Carolina and Tennessee.
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SERVICE DEPLOYMENT AND OPERATIONS
Customer Service. We strive to provide high quality customer service
through:
- Personnel. Our customer service representatives and sales personnel are
well trained and attentive to our customers' needs.
- Call Center. Our centralized customer service center in Las Vegas
operates 24 hours a day, seven days a week. Calls from our customers are
answered and responded to with minimal wait time.
- Coordination of Service Provisioning. We coordinate service installation
with our customer and the incumbent carrier to ensure a smooth transition
of services from the incumbent carrier to us.
- Close Customer Contact. We proactively monitor our network and keep our
customers informed of installation or repair problems and allocate the
necessary resources to resolve any problems.
- Billing. We provide our customers with accurate, timely and easily
understood bills.
Process Automation. We have developed a comprehensive, proprietary
operations support system to manage our business. Our proprietary system
provides integrated features addressing substantially all aspects of our
business including customer care, billing and collections, general ledger,
payroll, fixed asset tracking and personnel management. Additionally, customer
service representatives are able to handle all customer service inquiries,
including billing questions and repair calls, with the information available
from our integrated system.
We believe our system is adaptable to changing circumstances and multiple
incumbent carrier provisioning systems and will be able to support our
operations throughout our planned growth. We are in final testing of our
internal automation process whereby all new orders are provisioned through our
operations support system on a real-time basis. Since 1998, we have been
developing and implementing electronic order interfaces with all of the
incumbent carriers with whom we work designed to improve provisioning
performance by eliminating manual keying of information and the need to fax
paper orders back and forth. As an illustration, we are currently provisioning
the majority of our orders in Las Vegas through an electronic interface with
Sprint. This type of interface, also known as "electronic bonding,"
substantially reduces the time, number of steps and duplication of work
typically involved in the provisioning process, substantially lowering our costs
and providing a more attractive solution to our customers.
The billing component of our operations support system is designed to track
and bill all forms of local service, including line and feature charges as well
as long distance charges. We can accommodate business customers desiring a
single bill for many locations, summary bills without detail or a number of
other types of customized bills. We can deliver bills to our customers in a
number of alternative media including electronic files and on-line inquiry
through our Website.
GOVERNMENT REGULATIONS
Overview
Our services are regulated at the federal, state and local level. The FCC
exercises jurisdiction over all facilities of, and services offered by,
communications common carriers like us, as long as those facilities are used in
connection with interstate or international communications. State regulatory
commissions have some jurisdiction over most of the same facilities and services
if they are used in connection with communications within states. In recent
years, there has been a dramatic change in the regulation of telephone services
at both federal and state levels as both legislative and
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regulatory bodies seek to enhance competition in both the local exchange and
interexchange services. These efforts are ongoing and many of the legislative
measures and regulations adopted are subject to judicial review. We cannot
predict the impact on us of the results of these ongoing legislative and
regulatory efforts or the outcome of any judicial review.
Federal Regulation
The FCC regulates interstate and international communications services,
including access to local telephone facilities to place and receive interstate
and international calls. We provide these services as a common carrier. The FCC
also imposes regulations on common carriers that have some degree of market
power, including incumbent carriers. The FCC imposes less regulation on common
carriers without market power including competitive carriers like us. The FCC
grants automatic authority to carriers for interstate long distance service, but
requires common carriers to receive an authorization to construct and operate
communications facilities, and to provide or resell communications services,
between the United States and international points. Both domestic and
international carriers must file tariffs for their services. With respect to our
domestic and international service offerings, we have filed tariffs with the FCC
stating the rates, terms and conditions for our interstate and international
services. Our interstate tariffs are subject to "streamlined" tariff regulations
and are generally not reviewed by the FCC before becoming effective. Our tariffs
can be amended on one day's notice. Carriers subject to the jurisdiction of the
FCC must charge just and reasonable rates and must not discriminate among like
customers for like services. The FCC imposes numerous other regulations on
carriers subject to its jurisdiction some of the most important of which are
discussed below. It also hears complaints against carriers filed by customers or
other carriers and levies various charges and fees.
The Telecommunications Act permits virtually any entity, including cable
television companies and electric and gas utilities, to enter any communications
market. The Telecommunications Act takes precedence over inconsistent state
regulation. However, entities that enter communications markets must follow
state regulations relating to safety, quality, consumer protection and other
matters. Implementation of the Telecommunications Act continues to be affected
by numerous federal and state policy rulemaking proceedings and review by
courts. We are uncertain as to how our business may be affected by these
proceedings.
The Telecommunications Act is intended to promote competition. The
Telecommunications Act opens the local services market to competition by
requiring incumbent carriers to permit interconnection to their networks and by
establishing incumbent carrier and competitive carrier obligations with respect
to:
Reciprocal Compensation. All incumbent carriers and competitive
carriers are currently required to complete calls originated by each other
under reciprocal arrangements at prices based on tariffs or negotiated
prices.
Resale. All incumbent carriers and competitive carriers are required
to permit resale of their communications services without unreasonable
restrictions or conditions. In addition, incumbent carriers are required to
offer wholesale versions of all retail services to other common carriers
for resale at discounted rates, based on the costs avoided by the incumbent
carrier by offering these services at wholesale rates.
Interconnection. All incumbent carriers and competitive carriers are
required to permit their competitors to interconnect with their facilities.
All incumbent carriers are required to permit interconnection at any
feasible point within their networks, on nondiscriminatory terms, at prices
based on cost, which may include a reasonable profit. At the option of the
carrier
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requesting interconnection, collocation of the requesting carrier's
equipment in the incumbent carriers' premises must be offered.
Unbundled Access. All incumbent carriers are required to provide
access to specified individual components of their networks, which are
sometimes referred to as unbundled network elements, on nondiscriminatory
terms and at prices based on cost, which may include a reasonable profit.
Number Portability. All incumbent carriers and competitive carriers
are required to permit users of communications services to retain their
existing telephone numbers without impairment of quality, reliability or
convenience when switching from one common carrier to another.
Dialing Parity. All incumbent carriers and competitive carriers are
required to provide "l+" equal access to competing providers of long
distance service, and to provide nondiscriminatory access to telephone
numbers, operator services, directory assistance and directory listing,
with no unreasonable dialing delays.
Access to Rights-of-Way. All incumbent carriers and competitive
carriers are required to permit competing carriers access to their poles,
ducts, conduits and rights-of-way at regulated prices.
Incumbent carriers are required to negotiate in good faith with carriers
requesting any or all of the above arrangements. If the negotiating carriers
cannot reach agreement within a predetermined amount of time, either carrier may
request arbitration of the disputed issues by the state regulatory commission.
In August 1996, the FCC established rules to implement the incumbent
carrier interconnection obligations described above. On July 18, 1997, a United
States appeals court overturned portions of these rules and narrowly interpreted
the FCC's power to establish and enforce rules implementing the
Telecommunications Act. On January 25, 1999, the United States Supreme Court
reversed the appeals court decision and confirmed the FCC's broad authority to
issue rules implementing the Telecommunications Act. Specifically, the Supreme
Court decided that:
- the FCC has jurisdiction over pricing of unbundled network elements; and
- the FCC has authority to make rules allowing a competitive carrier to
"pick and choose" among the most favorable terms from existing agreements
between an incumbent carrier and other competitive carriers.
On the other hand, the Supreme Court vacated an FCC rule which described
the network elements the incumbent carriers must provide to competitors on an
unbundled basis. This required the FCC to re-examine its rules regarding which
unbundled network elements must be made available to competitors.
On November 5, 1999, the FCC released an order reaffirming and clarifying
the obligation of incumbent carriers to provide those network elements which we
currently lease from incumbent carriers, including standard telephone lines
which are also known as local loops, network interface devices and operations
support systems. These rules are subject to appeal and many require implementing
action by state regulatory agencies. We cannot predict the outcome of any
further proceedings or predict whether the incumbent carriers or others will
challenge this ruling.
On March 31, 1999, the FCC issued an order requiring incumbent carriers to
provide alternatives to traditional physical collocation, including providing
carriers with their own dedicated spaces in which to install their equipment. In
addition, the FCC ruled that incumbent carriers must allow competitive carriers
to collocate advanced services equipment and perform their own labor in
connecting their equipment within the incumbent carrier central office. This
order has been appealed.
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On November 18, 1999, the FCC ordered incumbent carriers to share their
telephone lines with providers of high speed Internet access and other data
services. The FCC has indicated that competitive carriers may obtain access to
the high-frequency portion of a standard telephone line from the incumbent
carriers. As a result, competitive carriers will be able to provide DSL-based
services over the same telephone lines simultaneously used by the incumbent
carrier to provide voice services, and will no longer need to purchase a
separate telephone line from the incumbent carrier to provide DSL services. The
ruling could have an unfavorable effect on our business by making it easier for
some of our competitors to provide DSL services.
The Telecommunications Act also contains special provisions that replace
prior antitrust restrictions that prohibited the regional Bell operating
companies from providing long distance services and engaging in communications
equipment manufacturing. Before the passage of the Telecommunications Act, the
regional Bell operating companies and the dominant incumbent carriers were
restricted to providing services within a distinct geographical area known as a
local access and transport area. The Telecommunications Act permits the regional
Bell operating companies to provide long distance service immediately in areas
outside of their market regions and within their market region once they have
satisfied several procedural and substantive requirements, including:
- a showing that the regional Bell operating company is subject to
meaningful competition in the area in which it seeks to offer long
distance service; and
- a determination that the regional Bell operating company's entry into
long distance markets is in the public interest.
In December 1999, the FCC approved Bell Atlantic's request to provide long
distance service to its New York customers. SBC Communications recently filed a
similar request to provide long distance service to its customers in Texas and
additional requests will likely be filed in the near future. One or more of
these requests also may be approved. If regional Bell operating companies are
allowed to offer long distance services in one or more of our markets, our
business will be unfavorably affected.
The FCC has initiated a rulemaking proceeding to consider whether to permit
regional Bell operating companies to eventually offer high-speed data services
between local access and transport areas through a separate subsidiary, without
first having to demonstrate that they have met the FCC procedural and
substantive requirements referred to above. Although the FCC has not acted in
this rulemaking, in approving the merger of SBC Communications and Ameritech, it
authorized the merged entity to provide advanced data services using a separate
subsidiary provided specific conditions relating to the status of competition
are met. A similar condition was accepted by Bell Atlantic in obtaining
authority to provide long distance services in New York.
On November 9, 1999, the FCC released a decision which concluded that
advanced services, such as DSL, sold by incumbent carriers to Internet service
providers and bundled by the Internet service provider with its other services
are not subject to the resale obligations of the Act. This decision will allow
incumbent carriers to provide Internet service providers with special rate
packages for DSL on terms and conditions not available to us.
In two orders released on December 24, l996 and May 16, 1997, the FCC made
major changes in the structure of the access charges incumbent carriers impose
for the use of their facilities to originate or complete interstate and
international calls. The December 24th order permitted incumbent carriers to
lower access charges. The May 16th order granted incumbent carriers subject to
the FCC's price cap rules increased pricing flexibility upon demonstrations of
increased competition or potential competition in their markets. The manner in
which these changes are implemented could have a material effect on the amount
of switched access charges we collect from long distance carriers.
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At present we are in litigation with AT&T and Sprint over the access
charges we have billed to them. The FCC released a staff decision in July 1999
requiring AT&T to pay us the charges at our tariffed rate through March 1999.
The FCC affirmed this decision in December 1999, but this decision is subject to
judicial review.
In August 1999 the FCC adopted an order providing additional pricing
flexibility to incumbent carriers subject to price cap regulation in their
provision of interstate access services, particularly special access and
dedicated transport. Some of the actions taken by the FCC would immediately
eliminate rate scrutiny for "new services" and permit the establishment of
additional geographic zones within a market that would have separate rates.
Additional and more substantial pricing flexibility will be given to incumbent
carriers as specified levels of competition in a market are reached through the
collocation of competitive carriers and their use of competitive transport. This
flexibility will include, among other items, customer specific pricing, volume
and term discounts for some services and streamlined tariffing.
As part of the same August 1999 order, the FCC initiated another proceeding
to consider additional pricing flexibility proposals for incumbent carriers.
This proceeding also will consider the reasonableness of competitive carrier
access charges and seeks comment on whether the FCC should adopt rules to
regulate competitive carrier access charges. In addition, the FCC's rulemaking
is examining whether any statutory or regulatory constraints prevent long
distance carriers from declining to accept a competitive carrier's access
services, and if so, under what circumstances. The outcome of the rulemaking is
not possible to predict and may have an unfavorable effect on our business.
In addition, on May 21, 1999, a United States court of appeals reversed an
FCC order that had established the factors that are currently used to set annual
price caps. The court ordered the FCC to further explain the methodology it used
in establishing those factors. This proceeding is ongoing.
Incumbent carriers have been contesting whether their obligation to pay
reciprocal compensation to competitive carriers should apply to local telephone
calls from an incumbent carrier's customers to Internet service providers served
by competitive carriers. The incumbent carriers claim this traffic is interstate
in nature and should be exempt from reciprocal compensation arrangements
applicable to local and intrastate calls. Competitive carriers have contended
that their interconnection agreements with incumbent carriers provide no
exception for local calls to Internet service providers and reciprocal
compensation is applicable.
On February 26, 1999, the FCC ruled that Internet service provider traffic
is interstate in nature and within the FCC's jurisdiction but that its current
rules neither require nor prohibit the payment of reciprocal compensation for
these calls. The FCC also requested comment on federal rules to govern
compensation for these calls in the future.
Most, but not all, state commissions and several federal and state courts
have ruled that reciprocal compensation arrangements under interconnection
agreements existing prior to the FCC decision apply to calls to Internet service
providers. There are, however, ongoing disputes concerning the appropriate
treatment of Internet service provider traffic under new interconnection
agreements.
Internet service providers may be among our potential customers and adverse
decisions regarding reciprocal compensation could limit our ability to service
this group of customers profitably. While some competitive carriers target
Internet service providers in order to generate additional revenues from
reciprocal compensation charges, at the present time we do not focus our
marketing efforts on Internet service providers. In addition, given the
uncertainty as to whether reciprocal compensation is payable in connection with
calls to Internet service providers, we do not recognize revenue from calls to
Internet service providers. Therefore, the outcome of this dispute in favor of
either the incumbent carrier or competitive carrier will have minimal impact on
us.
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<PAGE> 43
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy program. The FCC's May 8, 1997 order
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.25 billion
and for services provided to rural health care providers with an annual cap of
$400 million. The FCC also expanded federal subsidies for local dialtone
services provided to low-income consumers. Providers of interstate
telecommunications service, including us, must contribute to these programs. On
July 30, 1999, the United States appeals court issued a decision partially
upholding the FCC order but precluding the FCC from basing the amount a carrier
must contribute to the subsidy program on a carrier's intrastate revenues.
Currently, the FCC is assessing contributions to these programs at 5.8% of a
provider's interstate and international revenue for the previous year. We intend
to recover our share of these costs through charges assessed directly to our
customers and participation in federally subsidized programs. On November 2,
1999, the FCC revised its proposed methodology for subsidizing service provided
by non-rural carriers in high cost areas. This action may result in further
substantial increases in the cost of the subsidy program. The net financial
effect of these regulations on us cannot be determined at this time.
In 1994, Congress adopted the Communications Assistance for Law Enforcement
Act to insure that law enforcement agencies would be able to conduct properly
authorized electronic surveillance over the new digital and wireless media as
well as traditional wireline carriers. An interim technical standard was
released in 1997 and the FCC recently required carriers to have additional
capabilities requested by law enforcement authorities and directed that the
interim standard be revised. Some in the industry believe that the cost of
providing these additional capabilities is unreasonably high and the FCC's
decision has been appealed. We are not able to predict the outcome of this
litigation or the cost of compliance with whatever standards are ultimately
developed.
State Regulation
The implementation of the Telecommunications Act is subject to numerous
state rulemaking proceedings. As a result, it is currently difficult to predict
how quickly full competition for local services, including local dialtone, will
be introduced.
To provide services within a state, we generally must obtain a certificate
of public convenience and necessity from the state regulatory agency and comply
with state requirements for telecommunications utilities, including state
tariffing requirements. To date, we have satisfied state requirements to provide
local and intrastate long distance service in Nevada, Georgia, Illinois,
California, Florida, Massachusetts, Ohio, Texas and Wisconsin and have applied
for competitive carrier certification in 14 other states and the District of
Columbia.
State regulatory agencies have jurisdiction over our facilities and
services used to provide intrastate services, including our rates. State
agencies require us to file periodic reports, pay various fees and assessments
and comply with rules governing quality of service, consumer protection and
similar issues. These agencies may also have to approve the transfer of assets
or customers located in the state, a change of control of our company or our
issuance of securities or assumption of debt. The specific requirements vary
from state to state. State regulatory agencies also must approve our
interconnection agreements with incumbent carriers. Price cap or rate of return
regulation does not apply in any of our current or planned expansion markets.
However, we cannot assure you that the imposition of new regulatory burdens in a
particular state will not affect the profitability of our services in that
state.
Prior to issuing any equity, we must obtain the approval of the State of
Georgia. Because of time constraints, we will not have obtained approval from
the State of Georgia before closing this offering and the concurrent offering.
We believe the approval will be granted and that seeking approval after
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this offering should not result in any material adverse consequences to us,
although we cannot assure you of a favorable result.
Local Regulation
Our networks must comply with numerous local regulations such as building
codes, municipal franchise requirements and licensing. These regulations vary on
a city by city and county by county basis. In some of the areas where we provide
service, we may have to comply with municipal franchise requirements and may be
required to pay license or franchise fees based on a percentage of gross revenue
or other factors. Municipalities that do not currently impose fees may seek to
impose fees in the future. We cannot assure you fees will remain at their
current levels following the expiration of existing franchises.
COMPETITION
The communications industry is highly competitive. We believe the principal
competitive factors affecting our business will be:
- pricing levels and policies,
- transmission speed,
- customer service,
- breadth of service availability,
- network security,
- ease of access and use,
- bundled service offerings,
- brand recognition,
- operating experience,
- capital availability,
- exclusive contracts,
- accurate billing, and
- variety of services.
To maintain our competitive posture, we believe we must be in a position to
reduce our prices to meet any reductions in rates by our competitors. Any
reductions could adversely affect us. Many of our current and potential
competitors have financial, personnel and other resources, including brand name
recognition, substantially greater than ours, as well as other competitive
advantages over us. In addition, competitive alternatives may result in
substantial customer turnover in the future. Many providers of communications
and networking services experience high rates of customer turnover.
A continuing trend toward consolidation of communications companies and the
formation of strategic alliances within the communications industry, as well as
the development of new technologies, could give rise to significant new
competitors. For example, WorldCom has merged with MCI Communications and now
proposes to merge with Sprint. AT&T has acquired Teleport Communications Group
Inc., a competitive carrier, and Tele-Communications, Inc., a cable,
communications and high-speed Internet services provider, and has announced its
intent to merge with another cable television company, MediaOne. Ameritech
Corporation recently merged with SBC Communications, Bell Atlantic has agreed to
merge with GTE Corporation and Qwest is seeking to
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merge with US West. These types of consolidations and other strategic alliances
could put us at a competitive disadvantage.
LOCAL DIALTONE SERVICES
Incumbent Carriers
In each of the markets we target, we will compete principally with the
incumbent carrier serving that area. We believe the regional Bell operating
companies are aggressively seeking to be able to offer long distance service in
their service territories. In December 1999, Bell Atlantic received approval to
offer long distance service in New York and announced that it would offer long
distance service beginning in January 2000. Many experts expect one or more of
the other regional Bell operating companies to be successful in entering the
long distance market in early 2000. We believe the regional Bell operating
companies expect to offset losses of market share in their local markets by
attempting to capture a large percentage of the long distance market in their
market areas, especially among residential users where their strong regional
brand names and extensive advertising campaigns may be very successful. In
addition, a continuing trend toward business combinations and alliances in the
communications industry may create significant new competitors for us.
We have not achieved and do not expect to achieve a significant market
share for any of our services. The incumbent carriers have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than ours and have the potential to subsidize
competitive services with revenues from a variety of businesses. While recent
regulatory initiatives which allow competitive carriers to interconnect with
incumbent carrier facilities provide increased business opportunities for us,
interconnection opportunities have been and likely will continue to be
accompanied by increased pricing flexibility for, and relaxation of regulatory
oversight of, the incumbent carriers.
Incumbent carriers have long-standing relationships with regulatory
authorities at the federal and state levels. The FCC recently proposed a rule
that would provide for increased pricing flexibility for incumbent carriers and
deregulation for competitive access services, either automatically or after
competitive levels are reached. If the incumbent carriers are allowed by
regulators to offer discounts to large customers through contract tariffs,
engage in aggressive volume and term discount pricing practices for their
customers, and/or seek to charge competitors excessive fees for interconnection
to their networks, our operating margins could be materially adversely affected.
Future regulatory decisions which give the incumbent carriers increased pricing
flexibility or other regulatory relief could also have a material adverse effect
on us.
Competitive Carriers/Long Distance Carriers/Other Market Entrants.
We face, and expect to continue to face, competition from long distance
carriers, including AT&T, MCI WorldCom, and Sprint, seeking to enter, reenter or
expand entry into the local exchange market. We also compete with other
competitive carriers, resellers of local dialtone services, cable television
companies, electric utilities, microwave carriers and wireless telephone system
operators.
The Telecommunications Act includes provisions which impose regulatory
requirements on all incumbent carriers and competitive carriers but grants the
FCC expanded authority to reduce the level of regulation applicable to these
common carriers. The manner in which these provisions of the Telecommunications
Act are implemented and enforced could have a material adverse effect on our
ability to successfully compete against incumbent carriers and other
communications service providers.
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The Telecommunications Act radically altered the market opportunity for
competitive carriers. Many existing competitive carriers which entered the
market before 1996 had to build a fiber infrastructure before offering services.
With the Telecommunications Act requiring unbundling of the incumbent carrier
networks, competitive carriers are now able to more rapidly enter the market by
installing switches and leasing standard telephone lines and cable.
A number of competitive carriers have entered or announced their intention
to enter one or more of our markets. We believe that not all competitive
carriers, however, are pursuing the same target customers we pursue. We intend
to keep our prices at levels below those of the incumbent carriers while
providing, in our opinion, a higher level of service and responsiveness to our
customers. Innovative packaging and pricing of basic telephone services is
expected to provide competitive differentiation for us in each of our markets.
LONG DISTANCE SERVICES
The long distance services industry is very competitive and many long
distance providers experience a high average turnover rate as customers
frequently change long distance providers in response to offerings of lower
rates or promotional incentives by competitors. Prices in the long distance
market have declined significantly in recent years and are expected to continue
to decline. We expect to face increasing competition from companies offering
long distance data and voice services over the Internet. Companies offering
these services over the Internet could enjoy a significant cost advantage
because they do not currently pay common carrier access charges or universal
service fees.
DATA AND INTERNET SERVICES
We expect the level of competition with respect to data and Internet
services to intensify in the future. We expect significant competition from:
- Incumbent Carriers. Most incumbent carriers have announced deployment of
commercial DSL services. Some incumbent carriers have announced they
intend to aggressively market these services to their residential
customers at attractive prices. In addition, most incumbent carriers are
combining their DSL service with their own Internet service provider
businesses. We believe incumbent carriers have the potential to quickly
overcome many of the issues that have delayed widespread deployment of
DSL services in the past. The incumbent carriers have an established
brand name in their service areas, possess sufficient capital to deploy
DSL services rapidly and are in a position to offer service from central
offices where we may be unable to secure collocation space. When the
regional Bell operating companies begin providing long distance service,
they may be able to offer "one stop shopping" that would be competitive
with our offerings.
- Traditional Long Distance Carriers. Many of the leading traditional long
distance carriers, including AT&T, MCI WorldCom and Sprint, are expanding
their capabilities to support high-speed, end-to-end networking services.
We expect them to offer combined data, voice and video services over
their networks. These carriers have extensive fiber networks in many
metropolitan areas that primarily provide high-speed data and voice
services to large companies. They could deploy DSL services in
combination with their current fiber networks. They also have
interconnection agreements with many incumbent carriers and have secured
collocation space from which they could begin to offer competitive DSL
services.
- Newer Long Distance Carriers. The newer long distance carriers,
including Williams Communications, Qwest Communications International and
Level 3 Communications, are building and managing high-speed networks
nationwide. They are also building direct sales forces and partnering
with Internet service providers to offer services directly to business
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customers. They could extend their existing networks and offer high-speed
services using DSL, either alone or in partnership with others.
- Cable Modem Service Providers. Cable modem service providers, like @Home
Networks and its cable partners, are offering, or are preparing to offer,
high-speed Internet access over cable networks to consumers. @Work has
positioned itself to do the same for businesses. These networks provide
high-speed data services similar to our services, and in some cases at
higher speeds. These companies use a variety of new and emerging
technologies, including point-to-point and point-to-multipoint wireless
services, satellite-based networking and high-speed wireless digital
communications.
- Internet Service Providers. Internet service providers, including Yahoo,
Earthlink, PSINet, Concentric and Verio, offer Internet portal services
which compete with our MGCi.com service. We offer basic web hosting and
e-mail services and anticipate offering an enhanced set of Internet
products in the future. The competitive Internet service providers
generally provide more features and functions than our current Internet
portal.
- Wholesale DSL Carriers. Carriers, including Covad Communications Group,
Inc., Rhythms NetConnections Inc. and NorthPoint Communications, Inc.,
have begun offering DSL services and have significant strategic equity
investors, marketing alliances and product development partners.
Many of these competitors are offering, or may soon offer, DSL technologies
and services that will directly compete with us. Please see "Risk
Factors -- Because we compete against established industry competitors with
substantially greater financial resources, we may not be able to achieve our
operating and financial objectives."
PROPERTY
In Las Vegas, we have a five year lease, expiring in 2001, with a five year
option for the site housing our switch. We also lease space in Las Vegas for our
national customer service operations, national sales personnel, Las Vegas sales
personnel and general administration functions. This lease expires in 2004. This
facility is owned by a limited liability company which is principally owned by
two of our principal stockholders and directors, Maurice J. Gallagher, Jr. and
Timothy P. Flynn.
We have recently leased office space in the Rochester, New York area and we
have moved our corporate headquarters to the Rochester area.
We also own property housing our switch facilities in Ontario, Long Beach
and San Diego, California, Chicago, Illinois, and Fort Lauderdale, Florida. Our
switch site in Atlanta, Georgia has been leased for a term expiring in 2007 with
renewal options. We have leased facilities to house our local sales and
administration staff in each market.
We place great importance on each switch facility and seek to insure
maximum security and environmental control. We believe this can be achieved most
effectively through stand-alone structures. This approach minimizes the risk of
fire or other hazards from adjacent tenants or properties.
PERSONNEL
As of February 2, 2000, we had approximately 919 employees, most of whom
were located in Las Vegas. We expect to substantially increase the number of our
employees over the next two years.
We have non-disclosure and non-compete agreements with all of our executive
employees. None of our employees are represented by a collective bargaining
agreement.
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LEGAL PROCEEDINGS
We are party to numerous state and federal administrative proceedings. In
these proceedings, we are seeking to define and/or enforce incumbent carrier
performance requirements related to:
- the cost and provisioning of those network elements we lease;
- the establishment of customer care and provisioning;
- the allocation of subsidies; and
- collocation costs and procedures.
The outcome of these proceedings will establish the rates and procedures by
which we obtain and provide leased network elements and could have a material
effect on our operating costs.
We are also involved in legal proceedings in which we are seeking to
enforce our tariffed rates for originating and terminating long distance calls.
AT&T, Sprint, MCI WorldCom and other long distance carriers refused to pay the
full amount of the long distance access charges billed to them. Access charges
represented 41% of our operating revenues in 1998 and 35% of our operating
revenues in the first nine months of 1999. Access charge revenues from AT&T,
Sprint and MCI WorldCom represented 81% of our total access charge revenues in
1998 and 75% of our access charge revenue in the first nine months of 1999. As
of September 30, 1999, we had outstanding receivables of approximately $12.3
million attributable to access charges from AT&T, Sprint, MCI WorldCom and other
long distance carriers, as compared to $8.1 million as of June 30, 1999. We have
recently settled our dispute with MCI WorldCom; however, our disputes continue
with AT&T and Sprint.
We initiated proceedings against AT&T at the FCC under an FCC procedure for
expedited settlement of disputes between common carriers. On July 16, 1999, the
FCC released a decision ordering AT&T to pay us the full amount we billed to
them for originating switched access charges from August 1998 through March 1999
at our tariffed rate. AT&T asked the FCC to review the order and in December
1999 the FCC decided not to review its previous decision. The FCC decision is
subject to appeal to a federal appeals court.
We have also filed a complaint before the FCC to obtain an order compelling
Sprint to pay our tariff rate for access charges. In January 2000, Sprint filed
a complaint against us before the FCC seeking a declaration that Sprint should
be entitled to recover any amounts it may be ordered to pay to us under our
complaint on the basis that our charges are unjust and unreasonable.
The final outcome of the disputes with AT&T and Sprint is uncertain. If we
are unable to collect from these long distance carriers, it could have a
material impact on our financial condition. See "Risk Factors -- We may not be
able to collect all of the access charges we have billed to long distance
carriers."
From time to time, we engage in other litigation and governmental
proceedings in the ordinary course of our business. We do not believe any other
pending litigation or governmental proceeding will have a material adverse
effect on our results of operations or financial condition.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their respective ages as of
January 14, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Maurice J. Gallagher, Jr....... 50 Chairman of the Board of Directors
Rolla P. Huff.................. 43 Chief Executive Officer, President, Director
Timothy P. Flynn(1)............ 49 Director
Jack L. Hancock(2)............. 69 Director
David Kronfeld................. 52 Director
Mark J. Masiello............... 32 Director
Thomas Neustaetter(1)(2)....... 47 Director
Paul J. Salem(1)(2)............ 36 Director
James Ball..................... 37 President -- Midwest Region
John Boersma................... 39 Senior Vice President -- Operations
David S. Clark................. 39 Senior Vice President -- Investor Relations
S. Gregory Clevenger........... 36 Senior Vice President -- Corporate Development
Michael R. Daley............... 38 Executive Vice President and Chief Financial Officer
Neil Hediger................... 41 Senior Vice President -- Marketing
Kent F. Heyman................. 44 Senior Vice President and General Counsel
George Longyear................ 30 President -- Southwestern Region
Mark D. Magarian............... 33 Senior Vice President -- People Services
James Mitchell................. 38 President -- Eastern Region
Mark W. Peterson............... 45 President -- Western Region
Michele Sadwick................ 33 Vice President -- Corporate Communications
Linda M. Sunbury............... 38 Senior Vice President -- Finance
</TABLE>
- -------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
MAURICE J. GALLAGHER, JR. has served as the chairman of our board of
directors since our inception. Mr. Gallagher was a founder of ValuJet Airlines,
Inc. in 1993 and served as a director of ValuJet from 1993 until November 1997
and served as vice chairman from 1994 to 1997.
ROLLA P. HUFF was elected as our chief executive officer and president and
as a member of our board of directors as of November 1, 1999. From March 1999 to
September 1999, Mr. Huff served as president and chief operating officer of
Frontier Corporation and served as executive vice president and chief financial
officer of that corporation from May 1998 to March 1999. From July 1997 to May
1998, Mr. Huff was president of AT&T Wireless for the Central U.S. region and
Mr. Huff served as senior vice president and chief financial officer of that
company from March 1995 to July 1997. From July 1994 to March 1995, Mr. Huff was
financial vice president of mergers and acquisitions for AT&T.
TIMOTHY P. FLYNN has served as a member of our board of directors since
1996. Mr. Flynn served as a member of the board of directors of ValuJet Airlines
since he participated in its founding in 1993 until November 1997. Mr. Flynn and
Mr. Gallagher are affiliated in a number of other transactions.
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JACK L. HANCOCK has served as a member of our board of directors since
1996. Mr. Hancock was vice president of systems technology and executive vice
president, product and technology for PacBell from 1988 to 1993. He has served
as a member of the boards of directors of Union Bank of California and Wittaker
Corporation since 1994.
DAVID KRONFELD was elected to serve as a member of our board of directors
in February 1998. Mr. Kronfeld is the founder of JK&B Management, L.L.C., a
venture capital firm, and has managed its affairs since 1995. Since 1989, Mr.
Kronfeld has also been a partner at Boston Capital Ventures, a venture capital
firm where he specialized in the telecommunications and software industries.
MARK J. MASIELLO was elected to serve as a member of our board of directors
in November 1999. Mr. Masiello is a principal of Providence Equity Partners,
Inc., which provides investment management services to Providence Equity
Partners III L.P. ("PEP") and has since its founding in 1998 served as a member
of Providence Equity Partners III LLC, the general partner of PEP. Mr. Masiello
has been with Providence since 1989 and he currently serves as a director of VIA
NET.WORKS, Inc., Netcom Internet Limited and Netcom Canada Inc.
THOMAS NEUSTAETTER was elected to serve as a member of our board of
directors in February 1998. Since March 1999, Mr. Neustaetter has been an
executive member of JK&B Capital. From January 1996 to December 1999, Mr.
Neustaetter was a partner of The Chatterjee Group, an investment firm which is
an affiliate of Soros Fund Management. Before joining The Chatterjee Group, he
was the president and founder of Bancroft Capital, a general consulting firm,
from December 1994 to December 1996. Mr. Neustaetter also serves as a director
of 21st Century Telecom Group, Inc., Gloss.com, Update Marketing, Selectica,
Inc. and Vector Holdings.
PAUL J. SALEM was elected to serve as a member of our board of directors in
May 1999. Since 1997, Mr. Salem served as a managing director of Providence
Equity Partners, Inc., which provides investment management services to PEP and
has since its founding in 1998 served as a member of Providence Equity Partners
III LLC, the general partner of PEP. Mr. Salem also served as a vice president
of Providence Ventures Inc. from 1992 to 1996. Mr. Salem has served as a
director of MetroNet Communications Corp. since July 1996 and as a director of
Verio, Inc. since 1996.
JAMES BALL joined our company as president -- midwest region in November
1999. From September 1998 until November 1999, Mr. Ball served as regional vice
president for a 12-city region with Chicago-based Level 3 Communications. Before
September 1998, Mr. Ball held senior management positions at Epoch Internet from
November 1997 to August 1998 and MFS Telecom from August 1993 to October 1997.
JOHN BOERSMA has served as our vice president -- operations since May 1997
and was designated senior vice president -- operations in May 1999. He served as
vice president of carrier relations for ICG Telecom Group, Inc. from 1996 to
1997. In that capacity, he was responsible for ICG Telecom's relationship with
local exchange carriers and implementation, purchase agreements and service
quality. Mr. Boersma served as vice president, northern California operations of
ICG Telecom from April 1994 to September 1996.
DAVID S. CLARK has since December 1999 served as our senior vice
president -- investor relations. Mr. Clark served as our vice
president -- marketing from May 1997 until May 1999 when he was designated
senior vice president -- sales and marketing. Mr. Clark has been in the
telecommunications industry for 11 years, with responsibilities including
engineering, purchasing, product development, client acquisition and
maintenance, marketing and advertising. From 1989 to 1997, Mr. Clark was
employed by North American Telecom, his last position being vice president of
communications services.
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S. GREGORY CLEVENGER joined our company as senior vice
president -- corporate development in January 2000. From March 1997 to December
1999, Mr. Clevenger was vice president of investment banking at Goldman, Sachs &
Co. in the communications, media and entertainment group in Singapore and New
York. From September 1992 to March 1997, Mr. Clevenger was an associate and vice
president in the investment banking division of Morgan Stanley & Co.
Incorporated in New York, Hong Kong and Singapore in a variety of groups
including the global telecommunications group and the global project finance and
leasing group. From May 1990 to September 1992, Mr. Clevenger was an associate
and vice president at Argent Group Ltd. in New York.
MICHAEL R. DALEY joined our company as executive vice president and chief
financial officer in November 1999. From November 1998 to November 1999, Mr.
Daley served as executive vice president and chief financial officer of
Concentrix Corporation. From 1984 through ACC Corp.'s merger with Teleport
Communications Group, Inc. in 1998, Mr. Daley served in various capacities at
ACC Corp., including as executive vice president and chief financial officer
from March 1994 to October 1998 with responsibilities including operations
support, investor relations, human resources, legal, mergers and acquisitions
and business development.
NEIL HEDIGER joined our company as senior vice president -- marketing in
January 2000. From September 1995 to November 1999, Mr. Hediger served as vice
president of business communications for BellSouth and as vice president of
marketing for BellSouth business systems. From April 1991 to September 1995, he
served as director of marketing for MCI -- business markets.
KENT F. HEYMAN has served as our vice president and general counsel since
June 1996 and was designated senior vice president in December 1999. Mr. Heyman
has 18 years of legal experience, most recently as chairman of the litigation
department and senior trial counsel of the Dowling, Magarian, Aaron & Heyman law
firm. Mr. Heyman has served as a California Superior Court Judge pro tempore
presiding over trial, settlement conference and other proceedings from 1990 to
1996.
GEORGE LONGYEAR has served as our president -- southwestern region since
October 1999. From April 1998 until October, 1999, Mr. Longyear served as branch
director in our Atlanta office. Mr. Longyear has over nine years telephone
industry experience, most recently with MCI Communications from 1991 to 1997
where he held various senior sales and management positions in their local
service group and state government and university segment.
MARK D. MAGARIAN joined our company as senior vice president -- people
services in January 2000. Mr. Magarian practiced law and specialized in labor
and employment law from 1993 until December 1999.
JAMES MITCHELL has served as our president -- eastern region since February
1998. Mr. Mitchell has over nine years of telephone industry experience, serving
from 1990 to 1998 in various sales and marketing management roles with MCI, his
last position being regional sales and marketing manager for the southeast
region.
MARK W. PETERSON has served as our president -- western region since March
1997. From 1993 to 1996, Mr. Peterson was a marketing and communications
consultant and a law student. He previously served as head of corporate affairs
for WestAir Holding, Inc. from 1988 to 1992.
MICHELE SADWICK joined our company as vice president -- corporate
communications in December 1999. From April 1994 to November 1999, Ms. Sadwick
held various positions in public relations with Frontier Corporation.
LINDA M. SUNBURY has served as our vice president and principal accounting
officer since June 1996 and served as our chief financial officer from January
1998 to November 1999. Ms. Sunbury was designated senior vice president in May
1999 and since December 1999 has served as senior vice president -- finance. Ms.
Sunbury has over 15 years accounting and administrative
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experience, having held similar positions in the airline industry. Most
recently, Ms. Sunbury was vice president of administration for Business Express,
Inc. dba the Delta Connection from 1994 to 1996. While Ms. Sunbury was at
Business Express, creditors of Business Express filed an involuntary petition
for bankruptcy in January 1996. Business Express subsequently reorganized and
emerged from bankruptcy in April 1997. Before that, Ms. Sunbury served as
controller for WestAir Holding, Inc. from 1988 to 1994.
Messrs. Kronfeld and Neustaetter were initially selected to serve on our
board of directors by the holders of our Series A convertible preferred stock.
The Series A convertible preferred stock was automatically converted into common
stock upon our initial public offering.
Messrs. Salem and Masiello were selected to serve on our board of directors
by the purchasers of our Series B convertible preferred stock and Series C
convertible preferred stock.
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<PAGE> 53
PRINCIPAL AND SELLING STOCKHOLDERS
SECURITY OWNERSHIP OF MANAGEMENT AND BENEFICIAL OWNERS
The following table shows information known to us with respect to
beneficial ownership of common stock as of February 3, 2000, by (A) each
director, (B) all executive officers and directors as a group and (C) each
person known by us to be a beneficial owner of more than 5% of our outstanding
common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OWNERSHIP(1)
- ------------------------ --------------------- ------------
<S> <C> <C>
Providence Equity Partners III LLC(2).................. 5,003,969 17.5%
Maurice J. Gallagher, Jr., chairman of the board and
director(3).......................................... 3,312,608 14.0%
David Kronfeld, director(4)............................ 2,061,070 8.4%
Timothy P. Flynn, director(5).......................... 898,500 3.8%
Rolla P. Huff, president, chief executive officer and
director............................................. 150,000 *
Jack L. Hancock, director(6)........................... 37,200 *
Thomas Neustaetter, director........................... 8,800 *
Mark J. Masiello, director(7).......................... -- --
Paul J. Salem, director(7)............................. -- --
All executive officers and directors as a group (21
persons) (3)(4)(5)(6)(7)(8).......................... 7,089,992 28.7%
</TABLE>
- -------------------------
* Less than 1% of total.
(1) In accordance with the Commission's rules, each beneficial owner's holdings
have been calculated assuming the full exercise of options and the
conversion of all shares of convertible preferred stock held by the holder
which are currently exercisable or convertible or which will become
exercisable or convertible within 60 days after the date indicated and no
exercise of options or conversion of preferred stock held by any other
person.
(2) Includes 4,111,112 shares of Series B convertible preferred stock and
892,857 shares of Series C convertible preferred stock. The shares of Series
B convertible preferred stock and Series C convertible preferred stock are
convertible into common stock on a one-for-one basis. The address of this
beneficial owner is 901 Fleet Center, 50 Kennedy Plaza, Providence, Rhode
Island 02903.
(3) Includes options to purchase 52,000 shares of common stock which are
presently exercisable and 3,170,878 shares of common stock owned by the
various partnerships, trusts or corporations with respect to which Mr.
Gallagher is a general partner, beneficiary and/or controlling stockholder.
Also includes 44,730 shares owned by a trust for the benefit of Mr.
Gallagher's minor children with respect to which Mr. Gallagher disclaims any
beneficial ownership interest. Mr. Gallagher's address is 3291 N. Buffalo
Drive, Las Vegas, Nevada 89129.
(4) Includes 1,139,571 shares of common stock, 555,556 shares of Series B
convertible preferred stock and 357,143 shares of Series C convertible
preferred stock, all of which are owned by partnerships in which Mr.
Kronfeld is a general partner or manager of a general partner. The shares of
Series B convertible preferred stock and Series C convertible preferred
stock are convertible into common stock on a one-for-one basis. Mr.
Kronfeld's address is JK&B Management, L.L.C., 205 North Michigan, Suite
808, Chicago, Illinois 60601.
(5) Includes options to purchase 7,200 shares which are presently exercisable or
will become exercisable within 60 days after the date of this prospectus and
102,000 shares of common stock
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<PAGE> 54
owned by various partnerships or corporations with respect to which Mr.
Flynn is a general partner and/or controlling stockholder.
(6) Includes options to purchase 7,200 shares that are presently exercisable or
will become exercisable within 60 days after the date of this prospectus.
(7) Excludes 4,111,112 shares of Series B convertible preferred stock and
892,857 shares of Series C convertible preferred stock owned by Providence
Equity Partners III L.P. and its affiliates. Mr. Masiello and Mr. Salem
disclaim beneficial ownership of these shares except to the extent of their
pecuniary interest in the general partner of Providence Equity Partners III
L.P.
(8) Includes options to purchase 157,265 shares owned by executive officers not
named above which are presently exercisable or which will become exercisable
within 60 days after the date of this prospectus.
SELLING STOCKHOLDERS
The selling stockholders listed in the table below have agreed to sell the
number of shares of common stock indicated opposite their respective names. The
table sets forth information about common stock held of record by the selling
stockholders as of the date of this prospectus and as adjusted to reflect the
sale of shares of common stock in this offering. Information with respect to
ownership has been furnished by the respective selling stockholders. There is
and has been no material relationship during our history between us or any
affiliate of ours and any selling stockholder except as described in the
footnotes appearing at the end of the following table.
<TABLE>
<CAPTION>
SHARES OWNED SHARES SHARES OWNED
BEFORE THIS SOLD IN THIS AFTER THIS
SELLING STOCKHOLDER OFFERING OFFERING OFFERING
- ------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Pilgrim High Yield Fund....................... 10,778 10,178 600
The New American High Inc. Fund............... 8,086 8,086 --
The High Yield Plus Fund...................... 2,695 2,695 --
Tate & Lyle Pension Fund...................... 1,887 1,887 --
Anchor Series High Yield Fund................. 1,347 1,347 --
Teachers' Retirement System of Louisiana...... 1,347 1,347 --
State Boston Retirement Board................. 1,347 1,347 --
Wellington Trust Company NA
WTC CTF High Yield.......................... 808 808 --
John & Mary R. Markle Foundation.............. 539 539 --
Wellington Trust Company NA WTC
CIF High Yield.............................. 269 269 --
Wintergreen Investors (Bermuda) L.P. ......... 269 269 --
Wintergreen Partners L.P. .................... 269 269 --
</TABLE>
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<PAGE> 55
DESCRIPTION OF SECURITIES
GENERAL -- CAPITAL STOCK
The following description is a summary of the material terms of our capital
stock. It is not a complete description of all of the terms of our capital
stock. You should read this description of our capital stock as well as the
Nevada Revised Statutes, our articles of incorporation, including the
certificates of designation of our preferred stock, and our by-laws. Copies of
our articles and by-laws have been filed as exhibits to the registration
statement of which this prospectus is a part.
Our authorized capital stock consists of 60,000,000 shares of common stock,
$.001 par value per share, and 50,000,000 shares of preferred stock, $.001 par
value per share. As of February 2, 2000, 23,557,659 shares of common stock,
5,277,779 shares of Series B convertible preferred stock and 1,250,000 shares of
Series C convertible preferred stock were outstanding and 3,642,193 shares of
common stock were subject to outstanding options and warrants. As of January 31,
2000, there were approximately 241 holders of record of the common stock, six
holders of record of the Series B convertible preferred stock and six holders of
record of Series C convertible preferred stock.
If we issue preferred stock in the future, the preferred stock will have
the rights, terms and preferences specified by our board of directors in a
certificate filed with the Secretary of State of Nevada. As of the date of this
prospectus, we have authorized the issuance of up to 5,278,000 shares of Series
B convertible preferred stock and 1,250,000 shares of Series C convertible
preferred stock with the voting, dividend, liquidation and conversion rights
described below. The issuance of preferred stock by the board of directors in
the future could adversely affect the rights of holders of our then outstanding
capital stock. For example, an issuance of preferred stock could result in a
class of securities outstanding with preferences over the common stock with
respect to dividends and liquidations and/or a class of securities with voting
rights equal to or greater than those of the common stock. We have no present
plan to issue any additional series of preferred stock other than the Series D
convertible preferred stock. See "-- Anti-Takeover Provisions of Articles of
Incorporation."
SERIES B CONVERTIBLE PREFERRED STOCK
The Series B convertible preferred stock has the following rights and
preferences:
Dividends accrued at the rate of 10% per year from their issuance on May 4,
1999 until November 21, 1999 and must be paid before any dividends may be paid
on our common stock. Effective as of November 22, 1999, we elected to terminate
the accrual of dividends since our common stock price per share exceeded $27.00
for 20 consecutive trading days. Except as described below, accrued dividends
will be paid in common stock at the time the Series B convertible preferred
stock is converted into common stock if the dividends have not been paid before
that time.
On any matter submitted to our stockholders, holders of shares of Series B
convertible preferred stock will be treated as if they hold the number of shares
of common stock into which their shares of Series B convertible preferred stock
could be converted and will be allowed to vote those shares along with the
holders of our common stock. In addition, the holders of shares of Series B
convertible preferred stock will have the right to approve any action to:
- issue preferred stock ranking equal or senior to the Series B convertible
preferred stock;
- dispose of assets in excess of a fixed dollar amount, merge or
consolidate or sell our company;
- liquidate our company;
- alter the terms of the Series B convertible preferred stock;
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<PAGE> 56
- pay dividends on common stock or other securities junior to the Series B
convertible preferred stock other than dividends payable in common stock;
- enter into transactions with our affiliates other than transactions
covered by specified exceptions;
- make acquisitions in excess of a fixed dollar amount;
- incur additional debt in excess of fixed amounts;
- make material changes to our business plan;
- hire a chief executive officer;
- organize subsidiaries or enter into joint ventures unless specified
conditions are met; and
- issue additional common stock that would result in an increase in the
number of shares of common stock into which the Series B convertible
preferred stock may be converted.
If we were to take one of these restricted actions without the approval of
the holders of the Series B convertible preferred stock, the holders of the
Series B convertible preferred stock may have the right to require us to seek a
sale of our company. To avoid having to sell our company if one of the
restricted actions described above is not approved, we have the right to redeem
the Series B convertible preferred stock at predetermined prices. If we elect
not to redeem the Series B convertible preferred stock and the required sale of
our company is not effected within six months, then the holders of the Series B
convertible preferred stock, along with the holders of the Series C convertible
preferred stock if they then have similar rights, would be entitled to elect a
majority of our board of directors.
The approval rights described above will terminate if fewer than 1,759,260
shares of Series B convertible preferred stock remain outstanding and the shares
of Series B convertible preferred stock outstanding constitute less than 5% of
the outstanding common stock assuming conversion of all outstanding shares of
Series B convertible preferred stock. Based on the number of shares of common
stock to be outstanding after this offering, 5% of the common stock would be
approximately 1,650,000 shares.
The holders of the Series B convertible preferred stock have approved the
issuance of the Series C convertible preferred stock and Series D convertible
preferred stock, each of which will rank equal to the Series B convertible
preferred stock.
The holders of the Series B convertible preferred stock have the right to
representation on our board of directors as discussed below under "-- Series B
and C Preferred Stock Board Representation."
Upon our liquidation, the holders of the Series B convertible preferred
stock are entitled to receive their liquidation amount on a pro rata basis with
the holders of any series of preferred stock which ranks equally with the Series
B convertible preferred stock and before any amounts may be paid to holders of
our common stock or other junior securities. The liquidation amount will be the
greater of (a) $9.00 per share plus accrued and unpaid dividends or (b) the
amount the holders of Series B convertible preferred stock would have received
if the Series B convertible preferred stock had been converted into common
stock. The holders of the Series B convertible preferred stock have the right to
elect that a sale of our company be treated as a liquidation for these purposes.
If the liquidation or sale occurs before May 4, 2002, the accrued dividends will
not be paid to the extent the holders of Series B convertible preferred stock
will receive more than $22.50 per share.
A holder of shares of Series B convertible preferred stock may convert
those shares into common stock at any time. Initially, each share of Series B
convertible preferred stock may be converted into
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<PAGE> 57
one share of common stock. The number of shares of common stock into which each
share of Series B convertible preferred stock can be converted may be adjusted
as a result of stock splits, stock dividends and other issuances of additional
stock.
After the earlier of May 24, 2000 or the date on which the holders of
Series B convertible preferred stock or Series C convertible preferred stock
exercise their demand registration rights, which are discussed below, we have
the right to require the conversion of the Series B convertible preferred stock
if our common stock price exceeds $27.00 per share for 20 consecutive trading
days. If we require conversion before May 4, 2002, no accrued dividends will be
paid.
The holders of Series B convertible preferred stock have the right to
require us to redeem the Series B convertible preferred stock after May 4, 2005
or upon a sale of our company. The redemption price will be equal to the greater
of:
- $9.00 per share plus accrued and unpaid dividends; or
- the value of the common stock into which the Series B convertible
preferred stock is then convertible.
If we fail to redeem all shares of Series B convertible preferred stock
within six months of the date specified by the holders of the Series B
convertible preferred stock, then the holders of the Series B convertible
preferred stock, along with the holders of the Series C convertible preferred
stock if they then have similar rights, will have the right to elect a majority
of our board of directors.
The purchasers of Series B convertible preferred stock have demand and
piggyback registration rights.
SERIES C CONVERTIBLE PREFERRED STOCK
The Series C convertible preferred stock, which was issued in December
1999, has the following rights and preferences:
Dividends will accrue at the rate of 10% per year, are cumulative and must
be paid before any dividends may be paid on our common stock. Except as
described below, accrued dividends will be paid in common stock at the time the
Series C convertible preferred stock is converted into common stock if the
dividends have not been paid before that time.
On any matter submitted to our stockholders, holders of shares of Series C
convertible preferred stock will be treated as if they hold the number of shares
of common stock into which their shares of Series C convertible preferred stock
could be converted and will be allowed to vote those shares along with the
holders of our common stock. In addition, the holders of shares of Series C
convertible preferred stock will have the right to approve any action to:
- issue preferred stock ranking equal or senior to the Series C convertible
preferred stock;
- dispose of assets in excess of a fixed dollar amount, merge or
consolidate or sell our company;
- liquidate our company;
- alter the terms of the Series C convertible preferred stock;
- pay dividends on common stock or other securities junior to the Series C
convertible preferred stock other than dividends payable in common stock;
- enter into transactions with our affiliates other than transactions
covered by specified exceptions;
- make acquisitions in excess of a fixed dollar amount;
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<PAGE> 58
- incur additional debt in excess of fixed amounts;
- make material changes to our business plan;
- hire a chief executive officer;
- organize subsidiaries or enter into joint ventures unless specified
conditions are met; and
- issue additional common stock that would result in an increase in the
number of shares of common stock into which the Series C convertible
preferred stock may be converted.
If we were to take one of these restricted actions without the approval of
the holders of the Series C convertible preferred stock, the holders of the
Series C convertible preferred stock may have the right to require us to seek a
sale of our company. To avoid having to sell our company if one of the
restricted actions described above is not approved, we have the right to redeem
the Series C convertible preferred stock at predetermined prices. If we elect
not to redeem the Series C convertible preferred stock and the required sale of
our company is not effected within six months, then the holders of the Series C
convertible preferred stock, along with the holders of the Series B convertible
preferred stock if they then have similar rights, would be entitled to elect a
majority of our board of directors.
The approval rights described above will terminate if fewer than 416,667
shares of Series C convertible preferred stock remain outstanding.
Concurrently with the issuance of the Series C convertible preferred stock,
the purchasers of the Series C convertible preferred stock will consent to the
issuance of the Series D convertible preferred stock, which will rank equally
with the Series B convertible preferred stock and Series C convertible preferred
stock.
The holders of the Series C convertible preferred stock have the right to
representation on our board of directors as discussed below under "-- Series B
and C Preferred Stock Board Representation."
Upon our liquidation, the holders of the Series C convertible preferred
stock are entitled to receive their liquidation amount on a pro rata basis with
the holders of any series of preferred stock which ranks equally with the Series
C convertible preferred stock and before any amounts may be paid to holders of
our common stock or other junior securities. The liquidation amount will be the
greater of (a) $28.00 per share plus the greater of $2.80 per share or the
accrued and unpaid dividends or (b) the amount the holders of Series C
convertible preferred stock would have received if the Series C convertible
preferred stock had been converted into common stock. The holders of the Series
C convertible preferred stock have the right to elect that a sale of our company
be treated as a liquidation for these purposes. If the liquidation or sale
occurs before June 30, 2002, the accrued dividends will not be paid to the
extent the holders of Series C convertible preferred stock will receive more
than $58.80 per share.
A holder of shares of Series C convertible preferred stock may convert
those shares into common stock at any time. Initially, each share of Series C
convertible preferred stock may be converted into one share of common stock. The
number of shares of common stock into which each share of Series C convertible
preferred stock can be converted may be adjusted as a result of stock splits,
stock dividends and other issuances of additional stock.
After the earlier of January 19, 2001, or the date on which the holders of
Series B convertible preferred stock or Series C convertible preferred stock
exercise their demand registration rights, which are discussed below, we have
the right to require the conversion of the Series C convertible preferred stock
if our common stock price exceeds $56.00 per share for 20 consecutive trading
days.
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<PAGE> 59
If we require conversion before June 30, 2002, no accrued dividends in excess of
$2.80 per share will be paid.
The holders of Series C convertible preferred stock have the right to
require us to redeem the Series C convertible preferred stock after December 30,
2005 or upon a sale of our company. The redemption price will be equal to the
greater of:
- $28.00 per share plus the greater of $2.80 per share or accrued and
unpaid dividends; or
- the value of the common stock into which the Series C convertible
preferred stock is then convertible.
If we fail to redeem all shares of Series C convertible preferred stock
within six months of the date specified by the holders of the Series C
convertible preferred stock, then the holders of the Series C convertible
preferred stock (along with the holders of the Series B convertible preferred
stock if they then have similar rights) will have the right to elect a majority
of our board of directors.
The purchasers of Series C convertible preferred stock have demand and
piggyback registration rights.
SERIES B AND C PREFERRED STOCK BOARD REPRESENTATION
The purchasers of the Series B convertible preferred stock and Series C
convertible preferred stock have the right to nominate two or more directors
depending on the size of our board of directors and the percentage of our stock
represented by the purchasers' Series B convertible preferred stock, Series C
convertible preferred stock and common stock received upon conversion of the
Series B convertible preferred stock or Series C convertible preferred stock.
The purchasers of the Series B convertible preferred stock and Series C
convertible preferred stock also have the right to have one of their board
representatives serve on each committee of our board of directors and on the
board of each of our subsidiaries. The holders of the Series B convertible
preferred stock and Series C convertible preferred stock are entitled to
nominate two directors. Paul J. Salem and Mark J. Masiello have been elected to
the board of directors after being designated by the holders of Series B
convertible preferred stock and Series C convertible preferred stock.
The right to nominate directors will terminate if fewer than 1,759,260
shares of Series B convertible preferred stock remain outstanding, fewer than
416,667 shares of Series C convertible preferred stock remain outstanding and
the shares of Series B convertible preferred stock, Series C convertible
preferred stock and common stock issued upon conversion of the Series B
convertible preferred stock or Series C convertible preferred stock constitute
less than 5% of the outstanding common stock assuming conversion of all
outstanding shares of Series B convertible preferred stock and Series C
convertible preferred stock.
SERIES D CONVERTIBLE PREFERRED STOCK
For a description of the terms of the Series D convertible preferred stock,
see "Description of Series D Convertible Preferred Stock."
OUTSTANDING WARRANTS
As of February 2, 2000, there are outstanding warrants to purchase
approximately 279,886 shares of common stock. These warrants were originally
issued in September 1997 to purchasers of units consisting of our senior secured
notes and the warrants. Each holder of a warrant may purchase shares of common
stock at a price of $.02 per share at any time on or before October 1, 2004.
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<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and the concurrent offering, we will have
outstanding 28,028,618 shares of common stock. The 4,500,000 shares of common
stock and the estimated shares which may be issued upon conversion of the
Series D convertible preferred stock to be sold in this offering and the
concurrent offering, any additional shares sold upon exercise of the over-
allotment option granted to the underwriters, any shares of common stock which
may be issued as dividends on our Series D convertible preferred stock, the
9,612,695 shares sold in our prior public offerings, approximately 657,753
shares issued upon exercise of stock options and any common stock issued on
future stock option exercises will be freely tradable without restriction or
further registration under the Securities Act unless those shares are held by
our "affiliates" as defined by the Securities Act.
The remaining 13,258,170 shares of our common stock, plus 6,527,779 shares
of common stock which may be issued upon conversion of the Series B convertible
preferred stock and Series C convertible preferred stock, are "restricted
securities" under the Securities Act because they were issued and sold by us in
private transactions in reliance upon exemptions from registration under the
Securities Act. Restricted securities may not be sold except in compliance with
the registration requirements of the Securities Act or under an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act. After sale under Rule 144 under the Securities Act, these shares will be
freely tradable without restriction or registration under the Securities Act.
Substantially all of our restricted securities, other than the 6,527,779 shares
of common stock which may be issued upon conversion of the Series B convertible
preferred stock and Series C convertible preferred stock, currently qualify for
sale under Rule 144.
The holders of:
- approximately 7,726,707 shares of our common stock;
- 5,277,779 shares of Series B convertible preferred stock;
- 1,250,000 shares of Series C convertible preferred stock; and
- warrants to purchase approximately 279,886 shares of common stock,
excluding holders including those shares for sale in this offering.
have agreed that, for a period of 90 days from the date of this prospectus, they
will not, without the prior written consent of Salomon Smith Barney Inc.,
dispose of or hedge any shares of common stock or any securities convertible
into or exchangeable for common stock, except for the shares offered by this
prospectus. See "Underwriting." After the 90 day period, all of these securities
other than the 5,277,779 shares of Series B convertible preferred stock and
1,250,000 shares of Series C convertible preferred stock will be eligible for
sale in the public market upon compliance with Rule 144 under the Securities
Act.
Sales of a substantial amount of common stock in the public market, or the
perception that sales could occur, could reduce the price of our stock.
REGISTRATION RIGHTS OF SECURITY HOLDERS
The holders of the 5,277,779 shares of our outstanding Series B convertible
preferred stock, the holders of the 1,250,000 shares of Series C convertible
preferred stock, the holders of approximately 639,997 shares of common stock
that have been or may be acquired upon exercise of the warrants and the holders
of 1,080,470 shares of common stock received upon conversion of the Series A
convertible preferred stock upon our initial public offering have the right to
demand that their common stock be registered with the SEC.
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<PAGE> 61
The holders of the 5,277,779 shares of our outstanding Series B convertible
preferred stock, the holders of the 1,250,000 shares of Series C convertible
preferred stock, the holders of approximately 639,997 shares of common stock
that have been or may be acquired upon exercise of the warrants and the holders
of an additional 1,107,471 shares of common stock have piggyback registration
rights under agreements with us. Some of these holders have elected to include
shares in this offering.
FUTURE SALE OF STOCK TO EMPLOYEES
We plan to seek to attract and retain employees in part by offering stock
options and other purchase rights for a significant number of our shares of
common stock. These plans may dilute the percentage of ownership of our then
existing stockholders.
CONTROL SHARE ACQUISITIONS
Sections 78.3791 through 78.3793 of the Nevada Revised Statutes generally
apply to any acquisition of outstanding voting securities of an issuing
corporation which results in the acquiror owning more than 20% of the issuing
corporation's then outstanding voting securities. An issuing corporation is any
Nevada corporation with at least 200 stockholders, at least 100 of which are
stockholders of record and Nevada residents, and which conducts business in
Nevada.
The securities acquired in a covered acquisition are denied voting rights
unless a majority of the security holders of the issuing corporation approve the
granting of voting rights. If permitted by the issuing corporation's articles of
incorporation or by-laws then in effect, voting securities acquired in the
covered acquisition are redeemable by the issuing corporation at the average
price paid for the securities by the acquiror if the acquiring person has not
given timely notice to the issuing corporation or if the stockholders of the
issuing corporation vote not to grant voting rights to the acquiring person's
securities.
Unless the issuing corporation's articles of incorporation or by-laws then
in effect provide otherwise, if the acquiring person acquired securities having
50% or more of the voting power of the issuing corporation's outstanding
securities and the stockholders of the issuing corporation grant voting rights
to the acquiring person, then any stockholders of the issuing corporation who
voted against granting voting rights to the acquiring person may demand that the
issuing corporation purchase, for fair value, all or any portion of his
securities.
Our articles of incorporation and by-laws do not limit the effect of these
provisions.
TRANSFER AGENT
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, New York, New York.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS
The right of the stockholders to sue any director for misconduct in
conducting our affairs is limited by our articles of incorporation and Nevada
statutes to cases for damages resulting from breaches of fiduciary duties
involving acts or omissions involving intentional misconduct, fraud, knowing
violations of the law or the unlawful payment of dividends. Ordinary negligence
is not grounds for suit. The statute does not limit the liability of directors
or officers for monetary damages under the federal securities laws.
We also have the obligation, under our by-laws, to indemnify any director
or officer of ours for expenses incurred in connection with any legal action
brought or threatened which relates to any action or omission alleged to have
been committed while acting in the scope of the person's duties.
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<PAGE> 62
This indemnification is to be provided only if the person acted in good faith
and in a manner which the person reasonably believed to be in or not opposed to
our best interests. With respect to criminal actions, the indemnification is to
be provided only if the person had no reasonable cause to believe the person's
conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or other controlling persons under
the foregoing provisions, we have been informed that in the opinion of the SEC
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
ANTI-TAKEOVER PROVISIONS OF ARTICLES OF INCORPORATION
Our articles of incorporation authorize our board of directors to issue up
to 50,000,000 shares of preferred stock from time to time in one or more
designated series or classes. As of February 2, 2000, 5,278,000 shares of
preferred stock have been designated as Series B convertible preferred stock,
5,277,779 shares of Series B convertible preferred stock were outstanding and
1,250,000 shares of preferred stock have been designated as Series C convertible
preferred stock and all 1,250,000 shares of Series C convertible preferred stock
were outstanding. We may also issue up to 3,450,000 shares of Series D
convertible preferred stock in the concurrent offering. We previously issued
6,571,427 shares of Series A convertible preferred stock which reverted to
authorized but unissued shares of preferred stock when we closed our initial
public offering of common stock. Our board of directors, without approval of the
stockholders, is authorized to establish the voting, dividend, redemption,
conversion, liquidation and other provisions of a particular series of preferred
stock, which could, among other things, adversely affect the voting power or
other rights of the holders of common stock and, under some circumstances, make
it more difficult for a third party to acquire, or discourage a third party from
acquiring, control of our company. Our board of directors has no present
intention to authorize the issuance of any additional series of preferred stock
other than the Series D convertible preferred stock being offered concurrently
with this offering.
BOARD OF DIRECTORS
Our by-laws provide that our board of directors is divided into three
classes of directors, with each class having a number of directors as nearly
equal as possible and with the term of each class expiring in a different year.
Because only one class of directors stands for election or re-election each
year, classifying our board of directors prevents persons seeking to acquire
control of our company from electing more than a minority of directors in any
year, thereby delaying, deferring or preventing a change of control. Our by-laws
provide that our board of directors shall consist of between three and nine
members, with the exact number to be determined from time to time by our board
of directors. Our board of directors currently consists of eight directors and,
as a result, the size of each class is two or three.
STOCKHOLDER ACTION AND SPECIAL MEETINGS
Our by-laws provide that:
- all action required or permitted to be taken by our stockholders must be
effected at a duly called annual or special meeting of stockholders and
may not be effected by any consent in writing, and
- the number of directors is set by resolution of our board of directors.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company. Our by-laws provide that
special meetings of stockholders may be called by the board of directors, the
chairman of the board, the president or the holders of at least a majority of
the shares of our common stock issued and outstanding and entitled to vote.
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DESCRIPTION OF THE SERIES D CONVERTIBLE PREFERRED STOCK
The following is a summary of the material provisions of the certificate of
designation and the Series D convertible preferred stock. Copies of the
certificate of designation and the form of Series D convertible preferred stock
share certificate are available upon request at our address set forth under
"Where You Can Find More Information." This summary is not intended to be
complete and is subject to, and is qualified in its entirety by reference to,
the certificate of designation. The definitions of capitalized terms used in the
following summary that are not defined herein are defined in the certificate of
designation.
GENERAL
At the consummation of the concurrent offering, we will issue 3,000,000
shares of our % Series D Convertible Redeemable Preferred Stock, $0.001 par
value per share. When issued, the Series D convertible preferred stock will be
validly issued, fully paid and nonassessable. The holders of the Series D
convertible preferred stock will have no preemptive or preferential right to
purchase or subscribe to stock, obligations, warrants or any other of our
securities of any class. We have applied to have the Series D convertible
preferred stock approved for listing on the Nasdaq National Market.
RANKING
The Series D convertible preferred stock will, with respect to dividend
rights and rights on liquidation, dissolution or winding-up, rank:
- junior to all our existing and future debt obligations;
- junior to "Senior Stock," which is each class of our capital stock or
series of preferred stock established after the Series D convertible
preferred stock by our board of directors that has terms which expressly
provide that the class or series will rank senior to the Series D
convertible preferred stock;
- on a parity with "Parity Stock," which is our Series B convertible
preferred stock and Series C convertible preferred stock and each class
of capital stock or series of preferred stock established after the
Series D convertible preferred stock by our board of directors that has
terms which expressly provide that the class or series will rank on a
parity with the Series D convertible preferred stock; and
- senior to "Junior Stock," which is our common stock and any other class
of our capital stock established after the Series D convertible preferred
stock by our board of directors whose terms do not expressly provide that
the class or series ranks senior to, or on a parity with, our Series D
convertible preferred stock.
While any shares of Series D convertible preferred stock are outstanding,
we may not authorize, create or increase the authorized amount of any class or
series of capital stock that ranks senior to the Series D convertible preferred
stock with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding-up without the consent of the holders of at least 66 2/3%
of the outstanding shares of Series D convertible preferred stock. We may,
however, without the consent of any holder of Series D convertible preferred
stock, create additional classes of common stock, increase the authorized number
of shares of preferred stock, increase the authorized number of shares of, issue
additional shares of or issue series of preferred stock that ranks on a parity
with, or junior to, the Series D convertible preferred stock with respect, in
each case, to the payment of dividends and amounts upon liquidation, dissolution
and winding-up. See "-- Voting Rights."
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DIVIDENDS
Subject to the rights of any holders of Senior Stock and Parity Stock,
holders of shares of Series D convertible preferred stock will be entitled to
receive, when, as and if declared by our board of directors out of our funds
which are legally available for payment, cumulative dividends at the annual rate
of % of the liquidation preference of $50 per share of Series D convertible
preferred stock. This is equivalent to $ per share annually.
Dividends on the Series D convertible preferred stock will be payable
quarterly on , , and
of each year commencing , 2000. Dividends will accrue from
the most recent date as to which dividends have been paid or, if no dividends
have been paid, from the date of the original issuance of the Series D
convertible preferred stock. Each dividend will be payable to holders of record
as they appear on our stock records at the close of business on the record date
next preceding the quarterly dividend payment date. Each record date will be
established by our board of directors and will be not more than 60 days nor less
than 15 days before the respective quarterly dividend payment date.
Dividends will be cumulative from the quarterly dividend payment date,
whether or not in any dividend period or periods we have funds legally available
for the payment of dividends. Accumulations of dividends on shares of Series D
convertible preferred stock will not bear interest. Dividends payable on the
Series D convertible preferred stock for any period greater or less than a full
quarterly dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
At our option, any dividend on the Series D convertible preferred stock
will be payable:
- in cash, or
- in shares of our common stock.
If we pay dividends in shares of common stock, the number of shares of
common stock to be issued on each dividend payment date will be determined by
dividing the total dividend to be paid on all of the outstanding shares of
Series D convertible preferred stock by the product of (x) 95% and (y) the
average of the daily closing prices of the common stock for the five consecutive
trading days ending on and including the fourth trading day before the dividend
payment date.
The transfer agent is authorized and directed in the certificate of
designation to:
- aggregate any fractional shares of common stock that are distributable as
dividends;
- sell them at the best available price; and
- distribute the proceeds to the holders of the Series D convertible
preferred stock in proportion to their respective interests.
We will pay the expenses of the transfer agent with respect to any sale of
the aggregated fractional shares, including brokerage commissions. If the sale
by the transfer agent of the aggregated fractional interests would be
restricted, we will agree with the transfer agent on other appropriate
arrangements for the cash realization of fractional interests.
All shares of common stock distributed on the related dividend payment date
in payment of dividends on the Series D convertible preferred stock will be
freely transferable without restriction under the Securities Act.
We will not declare or pay, or set apart any sum for the payment of
dividends on any outstanding share of the Series D convertible preferred stock
for any dividend period unless all dividends for all preceding dividend periods
have been declared and paid, or declared and a sufficient
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sum set apart for the payment of the dividend, on all outstanding shares of
Series D convertible preferred stock.
We will not:
(1) declare, pay or set apart funds for the payment of any dividend or
other distribution with respect to any Junior Stock; or
(2) redeem, purchase or otherwise acquire for consideration any Junior
Stock through a sinking fund or otherwise; unless:
(a) all accrued and unpaid dividends with respect to the Series D
convertible preferred stock at the time these actions are taken have
been paid or funds have been set apart for payment of these dividends;
and
(b) sufficient funds have been paid or set apart for, or a
sufficient number of shares of common stock have been reserved for, the
payment of the dividend for the current dividend period with respect to
the Series D convertible preferred stock.
We will not declare or pay any dividend on any Parity Stock unless full
cumulative dividends have been paid on the Series D convertible preferred stock
for all prior dividend periods unless the dividend declared on any Parity Stock
is declared ratably in proportion to accrued and unpaid dividends on the Series
D convertible preferred stock and the Parity Stock.
Notwithstanding anything herein to the contrary, we may:
- declare and pay dividends on Parity Stock which are payable solely in
shares of Parity Stock or Junior Stock;
- declare and pay dividends on Junior Stock which are payable solely in
shares of Junior Stock;
- declare and pay dividends on Parity Stock or Junior Stock by increasing
the liquidation value of the Parity Stock or Junior Stock, as applicable;
- repurchase, redeem or otherwise acquire Junior Stock in exchange for
Junior Stock; or
- repurchase, redeem or otherwise acquire Parity Stock in exchange for
Parity Stock or Junior Stock.
For the foreseeable future, we intend to pay all dividends on the Series D
convertible preferred stock in shares of our common stock, other than cash paid
instead of fractional shares. If, in the future, we were to consider paying cash
dividends on the Series D convertible preferred stock we would have to comply
with the restrictions contained in our debt indenture and the terms of our
outstanding series of preferred stock. See "Risk Factors--Our debt covenants and
preferred stock could limit how we conduct our business and our ability to raise
additional funds."
REDEMPTION
Mandatory Redemption
On , 2012, subject to legal availability of funds, we will
be required to redeem all of the outstanding shares of the Series D convertible
preferred stock at a redemption price, payable in cash, equal to the liquidation
preference plus accumulated and unpaid dividends, if any, whether or not
declared, to the date of redemption. We will not be required to make sinking
fund payments with respect to the Series D convertible preferred stock. The
certificate of designation for the Series D convertible preferred stock will
provide that we will take all actions required or permitted under Nevada law to
permit the redemption.
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Provisional Redemption
On or after , 2002 but before , 2003, if the
closing price of our common stock equals or exceeds 150% of the Conversion Price
for at least 20 trading days within any 30 trading day period, we may redeem
Series D convertible preferred stock (a "Provisional Redemption"). If we redeem
the Series D convertible preferred stock, the redemption price will be % of
the liquidation preference, plus accumulated and unpaid dividends, if any,
whether or not declared, to the redemption date (the "Provisional Redemption
Date").
If we undertake a Provisional Redemption, the holders of shares of Series D
convertible preferred stock called for redemption also will receive an
"additional payment" in an amount equal to the present value of the dividends
that would have been payable on the Series D convertible preferred stock for the
period from the Provisional Redemption Date to , 2003. The
present value will be calculated using a formula set forth in the certificate of
designation.
We may pay the redemption price, including any additional payment, at our
option, in cash, in shares of common stock or a combination thereof. However, we
may not pay in common stock unless we satisfy conditions specified in the
certificate of designation before the Provisional Redemption Date.
We will notify the holders of Series D convertible preferred stock not less
than 30 nor more than 60 days before any Provisional Redemption Date.
LIQUIDATION PREFERENCE
Upon our voluntary or involuntary liquidation, dissolution or winding-up,
and subject to the rights of our creditors and holders of Senior Stock and
Parity Stock, each holder of Series D convertible preferred stock will be
entitled to be paid, out of our assets available for distribution to
stockholders, an amount equal to the liquidation preference of $50 per share of
Series D convertible preferred stock held by the holder, plus accumulated and
unpaid dividends thereon to the date fixed for liquidation, dissolution or
winding-up, before any distribution is made on any Junior Stock, including our
common stock. If, upon our voluntary or involuntary liquidation, dissolution or
winding-up, there are not sufficient assets to pay the amounts payable with
respect to the Series D convertible preferred stock and all other Parity Stock
in full, all accumulated and unpaid dividends on the Series D convertible
preferred stock and all Parity Stock will be paid in full and then the holders
of the Series D convertible preferred stock and the Parity Stock will share
equally and ratably in any distribution of our assets in proportion to the other
respective amounts to which they are entitled. After payment of the full amount
of the liquidation preference of the Series D convertible preferred stock and
any accrued and unpaid dividends, the holders of shares of Series D convertible
preferred stock will not be entitled to any further participation in any
distribution of our assets.
Neither the sale, conveyance, exchange or transfer, whether for cash,
shares of stock, securities or other consideration, of all or substantially all
of our property or assets nor our consolidation or merger with or into, one or
more entities will be deemed to be a liquidation, dissolution or winding-up.
The certificate of designation will not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Series D
convertible preferred stock even though it is substantially in excess of the par
value thereof.
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VOTING RIGHTS
The holders of Series D convertible preferred stock have no voting rights,
except as otherwise required under Nevada law or as provided in the certificate
of designation.
If:
(1) dividends on the Series D convertible preferred stock are in
arrears and unpaid for six or more dividend periods, whether or not
consecutive;
(2) we fail to redeem all of the Series D convertible preferred stock
in cash on the Mandatory Redemption Date; or
(3) we fail to offer to repurchase or, if the offer to repurchase is
accepted, to repurchase shares of Series D convertible preferred stock if a
Non-Stock Change of Control occurs (each a "Voting Rights Triggering
Event");
then the holders of the outstanding shares of Series D convertible preferred
stock, voting separately and as a class together with the holders of any Parity
Stock upon which like rights have been conferred and are exercisable, will be
entitled to elect to serve on our board of directors the lesser of:
(a) two additional members to the board of directors, or
(b) that number of directors constituting at least 25% of the members of
the board of directors,
and the number of members of the board of directors will be immediately and
automatically increased by that number. The voting rights of the Series D
convertible preferred stock will continue until all Voting Rights Triggering
Events are cured or waived, at which time the term of any directors elected
pursuant to the provisions of this paragraph will terminate and the number of
directors constituting the board of directors will be immediately and
automatically decreased by that number.
Without the approval of the holders of at least 66 2/3% of the then
outstanding shares of Series D convertible preferred stock, we may not amend the
Change of Control provisions of the Series D convertible preferred stock.
Without the approval of the holders of at least a majority of the then
outstanding shares of Series D convertible preferred stock, we may not:
- amend the certificate of designation so as to affect adversely the
specified rights, preferences, privileges or voting rights of holders of
shares of the Series D convertible preferred stock;
- increase or decrease the total number of authorized shares of Series D
convertible preferred stock; or
- waive any Voting Rights Triggering Event or compliance with any provision
of the Series D convertible preferred stock.
Except as expressly set forth above,
(1) the creation, authorization or issuance of any shares of Junior
Stock or Parity Stock, including the designation of a series thereof within
the existing class of preferred stock, or
(2) the increase or decrease in the amount of authorized capital stock
of any class, including any preferred stock,
will not require the consent of the holders of Series D convertible preferred
stock and will not be deemed to affect adversely the rights, preferences,
privileges or voting rights of shares of Series D convertible preferred stock.
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CONVERSION RIGHTS
Shares of Series D convertible preferred stock will be convertible, in
whole or in part, at any time after the issue date, at the option of the holders
thereof, into shares of common stock initially at the conversion price of
$ per share, subject to adjustment as described below ("Conversion
Price"). The right to convert shares of Series D convertible preferred stock
called for redemption will terminate at the close of business on the relevant
redemption date.
Conversion of shares of Series D convertible preferred stock, or a
specified portion thereof, may be effected by delivering certificates evidencing
the shares being converted, together with written notice of conversion and a
proper assignment of the certificates to us or in blank, to the office or agency
to be maintained by us for that purpose. Initially, Continental Stock Transfer &
Trust Company will maintain that office for us.
Each conversion will be deemed to have been effected immediately before the
close of business on the date on which the certificates for shares of Series D
convertible preferred stock have been surrendered to, and, if applicable,
payment of an amount equal to the dividends payable on the shares received by,
us. We will issue a certificate evidencing the common stock distributed upon
conversion as soon as reasonably practical after the conversion date.
All shares of common stock distributed upon conversion will be freely
transferable without restriction under the Securities Act.
Holders of shares of Series D convertible preferred stock at the close of
business on a record date will be entitled to receive the dividend payable on
the corresponding dividend payment date notwithstanding the conversion of the
shares following the record date and before the dividend payment date. However,
shares of Series D convertible preferred stock surrendered for conversion during
the period between the close of business on any record date and the opening of
business on the corresponding payment date, must be accompanied by payment of an
amount equal to the dividend payable on the shares on the dividend payment date
unless the shares are converted after the issuance of a notice of redemption
with respect to a redemption date during the period between the record date and
the dividend payment date. A holder of shares of Series D convertible preferred
stock on a record date who tenders the shares for conversion on the dividend
payment date will receive the dividend payable on the dividend payment date and
the converting holder need not include payment of the amount of the dividend
upon surrender of the shares for conversion. Except as provided above, we will
make no payment or allowance for unpaid dividends, whether or not in arrears, on
converted shares.
Fractional shares of common stock will not be issued upon conversion but,
instead, we will pay a cash adjustment based on the closing price of the common
stock on the business day before the conversion date.
The Conversion Price is subject to adjustment upon certain events,
including:
(1) any redemption payment or payment of a dividend or other
distribution payable in shares of common stock to all holders of any class
of our capital stock, other than the issuance of shares of common stock in
connection with the payment:
(a) in redemption for, of dividends on or on the conversion of the
Series D convertible preferred stock,
(b) in redemption for, of dividends on or on the conversion of the
Series B convertible preferred stock, Series C convertible preferred
stock or Parity Stock, in accordance with the terms thereof as in effect
on the issue date of the Series D convertible preferred stock, or
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(c) to all holders of the Series D convertible preferred stock
based on the number of shares of common stock into which the Series D
convertible preferred stock is then convertible;
(2) any issuance to all holders of shares of our common stock of
rights, options or warrants entitling them to subscribe for or purchase
shares of common stock or securities convertible into or exchangeable for
shares of our common stock at less than market value as of the date of
conversion or exchange; provided no adjustment will be made if the holder
of shares of the Series D convertible preferred stock would be entitled to
receive the rights, options or warrants upon conversion of the Series D
convertible preferred stock into common stock and, provided further, if the
rights, options or warrants are only exercisable if certain triggering
events occur, then the Conversion Price will not be adjusted until the
triggering events occur;
(3) any subdivision, combination or reclassification of common stock;
(4) any distribution to all holders of our common stock consisting
exclusively of cash that, when aggregated with:
(a) all other cash distributions made within the then preceding 12
months in respect of which no adjustment has been made, and
(b) any cash and the fair market value of other consideration paid
or payable in respect of any tender offer by us or any of our
subsidiaries for shares of our common stock concluded within the then
preceding 12 months in respect of which no adjustment has been made,
exceeds 15% of our market capitalization, after excluding any cash
distributed in a transaction involving:
(x) our merger or consolidation,
(y) the sale or transfer to another corporation of substantially
all of our assets, or
(z) any statutory exchange of securities with another
corporation, in which no adjustment to the Conversion Price is made
pursuant to the last paragraph under the caption Conversion Rights;
(5) the completion of a tender or exchange offer by us or any of our
subsidiaries for shares of our common stock that involves an aggregate
consideration that, together with:
(a) any cash and other consideration payable in a tender or
exchange offer by us or any of our subsidiaries for shares of our common
stock expiring within the then preceding 12 months in respect of which
no adjustment has been made, and
(b) the aggregate amount of any cash distributions referred to in
clause 4 above to all holders of shares of our common stock within the
then preceding 12 months in respect of which no adjustments have been
made,
exceeds 15% of our market capitalization immediately before the expiration
of the tender offer where the tender offer price or exchange offer price
per share of our common stock is less than the closing price per share of
our common stock on the date after the tender offer or exchange offer
expires; or
(6) a distribution to all holders of our common stock of evidences of
indebtedness, shares of capital stock other than our common stock or
assets, including securities, but excluding those dividends and those
issuances of rights, options, warrants and other distributions for which an
adjustment to the Conversion Price as referred to above is applicable.
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No adjustment of the Conversion Price will be required to be made:
- until cumulative adjustments amount to one percent of the Conversion
Price, or
- with respect to rights, options or warrants issued pursuant to certain
of our employee benefit plans.
We also may from time to time decrease the Conversion Price by any amount
for any period of at least 20 days, so long as the decrease is irrevocable
during the period. We will give at least 15 days' notice of any such decrease.
In addition, we will be permitted to reduce the Conversion Price in order to
make any stock dividend, subdivision of shares, distribution of rights to
purchase stock or securities or distribution of securities convertible into or
exchangeable for stock not taxable to the recipients. If we elect to reduce the
Conversion Price, we will comply with the requirements of Rule 14e-1 under the
Exchange Act, and any other securities laws and regulations, if and to the
extent they are applicable.
If at any time we distribute property to our stockholders and the
distribution would be taxable as a dividend for federal income tax purposes and,
pursuant to the antidilution provisions described above or under the caption
"-- Change of Control," the Conversion Price of the Series D convertible
preferred stock is reduced, the reduction may be deemed to be the receipt of
taxable income by holders of the Series D convertible preferred stock.
If we distribute rights, options or warrants, other than those referred to
in clause 2 above, to all holders of common stock and do not distribute them to
the holders of the Series D convertible preferred stock, so long as the rights,
options or warrants have not expired or been redeemed, the holder of any shares
of Series D convertible preferred stock surrendered for conversion will be
entitled to receive a number of rights, options or warrants equal to:
(1) for each share of common stock issued upon conversion of the
Series D convertible preferred stock, the number of rights, options or
warrants which a holder of a share of common stock is then entitled, if the
conversion occurs on or before the distribution of separate certificates
evidencing the rights, options or warrants, and
(2) the number of rights, options or warrants which the holder of
Series D Convertible Preferred Stock would have received had the holder
converted the Series D convertible preferred stock into common stock
immediately before the distribution of certificates, if the conversion
occurs after the distribution of certificates evidencing the rights,
options or warrants.
Except as stated above or under the caption "-- Change of Control," the
Conversion Price will not be adjusted for the issuance of common stock or any
securities convertible into or exchangeable for common stock or carrying the
right to purchase any of the foregoing, in exchange for cash, property or
services.
In case of:
(1) our merger or consolidation;
(2) any sale or transfer to another corporation of our property as an
entirety or substantially as an entirety; or
(3) any statutory exchange of securities with another corporation,
other than in connection with a merger or acquisition (each of the above,
an "Exchange Event");
there will be no adjustment of the Conversion Price unless the Exchange Event
causes a Common Stock Change of Control (as defined under the caption "-- Change
of Control").
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Upon the occurrence of an Exchange Event, other than a merger or
consolidation in which:
(1) we are the continuing corporation, and
(2) the common stock outstanding immediately before the merger or
consolidation is not exchanged for cash, securities or other property of
another corporation,
and subject to any adjustment to the Conversion Price if the Exchange Event
causes a Common Stock Change of Control, each share of the then outstanding
Series D convertible preferred stock will, without the consent of the holder,
become convertible only into the kind and amount of securities, cash or other
property receivable upon the Exchange Event by a holder of the number of shares
of common stock into which the Series D convertible preferred stock was
convertible immediately before the Exchange Event, assuming the holder of common
stock failed to exercise any rights of election as to the kind or amount of
securities, cash or other property receivable upon the Exchange Event.
In the case of a cash merger of us into another company or any other cash
transaction of the type mentioned above, the effect of these provisions would be
that after the transaction each share of Series D convertible preferred stock
would be convertible at the Conversion Price then in effect into the amount of
cash a holder of a share of Series D convertible preferred stock would have been
entitled to receive had the share of Series D convertible preferred stock been
converted into common stock immediately before the effective date of the cash
merger or transaction. Depending upon the terms of the cash merger or
transaction, this amount could be more or less than the liquidation preference
of the Series D convertible preferred stock.
EXPIRATION OF CONVERSION RIGHTS
On or after , 2003, we may, at our option, cancel the conversion
rights of the Series D convertible preferred stock. We may exercise this option
if the closing price of our common stock equals or exceeds 140% of the
Conversion Price for at least 20 trading days within any 30 trading day period.
In order for us to exercise this option, we must issue a press release for
publication on the Dow Jones News Service, or a comparable news service, before
the opening of business on the second trading day after any period in which the
condition in the preceding sentence has been met. The press release will
announce that we are canceling the conversion rights of the Series D convertible
preferred stock and the date the conversion rights will expire. The press
release will also provide the Conversion Price and the closing price of our
common stock, each as of the close of business of the previous day.
We must notify the holders of the Series D convertible preferred stock of
the expiration of their conversion rights by first-class mail not more than four
business days after we issue the press release. We will select the date upon
which the conversion rights will expire, which date will be not less than 30 nor
more than 60 days after the date we issue the press release. The conversion
rights will terminate at the close of business on the expiration date.
CHANGE OF CONTROL
Definitions
A "Change of Control" shall be deemed to have occurred at the time of:
(1) the sale, lease, transfer, conveyance or other disposition, other
than by way of merger or consolidation, in one or a series of related
transactions, of all or substantially all our assets to any "person," as
that term is used in Section 13(d)(3) of the Exchange Act;
(2) the adoption of a plan relating to our liquidation, dissolution or
winding-up;
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(3) the closing of any transaction, including any merger or
consolidation, as a result of which any "person" (as defined above) other
than any Permitted Holder becomes the beneficial owner (as that term is
defined in Rules 13d-3 and 13d-5 promulgated under the Exchange Act),
directly or indirectly, of more than 50% of our voting stock;
(4) the first day on which the Permitted Holders collectively become
the beneficial owner (as that term is defined in Rules 13d-3 and 13d-5
promulgated under the Exchange Act), directly or indirectly, of more than
70% of our voting stock; or
(5) the first day on which a majority of the members of our board of
directors are not Continuing Directors, as defined in the certificate of
designation.
"Permitted Holders" means:
(1) Providence Equity Partners Inc., JK&B Capital, L.P. or any of
their affiliates;
(2) any of Maurice J. Gallagher, Jr., Timothy P. Flynn, Rolla P. Huff
or their respective spouses or lineal descendants and their respective
spouses (collectively, the "Individual Family Holders") whether acting in
their own name or as a majority of persons having the power to exercise the
voting rights attached to, or having investment power over, shares held by
others;
(3) any affiliate of any member of the Individual Family Holders;
(4) any trust principally for the benefit of one or more members of
the Individual Family Holders, whether or not any member of the Individual
Family Holders is a trustee of the trust; and
(5) any charitable foundation whose majority of members, trustees or
directors, as the case may be, are persons referred to in (2) above.
The term "Common Stock Change of Control" means any Change of Control in
which more than 50% of the value of the consideration received by holders of our
common stock, as determined in good faith by our board of directors, consists of
common stock of another company that for each of the 10 consecutive trading days
ending on and including the record date of the transaction resulting in the
Change of Control has been admitted for listing or admitted for listing subject
to notice of issuance on a national securities exchange or quoted on the Nasdaq
National Market; provided a Change of Control will not be a Common Stock Change
of Control unless either:
(1) we continue to exist after the occurrence of the Change of Control
and the outstanding shares of Series D convertible preferred stock continue
to exist as outstanding shares of Series D convertible preferred stock; or
(2) not later than the occurrence of the Change of Control, the
outstanding shares of Series D convertible preferred stock are converted
into or exchanged for shares of convertible preferred stock of a
corporation succeeding to our business, which convertible preferred stock
has powers, preferences and relative, participating, optional or other
rights, and qualifications, limitations and restrictions, substantially
similar to those of the Series D convertible preferred stock.
The term "Non-Stock Change of Control" means any Change of Control other
than a Common Stock Change of Control.
Non-Stock Change of Control
If a Non-Stock Change of Control occurs, each holder of Series D
convertible preferred stock will have the right, at the holder's option, to
require us to repurchase all of its shares of Series D convertible preferred
stock. If the terms of our outstanding indebtedness restrict our ability to
71
<PAGE> 73
repurchase the Series D convertible preferred stock following a Non-Stock Change
of Control, each holder of shares of Series D convertible preferred stock will
have the right to convert the shares of Series D convertible preferred stock
into shares of common stock at the conversion price specified below.
Within 30 days after the occurrence of a Non-Stock Change of Control, we
are obligated to give to all holders of shares of Series D convertible preferred
stock notice (the "Company Notice") of the occurrence of the Non-Stock Change of
Control and of the repurchase right or conversion right arising as a result
thereof. We must also deliver a copy of the Company Notice to our transfer
agent.
The Company Notice will specify:
- the date, which must be no earlier than 30 nor later than 60 days after
the date of the notice, on which we will repurchase or convert any
validly tendered shares of Series D convertible preferred stock (the
"Repurchase Date"); and
- the repurchase price or conversion price.
In the event of a repurchase, any validly tendered shares will be
repurchased at a price equal to 100% of the liquidation preference of the Series
D convertible preferred stock, together with accumulated and unpaid dividends,
if any, whether or not declared, to the Repurchase Date (the "Repurchase
Price").
We may, at our option, instead of paying the Repurchase Price in cash, pay
the Repurchase Price in common stock valued at 95% of the average of the daily
closing prices of the common stock for the five trading days immediately
preceding and including the third day before the Repurchase Date; provided that
we may not pay in common stock unless we satisfy conditions specified in the
certificate of designation prior to the Repurchase Date.
The conversion price for each share of Series D convertible preferred stock
tendered on the Repurchase Date will be determined by dividing the liquidation
preference of the Series D convertible preferred stock, together with
accumulated and unpaid dividends, if any, whether or not declared, to the
Repurchase Date, by 95% of the average of the daily closing prices of the common
stock for the five trading days immediately preceding and including the third
day before the Repurchase Date.
To exercise the repurchase right or conversion right, a holder of shares of
Series D convertible preferred stock must deliver, on or before the 30(th) day
after the date of the Company Notice, written notice to the transfer agent of
the holder's exercise of the repurchase right or conversion right, together with
the shares of Series D convertible preferred stock with respect to which the
right is being exercised.
Common Stock Change of Control
If a Common Stock Change of Control occurs, each share of the Series D
convertible preferred stock will be convertible solely into common stock of the
kind received by holders of our common stock as the result of the Common Stock
Change of Control and the Conversion Price in effect will be adjusted
immediately after the Change of Control as described below.
If:
(1) a Common Stock Change of Control occurs;
(2) 100% of the consideration received by a holder of our common stock
is common stock of the successor, acquiror or other third party, with cash,
if any, being paid only with respect to any fractional interests resulting
from the Common Stock Change of Control; and
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<PAGE> 74
(3) all our common stock is exchanged for, converted into, or acquired
for, common stock (and cash with respect to fractional interests) of the
successor, acquiror or other third party;
then, the Conversion Price will be adjusted by multiplying the Conversion Price
by a fraction, of which the numerator will be one and the denominator will be
the number of shares of common stock of the successor, acquiror, or other third
party received by a holder of one share of our common stock as a result of the
Common Stock Change of Control.
If a Common Stock Change of Control occurs and all the conditions listed in
the previous paragraph are not met, the Conversion Price will be adjusted by
multiplying the Conversion Price by a fraction, of which the numerator will be
the Purchaser Stock Price and the denominator will be the average of the closing
prices for our common stock during the 10 trading days ending on and including
the record date for determining the holders of common stock entitled to receive
cash, securities, property or other assets in connection with the Common Stock
Change of Control, as adjusted in good faith by our board of directors to
appropriately reflect any of the events referred to in clauses (1) through (6)
under the heading "-- Conversion Rights."
The term "Purchaser Stock Price" means the product of (x) the number of
shares of common stock received as consideration for each share of our common
stock, and (y) the average of the closing prices for the common stock received
as consideration for the ten consecutive trading days ending on and including
the record date for the determination of the holders of our common stock
entitled to receive consideration in the Common Stock Change of Control, or, if
there is no record date, the date on which the holders of our common stock have
the right to receive the consideration, in each case, as adjusted in good faith
by our board of directors to appropriately reflect any of the events referred to
in clauses (1) through (6) under the heading "-- Conversion Rights"; provided,
if no closing prices exist, then the Purchaser Stock Price will be set at a
price determined in good faith by our board of directors.
The foregoing Conversion Price adjustments will apply in situations where
more than 50% of the value received by holders of our common stock consists of
common stock of another company that has been admitted for listing on a national
securities exchange or quoted on the Nasdaq National Market. If consideration
for our common stock is solely common stock of another company, each share of
Series D convertible preferred stock will be convertible into the same number of
shares of common stock of the other company receivable by a holder of the number
of shares of our common stock into which a share of Series D convertible
preferred stock was convertible immediately before the transaction. If
consideration for the common stock consists only partly of common stock of
another company, each share of Series D convertible preferred stock will be
convertible into shares of common stock of the other company with a value equal
to the value of the shares of our common stock into which a share of Series D
convertible preferred stock was convertible immediately before the transaction.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Without the consent of the holders of at least a majority of the
outstanding shares of Series D convertible preferred stock, we may not
consolidate with or merge with or into any other person or convey, transfer or
lease our properties and assets substantially as an entirety to any person
unless certain conditions are met and:
(1)(a) the successor, transferee or lessee is organized under the laws
of the United States, any state thereof or the District of Columbia and (b)
the shares of Series D convertible preferred stock will become shares of
the successor, transferee or lessee, having in respect of the successor,
transferee or lessee the same powers, preferences and relative,
participating, optional
73
<PAGE> 75
or other special rights and the qualifications, limitations or restrictions
thereon, as the Series D convertible preferred stock had immediately before
the transaction; or
(2)(a) the consideration received by holders of our common stock
consists entirely of cash and (b) each share of Series D convertible
preferred stock is converted into the right to receive an amount of cash at
least equal to the greater of:
(x) the liquidation preference, plus accumulated and unpaid
dividends thereon, if any, whether declared or undeclared, to the date
the transaction is completed; and
(y) the amount of cash which would have been received by the holder
if the share of Series D convertible preferred stock had been converted
into common stock immediately before the completion of the transaction;
or
(3)(a) the consideration received by holders of our common stock in
respect of each share of our common stock has a value which, for any five
trading days during the period of ten consecutive trading days after we
publicly announce the consolidation, merger, transfer or lease, equals or
exceeds 140% of the conversion price in effect on the date we publicly
announce the consolidation, merger, transfer or lease, and (b) the
consolidated net worth of the successor, transferee or lessee immediately
before the consolidation, merger, transfer or lease equals or exceeds two
times our consolidated net worth immediately before the consolidation,
merger, transfer or lease.
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not we are required to file reports with the SEC, if any shares
of Series D convertible preferred stock are outstanding, we will file with the
SEC all reports and other information we would be required to file with the SEC
by Sections 13(a) or 15(d) under the Exchange Act. See "Where You Can Find More
Information." We will supply each holder of Series D convertible preferred
stock, upon request, without cost to the holder, copies of these reports or
other information.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
The transfer agent, registrar, dividend disbursing agent and redemption
agent for the shares of Series D convertible preferred stock will be Continental
Stock Transfer & Trust Company.
74
<PAGE> 76
UNDERWRITING
Under the terms and conditions stated in the underwriting agreement dated
the date of this prospectus, each underwriter named below has severally agreed
to purchase, and we and the selling stockholders have agreed to sell to each
underwriter named below, the number of shares set forth opposite the name of the
underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Salomon Smith Barney Inc. ..................................
Bear, Stearns & Co. Inc.....................................
Goldman, Sachs & Co. .......................................
ING Barings LLC.............................................
Warburg Dillon Read LLC ....................................
---------
Total..................................................... 4,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., Bear, Stearns & Co.
Inc., Goldman, Sachs & Co., ING Barings LLC and Warburg Dillon Read LLC are
acting as representatives, propose to offer some of the shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and these dealers may reallow, a concession not in excess of $ per
share on sales to certain other dealers. If all of the shares are not sold at
the initial offering price, the representatives may change the public offering
price and the other selling terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 675,000 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent this
option is exercised, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to the underwriter's initial purchase commitment.
Our officers and directors, the selling stockholders and certain other
stockholders have agreed that, for a period of 90 days from the date of this
prospectus, they will not, without the prior written consent of Salomon Smith
Barney Inc., dispose of or hedge any shares of common stock or any securities
convertible into or exchangeable for common stock, except for the shares offered
by this prospectus.
In addition, we have agreed that, for a period of 90 days from the date of
this prospectus, we will not, without the prior written consent of Salomon Smith
Barney Inc., dispose of or hedge any shares of common stock or any securities
convertible into or exchangeable for common stock, except for:
- the shares of common stock offered by this prospectus;
- the shares of Series D convertible preferred stock offered in the
concurrent offering;
- any shares of common stock which may be issued by us upon exercise of
outstanding warrants and conversion of outstanding convertible preferred
stock;
75
<PAGE> 77
- any shares of common stock which may be issued as dividends on or upon
the conversion of the Series D convertible preferred stock offered in the
concurrent offering; and
- shares issued and options granted under our existing stock option plan.
Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these lock-up agreements at any time without notice.
Because certain indirect affiliates of the underwriters have beneficial
ownership interests in Providence Equity Partners III L.P., which acquired
shares of our Series C convertible preferred stock, Providence Equity Partners
III L.P. has agreed not to dispose of or hedge 14,912 shares of our Series C
convertible preferred stock, or any shares of common stock issuable upon
conversion of these shares of our Series C convertible preferred stock, for a
period of one year from the date of the prospectus.
The common stock is quoted on the Nasdaq National Market under the symbol
"MPWR" (previously "MGCX").
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us and by the selling stockholders in connection
with this offering. With respect to the underwriting discounts and commissions
to be paid by us, these amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares of common
stock.
<TABLE>
<CAPTION>
PAID BY US
----------------------------- PAID BY
NO EXERCISE FULL EXERCISE SELLING STOCKHOLDERS
------------ ------------- --------------------
<S> <C> <C> <C>
Per share........................... $ $ $
Total............................... $ $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed to cover syndicate short
positions. Stabilizing transactions consist of certain bids or purchases of
common stock made for the purpose of preventing or retarding a decline in the
market price of the common stock while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of the common stock to be
higher than the price that otherwise would exist in the open market in the
absence of these transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.
In addition, in connection with this offering, certain of the underwriters
and selling group members may engage in passive market making transactions in
the common stock on the Nasdaq National Market, before the pricing and
completion of the offering. Passive market making consists of displaying bids on
the Nasdaq National Market no higher than the bid prices of independent market
makers and making purchases at prices no higher than those independent bids and
effected in
76
<PAGE> 78
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in the common stock during a specified period and must be
discontinued when the limit is reached. Passive market making may cause the
price of the common stock to be higher than the price that otherwise would exist
in the open market in the absence of these transactions. If passive market
making is commenced, it may be discontinued at any time.
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $640,000.
The underwriters named herein are also acting as underwriters of the
concurrent offering. An affiliate of ING Barings LLC provides cash management
services to us for which it receives customary fees. Bear, Stearns & Co. Inc.
issued a fairness opinion in connection with the issuance of the Series C
convertible preferred stock for which they received a customary fee. The
representatives have performed certain other investment banking and advisory
services for us for which they have received customary fees. The representatives
may, from time to time, engage in transactions with and perform services for us
in the ordinary course of business.
Our company and the selling stockholders have agreed to indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make in respect of any of those liabilities.
LEGAL MATTERS
Various legal matters regarding the validity of the common stock offered by
this prospectus will be passed upon for us by Ellis, Funk, Goldberg, Labovitz &
Dokson, P.C., Atlanta, Georgia. Shareholders of Ellis, Funk, Goldberg, Labovitz
& Dokson, P.C. own approximately 17,950 shares of our common stock. Kronish Lieb
Weiner & Hellman LLP, New York, New York, is acting as counsel to the
underwriters in connection with various legal matters relative to the common
stock offered by this prospectus.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP and KPMG LLP, independent
public accountants, and are included herein in reliance upon the authority of
these firms as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We must comply with the periodic reporting and other informational
requirements of the Exchange Act and file reports, proxy statements and other
information with the SEC. Copies of our periodic reports and proxy statements
and of other information filed by us with the SEC may be inspected at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at its regional offices located at the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor, New York, New York 10007. The SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding us. The address of the SEC's Web site is
http://www.sec.gov. Our Internet address is http://www.mgci.com.
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act covering the securities being offered. This prospectus does not
contain all the information included in the registration statement, parts of
which are omitted as allowed by the rules of the SEC. For further
77
<PAGE> 79
information about us and the securities offered, please refer to the
registration statement. The registration statement may be inspected and copied,
at prescribed rates, at the SEC's public reference facilities at the addresses
shown above. Statements made in this prospectus concerning the contents of any
document referred to in this prospectus are not necessarily complete. With
respect to each document filed with the SEC as an exhibit to the registration
statement, you should refer to the exhibit for a more complete description of
the matter involved.
The following documents filed by us with the SEC are incorporated into this
prospectus by reference:
- our Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
- our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999;
- our Current Reports on Form 8-K dated July 19, 1999 and October 14, 1999;
and
- all reports filed by us to comply with Section 13(a) or 15(d) of the
Exchange Act since the end of the quarter covered by our Quarterly Report
on Form 10-Q for our quarter ended September 30, 1999.
All documents filed by us as required by Section 13(a), 13(c), 14, or 15(d)
of the Exchange Act after the date of this prospectus are incorporated by
reference in this prospectus and are made a part of this prospectus from the
date of filing of these documents.
Any statement contained in a document incorporated by reference in this
prospectus shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this prospectus or in any
other subsequently filed document which also is incorporated by reference
modifies or supersedes an earlier statement. Any earlier statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
IN OR DELIVERED WITH THIS PROSPECTUS. THESE DOCUMENTS ARE AVAILABLE TO YOU
WITHOUT CHARGE UPON YOUR WRITTEN OR ORAL REQUEST. TO REQUEST THESE DOCUMENTS,
PLEASE CONTACT KENT F. HEYMAN, ESQ., SENIOR VICE PRESIDENT AND GENERAL COUNSEL,
MGC COMMUNICATIONS, INC., 171 SULLY'S TRAIL, SUITE 202, PITTSFORD, NEW YORK
14534 (TELEPHONE 716-218-6540).
78
<PAGE> 80
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MGC COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Independent Auditors' Report................................ F-3
Consolidated Balance Sheets as of September 30, 1999 (as
restated) (unaudited) and December 31, 1998 and 1997...... F-4
Consolidated Statements of Operations for the nine months
ended September 30, 1999 and 1998 (as restated)
(unaudited) and for the years ended December 31, 1998,
1997 and 1996............................................. F-5
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity for the nine months ended September
30, 1999 (as restated) (unaudited) and for the years ended
December 31, 1998, 1997 and 1996.......................... F-6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 (unaudited) and for the
years ended December 31, 1998, 1997 and 1996.............. F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
MGC Communications, Inc.:
We have audited the accompanying consolidated balance sheets of MGC
Communications, Inc. (a Nevada corporation) and subsidiary (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, redeemable preferred stock and stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MGC Communications, Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 2, 1999
F-2
<PAGE> 82
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MGC Communications, Inc.
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of MGC Communications, Inc. for the year ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and the cash flows of MGC
Communications, Inc. for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Las Vegas, Nevada
August 18, 1997
F-3
<PAGE> 83
MGC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
(AS RESTATED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 93,224 $ 11,886 $ 45,054
Investments held-to-maturity.............................. -- -- 7,797
Investments available-for-sale............................ 50,177 9,851 --
Restricted investments.................................... 30,375 20,797 18,482
Accounts receivable, less allowance for doubtful accounts
of $478, $257 and $216.................................. 16,145 6,360 1,200
Prepaid expenses.......................................... 599 208 277
---------- -------- --------
Total current assets............................... 190,520 49,102 72,810
Property and equipment, net................................. 151,159 116,380 24,617
Investments held-to-maturity................................ -- -- 49,913
Investments available-for-sale.............................. 35,560 63,212 --
Restricted investments...................................... -- 18,582 39,092
Deferred financing costs, net of accumulated amortization of
$1,686, $1,065 and $198................................... 4,093 4,714 5,448
Other assets................................................ 482 129 97
---------- -------- --------
Total assets....................................... $ 381,814 $252,119 $191,977
========== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................ $ 283 $ 332 $ 381
Accounts payable:
Trade..................................................... 8,912 5,314 462
Property and equipment.................................... 15,276 18,577 3,123
Accrued interest............................................ 10,400 5,200 5,328
Accrued other expenses...................................... 8,492 2,473 786
---------- -------- --------
Total current liabilities.......................... 43,363 31,896 10,080
Senior Secured Notes, net of unamortized discount of $2,875,
$3,307 and $3,882......................................... 157,125 156,693 156,118
Other long-term debt........................................ 269 270 138
---------- -------- --------
Total liabilities.................................. 200,757 188,859 166,336
---------- -------- --------
Commitments and contingencies
Redeemable preferred stock:
8% Series A Convertible Preferred Stock, 6,571,450 shares
authorized, 5,148,570 issued and outstanding at December
31, 1997................................................ -- -- 16,665
10% Series B Convertible Preferred Stock, 5,278,000 shares
authorized and 5,277,779 issued and outstanding......... 49,452 -- --
Stockholders' equity:
Preferred stock, 44,722,221 shares authorized but
unissued................................................ -- -- --
Common stock, $0.001 par value, 60,000,000 shares
authorized, 22,810,060, 17,190,428 and 8,799,600 issued,
22,800,920, 17,190,428 and 8,799,600 shares
outstanding............................................. 23 17 9
Additional paid-in capital................................ 223,240 108,991 22,118
Accumulated deficit....................................... (89,136) (44,392) (12,463)
Less: treasury stock...................................... (76) -- --
---------- -------- --------
134,051 64,616 9,664
Accumulated other comprehensive income.................... (360) 817 --
Notes receivable from stockholders for issuance of common
stock................................................... (2,086) (2,173) (688)
---------- -------- --------
Total stockholders' equity......................... 131,605 63,260 8,976
---------- -------- --------
Total liabilities, redeemable preferred stock and
stockholders' equity............................. $ 381,814 $252,119 $191,977
========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 84
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
----------------------- --------------------------------
1999 1998 1998 1997 1996
---------- ---------- ---------- --------- -------
(AS
RESTATED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues:
Telecommunication services....... $ 34,922 $ 11,772 $ 18,249 $ 3,791 $ 1
---------- ---------- ---------- --------- -------
Operating expenses:
Cost of operating revenues
(excluding depreciation)...... 31,449 10,575 17,129 3,928 305
Selling, general and
administrative................ 27,469 11,250 17,877 6,440 841
Depreciation and amortization.... 12,406 3,149 5,238 1,274 54
Write-off of purchased
software...................... -- -- -- -- 355
---------- ---------- ---------- --------- -------
71,324 24,974 40,244 11,642 1,555
---------- ---------- ---------- --------- -------
Loss from operations.......... (36,402) (13,202) (21,995) (7,851) (1,554)
Other income (expense):
Gain on sale of investments...... 252 -- 223 -- --
Interest income.................. 5,228 6,989 8,771 2,507 63
Interest expense................. (13,822) (16,080) (19,064) (5,492) --
---------- ---------- ---------- --------- -------
Net loss...................... (44,744) (22,293) (32,065) (10,836) (1,491)
Accrued preferred stock dividend... (1,926) -- -- (136) --
Value of preferred stock beneficial
conversion feature............... (47,500) -- -- -- --
Accretion of preferred stock to
redemption value................. (2,789) -- -- -- --
---------- ---------- ---------- --------- -------
Net loss applicable to common
stockholders..................... $ (96,959) $ (22,293) $ (32,065) $ (10,972) $(1,491)
========== ========== ========== ========= =======
Basic and diluted loss per share of
common stock..................... $ (5.19) $ (1.69) $ (2.26) $ (1.30) $ (2.11)
========== ========== ========== ========= =======
Basic and diluted weighted average
shares outstanding............... 18,670,645 13,171,681 14,178,729 8,458,991 707,359
========== ========== ========== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 85
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
--------------------- ------------------- PAID-IN ACCUMULATED ---------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
---------- -------- ---------- ------ ---------- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996........ -- $ -- 240,000 $-- $ 1 $ -- -- $ --
Common stock issued for services
contributed by stockholder...... -- -- 480,000 1 1 -- -- --
Common stock issued for cash...... -- -- 6,456,000 6 12,274 -- -- --
Net loss.......................... -- -- -- -- -- (1,491) -- --
---------- -------- ---------- --- -------- -------- ------ ----
BALANCE AT DECEMBER 31, 1996...... -- -- 7,176,000 7 12,276 (1,491) -- --
Common stock issued for cash...... -- -- 1,458,600 2 4,860 -- -- --
Common stock issued for notes
receivable...................... -- -- 165,000 -- 688 -- -- --
Proceeds from offering allocated
to warrants..................... -- -- -- -- 3,885 -- -- --
Warrants issued for common stock
commitment...................... -- -- -- -- 409 -- -- --
Net loss.......................... -- -- -- -- -- (10,836) -- --
8% Series A Convertible Preferred
Stock issued for cash........... 5,148,570 16,665 -- -- -- -- -- --
Accrued preferred stock
dividend........................ -- -- -- -- -- (136) -- --
---------- -------- ---------- --- -------- -------- ------ ----
BALANCE AT DECEMBER 31, 1997...... 5,148,570 16,665 8,799,600 9 22,118 (12,463) -- --
Common stock issued for cash...... -- -- 100,680 -- 774 -- -- --
Common stock issued for notes
receivable...................... -- -- 189,000 -- 1,485 -- -- --
Warrants and options exercised for
common stock.................... -- -- 133,309 -- 14 -- -- --
8% Series A Convertible Preferred
Stock issued for cash........... 1,422,857 4,980 -- -- -- -- -- --
Accrued preferred stock
dividend........................ -- -- -- -- -- (654) -- --
Common stock issued for cash...... -- -- 4,025,000 4 62,959 -- -- --
Conversion of preferred stock to
common stock.................... (6,571,427) (21,645) 3,942,839 4 21,641 790 -- --
Unrealized gain on investments
available-for-sale.............. -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- (32,065) -- --
---------- -------- ---------- --- -------- -------- ------ ----
BALANCE AT DECEMBER 31, 1998...... -- -- 17,190,428 17 108,991 (44,392) -- --
Unrealized loss on investments
available-for-sale.............. -- -- -- -- -- -- -- --
Common stock issued............... -- -- 5,027,001 5 118,309 -- -- --
Warrants and options exercised for
common stock.................... -- -- 592,631 1 655 -- -- --
Payments on stockholder's note.... -- -- -- -- -- -- -- --
Repurchase of common stock........ -- -- (9,140) -- -- -- 9,140 (76)
10% Series B Convertible Preferred
Stock issued for cash........... 5,277,779 46,663 -- -- -- -- -- --
Accrued preferred stock
dividend........................ -- -- -- -- (1,926) -- -- --
Value of preferred stock
beneficial conversion feature... -- -- -- -- (47,500) -- -- --
Value of preferred stock
beneficial conversion feature... -- -- -- -- 47,500 -- -- --
Accretion of preferred stock to
redemption value................ -- 2,789 -- -- (2,789) -- -- --
Net loss.......................... -- -- -- -- -- (44,744) -- --
---------- -------- ---------- --- -------- -------- ------ ----
BALANCE AT SEPTEMBER 30, 1999
(unaudited) (As Restated)....... 5,277,779 $ 49,452 22,800,920 $23 $223,240 $(89,136) 9,140 $(76)
========== ======== ========== === ======== ======== ====== ====
<CAPTION>
NOTES
RECEIVABLE FROM ACCUMULATED
STOCKHOLDERS FOR OTHER TOTAL
ISSUANCE OF COMPREHENSIVE STOCKHOLDERS'
COMMON STOCK INCOME EQUITY
----------------- ------------- --------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1996........ $ -- $ -- $ 1
Common stock issued for services
contributed by stockholder...... -- -- 2
Common stock issued for cash...... -- -- 12,280
Net loss.......................... -- -- (1,491)
------- ------- --------
BALANCE AT DECEMBER 31, 1996...... -- -- 10,792
Common stock issued for cash...... -- -- 4,862
Common stock issued for notes
receivable...................... (688) -- --
Proceeds from offering allocated
to warrants..................... -- -- 3,885
Warrants issued for common stock
commitment...................... -- -- 409
Net loss.......................... -- -- (10,836)
8% Series A Convertible Preferred
Stock issued for cash........... -- -- --
Accrued preferred stock
dividend........................ -- -- (136)
------- ------- --------
BALANCE AT DECEMBER 31, 1997...... (688) -- 8,976
Common stock issued for cash...... -- -- 774
Common stock issued for notes
receivable...................... (1,485) -- --
Warrants and options exercised for
common stock.................... -- -- 14
8% Series A Convertible Preferred
Stock issued for cash........... -- -- --
Accrued preferred stock
dividend........................ -- -- (654)
Common stock issued for cash...... -- -- 62,963
Conversion of preferred stock to
common stock.................... -- -- 22,435
Unrealized gain on investments
available-for-sale.............. -- 817 817
Net loss.......................... -- -- (32,065)
------- ------- --------
BALANCE AT DECEMBER 31, 1998...... (2,173) 817 63,260
Unrealized loss on investments
available-for-sale.............. -- (1,177) (1,177)
Common stock issued............... -- -- 118,314
Warrants and options exercised for
common stock.................... -- -- 656
Payments on stockholder's note.... 11 -- 11
Repurchase of common stock........ 76 -- --
10% Series B Convertible Preferred
Stock issued for cash........... -- -- --
Accrued preferred stock
dividend........................ -- -- (1,926)
Value of preferred stock
beneficial conversion feature... -- -- (47,500)
Value of preferred stock
beneficial conversion feature... -- -- 47,500
Accretion of preferred stock to
redemption value................ -- -- (2,789)
Net loss.......................... -- -- (44,744)
------- ------- --------
BALANCE AT SEPTEMBER 30, 1999
(unaudited) (As Restated)....... $(2,086) $ (360) $131,605
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 86
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ---------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(44,744) $(22,293) $(32,065) $ (10,836) $ (1,491)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 12,406 3,149 5,238 1,274 54
Write-off of purchased software......................... -- -- -- -- 355
Gain on sale of investments............................. (252) -- (223) -- --
Amortization of debt discount........................... 432 431 575 144 --
Amortization of deferred financing costs................ 621 658 867 198 --
Stock issued for services rendered...................... -- -- -- -- 2
Changes in assets and liabilities:
Increase in accounts receivable, net.................... (9,785) (2,531) (5,160) (1,190) (9)
(Increase) decrease in prepaid expenses and other....... (391) 47 69 (254) (23)
Increase in other assets................................ (403) (40) (32) (91) (5)
Increase in accounts payable -- trade................... 3,598 2,862 4,852 386 76
Increase in accrued interest and other expenses......... 9,292 8,644 1,695 5,879 99
-------- -------- -------- --------- --------
Net cash used in operating activities................. (29,226) (9,073) (24,184) (4,490) (942)
-------- -------- -------- --------- --------
Cash flows from investing activities:
Purchase of property and equipment, net of payables....... (46,888) (58,681) (81,597) (20,207) (2,287)
Decrease in accounts payable-property
and equipment........................................... (3,301) -- -- -- --
Purchase of investments held-to-maturity.................. -- (42,622) (42,622) (57,710) --
Sale (purchase) of investments available-for-sale, net.... (13,599) -- 28,309 --
Sale (purchase) sale of restricted investments............ 9,004 8,355 18,195 (57,574) --
-------- -------- -------- --------- --------
Net cash used in investing activities................. (54,784) (92,948) (77,715) (135,491) (2,287)
-------- -------- -------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of Senior Secured Notes net of
discount of $4,026...................................... -- -- -- 155,974 --
Costs associated with issuance of Senior Secured Notes and
warrants................................................ -- (133) (133) (5,237) --
Proceeds from issuance of 8% Series A Convertible
Preferred Stock, net of issuance costs.................. -- 4,980 4,980 16,665 --
Proceeds from issuance of 10% Series B Convertible
Preferred Stock, net of issuance costs.................. 46,663 -- -- -- --
Proceeds from issuance of warrants........................ -- -- -- 3,885 --
(Payments) proceeds on other long term debt, net.......... (296) (210) 133 (164) --
Proceeds received on stockholders note.................... 11 -- -- -- --
Proceeds from issuance of common stock.................... 118,970 63,750 63,751 6,015 11,126
-------- -------- -------- --------- --------
Net cash provided by financing activities............. 165,348 68,387 68,731 177,138 11,126
-------- -------- -------- --------- --------
Net (decrease) increase in cash....................... 81,338 (33,634) (33,168) 37,157 7,897
Cash and cash equivalents at beginning of period............ 11,886 45,054 45,054 7,897 --
-------- -------- -------- --------- --------
Cash and cash equivalents at the end of period.............. 93,224 11,420 $ 11,886 $ 45,054 $ 7,897
-------- -------- -------- --------- --------
Supplemental schedule of non-cash investing and financing
activities:
Stock issued for services rendered........................ $ -- $ -- $ -- $ -- $ 2
======== ======== ======== ========= ========
Increase in property and equipment purchases included in
accounts/notes payable -- property and equipment........ $ 247 $ 8,455 $ 15,504 $ 2,434 $ 1,372
======== ======== ======== ========= ========
Stock issued (repurchased) for notes receivable........... $ (76) $ 1,485 $ 1,485 $ 688 $ --
======== ======== ======== ========= ========
Warrants issued as consideration in debt offering
capitalized as deferred financing costs................. $ -- $ -- $ -- $ 409 $ --
======== ======== ======== ========= ========
Increase in accrued preferred stock dividends............. $ 1,926 $ -- $ -- $ 136 $ --
======== ======== ======== ========= ========
Other disclosures:
Cash paid for interest net of amounts capitalized......... $ 7,570 $ 10,996 $ 19,192 $ 164 $ --
======== ======== ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 87
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 IS
UNAUDITED)
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements of MGC Communications,
Inc. (the "Company"), 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 have been eliminated.
The Company was organized on October 16, 1995 as a competitive local
exchange carrier to provide low cost alternative communication services to
residential and small business users through the utilization of Company owned
switches and network architecture leased from incumbent local exchange carriers.
During the year ended December 31, 1998, the Company operated in Las Vegas,
Atlanta, Chicago, southern Florida, and selected areas of southern California
including Los Angeles and San Diego with substantially all of its operating
revenues being derived from the Las Vegas, southern California, and Atlanta
operations.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The financial statements for the nine months ended September 30, 1999 and
1998 and the related amounts in the Notes to Consolidated Financial Statements
are unaudited, but in the opinion of management reflect all normal and recurring
adjustments necessary for a fair presentation of the results of those periods.
REVENUE RECOGNITION
The Company recognizes operating revenues from the sale of communication
services including local dialtone, long distance, Internet access and data
services. Operating revenues are also recognized from installation charges as
well as from access charges billed to other long distance carriers for utilizing
the Company's network. Telecommunication revenues and accounts receivable are
recognized when calls are terminated or when the installation services are
completed. Accounts receivable include both billed and unbilled amounts and are
reduced by an estimate for uncollectible amounts. 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 nine months ended September 30, 1999 and 1998 and the
years ended December 31, 1998, 1997 and 1996, the Company has recognized in
operating revenues switched access revenues of approximately $12.1 million, $4.7
million, $7.4 million, $.7 million and $0, respectively. These revenue amounts
exclude $6.3 million, $1.8 million, $3.2 million, $0.2 million and $0 of billed
services which have not been recorded as revenue in the accompanying
consolidated statements of operations for the nine months ended September 30,
1999 and 1998 and the years ended December 31, 1998, 1997 and 1996. Included in
trade accounts receivable in the accompanying balance sheets as of September 30,
1999 and December 31, 1998 and 1997 are receivables related to switched access
of approximately $12.3 million, $3.6 million and $.7 million, respectively.
CASH AND CASH EQUIVALENTS
The Company considers short-term investments with a remaining maturity of
three months or less at the date of purchase to be cash equivalents.
F-8
<PAGE> 88
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED INVESTMENTS
Restricted investments consist of U.S. Treasury Notes which are restricted
in that they must be used for the repayment of interest on certain debt and are
stated at amortized cost plus accrued interest. Management designated these
investments as held-to-maturity securities in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The carrying value of the
restricted investments approximates the fair value.
ADVERTISING COSTS
The Company expenses advertising costs in the period incurred. For the
years ended December 31, 1998, 1997 and 1996, the Company had expensed
advertising costs of $810,000, $125,000 and $0, respectively.
INVESTMENTS
Investments classified as available-for-sale at December 31, 1998 were
classified as held-to-maturity as of December 31, 1997. During the fourth
quarter of 1998, the Company sold investments, previously classified as
held-to-maturity, prior to their maturity date. In accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
classification of these investments has been appropriately changed in the
accompanying consolidated financial statements.
During 1998, the Company sold $28.3 million in investments held for sale
and recorded $0.8 million in unrealized gains as part of other comprehensive
income for the year ended December 31, 1998. The Company was not able to
continue to hold these securities to maturity and was required to sell these
securities to fund capital expenditures in 1998.
Available-for-sale securities represent investments principally in
commercial paper and government securities. The commercial paper reflected as of
December 31, 1998 matures in March of 1999 and the government securities mature
periodically through September 30, 2001. The unamortized cost basis of these
investments at December 31, 1998 is approximately $72,246,000. The cost basis
for which the realized gain was calculated on available-for-sale securities was
$72,023,000 using the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Direct and indirect costs of construction are capitalized, and
include $3,175,000 and $188,000 of interest costs related to construction during
1998 and 1997, respectively. Depreciation is computed using the straight-line
method over estimated useful lives beginning in the month an asset is put into
service.
F-9
<PAGE> 89
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Buildings................................ 40 years
Telecommunications and other switching
equipment.............................. 5-10 years
Computer hardware and software........... 3-5 years
Office furniture & equipment............. 3-5 years
Leasehold improvements................... the lesser of the estimated useful lives
or term of lease
</TABLE>
The Company capitalizes costs associated with the design, deployment and
expansion of the Company's network including internally and externally developed
software. Capitalized external software costs include the actual costs to
purchase software from vendors. Capitalized internal software costs generally
include personnel and related costs incurred in the enhancement and
implementation of purchased software packages. Capitalized internal labor costs
for the nine months ended September 30, 1999 and for the years ended December
31, 1998 and 1997 were $826,000, $0 and $0, respectively.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized to interest expense over the life of
the related financing using the effective interest method.
INCOME TAXES
The Company has applied the provisions of SFAS No. 109, "Accounting for
Income Taxes," which requires the recognition of deferred tax assets and
liabilities for the consequences of temporary differences between amounts
reported for financial reporting and income tax purposes. SFAS No. 109 requires
recognition of a future tax benefit of net operating loss carryforwards and
certain other temporary differences to the extent that realization of such
benefit is more likely than not; otherwise, a valuation allowance is applied.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. SFAS No. 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. At December 31, 1998
and 1997, the carrying value of all financial instruments (accounts receivable,
accounts payable and long-term debt) approximates fair value due to the short
term nature of the instruments or interest rates, which are comparable with
current rates.
LONG-LIVED ASSETS
Management periodically evaluates the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value of the assets may
exceed the undiscounted future net cash flow expected to be generated by such
assets. To the extent the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized down to the asset's fair value based on the
present value of the discounted cash flows of the related
F-10
<PAGE> 90
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
asset or other relevant measures. Management believes no material impairment in
the value of long-lived assets exists at December 31, 1998 or 1997.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued 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 is effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company has adopted SFAS No. 130 as
reflected in the accompanying consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures 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
in only one segment, communications services, and hence, separate segment
reporting is not applicable.
The American Institute of Certified Public Accountants recently issued
Statement of Position ("SOP") 98-5, "Reporting 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 consolidated financial statements.
CONCENTRATION OF SUPPLIERS
The Company currently leases its transport capacity from a limited number
of suppliers and is dependent upon the availability of collocation space and
fiber optic transmission facilities owned by the suppliers. The Company is
currently vulnerable to the risk of renewing favorable supplier contracts,
timeliness of the supplier in processing the Company's orders for customers and
is at risk with regard to regulatory agreements that govern the rates to be
charged to the Company.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
RECLASSIFICATION
Certain reclassifications, which have no effect on net income, have been
made in the prior period financial statements to conform to the current
presentation.
(2) PLAN OF OPERATIONS
In September 1997, the Company completed an offering of units consisting of
in the aggregate $160 million of 13% Senior Secured Notes due in 2004 (the
"Notes") and warrants to purchase shares of common stock, as discussed in Note
4. During May and June 1998, the Company sold an
F-11
<PAGE> 91
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate of 4,025,000 shares of common stock at $17.00 per share as discussed
in Note 5. The Company expects to continue its expansion into new markets and
its development of new services. The Company expects to fund its capital
requirements through existing resources, debt or equity financing and internally
generated funds.
Management recognizes the Company must generate additional resources or
consider modifications to its expansion plans. To the extent the Company is
unable to achieve its funding plan, management has contingency plans which
include curtailing capital expenditure activities, reducing infrastructure costs
associated with expansion and development plans and achieving profitable
operations as soon as practicable. However, no assurance can be given the
Company will be successful in raising additional capital, achieving profitable
results, or entering into new markets.
Management also recognizes certain risks are inherent to the industry. 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 suitable interconnect agreements
with the incumbent carriers, obtain an acceptable level of cooperation from the
incumbent carriers, all in a timely manner, at reasonable cost and on
satisfactory terms and conditions, as well as competitive, regulatory,
legislative and judicial developments that could materially affect the Company's
future results.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1999 1998 1997
------------- -------- -------
<S> <C> <C> <C>
Buildings and property....................... $ 5,298 $ 2,653 $ 278
Switching equipment.......................... 113,132 57,045 21,621
Leasehold improvements....................... 860 740 956
Computer hardware and software............... 3,629 2,218 1,404
Office equipment and vehicles................ 1,532 901 300
-------- -------- -------
124,451 63,557 24,559
Less accumulated depreciation and
amortization............................... (18,834) (6,555) (1,317)
-------- -------- -------
105,617 57,002 23,242
Switching equipment under construction....... 45,542 59,378 1,375
-------- -------- -------
Net property and equipment................. $151,159 $116,380 $24,617
======== ======== =======
</TABLE>
F-12
<PAGE> 92
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT
Long-term borrowings at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
13% Senior Secured Notes, due October 1, 2004, net of
unamortized discount of $3,307 and $3,882................. $156,693 $156,118
10% note payable in monthly installments through February
1999.................................................... 225 441
Other..................................................... 377 78
-------- --------
157,295 156,637
Less current portion...................................... (332) (381)
-------- --------
$156,963 $156,256
======== ========
</TABLE>
Maturities of long-term debt for each of the next six years ending December
31, consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999...................................................... $ 332
2000...................................................... 174
2001...................................................... 96
2002...................................................... --
2003...................................................... --
2004...................................................... 156,693
--------
$157,295
========
</TABLE>
In September 1997, the Company completed an offering of units consisting of
in the aggregate $160 million of 13% Senior Secured Notes due in 2004 and
warrants to purchase 774,720 shares of common stock (collectively the "1997
Offering").
The Notes bear interest at the rate of 13% per annum, payable semi-annually
in arrears on April 1 and October 1, commencing April 1, 1998. As set forth in
the Indenture pursuant to which the Notes were issued the Company is required to
hold in a trust account sufficient funds to provide for payment in full of
interest on the Notes through October 1, 2000. The accompanying consolidated
financial statements reflect approximately $39.4 million as restricted
investments as security for the interest payments on the Notes. In addition, the
Notes are secured by a security interest in certain telecommunications equipment
owned by the Company or which may be acquired in the future. As of December 31,
1998, the Notes were secured by a security interest in telecommunications
equipment with a net book value of $85.3 million.
The Company has recorded the commitment fee as non-cash consideration in
connection with the 1997 Offering. The value of the warrants issued as a
commitment fee was determined based on a value of the Company's common stock at
$4.68 per share less the exercise price of $.02 per share specified in the
warrant agreement. All such warrants were exercised in January and February
1998.
F-13
<PAGE> 93
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Notes may be redeemed at the option of the Company, in whole or in
part, on or after October 1, 2001, at a premium declining to par in 2003, plus
accrued and unpaid interest and liquidated damages, if any, through the
redemption date as follows:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001................................................. 106.50
2002................................................. 103.25
2003 and thereafter.................................. 100.00
</TABLE>
In the event of a sale by the Company prior to October 1, 2000 of its
capital stock in one or more equity offerings, up to a maximum of 35% of the
aggregate principal amount of the Notes originally issued may, at the option of
the Company, be redeemed from the net cash proceeds at a redemption price equal
to 113% of the principal amount, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date, provided at least 65% of the aggregate
principal amount of Notes originally issued remains outstanding immediately
after the occurrence of such redemption. As of the date of these consolidated
financial statements, management has no intention of redeeming the Notes prior
to their stated redemption date.
The Indenture contains certain covenants that among other things, limit the
ability of the Company and its restricted subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, engage
in sale and lease back transactions, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its restricted
subsidiaries, conduct certain lines of business, issue or sell equity interests
of the Company's restricted subsidiaries or enter into certain mergers and
consolidations. As of December 31, 1998, management believes it is in compliance
with all debt covenants.
In January 1998, the Company filed a registration statement offering to
exchange the Notes for 13% Series B Senior Secured Notes due 2004 under the
Securities Act of 1933, as amended. Terms of the 13% Series B Senior Secured
Notes due 2004 are substantially the same as the Notes. The exchange was
consummated in March 1998.
In conjunction with the 1997 Offering, the Company engaged an
investment-banking firm that determined a value for each warrant and share of
common stock. Consistent with this determination, the Company has allocated a
portion of the 1997 Offering proceeds to the warrants based on a value of $4.68
per share of common stock less the exercise price of $.02 per share specified in
the warrant agreement.
The warrants are currently exercisable and expire on October 1, 2004. The
agreement pursuant to which the warrants were issued required an anti-dilution
adjustment if the November 1997 preferred stock offering was consummated at a
price less than $5.00 per share. As further discussed in Note 5, the Company
completed the November 1997 preferred stock offering for $3.50 per share.
Accordingly, the number of shares issuable upon exercise of the warrants was
increased from 774,200 to 862,923. This increase has been reflected in the
accompanying consolidated financial statements as of December 31, 1998 and 1997.
Expenses allocated to the warrants in connection with the 1997 Offering were
$141,000.
In conjunction with the 1997 Offering, certain persons deposited an
aggregate of $15.0 million in escrow (the "Common Stock Commitment"), which
funds were to have been applied to the purchase of shares of Common Stock in the
event the Company failed to sell at least $15.0 million of preferred
F-14
<PAGE> 94
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock within a certain period of time. Since sufficient preferred stock was
issued within the time period, the investors received a return of their funds
contributed to escrow. As a commitment fee for the Common Stock Commitment, the
Company issued to all such persons contributing to the escrow funds warrants to
purchase an aggregate of 90,000 shares of Common Stock at $.02 per share.
In conjunction with the 1997 Offering, the authorized capital stock of the
Company was increased to 60,000,000 shares of common stock, $.001 par value per
share, and 50,000,000 shares of preferred stock, $.001 par value per share.
Associated with the 1997 Offering, expenses of $68,000 were paid to a
related party for charter services in 1997.
(5) REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
COMMON STOCK
On December 6, 1996, the Board of Directors approved a four-hundred-for-one
stock split, effected in the form of a stock dividend distributed on December
31, 1996 to shareholders of record as of June 8, 1996. All share and per share
data presented in the consolidated financial statements and notes thereto have
been retroactively restated to give effect to this stock split.
During 1995, in exchange for expending cash to incorporate the Company, a
shareholder received 240,000 shares of $.001 par value common stock valued at
$.0042 per share. The Company capitalized the value of the issued shares as
organization costs included in other assets in the accompanying consolidated
financial statements, which costs are being amortized over 60 months using the
straight-line method.
In April 1996, the Company issued 480,000 shares of $.001 par value common
stock valued at $.0042 per share in exchange for services rendered by a
stockholder.
During 1996, NevTEL LLC ("LLC") was formed for the purpose of funding the
development stage of MGC Communications, Inc. In June 1996, the Company and LLC
entered into an agreement whereby LLC would acquire 3,696,000 shares of $.001
par value common stock of the Company for $.83 per share. The agreement called
for LLC to advance funds for operating expenses incurred by the Company (to be
applied against the purchase price of the stock) until the Company produced
operating revenues, at which time the remaining purchase price would be remitted
to the Company, the Company's common stock would be issued to LLC owners and LLC
would terminate. The agreement stipulated that the funds advanced for operating
expenses were to be paid back to LLC if the Company did not generate operating
revenue by December 31, 1996. The Company began revenue generating activities in
December 1996. The shares were issued to LLC owners on December 31, 1996, at
which time LLC terminated and the remaining purchase price was owed to the
Company. Such amount was transferred to the Company in February 1997 and is
classified as amounts receivable for shares issued at December 31, 1996.
In December 1996, the Company offered 4,068,600 shares of $.001 par value
common stock at $3.33 per share through a private placement. In connection with
this offering, the Company issued 1,308,600 shares and 2,760,000 shares of $.001
par value common stock and received proceeds of $4,362,000 and $9,200,000 during
the years ended December 31, 1997 and 1996, respectively.
In June 1997, the Company approved agreements with two key members of
management granting them rights to purchase a total of 150,000 shares at $3.33
per share and 165,000 shares at $4.17 per share. In both cases, the Company
retains the right to repurchase these shares at their cost
F-15
<PAGE> 95
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the event of termination of employment for any reason and has agreed to
finance the purchase price of the shares purchased at $4.17 per share over a
period of three years. During September 1997, the members of management
exercised their rights and the respective aforementioned shares were issued. The
Company received $500,000 for the 150,000 shares issued at $3.33 per share. The
$688,000 owed to the Company for the 165,000 shares issued at $4.17 per share
has been classified in the accompanying consolidated statements of redeemable
preferred stock and stockholders' equity as notes receivable from stockholders
for issuance of common stock.
During 1998, the Company issued 100,680 shares of $.001 par value common
stock at prices ranging from $5.83 to $8.33 per share, for total proceeds to the
Company of $774,000.
During 1998, the Company approved agreements with 11 key members of
management to purchase a total of 189,000 shares of common stock. The purchase
price of these shares ranged from $5.83 to $8.33 per share. In each case, the
Company retains the right to repurchase these shares at their cost in the event
of termination of employment for any reason and has agreed to finance a portion
of the purchase price of the shares over a period of three years. The $1,485,000
owed to the Company is classified in the accompanying statements of redeemable
preferred stock and stockholders' equity as notes receivable from stockholders
for issuance of common stock.
During May and June 1998, the Company sold 4,025,000 shares of common stock
at $17.00 per share pursuant to a registration statement on Form S-1, which was
declared effective by the Securities and Exchange Commission on May 11, 1998. In
connection with the initial public offering of the Company's common stock, the
Company effected a six for ten reverse stock split, which has been reflected in
the accompanying consolidated financial statements. In addition to the reverse
stock split, the Company's 6,571,427 outstanding shares of 8% Series A
Convertible Preferred Stock (the "Series A Preferred Stock") as discussed below,
were converted to 3,942,839 shares of the Company's common stock upon completion
of the initial public offering. The conversion of the Series A Preferred Stock
has been reflected in the accompanying consolidated financial statements.
REDEEMABLE PREFERRED STOCK
The Company has authorized the issuance of up to 50,000,000 shares of
preferred stock. In November 1997, the Company designated 6,571,450 shares as 8%
Series A Convertible Preferred Stock.
In November 1997, the Company completed a private placement offering in
which 5,148,570 shares of the Series A Preferred Stock were issued at $3.50 per
share, for total proceeds to the Company of approximately $16.7 million, net of
expenses.
In January 1998, the Company completed an additional private placement
offering in which 1,422,857 shares of Series A Preferred Stock were issued at
$3.50 per share for total proceeds to the Company of approximately $5.0 million,
net of expenses. The terms of the offering were substantially identical to those
of the previous preferred stock offering.
Each share of Series A Preferred Stock was automatically converted into
common stock on a six for ten basis upon the consummation of the Company's IPO.
In accordance with the terms of the Series A Preferred Stock, the accrued
dividends were reversed at the time of conversion.
(6) STOCK OPTION PLAN
In June 1996, the Company adopted a stock option plan which allows the
Board of Directors to grant incentives to employees in the form of incentive
stock options and non-qualified stock options.
F-16
<PAGE> 96
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the Company had reserved 1,440,000 shares of common
stock to be issued under the plan. In March 1998, the Board of Directors
approved an additional 1,200,000 shares of common stock to be issued under the
plan.
In July 1998, the Company filed a registration statement on Form S-8 to
register the shares of the Company's common stock reserved for issuance under
the MGC Communications, Inc. Stock Option Plan.
Under the plan, substantially all options have been granted to employees at
a price equal to the then-current market price, as estimated by management, and
vest primarily over a 5-year period. All options expire within ten years of the
date of grant.
Stock option transactions during 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1995.......................... -- --
Granted................................................... 811,860 $1.35
Canceled.................................................. (30,000) $1.67
---------
Outstanding at December 31, 1996.......................... 781,860 $1.35
Granted................................................... 274,560 $5.78
Canceled.................................................. (3,300) $5.08
---------
Outstanding at December 31, 1997.......................... 1,053,120 $2.50
Granted................................................... 865,700 $8.48
Exercised................................................. (7,380) $1.77
Canceled.................................................. (85,240) $5.84
---------
Outstanding at December 31, 1998.......................... 1,826,200 $5.18
=========
Exercisable at December 31, 1996.......................... 11,760 $3.33
=========
Exercisable at December 31, 1997.......................... 165,720 $1.47
=========
Exercisable at December 31, 1998.......................... 378,660 $2.07
=========
</TABLE>
For options granted during the year ended December 31, 1998, the weighted
average fair value of options on the date of grant, estimated using the
Black-Scholes option pricing model, was $6.70 using the following assumptions:
dividend yield of 0%; expected option life of 6.5 years; and risk free interest
rate of 5.06% and an expected volatility of 80.5%.
The weighted average fair value of the options issued during the years
ended December 31, 1997 and 1996, substantially all of which were granted at a
price equal to the then current market price as estimated by management, was
estimated to be $4.03 and $.92, respectively, using an option pricing model with
the following assumptions: dividend yield of 0%; expected option life of 6.5
years; and risk free interest rate at December 31, 1997 and 1996 of 5.06% and
6.12%, respectively.
F-17
<PAGE> 97
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT DEC. 31, CONTRACTUAL EXERCISE AT DEC. 31, EXERCISE
EXERCISE PRICE 1998 LIFE PRICE 1998 PRICE
- ---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.83 to $3.50 745,980 7.38 years $ 1.33 320,400 $1.37
$5.00 to $6.50 488,920 8.97 years $ 5.99 56,760 $5.84
$7.50 to $10.00 496,800 9.58 years $ 8.45 1,500 $8.33
$12.50 to $17.00 94,500 9.44 years $14.10 -- $ --
--------- -------
$0.83 to $17.00 1,826,200 8.51 years $ 5.18 378,660 $2.07
========= =======
</TABLE>
The Company applied Accounting Principles Board Opinion No. 25 in
accounting for its plan. No compensation expense was recognized for the years
ended December 31, 1998, 1997 and 1996. Had the Company determined compensation
expense using the fair value based method defined in SFAS No. 123, the Company's
loss for the years then ended would have increased by $565,000, $7,000 and
$10,000, respectively.
(7) LOSS PER SHARE
SFAS No. 128, "Earnings Per Share," requires the Company to calculate its
earnings per share based on basic and diluted earnings per share, as defined.
Basic and diluted loss per share for the years ended December 31, 1998, 1997 and
1996 were computed by dividing net loss applicable to common stockholders by the
weighted average number of shares of common stock outstanding.
The Company's warrants, preferred stock and stock options granted and
issued during 1998, 1997 and 1996, and outstanding as of December 31, 1998 and
1997, are antidilutive and have been excluded from the diluted loss per share
calculation for the years ended December 31, 1998, 1997 and 1996. Had the
Company shown the effects of dilution, the warrants, preferred stock and options
would have added an additional 1.8 million, 1.6 million and 0.5 million shares
to the weighted average shares outstanding for the years ended December 31,
1998, 1997 and 1996, respectively.
F-18
<PAGE> 98
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
The net deferred tax asset as of December 31, 1998 and 1997 is as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred Tax Asset
Net operating loss carry-forward........................... $ 17,804 $ 4,529
Start-up expenditures.................................... 164 220
Other.................................................... 534 141
-------- -------
18,502 4,890
Less: valuation allowance................................ (15,517) (4,309)
-------- -------
Net deferred tax asset................................... 2,985 581
-------- -------
Deferred Tax Liability
Excess of tax depreciation over book..................... 2,769 481
Other.................................................... 216 100
-------- -------
Net deferred tax liability............................... 2,985 581
-------- -------
Net........................................................ $ -- $ --
======== =======
</TABLE>
SFAS No. 109 requires recognition of the future tax benefit of these assets
to the extent realization of such benefits is more likely than not; otherwise, a
valuation allowance is applied. At December 31, 1998 and 1997, the Company
determined that $15,517,000 and $4,309,000, respectively, of tax benefits did
not meet the realization criteria because of the Company's historical operating
results. Accordingly, a valuation allowance was applied to reserve against the
applicable deferred tax asset.
At December 31, 1998 and 1997, the Company had net operating loss
carry-forwards available for income tax purposes of approximately $50,869,000
and $12,940,000, respectively, which expire principally from 2011 to 2018.
(9) COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company has entered into various leasing agreements for its switching
facilities, offices, and office equipment. The facility which houses the
Company's headquarters in Las Vegas is owned by an entity principally owned by
two of the Company's principal stockholders and directors. Management believes
the terms and conditions of this agreement are equal to the terms which would be
available from an unaffiliated lessor.
F-19
<PAGE> 99
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease obligations in effect as of December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
Payments during the year ending December 31:
1999...................................................... $1,389
2000...................................................... 1,272
2001...................................................... 1,166
2002...................................................... 977
2003...................................................... 159
Thereafter................................................ 342
------
$5,305
======
</TABLE>
Rent expense was $850,000, $207,000 and $33,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, of which $614,000 was paid to a
related party during 1998.
PURCHASE COMMITMENTS
In the ordinary course of business, the Company enters into purchase
agreements with its vendors of telecommunications equipment. As of September 30,
1999 and December 31, 1998, the Company had a total for all vendors of
approximately $53.4 million and $15.4 million, respectively, of remaining
purchase commitments for purchases of switching equipment.
LITIGATION
The Company is party to various legal proceedings, most of which relate to
routine matters incidental to its business. Management does not believe that the
outcome of such proceedings will have a material adverse effect on the Company's
financial position or results of operations.
INTERCONNECTION AGREEMENTS
The Company has interconnection agreements with five incumbent local
exchange carriers. These agreements expire on various dates through July 2000.
The Company is dependent on the cooperation of the incumbent local exchange
carriers to provide access service for the origination and termination of its
local and long distance traffic. Historically, these access charges can make up
a significant percentage of the overall cost of providing these services. To the
extent the access services of the local exchange carriers are used, the Company
and its customers are subject to the quality of service, equipment failures and
service interruptions of the local exchange carriers.
(10) 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 operating revenues related
to the Sprint (Nevada) interconnection agreement at amounts which 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 $3.4 million, $1.7 million and $1.1 million at September
30, 1999, December 31, 1998 and 1997, respectively, has not been recorded in the
accompanying consolidated financial statements.
F-20
<PAGE> 100
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management believes that the resolution of this matter will not have an adverse
effect on the Company's consolidated financial position, results of operations,
or liquidity.
(11) RELATED PARTY TRANSACTION
In May 1997, the Company entered into an agreement with a company, the
owner of which is a former officer and current stockholder of the Company, for
the purchase of certain computer software pursuant to which the Company paid the
contract price of $600,000 in six equal monthly installments beginning July 1,
1997. In addition, the Company has paid $656,000 and $40,000 during 1998 and
1997, respectively, under such agreement to support and maintain the Company's
proprietary operations support system. Management believes the terms and
conditions of this agreement are equal to the terms which would be available
from an unaffiliated party.
(12) SUBSEQUENT EVENTS (UNAUDITED)
PREFERRED STOCK OFFERINGS
On April 5, 1999, the Company entered into a Securities Purchase Agreement
with Providence Equity Partners III L.P. ("Providence"), JK&B Capital III L.P.
("JK&B III") and Wind Point Partners III L.P. ("Wind Point") under which
Providence, JK&B III and Wind Point and their affiliates (the "Purchasers")
agreed to purchase 5,277,779 shares of newly issued Series B Convertible
Preferred Stock ("Series B Preferred Stock") at $9.00 per share(the
"Transaction") for a total consideration of $47.5 million. The Transaction was
consummated on May 4, 1999. Net proceeds to the Company were approximately $46.5
million.
Dividends accrued on the Series B Preferred Stock at the rate of 10% per
annum from the issue date until November 21, 1999 and are payable in preference
to any dividends that may be paid with respect to the Company's Common Stock.
Effective as of November 22, 1999, the Company elected to terminate the accrual
of dividends since the Company's stock price exceeded $27.00 per share for 20
consecutive trading days (the "Market Threshold").
The Series B Preferred Stock is convertible into Common Stock at any time
at the option of the holder. Initially, the conversion price is $9.00 per share
and each share of Series B Preferred Stock is convertible into one share of
Common Stock. The conversion price is subject to adjustment as a result of stock
splits, stock dividends and certain other issuances of additional stock.
The Series B Preferred Stock was issued in May 1999 with a beneficial
conversion feature totaling $47.5 million measured as the difference between the
conversion price of $9 per share and the fair value of the underlying common
stock at the time of issuance, limited by the total amount of the proceeds of
the preferred stock issued.
After the earlier of May 24, 2000 or the date on which the holders of
Series B Preferred Stock exercise their demand registration rights, the Company
has the right to require the conversion of the Series B Preferred Stock if the
Company's stock price exceeds the Market Threshold referenced above. If the
Company requires conversion within three years after closing, no accrued
dividends will be paid.
Each balance sheet date, the Company records a pro rata accretion of the
Series B Preferred Stock to its anticipated redemption value. Such accretion is
based on the market value of the common stock at the balance sheet date, not to
exceed $27 per share based on the Market Threshold. For the nine months ended
September 30, 1999, the Company recorded accretion of $2.8 million which has
been recorded as an increase in redeemable preferred stock.
F-21
<PAGE> 101
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The holders of Series B Preferred Stock have the right to require us to
redeem the Series B Preferred Stock after May 4, 2005 or upon a sale of the
Company. The redemption price will be equal to the greater of (x) $9.00 per
share plus accrued and unpaid dividends, or (y) the value of the common stock
into which the Series B Preferred Stock is then convertible. If the Company
fails to redeem all shares of Series B Preferred Stock within six months of the
date specified by the holders of the Series B Preferred Stock, then the holders
of the Series B Preferred Stock, along with the holders of the Series C
Preferred Stock if they then have similar rights, will have the right to elect a
majority of the Company's Board of Directors.
In November 1999, the Company entered into an agreement with Providence,
JK&B III and their affiliates (the "Purchasers") under which the Purchasers are
to purchase 1,250,000 shares of newly issued Series C Convertible Preferred
Stock at $28.00 per share for a total consideration of $35.0 million. Of the
total consideration, $4.9 million was paid by an interest-bearing promissory
note due in March 2000. The transaction was consummated on December 30, 1999.
Dividends will accrue on the Series C Preferred Stock 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. No accrued dividends in
excess of $2.80 per share will be paid if the Company requires conversion of the
Series C Preferred Stock within 30 months of issuance. Conversion may be
required by the Company if the Company's stock price exceeds $56.00 per share
for 20 consecutive trading days.
The Series C Preferred Stock is convertible into Common Stock at any time
at the option of the holder. Initially, the conversion price is $28.00 per share
and each share of Series C Preferred Stock is convertible into one share of
Common Stock. The conversion price is subject to adjustment as a result of stock
splits, stock dividends and certain other issuances of additional stock.
The Series C Preferred Stock was issued in December 1999 with a beneficial
conversion feature totaling $25.0 million measured as the difference between the
conversion price of $28 per share and the fair value of the underlying common
stock at the time of issuance. The Company will record a pro rata accretion of
the Series C Preferred Stock to its anticipated redemption value. Such accretion
will be based on the market value of the common stock at the balance sheet date,
not to exceed $56 per share based on the Market Threshold.
The holders of Series C Preferred Stock have the right to require the
Company to redeem the Series C Preferred Stock after six years after issuance or
upon a sale of the Company. The redemption price will be equal to the greater of
(x) $28.00 per share plus the greater of $2.80 per share or accrued and unpaid
dividends, or (y) the value of the Common Stock into which the Series C
Preferred Stock is then convertible.
If the Company fails to redeem all shares of Series C Preferred Stock
within six months of the date specified by the holders of the Series C Preferred
Stock, then the holders of the Series C Preferred Stock, along with the holders
of the Series B Preferred Stock if they then have similar rights, will have the
right to elect a majority of the Company's Board of Directors.
The Series B Preferred Stock and Series C Preferred Stock will vote along
with the Common Stock on an as-converted basis. The holders of the Series B
Preferred Stock and Series C Preferred Stock have the right to nominate two or
more directors depending on the size of the Company's Board of Directors and the
percentage of the Company's stock represented by the outstanding Series B
Preferred Stock and Series C Preferred Stock. The holders of the Series B
Preferred Stock
F-22
<PAGE> 102
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and Series C Preferred Stock also have the right to have their Board
representative serve on each committee of the Company's Board and on the Board
of each of the Company's subsidiaries.
The Company's previously reported financial statements for the nine months
ended September 30, 1999 have been restated to reflect the above accretion of
anticipated redemption value and beneficial conversion feature with respect to
the Series B Preferred Stock. The effect of the restatement was to increase the
net loss applicable to common stockholders and basic and diluted loss per share
of common stock as follows:
<TABLE>
<CAPTION>
BASIC AND DILUTED
NET LOSS APPLICABLE TO LOSS PER SHARE
COMMON STOCKHOLDERS OF COMMON STOCK
---------------------- -----------------
<S> <C> <C>
As previously reported..................................... $(46,670) $(2.50)
Value of preferred stock beneficial conversion feature..... (47,500) (2.54)
Accretion of Series B Preferred Stock...................... (2,789) (0.15)
-------- ------
As restated................................................ $(96,959) $(5.19)
======== ======
</TABLE>
COMMON STOCK OFFERING
In July 1999, the Company issued 5,000,000 shares of common stock and
received net proceeds, after expenses, of approximately $118.1 million. In this
offering, existing shareholders sold an additional 587,695 shares of common
stock for which the Company did not receive any proceeds.
F-23
<PAGE> 103
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
<PAGE> 104
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,500,000 SHARES
MGC COMMUNICATIONS, INC.
COMMON STOCK
[MGC LOGO]
------------
PROSPECTUS
, 2000
------------
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
ING BARINGS
WARBURG DILLON READ LLC
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 105
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 2000
PRELIMINARY PROSPECTUS
3,000,000 SHARES
MGC COMMUNICATIONS, INC.
% SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK
[MGC LOGO]
------------------
We are selling 3,000,000 shares of our % Series D Convertible
Redeemable Preferred Stock, liquidation preference $50 per share. Each share of
Series D convertible preferred stock is convertible at the option of the holder
into shares of our common stock at a conversion price of $ per share,
subject to adjustments and expiration of conversion rights in certain
circumstances. The quarterly dividend will be $ per share, payable at our
option in cash or shares of our common stock, beginning , 2000.
We have applied to have the Series D convertible preferred stock listed on
the Nasdaq National Market. Our common stock is quoted on the Nasdaq National
Market under the symbol "MPWR." The last reported price of our common stock, on
February 2, 2000, was $54.38 per share.
Concurrently with this Series D convertible preferred stock offering, and
by a separate prospectus, we are offering 4,470,959 shares of our common stock.
The completion of the Series D convertible preferred stock offering and the
common stock offering are not dependent on one another.
The underwriters named in this prospectus may purchase up to 450,000
additional shares of Series D convertible preferred stock from us solely to
cover over-allotments.
------------------
INVESTING IN THE SERIES D CONVERTIBLE PREFERRED STOCK INVOLVES RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------ ------------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to MGC Communications (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 2000.
------------------
SALOMON SMITH BARNEY BEAR, STEARNS & CO. INC.
------------------
GOLDMAN, SACHS & CO.
ING BARINGS
WARBURG DILLON READ LLC
, 2000
<PAGE> 106
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 10
How We Intend to Use the Proceeds of this Offering.......... 21
Dividend Policy............................................. 21
Capitalization.............................................. 22
Selected Consolidated Financial and Operating Data.......... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 31
Management.................................................. 50
Principal Stockholders...................................... 54
Description of Securities................................... 56
Description of the Series D Convertible Preferred Stock..... 64
Federal Tax Considerations.................................. 77
Underwriting................................................ 85
Legal Matters............................................... 87
Experts..................................................... 87
Where You Can Find More Information......................... 87
Index to Consolidated Financial Statements.................. F-1
</TABLE>
<PAGE> 107
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors," our financial statements and the
notes related to our financial statements. Unless otherwise specified, all
information in this prospectus assumes no exercise of the underwriters'
over-allotment option.
MGC COMMUNICATIONS
We are a growing communications company currently offering a single package
of services including Internet access, voice over digital subscriber line or
DSL, local dialtone, long distance and other voice and data services. We market
these services primarily to small and medium size business customers. We have
launched bundled voice and high-speed data services using DSL technology in all
of our current markets. DSL technology allows us to use our existing network to
simultaneously carry up to 24 voice calls or multiple voice calls and high-speed
data traffic on a single standard telephone line. Since launching our services,
we have experienced operating losses and generated negative cash flow from
operations. We expect to continue to generate negative cash flow from operations
for the foreseeable future while we continue to expand our network and develop
our product offerings and customer base.
- By installing our own equipment in space we rent at 288 incumbent carrier
central office sites, we had access to approximately 16 million
addressable lines at the end of third quarter 1999. These 288 incumbent
carrier central office sites represent one of the broadest geographic
service areas of any competitive carrier providing local, long distance
and data products.
- We have developed a sophisticated, proprietary operations support system
designed to manage all aspects of our business, including timely and
accurate provisioning to place our customers on our network. This allows
us to control access to our customers. Our operations support system is
fully integrated and fully capable of accommodating our growth plans.
- We use a capital efficient network consisting of our own switches,
placing our equipment in the central offices of incumbent carriers and
leasing local telephone lines and cables.
- We have an experienced and proven management team led by our president
and chief executive officer, Rolla P. Huff.
- We currently deliver our services in the metropolitan areas of Atlanta,
Chicago, Las Vegas, southern Florida and selected areas of southern
California, including Los Angeles and San Diego.
- We have established working relationships with five incumbent local
exchange carriers: Ameritech, BellSouth, GTE, PacBell and Sprint.
- At the end of the third quarter of 1999, we had 138,400 customer lines
sold, of which 117,210 lines were in service.
- To rollout our network and services on a national basis, during 2000, we
plan to aggressively expand our network to include over 800 incumbent
carrier central office sites providing access to more than 35 million
addressable lines.
- We have announced that we intend to change our name to "Mpower
Communications Corp." in connection with the national rollout of our
services.
- In connection with the expansion of our network, we plan to increase the
size of our sales force from 128 sales personnel at the end of the third
quarter of 1999 to over 350 by the end of 2000.
3
<PAGE> 108
- We plan to build data centers and enter into co-marketing agreements with
"e-commerce" providers.
We were one of the first competitive carriers to implement a strategy of
building and owning the network equipment that controls how voice and data
transmissions originate and terminate, which we refer to as switches, while
leasing the telephone lines and cable over which the voice calls and data
traffic are transmitted, which we refer to as transport, from incumbent
carriers. We believe this strategy has allowed us to serve a broad geographical
area at a comparatively low cost while maintaining control of the access to our
customers. Having executed this strategy, we are well-positioned to serve the
growing demand from small and medium size business customers for communications
services.
By implementing DSL technology and using a single telephone line to deliver
a bundled voice and high-speed data product, we expect to significantly reduce
the per line costs of provisioning customer lines and the associated recurring
costs of leasing telephone lines. These savings should allow us to improve our
cash flow from operations and offer a value-priced package of services to our
customers.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are at 171 Sully's Trail, Suite 202,
Pittsford, New York 14534. Our telephone number is (716) 218-6550.
4
<PAGE> 109
THE OFFERING
Series D convertible preferred
stock offered by us........... 3,000,000 shares
Over-allotment option......... We have granted the underwriters an option to
purchase up to 450,000 additional shares of
Series D convertible preferred stock to cover
over-allotments.
Dividends..................... Holders of Series D convertible preferred stock
will be entitled to receive cumulative
dividends at an annual rate of % of the
liquidation preference payable quarterly on
each , ,
, and ,
commencing on , 2000. Dividends
will accrue from the date of the original
issuance of the Series D convertible preferred
stock. Any dividend on the Series D convertible
preferred stock shall be, at our option,
payable in cash or through the issuance of a
number of shares of our common stock equal to
the dividend amount divided by 95% of the
average closing prices for our common stock
during a specified period before the dividend
payment date.
For the foreseeable future, we intend to pay
these dividends solely in shares of common
stock. If, in the future, we were to consider
paying cash dividends on the Series D
convertible preferred stock we would have to
comply with the restrictions contained in our
debt indenture and the terms of our outstanding
preferred stock. See "Description of the Series
D Convertible Preferred Stock -- Dividends."
Conversion into common
stock......................... Series D convertible preferred stock is
convertible at the option of its holder, unless
previously redeemed, at any time after the
issue date, into shares of our common stock at
a conversion rate of shares of common
stock for each share of Series D convertible
preferred stock, representing a conversion
price of $ per share of common stock,
subject to adjustment in certain events. On or
after , 2003, we may cause the
conversion rights on the Series D convertible
preferred stock to expire if the trading price
of our common stock equals or exceeds 140% of
the conversion price for a specific trading
period. See "Description of the Series D
Convertible Preferred Stock -- Expiration of
Conversion Rights."
Liquidation preference........ $50 per share. See "Description of the Series D
Convertible Preferred Stock -- Liquidation
Preference."
Redemption.................... We are required to redeem the Series D
convertible preferred stock on ,
2012, at a redemption price equal to the
liquidation preference plus accumulated and
unpaid dividends, if any, whether or not
declared to the date of redemption. On or after
, 2002 but before , 2003,
if the closing price of our common stock equals
or exceeds 150% of the conversion price,
currently equal to
5
<PAGE> 110
$ per share, for a specified trading
period, we may redeem the Series D convertible
preferred stock for cash, shares of our common
stock or both at a redemption price of %
of the liquidation preference, plus accumulated
and unpaid dividends to the redemption date. In
addition to the payments in the previous
sentence, holders will receive a payment equal
to the present value of the dividends that
would have been payable on the Series D
convertible preferred stock from the redemption
date to , 2003. See "Description
of the Series D Convertible Preferred
Stock -- Redemption."
Voting rights................. Except as required by law or as specified in
the certificate of designation, the holders of
the Series D convertible preferred stock will
not be entitled to any voting rights.
If:
- payments of dividends on the Series D
convertible preferred stock are in arrears
and unpaid for an aggregate of six or more
quarterly dividend payments;
- the Series D convertible preferred stock is
not redeemed as required on ,
2012; or
- the Series D convertible preferred stock is
not repurchased or converted as required
following a change of control;
then, the holders of the Series D convertible
preferred stock, together with holders of other
series of preferred stock having similar
rights, will be entitled to elect the lesser of
two directors to our board of directors or that
number of directors constituting at least 25%
of our board of directors, until all dividend
arrearages have been paid or the Series D
convertible preferred stock is redeemed. See
"Description of the Series D Convertible
Preferred Stock -- Voting Rights."
Change of control............. Following a change of control, we must either
- offer to repurchase the Series D convertible
preferred stock at 100% of the liquidation
preference plus accumulated and unpaid
dividends to the date of repurchase or permit
a conversion of the Series D convertible
preferred stock; or
- adjust the conversion price.
Whether we are required to offer to repurchase
or permit a conversion of the Series D
convertible preferred stock or adjust the
conversion price of the Series D convertible
preferred stock following a change of control
depends on the consideration received in
connection with a change of control. See
"Description of the Series D Convertible
Preferred Stock -- Change of Control."
Ranking....................... The Series D convertible preferred stock will
be, with respect to dividends and upon
liquidation, dissolution or winding-up:
- junior to all our existing and future debt
obligations;
6
<PAGE> 111
- junior to each class of capital stock or
series of preferred stock, the terms of which
expressly provide that it ranks senior to the
Series D convertible preferred stock;
- on a parity with the Series B convertible
preferred stock and Series C convertible
preferred stock and each other class of
capital stock or series of preferred stock,
the terms of which expressly provide that it
ranks on a parity with the Series D
convertible preferred stock; and
- senior to all classes of our common stock and
each other class of capital stock or series
of preferred stock, the terms of which do not
expressly provide that it ranks senior to or
on a parity with the Series D convertible
preferred stock.
See "Description of the Series D Convertible
Preferred Stock--Ranking."
Proposed Nasdaq National
Market symbol................. MPWRP
Use of proceeds............... Capital expenditures related to the purchase
and installation of DSL and other
communications equipment, market expansion and
for general corporate purposes, including
working capital to fund our expanding sales,
marketing and product development efforts.
Concurrent offering........... Concurrently with this offering, and by
separate prospectus, we are offering to sell
4,470,959 shares of common stock and some of
our stockholders are offering to sell 29,041
shares of common stock. The completion of this
offering and the concurrent offering are not
dependent on one another.
7
<PAGE> 112
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues............................... $ 1 $ 3,791 $ 18,249 $ 11,772 $ 34,922
Cost of operating revenues, excluding
depreciation................................... 305 3,928 17,129 10,575 31,449
Selling, general and administrative expenses..... 841 6,440 17,877 11,250 27,469
Loss from operations............................. (1,554) (7,851) (21,995) (13,202) (36,402)
Net loss......................................... (1,491) (10,836) (32,065) (22,293) (44,744)
Basic and diluted loss per share of common
stock.......................................... $ (2.11) $ (1.30) $ (2.26) $ (1.69) $ (5.19)
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
--------------------------------------------------
ACTUAL AS ADJUSTED(1) AS FURTHER ADJUSTED(2)
-------- -------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and investments
available-for-sale, excluding restricted
investments.......................................... $178,961 $ 353,666 $ 583,979
Restricted investments................................. 30,375 30,375 30,375
Property and equipment, net............................ 151,159 151,159 151,159
Total assets........................................... 381,814 556,519 786,832
Long-term debt......................................... 157,677 157,677 157,677
Series B convertible preferred stock................... 49,452 49,452 49,452
Series C convertible preferred stock................... -- 29,600 29,600
Series D convertible preferred stock................... -- 145,105 145,105
Stockholders' equity................................... 131,605 131,605 361,918
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(3)...................................... $(1,145) $ (6,577) $(16,757) $(10,053) $(23,996)
Cash flows used in operating activities........ (942) (4,490) (24,184) (9,073) (29,226)
Cash flows used in investing activities........ (2,287) (135,491) (77,715) (92,948) (54,784)
Cash flows provided by financing activities.... 11,126 177,138 68,731 68,387 165,348
Insufficiency of earnings to cover combined
fixed charges and preferred stock
dividends(4)................................. 1,491 11,024 35,104 22,593 43,818
Capital expenditures........................... 3,659 22,641 97,101 67,136 47,135
OPERATING DATA AT END OF PERIOD:
Total access lines in service.................. 50 15,590 47,744 35,246 117,210
Central office collocation sites............... 9 25 207 85 288
Switches in service............................ 1 3 7 4 7
Number of sales personnel
Field sales.................................. 7 23 50 39 95
Inside sales................................. -- -- 31 53 33
------- --------- -------- -------- --------
Total sales personnel................. 7 23 81 92 128
</TABLE>
- ---------------
(1) Gives effect to the sale of 3,000,000 shares of Series D convertible
preferred stock in this offering at $50.00 per share and the sale of
1,250,000 shares of Series C convertible preferred stock at $28.00 per share
in December 1999 for cash and a $4.9 million promissory note.
(2) Gives effect to the sale of 3,000,000 shares of Series D convertible
preferred stock in this offering at $50.00 per share, the sale of 1,250,000
shares of Series C convertible preferred stock at $28.00 per share in
December 1999 for cash and a $4.9 million promissory note and the sale of
4,470,959 shares of common stock in the concurrent offering at an assumed
price of $54.38 per share, the closing price of our stock on February 2,
2000. The price per share to be paid for the Series D convertible preferred
stock has been established at $50.00 with the conversion price to be based
on the market price for our common stock at the time the Series D
convertible preferred stock is issued and negotiations between our
underwriters and us. The price per share paid for the Series C convertible
preferred stock was based on the trading price for our common stock
immediately before the purchasers' commitment to purchase that stock. The
assumed price of the shares of common stock is equal to the closing price of
our common stock on February 2, 2000.
8
<PAGE> 113
(3) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. For the year ended December 31, 1996, EBITDA excludes a charge
of $355,000 related to the one-time write-off of purchased software. EBITDA
does not represent funds available for management's discretionary use and is
not intended to represent cash flow from operations. EBITDA should not be
considered as an alternative to loss from operations as an indicator of our
operating performance or as an alternative to cash flows as a measure of
liquidity. In addition, EBITDA is not a term defined by generally accepted
accounting principles and, as a result, the measure of EBITDA may not be
comparable to similarly titled measures used by other companies. We believe
that EBITDA is often reported and widely used by analysts, investors and
other interested parties in the communications industry. Accordingly, we are
including this information to permit a more complete comparison of our
operating performance relative to other companies in the industry.
(4) For purposes of calculating the insufficiency of earnings to cover combined
fixed charges and preferred stock dividends: earnings consist of loss before
income taxes plus fixed charges excluding capitalized interest and preferred
stock dividends and fixed charges consist of interest expensed and
capitalized, plus amortization of deferred financing costs, debt discount,
preferred stock dividends and a portion of rent expense under operating
leases deemed by us to represent an interest factor.
Our financial information presented above as of and for the nine month
period ended September 30, 1999, has been restated to reflect the accretion of
anticipated redemption value and beneficial conversion feature with respect to
the Series B convertible preferred stock. See "Notes to Consolidated Financial
Statements -- Note(12)."
9
<PAGE> 114
RISK FACTORS
You should carefully consider the following factors, in addition to other
information in this prospectus, before purchasing the securities being offered.
IT IS DIFFICULT TO PREDICT OUR FUTURE OPERATING RESULTS FROM OUR PREVIOUS
PERFORMANCE SINCE OUR BUSINESS MODEL IS STILL EVOLVING AND WE HAVE A LIMITED
OPERATING HISTORY
Our limited operating history makes predicting future results difficult.
Because some of our services are new, we cannot be sure businesses will buy
them. In addition, we have recently hired a new chief executive officer who may
realign our operations into regional service areas to support our expanding
geographic markets or make other changes which could increase the cost of
providing our services.
WE EXPECT OUR LOSSES TO CONTINUE
We recorded net losses of $44.7 million in the first nine months of 1999,
$32.1 million in 1998, and $10.8 million in 1997. In addition, we had negative
cash flow from operations of $29.2 million in the first nine months of 1999,
$24.2 million in 1998 and $4.5 million in 1997. We expect to record significant
net losses and generate negative cash flow from operations for the foreseeable
future. We cannot assure you we will achieve or sustain profitability or
generate sufficient positive cash flow from operations to meet our planned
capital expenditures, working capital and debt service requirements.
WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS THAT WE MAY NOT BE ABLE TO OBTAIN
We require significant amounts of capital to fund the development and
expansion of our business and services as well as operating costs and debt
service. If we cannot generate or otherwise access sufficient funds, we may be
required to delay or abandon some of our future expansion plans. This would
likely have a negative impact on our growth and our ability to compete in the
communications industry. We expect to fund our capital requirements through
existing resources, debt or equity financing and internally generated funds,
including the proceeds of this offering, the concurrent offering and the
issuance of Series C convertible preferred stock. We cannot assure you we will
be successful in completing the concurrent offering or otherwise raising
sufficient debt or equity financing on acceptable terms.
OUR SUBSTANTIAL DEBT CREATES FINANCIAL AND OPERATING RISK
As of September 30, 1999, we had approximately $157.7 million of total debt
outstanding. Our level of debt could have important consequences to you,
including the following:
- a substantial portion of our cash flow from operations will be dedicated
to paying principal and interest on our debt, thereby reducing funds
available for expansion or other purposes;
- our significant amount of debt could make us more vulnerable to changes
in general economic conditions or increases in prevailing interest rates;
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes
could be impaired;
- our failure to comply with the restrictions contained in any of our
financing agreements could lead to a default which could result in our
being required to repay all of our outstanding debt; and
- we may be more leveraged than some of our competitors, which may result
in a competitive disadvantage.
10
<PAGE> 115
OUR DEBT COVENANTS AND PREFERRED STOCK TERMS COULD LIMIT HOW WE CONDUCT OUR
BUSINESS AND OUR ABILITY TO RAISE ADDITIONAL FUNDS
Our debt indenture contains covenants that restrict our ability to:
- incur additional debt;
- pay dividends and make other distributions;
- prepay subordinated debt;
- make investments and other restricted payments;
- create liens;
- sell assets; and
- engage in transactions with affiliates.
In addition, the terms of our outstanding preferred stock require us to
obtain the approval of the holders before we take specified actions. Please see
"Description of Securities -- Series B Convertible Preferred Stock" and
"Description of Securities -- Series C Convertible Preferred Stock."
Our future financing arrangements will likely contain similar or more
restrictive covenants. As a result of these restrictions, we may be:
- limited in how we conduct our business;
- unable to raise additional debt or equity financing to operate during
general economic or business downturns; and
- unable to compete effectively or to take advantage of new business
opportunities.
These restrictions may affect our ability to grow as we currently plan and our
ability to operate our business in the interests of our stockholders.
OUR SUCCESS DEPENDS ON THE EFFECTIVENESS OF OUR MANAGEMENT AND WE HAVE A NEW
CHIEF EXECUTIVE OFFICER AND ARE SEEKING TO MAKE OTHER CHANGES TO OUR MANAGEMENT
TEAM
Our business is managed by a small number of key management personnel, the
loss of some of whom could impair our ability to carry out our planned
expansion. We believe our future success will depend in large part on our
ability to attract and retain highly skilled and qualified personnel. None of
our key executives other than Rolla P. Huff is a party to a long-term employment
agreement and we do not maintain key man insurance on our officers.
We have recently hired a new chief executive officer, chief financial
officer and other new members of our senior management team. We cannot assure
you that our new senior officers will be effective in managing our company or
will successfully work with our existing management team.
IF OUR EQUIPMENT DOES NOT PERFORM AS WE EXPECT, IT COULD DELAY OUR EXPANSION
INTO NEW MARKETS AND OUR INTRODUCTION OF NEW SERVICES
In implementing our strategy, we may use new or existing technologies to
offer additional services. We also plan to use equipment manufactured by
multiple vendors to offer our current services and future services in each of
our new markets. If we cannot successfully install and integrate the technology
and equipment necessary to deliver our current services and any future services
within the time frame and with the cost effectiveness we currently contemplate,
we could be forced to delay or abandon a portion of our expansion plans or the
introduction of new services. This could also affect our ability to attract and
retain customers.
11
<PAGE> 116
THE FAILURE OF OUR OPERATIONS SUPPORT SYSTEM TO PERFORM AS WE EXPECT COULD
IMPAIR OUR ABILITY TO RETAIN CUSTOMERS AND OBTAIN NEW CUSTOMERS OR RESULT IN
INCREASED CAPITAL EXPENDITURES
We employ a proprietary operations support system which is expected to be
an important factor in our success. If the operations support system fails or is
unable to perform as expected, we could suffer customer dissatisfaction, loss of
business or the inability to add customers on a timely basis, any of which would
adversely affect our revenues. Furthermore, problems may arise with higher
processing volumes or with additional automation features, which could
potentially result in system breakdowns and delays and additional, unanticipated
expense to remedy the defect or to replace the defective system with an
alternative system.
OUR FAILURE TO MANAGE GROWTH COULD RESULT IN INCREASED COSTS AND OUR INABILITY
TO ACHIEVE OUR EXPANSION GOALS
We may be unable to manage our growth effectively. This could increase the
costs of expansion and impair our ability to fully implement our expansion
plans. The development and expansion of our business and our entry into new
markets will depend on, among other things, our ability to achieve the following
goals in a timely manner, at reasonable costs and on satisfactory terms and
conditions:
- purchase, install and operate switches and other equipment, including DSL
equipment;
- accurately assess potential new markets;
- negotiate suitable interconnection agreements with, and arrangements for
installing our equipment at the central offices of, incumbent carriers on
satisfactory terms and conditions, including incumbent carriers in
markets we plan to enter;
- hire and retain qualified personnel;
- lease suitable access to transport networks;
- lease or purchase suitable sites; and
- obtain required government authorizations.
We have experienced rapid growth since our inception, and we believe
sustained growth will place a strain on our operational, human and financial
resources. Our growth will also increase our operating complexity as well as the
level of responsibility for both existing and new management personnel. Our
ability to manage our expansion effectively will depend on the continued
development of plans, systems and controls for our operational, financial and
management needs and on our ability to expand, train and manage our employee
base.
OUR SERVICES MAY NOT ACHIEVE SUFFICIENT MARKET ACCEPTANCE TO BECOME PROFITABLE
To be successful, we must develop and market services that are widely
accepted by businesses at profitable prices. Our success will depend upon the
willingness of our target customers to accept us as an alternative provider of
local, long distance, high-speed data and Internet services. Although we are in
the process of rolling out high-speed data and Internet services and developing
additional products and services, we might not be able to provide the range of
communication services our target business customers need or desire. In
addition, the lack of willingness by e-commerce providers to accept us as a
marketing, sales and distribution partner would have a negative impact on our
ability to deliver additional products and services to our target customers.
12
<PAGE> 117
OUR FAILURE TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE AT DESIRED PRICING LEVELS
COULD IMPAIR OUR ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW
Prices for data communication services have fallen historically, a trend we
expect will continue. Accordingly, we cannot predict to what extent we may need
to reduce our prices to remain competitive or whether we will be able to sustain
future pricing levels as our competitors introduce competing services or similar
services at lower prices. Our ability to meet price competition may depend on
our ability to operate at costs equal to or lower than our competitors or
potential competitors. There is a risk competitors, perceiving us to lack
capital resources, may undercut our rates or increase their services or take
other actions in an effort to force us out of business. Our failure to achieve
or sustain market acceptance at desired pricing levels could impair our ability
to achieve profitability or positive cash flow.
IF WE ARE UNABLE TO NEGOTIATE AND ENFORCE FAVORABLE INTERCONNECTION AGREEMENTS
AND ARRANGEMENTS FOR INSTALLING OUR EQUIPMENT, WE COULD HAVE DIFFICULTY
OPERATING PROFITABLY IN OUR EXISTING MARKETS AND ENTERING NEW MARKETS
We must negotiate and renew favorable interconnection agreements and
arrangements for installing our equipment with other companies, including
incumbent carriers, in markets we plan to enter. The rates charged to us under
the interconnection agreements might not continue to be low enough for us to
attract a sufficient number of customers and to operate the business on a
profitable basis. In addition, our interconnection agreements provide for our
connection and maintenance orders to receive attention on the same basis as the
incumbent carrier's customers and for the incumbent carriers to provide adequate
capacity to keep blockage within industry standards. However, from time to time,
we have experienced excessive blockage in the delivery of calls to and from the
incumbent carriers due to the insufficient number of phone lines installed by
the incumbent carriers between their switches and our switches. Blocked calls
result in customer dissatisfaction which may result in the loss of business.
DELAYS BY THE INCUMBENT CARRIERS IN CONNECTING OUR CUSTOMERS TO OUR NETWORK
COULD RESULT IN CUSTOMER DISSATISFACTION AND LOSS OF BUSINESS
We rely on the timeliness of incumbent carriers and competitive carriers in
processing our orders for customers switching to our service and in maintaining
the customer's standard telephone lines to assure uninterrupted service. The
incumbent carriers have had little experience leasing standard telephone lines
to other companies. Therefore, the incumbent carriers might not be able to
continue to provide and maintain leased standard telephone lines in a prompt and
efficient manner as the number of standard telephone lines requested by
competitive carriers increases.
WE MAY NOT BE ABLE TO SERVICE OUR CUSTOMERS IF WE CANNOT SECURE SUFFICIENT
TELEPHONE LINES AND CABLE TO MEET OUR FUTURE NEEDS
We may not be able to lease sufficient telephone lines and cable in markets
we want to enter or renew our lease arrangements or obtain comparable
arrangements from other carriers in our existing markets. Because we lease
rather than construct telephone lines and cable in each of our markets, we would
be unable to service our customers if we cannot obtain sufficient telephone
lines and cable. Our inability to lease sufficient telephone lines and cable
could result in the loss of customers, the inability to add new customers and
limitations on our ability to enter new markets.
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<PAGE> 118
OUR RELIANCE ON A LIMITED NUMBER OF EQUIPMENT SUPPLIERS COULD RESULT IN
ADDITIONAL EXPENSES OR DELAYS IN OUR EXPANSION
We currently rely and expect to continue to rely on a limited number of
third party suppliers to manufacture the equipment we require to implement our
DSL technology. If our suppliers enter into competition with us, or if our
competitors enter into exclusive or restrictive arrangements with our suppliers,
it may materially and adversely affect the availability and pricing of the
equipment we purchase. Our reliance on third-party vendors involves a number of
additional risks, including the absence of guaranteed supply and reduced control
over delivery schedules, quality assurance, production yields and costs.
We cannot assure you that our vendors will be able to meet our needs in a
satisfactory and timely manner in the future or that we will be able to obtain
alternative vendors when and if needed. It could take a significant period of
time to establish relationships with alternative suppliers for critical
technologies and to introduce substitute technologies into our network. As a
result, the use of alternative vendors could delay our expansion plans. In
addition, if we change vendors, we may need to replace all or a portion of the
DSL equipment deployed within our network at significant expense in terms of
equipment costs and loss of revenues in the interim.
BECAUSE WE COMPETE AGAINST ESTABLISHED INDUSTRY COMPETITORS WITH SUBSTANTIALLY
GREATER RESOURCES, WE MAY NOT BE ABLE TO ACHIEVE OUR OPERATING AND FINANCIAL
OBJECTIVES
The market in which we operate is highly competitive and most of our
competitors and potential competitors have substantially greater resources than
we have. Our failure to compete effectively could prevent us from obtaining
sufficient market share to become profitable. For more information regarding the
competitive environment in which we operate, please see
"Business -- Competition."
IF WE ARE NOT ABLE TO OBTAIN OR IMPLEMENT NEW TECHNOLOGIES, WE MAY LOSE BUSINESS
AND LIMIT OUR ABILITY TO ATTRACT NEW CUSTOMERS
We may be unable to obtain access to new technology on acceptable terms or
at all. We may be unable to adapt to new technologies and offer services in a
competitive manner. If these events occur, we may lose customers to competitors
offering more advanced services and our ability to attract new customers would
be hindered. Rapid and significant changes in technology are expected in the
communications industry. We cannot predict the effect of technological changes
on our business. Our future success will depend, in part, on our ability to
anticipate and adapt to technological changes, evolving industry standards and
changing needs of our current and prospective customers.
A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS AND RESULT IN CUSTOMER DISSATISFACTION
Interruptions in service, capacity limitations or security breaches could
have a negative effect on customer acceptance and, therefore, on our revenues
and ability to attract new customers. Our networks may be affected by physical
damage, power loss, capacity limitations, software defects, breaches of security
by computer viruses, break-ins or otherwise and other factors which may cause
interruptions in service or reduced capacity for our customers.
IF WE ARE UNABLE TO EFFECTIVELY DELIVER DSL SERVICES TO A SUBSTANTIAL NUMBER OF
CUSTOMERS, WE MAY NOT ACHIEVE OUR REVENUE GOALS
We cannot guarantee our network will be able to connect and manage a
substantial number of customers at high transmission speeds. If we cannot
achieve and maintain digital transmission speeds that are otherwise available in
the market, we may lose customers to competitors with higher transmission speeds
and we may not be able to attract new customers. While digital transmission
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<PAGE> 119
speeds of up to 1.5 Mbps are possible on portions of our network, that speed may
not be available over a majority of our network. Actual transmission speeds on
our network will depend on a variety of factors many of which are beyond our
control, including the distance an end user is located from a central office,
the quality of the telephone lines, the presence of interfering transmissions on
nearby lines and other factors.
WE MAY LOSE CUSTOMERS OR POTENTIAL CUSTOMERS BECAUSE THE TELEPHONE LINES WE
REQUIRE MAY BE UNAVAILABLE OR IN POOR CONDITION
Our ability to provide DSL services to potential customers depends on the
quality, physical condition, availability and maintenance of telephone lines
within the control of the incumbent carriers. If the telephone lines are not
adequate, we may not be able to provide DSL services to many of our target
customers and our expected revenues will be diminished. We believe the current
condition of telephone lines in many cases may be inadequate to permit us to
fully implement our DSL services. In addition, the incumbent carriers may not
maintain the telephone lines in a condition that will allow us to implement our
DSL services effectively or may claim they are not of sufficient quality to
allow us to fully implement or operate our DSL services. Further, some customers
use technologies other than copper lines to provide telephone services, and as a
result, DSL services might not be available to these customers.
INTERFERENCE OR CLAIMS OF INTERFERENCE COULD DELAY OUR ROLLOUT OR RESULT IN
CUSTOMER DISSATISFACTION
Interference, or claims of interference by the incumbent carriers, if
widespread, could adversely affect our speed of deployment, reputation, brand
image, service quality and customer satisfaction and retention. Technologies
deployed on copper telephone lines, such as DSL, have the potential to interfere
with other technologies on the copper telephone lines. Interference could
degrade the performance of our services or make us unable to provide service on
selected lines and the customers served by those lines. Although we believe our
DSL technologies, like other technologies, do not interfere with existing voice
services, incumbent carriers may claim the potential for interference permits
them to restrict or delay our deployment of DSL services. The procedures to
resolve interference issues between competitive carriers and incumbent carriers
are still being developed. We may be unable to successfully resolve interference
issues with incumbent carriers.
OUR FUTURE SUCCESS WILL DEPEND ON GROWTH IN THE DEMAND FOR INTERNET ACCESS AND
HIGH-SPEED DATA SERVICES
If the markets for the services we offer, including Internet access and
high-speed data services, fail to develop, grow more slowly than anticipated or
become saturated with competitors, we may not be able to achieve our projected
revenues. The markets for business Internet and high-speed data services are in
the early stages of development. Demand for Internet services is highly
uncertain and depends on a number of factors, including the growth in consumer
and business use of new interactive technologies, the development of
technologies that facilitate interactive communication between organizations and
targeted audiences, security concerns and increases in data transport capacity.
In addition, the market for high-speed data transmission via DSL technology
is relatively new and evolving. Various providers of high-speed digital services
are testing products from various suppliers for various applications, and no
industry standard has been broadly adopted. Critical issues concerning
commercial use of DSL for Internet and high-speed data access, including
security, reliability, ease of use and cost and quality of service, remain
unresolved and may impact the growth of these services.
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<PAGE> 120
THE DESIRABILITY AND MARKETABILITY OF OUR INTERNET SERVICE MAY BE ADVERSELY
AFFECTED IF WE ARE NOT ABLE TO MAINTAIN RECIPROCAL RELATIONSHIPS WITH OTHER
INTERNET SERVICE PROVIDERS
The Internet is comprised of many Internet service providers and underlying
transport providers who operate their own networks and interconnect with other
Internet service providers at various points. As we commence the operation of
Internet services, connections to the Internet will be provided through
wholesale carriers. We anticipate as our volume increases, we will enter into
reciprocal agreements with other Internet service providers. We cannot assure
you other national Internet service providers will maintain reciprocal
relationships with us. If we are unable to maintain these relationships, our
Internet services may not be attractive to our target customers, which would
impair our ability to retain and attract customers. In addition, the
requirements associated with maintaining relationships with the major national
Internet service providers may change. We cannot assure you we will be able to
expand or adapt our network infrastructure to meet any new requirements on a
timely basis, at a reasonable cost, or at all.
WE MAY INCUR LIABILITIES AS A RESULT OF OUR INTERNET SERVICE OFFERINGS
United States law relating to the liability of on-line service providers
and Internet service providers for information carried on, disseminated through,
or hosted on their systems is currently unsettled. If liability is imposed on
Internet service providers, we would likely implement measures to minimize our
liability exposure. These measures could require us to expend substantial
resources or discontinue some of our product or service offerings. In addition,
increased attention to liability issues, as a result of litigation, legislation
or legislative proposals could adversely affect the growth and use of Internet
services.
CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS COULD RESTRICT THE WAY WE
OPERATE OUR BUSINESS AND NEGATIVELY AFFECT OUR COSTS AND COMPETITIVE POSITION
A significant number of the services we offer are regulated at the federal,
state and/or local levels. If these laws and regulations change or if the
administrative implementation of laws develops in an adverse manner, there could
be an adverse impact on our costs and competitive position. In addition, we may
expend significant financial and managerial resources to participate in
administrative proceedings at either the federal or state level, without
achieving a favorable result. We believe incumbent carriers and others may work
aggressively to modify or restrict the operation of many provisions of the
Telecommunications Act. We expect incumbent carriers and others to continue to
pursue litigation in courts, institute administrative proceedings with the
Federal Communications Commission or FCC and other regulatory agencies and lobby
the United States Congress, all in an effort to affect laws and regulations in a
manner favorable to them and against the interest of competitive carriers. For
more details about our regulatory situation, please see "Business -- Government
Regulations."
WE MAY NOT BE ABLE TO COLLECT ALL OF THE ACCESS CHARGES WE HAVE BILLED TO LONG
DISTANCE CARRIERS
When our facilities are used to originate a customer's long distance call
and deliver it to the long distance carrier designated by the customer, or to
terminate a long distance call received from a long distance carrier by
delivering it to a telephone number connected to our network, the long distance
carrier is required to pay us for access to our network and the use of our
facilities. These charges are called "access charges." Access charges
represented a significant portion of revenues in 1998 and 1999. The long
distance carriers responsible for generating a significant portion of our access
charge revenues have refused to pay the full amount of access charges billed to
them under our tariffs. The law applicable to our disputes with these carriers
is unclear and we may not be able to collect the full amount of the access
charges owed to us. Until these disputes are resolved and access charge
receivables are collected on a timely basis, we cannot rely on these revenues as
a source of cash flow.
16
<PAGE> 121
As a result, we may be required to raise additional capital sooner than we
currently anticipate. See "-- We will need significant additional funds that we
may not be able to obtain," and "Business -- Legal Proceedings."
THE PRICES WE CHARGE FOR OUR SERVICES AND PAY FOR THE USE OF SERVICES OF
INCUMBENT CARRIERS AND OTHER COMPETITIVE CARRIERS MAY BE NEGATIVELY AFFECTED IN
REGULATORY PROCEEDINGS, WHICH COULD RESULT IN DECREASED REVENUES, INCREASED
COSTS AND LOSS OF BUSINESS
If we were required to decrease the prices we charge for our services or to
pay higher prices for services we purchase from incumbent carriers and other
competitive carriers, it would have an adverse effect on our ability to achieve
profitability, our costs and our ability to offer competitively priced services.
We must file tariffs with state and federal regulators which indicate the prices
we charge for our services. In addition, we purchase some tariffed services from
incumbent carriers and/or competitive carriers. The rate we pay for other
services we purchase from incumbent carriers and other competitive carriers are
set by negotiations between the parties. All of the tariffed prices may be
challenged in regulatory proceedings by customers, including incumbent carriers,
competitive carriers and long distance carriers who purchase these services.
These negotiated rates are also subject to regulatory review. In August 1999,
the FCC initiated a proceeding which is considering the reasonableness of
competitive carrier access charges and is seeking comments on whether the FCC
should regulate the access charges set by competitive carriers. While the
outcome of this proceeding cannot be predicted, if we were required to decrease
our access charges it could have an adverse effect on our expected revenues.
ONE OF OUR INTERCONNECTION AGREEMENTS REQUIRES A RETROACTIVE ADJUSTMENT TO THE
RATE WE PAY FOR CERTAIN SERVICES WHICH MAY INCREASE OUR LOSSES
One of our interconnection agreements requires a retroactive adjustment to
the rates we pay for leased telephone lines and installation services when the
state regulatory commission makes a final determination of the appropriate
rates. The state regulatory commission has recently released its determination
of the appropriate rates. The final rate for leased telephone lines, a recurring
expense, was below the rate we previously estimated. The final rate for
non-recurring installation services was above the rate we previously estimated.
We are in the process of determining the aggregate impact to our cost of
operating revenues. Our best estimate of the probable outcome is that it may be
necessary to expense approximately $1.2 million of additional cost of operating
revenues in 1999.
WE WILL FACE ADDITIONAL RISKS IF WE ACQUIRE OTHER BUSINESSES
We may acquire other businesses as a means of expanding into new markets or
developing new services. We are unable to predict whether or when any
prospective acquisitions will occur or the likelihood of any acquisition being
completed on favorable terms and conditions. Acquisitions of other businesses
involve risks including:
- difficulties assimilating acquired operations and personnel;
- potential disruptions of our ongoing business;
- the diversion of resources and management time;
- the possibility uniform standards, controls, procedures and policies may
not be maintained;
- risks associated with entering new markets in which we have little or no
experience; and
- the potential impairment of relationships with employees or customers as
a result of changes in management.
Any business we might acquire might not perform as expected.
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<PAGE> 122
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could fluctuate widely in response to a variety of
factors, including:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- significant acquisitions, strategic partnerships, joint ventures or
capital commitments;
- additions or departures of key personnel;
- sales of common stock; and
- other events or factors that may be beyond our control.
In addition, the Nasdaq National Market, where many publicly held
communications companies like us are traded, has recently experienced extreme
price and volume fluctuations. These fluctuations often have been unrelated or
disproportionate to the operating performance of these companies. Broad market
and industry factors may materially adversely affect the market price of our
common stock, regardless of our actual operating performance. The volatility of
the trading price of our common stock may impact the trading price of our Series
D convertible preferred stock.
FUTURE SALES OF OUR STOCK BY EXISTING STOCKHOLDERS MAY ADVERSELY AFFECT OUR
STOCK PRICE
Our stock price will likely decline if the supply of our stock being sold
in the open market exceeds the demand for our stock. Substantially all of our
common stock is currently eligible for sale in the open market. The shares of
common stock which may be issued in the concurrent offering or upon conversion
of or as dividends on the Series D convertible preferred stock will also be
freely tradeable. In addition, shares of our common stock issued upon exercise
of stock options are freely tradeable under a currently effective registration
statement. Sales and potential sales of substantial amounts of our common stock
in the open market could cause the market price for our common stock and
preferred stock to fall. See "Description of Securities -- Shares Eligible for
Future Sale."
The holders of some of our outstanding shares of common stock and
convertible securities have demand registration rights which if exercised could
result in a registration statement covering shares of common stock being filed
by us. These holders also have the right to have shares of common stock included
in any registration statement filed by us in the future. See "Description of
Securities -- Registration Rights of Security Holders."
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<PAGE> 123
OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
CAUSE US TO LOSE CUSTOMERS
We may lose customers if service interuptions are caused by our failure or
the failure of third parties to be Year 2000 compliant. For a discussion of
risks presented by our ability and the ability of others on whom we rely to
successfully make computer systems and other technology Year 2000 compliant, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of Year 2000" in this prospectus.
SOME PROVISIONS OF NEVADA LAW AND OUR ARTICLES OF INCORPORATION AND BY-LAWS
COULD DISCOURAGE A TAKEOVER OF OUR COMPANY AND ADVERSELY AFFECT THE PRICE OF OUR
STOCK
After completion of this offering and the concurrent offering, our board of
directors will have the authority to issue up to 39,222,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of our capital stock
may be adversely affected by the rights of the holders of any class of preferred
stock that may be issued in the future. The issuance of future classes of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock. Other than the
Series D convertible preferred stock, we have no current plans to issue shares
of preferred stock.
We are also subject to provisions of Nevada law which could have the effect
of delaying, deterring or preventing a change of control of our company. In
addition, our articles of incorporation and by-laws contain provisions that
could discourage potential takeover attempts and make attempts by stockholders
to change management more difficult. See "Description of Securities -- Control
Share Acquisitions," "-- Anti-Takeover Provisions of Articles of Incorporation,"
"-- Board of Directors," and "-- Stockholder Action and Special Meetings."
PAYMENT OF DIVIDENDS IN SHARES OF COMMON STOCK MAY NOT RESULT IN STATED DIVIDEND
YIELD
We expect to pay dividends in the form of our common stock. The number of
shares of common stock to be issued on each dividend payment date will be
determined by dividing the total dividend to be paid on all outstanding shares
of Series D convertible preferred stock by 95% of the average closing prices for
our common stock during a specified period before the dividend payment date. If
the market price of common stock during the specified period is higher than the
market price for the common stock on the dividend payment date and you sell your
common stock at the lower price, your actual dividend yield could be lower than
the stated dividend yield on the Series D convertible preferred stock. In
addition, you are likely to incur commissions and other transaction costs in
connection with the sale of the common stock.
THE SERIES D CONVERTIBLE PREFERRED STOCK IS SUBORDINATED TO ALL OUR LIABILITIES
AND RANKS EQUALLY WITH OUR OUTSTANDING PREFERRED STOCK
If we file for bankruptcy, liquidate or wind up our business, our assets
will be available to pay obligations on the Series D convertible preferred stock
only after all indebtedness and other liabilities, including our existing senior
secured notes, have been paid. In addition, any remaining assets will be, after
payment of any accrued and unpaid dividends, shared ratably among the holders of
our Series D convertible preferred stock, Series B convertible preferred stock,
Series C convertible preferred stock and any other parity security that may be
issued in the future. There may not be sufficient assets remaining to pay
amounts due on any or all of the Series D convertible preferred stock, Series B
convertible preferred stock, Series C convertible preferred stock and any other
parity security then outstanding. As of September 30, 1999, the Series D
convertible preferred stock would have been junior in right of payment to our
$157.7 million of long-term debt and would have ranked equally in
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<PAGE> 124
right of payment with $84.4 million of liquidation preference of Series B
convertible preferred stock and Series C convertible preferred stock.
OUR SERIES D CONVERTIBLE PREFERRED STOCK IS A NEW ISSUE OF SECURITIES AND HAS
NEVER BEEN PUBLICLY TRADED
Before this offering, there has been no trading market for the Series D
convertible preferred stock. We have applied to have the Series D convertible
preferred stock listed for quotation on the Nasdaq National Market; however, no
assurance can be given as to the liquidity of, or trading market for, the Series
D convertible preferred stock. If an active market for the Series D convertible
preferred stock fails to develop or be sustained, the trading price of the
Series D convertible preferred stock could be materially adversely affected.
OUR FORWARD-LOOKING STATEMENTS MAY MATERIALLY DIFFER FROM ACTUAL EVENTS OR
RESULTS
This prospectus contains "forward-looking statements," which you can
generally identify by our use of forward-looking words including "believe,"
"expect," "intend," "may," "will," "should," "could," "anticipate" or "plan" or
the negative or other variations of these terms or comparable terminology, or by
discussion of strategies that involve risks and uncertainties. We often use
these types of statements when discussing:
- our plans and strategies;
- our anticipation of profitability or cash flow from operations;
- the development of our business;
- the expected market for our services and products;
- our anticipated capital expenditures;
- changes in regulatory requirements; and
- other statements contained in this prospectus regarding matters that are
not historical facts.
We caution you these forward-looking statements are only predictions and
estimates regarding future events and circumstances. We cannot assure you we
will achieve the future results reflected in these statements.
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<PAGE> 125
HOW WE INTEND TO USE THE PROCEEDS OF THIS OFFERING
The net proceeds we receive from the sale of the Series D convertible
preferred stock we are offering are estimated to be approximately $145.1
million, after deducting estimated underwriting discounts and other offering
expenses payable by us. We will receive $166.9 million if the over-allotment
granted to the underwriters with respect to the Series D convertible preferred
stock is exercised in full.
The net proceeds we receive from the sale of the 4,470,959 shares of common
stock being offered concurrently with this offering are estimated to be
approximately $230.3 million, based on an assumed offering price of $54.38 per
share, the closing price of our common stock on February 2, 2000, and after
deducting estimated underwriting discounts and other offering expenses payable
by us. We will receive approximately $265.2 million if the over-allotment option
granted to the underwriters with respect to the common stock is exercised in
full.
Neither this offering nor the concurrent offering of common stock are
conditioned on the other and one offering may be completed without the other.
We intend to use the net proceeds from both offerings, as follows:
<TABLE>
<S> <C>
Capital expenditures related to the purchase and
installation of DSL and other communications
equipment $157.0 million
--------------
Market expansion and general corporate purposes,
including working capital to fund expanded sales,
marketing and product development efforts $218.4 million
--------------
</TABLE>
However, management will have broad discretion in determining the uses and
exact amounts for each use of the net proceeds. In addition, we may use a
portion of the net proceeds for acquisitions, although we are not involved in
any acquisition negotiations at this time. See "Risk Factors -- We will face
additional risks if we acquire other businesses."
Pending use of the net proceeds as described above, we intend to invest
them in short-term, investment grade securities.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock and we do not
anticipate paying cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will depend on our financial condition, results of operations,
capital requirements and other factors our board of directors considers
relevant. In addition, the terms of our outstanding indebtedness and preferred
stock restrict our ability to pay cash dividends on our common stock and
preferred stock.
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<PAGE> 126
CAPITALIZATION
The following table shows our capitalization as of September 30, 1999, (A)
on an actual basis, (B) as adjusted to reflect the sale of the 3,000,000 shares
of Series D convertible preferred stock we are offering by means of this
prospectus and the sale of 1,250,000 shares of Series C convertible preferred
stock in December 1999, and (C) as further adjusted to reflect the sale of the
3,000,000 shares of Series D convertible preferred stock we are offering by
means of this prospectus, the sale of 1,250,000 shares of Series C convertible
preferred stock in December 1999, and the sale of 4,470,959 shares of common
stock we are offering in the concurrent offering.
You should read this table with our financial statements and the related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------------------------
ACTUAL AS ADJUSTED(1) AS FURTHER ADJUSTED(2)
-------- -------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents and investments
available-for-sale, excluding restricted
investments...................................... $178,961 $353,666 $583,979
Restricted investments............................. 30,375 30,375 30,375
-------- -------- --------
Total cash and cash equivalents, investments
available-for-sale and restricted
investments.................................... $209,336 $384,041 $614,354
======== ======== ========
13% senior secured notes due 2004.................. $157,125 $157,125 $157,125
Other long-term debt............................... 552 552 552
Series B convertible preferred stock............... 49,452 49,452 49,452
Series C convertible preferred stock............... -- 34,500 34,500
Note receivable from stockholder for issuance of
Series C convertible preferred stock............. -- (4,900) (4,900)
Series D convertible preferred stock............... -- 145,105 145,105
Stockholders' equity:
Common stock, $0.001 par value, 60,000,000 shares
authorized, 22,800,920 outstanding actual and
as adjusted and 27,239,514 as further
adjusted....................................... 23 23 27
Additional paid-in-capital....................... 223,240 223,240 453,549
Accumulated deficit.............................. (89,136) (89,136) (89,136)
Less: treasury stock............................. (76) (76) (76)
Accumulated other comprehensive income........... (360) (360) (360)
Notes receivable from stockholders for issuance
of common stock................................ (2,086) (2,086) (2,086)
-------- -------- --------
Total stockholders' equity....................... 131,605 131,605 361,918
-------- -------- --------
Total capitalization............................... $338,734 $513,439 $743,752
======== ======== ========
</TABLE>
- -------------------------
(1) Gives effect to the sale of 3,000,000 shares of Series D convertible
preferred stock in this offering and the sale of 1,250,000 shares of Series
C convertible preferred stock in December 1999 for cash and a $4.9 million
promissory note due in March 2000 and bearing an interest rate of 7.5% per
year. Also gives effect to a $47.5 million beneficial conversion feature
recognized at the date of issuance for the Series B convertible preferred
stock and a $25.0 million beneficial conversion feature recognized at the
date of issuance for the Series C convertible preferred stock.
(2) Gives effect to the sale of 3,000,000 shares of Series D convertible
preferred stock in this offering, the sale of 1,250,000 shares of Series C
convertible preferred stock in December 1999 for cash and a $4.9 million
promissory note due in March 2000 and bearing an interest rate of 7.5% per
year and the sale of 4,470,959 shares of common stock in the concurrent
offering. Also gives effect to a $47.5 million beneficial conversion feature
recognized at the date of issuance for the Series B convertible preferred
stock and a $25.0 million beneficial conversion feature recognized at the
date of issuance for the Series C convertible preferred stock.
Our financial information presented above as of and for the nine month period
ended September 30, 1999, has been restated to reflect the accretion of
anticipated redemption value and beneficial conversion feature with respect to
the Series B convertible preferred stock. See "Notes to Consolidated Financial
Statements -- Note(12)."
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<PAGE> 127
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
You should read the following selected consolidated financial and operating
data with our consolidated financial statements and the related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," each of which can be found elsewhere in this prospectus. The
selected consolidated statement of operations data presented below for the years
ended December 31, 1996, 1997 and 1998 are derived from our consolidated
financial statements, which have been audited by KPMG LLP (1996) and Arthur
Andersen LLP (1997 and 1998), independent auditors.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------
1996(1) 1997 1998 1998 1999
------- ------- -------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues........................................ $ 1 $ 3,791 $ 18,249 $ 11,772 $ 34,922
Cost of operating revenues, excluding depreciation........ 305 3,928 17,129 10,575 31,449
Selling, general and administrative expenses.............. 841 6,440 17,877 11,250 27,469
Loss from operations...................................... (1,554) (7,851) (21,995) (13,202) (36,402)
Net loss.................................................. (1,491) (10,836) (32,065) (22,293) (44,744)
Basic and diluted loss per share of common stock.......... $ (2.11) $ (1.30) $ (2.26) $ (1.69) $ (5.19)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1999
----------------------------- --------------------------------------------------
1996(1) 1997 1998 ACTUAL AS ADJUSTED(2) AS FURTHER ADJUSTED(3)
------- -------- -------- -------- -------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
investments, excluding restricted
investments....................... $ 7,897 $102,764 $ 84,949 $178,961 $ 353,666 $ 583,979
Restricted investments.............. -- 57,574 39,379 30,375 30,375 30,375
Property and equipment, net......... 3,250 24,617 116,380 151,159 151,159 151,159
Total assets........................ 12,339 191,977 252,119 381,814 556,519 786,832
Long-term debt...................... -- 156,637 157,295 157,677 157,677 157,677
Series A convertible preferred
stock............................. -- 16,665 -- -- -- --
Series B convertible preferred
stock............................. -- -- -- 49,452 49,452 49,452
Series C convertible preferred
stock............................. -- -- -- -- 29,600 29,600
Series D convertible preferred
stock............................. -- -- -- -- 145,105 145,105
Stockholders' equity................ 10,792 8,976 63,260 131,605 131,605 361,918
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1996(1) 1997 1998 1998 1999
------- --------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(4)............................................... $(1,145) $ (6,577) $(16,757) $ (10,053) $ (23,996)
Cash flows used in operating activities................. (942) (4,490) (24,184) (9,073) (29,226)
Cash flows used in investing activities................. (2,287) (135,491) (77,715) (92,948) (54,784)
Cash flows provided by financing activities............. 11,126 177,138 68,731 68,387 165,348
Insufficiency of earnings to cover combined fixed
charges and preferred stock dividends(5).............. 1,491 11,024 35,104 22,593 43,818
Capital expenditures.................................... 3,659 22,641 97,101 67,136 47,135
OPERATING DATA AT END OF PERIOD:
Total access lines in service........................... 50 15,590 47,744 35,246 117,210
Central office collocation sites........................ 9 25 207 85 288
Switches in service..................................... 1 3 7 4 7
Number of sales personnel
Field sales......................................... 7 23 50 39 95
Inside sales........................................ -- -- 31 53 33
------- --------- -------- --------- ---------
Total.......................................... 7 23 81 92 128
</TABLE>
- ---------------
(1) No data is presented for periods before 1996 since we commenced our
operation in December 1996 and no revenues or expenses were recognized and
no cash transactions occurred between our inception on October 16, 1995 and
December 31, 1995.
(2) Gives effect to the sale of 3,000,000 shares of Series D convertible
preferred stock in this offering at $50.00 per share and the sale of
1,250,000 shares of Series C convertible preferred stock at $28.00 per share
in December 1999 for cash and a $4.9 million promissory note.
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(3) Gives effect to the sale of 3,000,000 shares of Series D convertible
preferred stock in this offering at $50.00 per share, the sale of 1,250,000
shares of Series C convertible preferred stock at $28.00 per share in
December 1999 for cash and a $4.9 million promissory note, and the sale of
4,470,959 shares of common stock in the concurrent offering at an assumed
price of $54.38 per share, the closing price of our stock on February 2,
2000. The price per share to be paid for the Series D convertible preferred
stock has been established at $50.00 with the conversion price to be based
on the market price for our common stock at the time the Series D
convertible preferred stock is issued and negotiations between our
underwriters and us. The price per share paid for the Series C convertible
preferred stock was based on the trading price for our common stock
immediately before the purchasers' commitment to purchase that stock. The
assumed price of the shares of common stock is equal to the closing price of
our common stock on February 2, 2000.
(4) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. For the year ended December 31, 1996, EBITDA excludes a charge
of $355,000 related to the one-time write-off of purchased software. EBITDA
does not represent funds available for management's discretionary use and is
not intended to represent cash flow from operations. EBITDA should not be
considered as an alternative to loss from operations as an indicator of our
operating performance or to cash flows as a measure of liquidity. In
addition, EBITDA is not a term defined by generally accepted accounting
principles and, as a result, the measure of EBITDA may not be comparable to
similarly titled measures used by other companies. We believe that EBITDA is
often reported and widely used by analysts, investors and other interested
parties in the communications industry. Accordingly, we are including this
information to permit a more complete comparison of our operating
performance relative to other companies in the industry.
(5) For purposes of calculating the insufficiency of earnings to cover combined
fixed charges and preferred stock dividends: earnings consist of loss before
income taxes plus fixed charges excluding capitalized interest and preferred
stock dividends and fixed charges consist of interest expensed and
capitalized, plus amortization of deferred financing costs, debt discount,
preferred stock dividends and a portion of rent expense under operating
leases deemed by us to represent an interest factor.
Our financial information presented above as of and for the nine month
period ended September 30, 1999, has been restated to reflect the accretion of
anticipated redemption value and beneficial conversion feature with respect to
the Series B convertible preferred stock. See "Notes to Consolidated Financial
Statements -- Note (12)."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our financial
statements and the notes related to our financial statements, each of which can
be found elsewhere in this prospectus.
OVERVIEW
We began providing competitive local dialtone services to small business
and residential customers in December 1996 and began offering long distance
services by February 1998. In third quarter 1999, we began to offer high-speed
data and Internet services in our Las Vegas market. Currently, we have switches
fully operational in Las Vegas, Atlanta, Chicago, southern Florida, and in
selected areas of southern California, including Los Angeles and San Diego.
Our 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 the first
nine months of 1999, long distance services also contributed to our revenue
base. Local services and long distance services are generally provided and
billed as a bundled offering under which customers pay a fixed amount for a
package of combined local and long distance services. As a result, the portion
of our revenues attributable to each kind of service is not identifiable and,
therefore, we do not record or report these amounts separately.
Our principal operating expenses consist of cost of operating revenues,
selling, general and administrative expenses 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 lease expenses for our "collocation"
sites, the space we rent from the incumbent carriers for the purpose of
installing our equipment to deliver our services to our customers. Selling,
general and administrative expenses consist primarily of compensation expenses,
advertising, provision for bad debts, professional fees and office rentals.
Depreciation and amortization expense includes depreciation of switching and
collocation equipment as well as general property and equipment.
During 1998, we expanded significantly with the installation of four
additional switches and the build-out of 182 additional collocation sites.
During the first nine months of 1999, we have continued this expansion with the
build-out of 81 additional collocation sites. As expected, both cost of
operating revenues and selling, general and administrative expenses increased as
many of the fixed costs of providing service in new markets are incurred before
significant revenue can be generated from those markets. In addition, we
incurred significant marketing costs to build our initial base of customers in
our new markets.
Building and expanding our business has required and will continue to
require us to incur significant capital expenditures primarily consisting of the
costs of purchasing switches, associated equipment and land for switching sites
and constructing buildings or improving leased buildings to house our switching
and collocation facilities. As part of our network growth strategy, we purchased
and installed host switches in each of our markets while leasing the means of
transporting voice and data traffic from these switches to our customers'
telephones or other equipment. We believe this facilities-based strategy, while
initially increasing our level of capital expenditures and operating losses,
will enhance our long-term financial performance in comparison to a resale
strategy.
We have experienced operating losses and generated negative cash flow from
operations since inception and expect to continue to generate negative cash flow
from operations for the foreseeable future while we continue to expand our
network and develop our product offerings and customer base. There can be no
assurance our revenue or customer base will grow or that we will be able to
achieve or sustain positive cash flow from operations. See "Risk Factors -- We
expect our losses to continue."
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RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 VS. SEPTEMBER 30, 1998
Total operating revenues increased to $34.9 million for the nine months
ended September 30, 1999 as compared to $11.8 million for the nine months ended
September 30, 1998. The 196% increase was primarily the result of the increase
in the number of lines in service. Total lines in service increased 233% from
35,246 at September 30, 1998 to 117,210 at September 30, 1999. In addition, long
distance service, which was added to our product offerings in February 1998,
contributed to the revenue base for the full nine month period in 1999, but only
for seven full months in the similar period in 1998. Our switched access
revenues, which represented 35% of our total operating revenues for the nine
months ended September 30, 1999, increased $7.4 million or 157% from the nine
month period ended September 30, 1998 to the nine month period ended September
30, 1999. As of September 30, 1999, 46% of our switched access receivable
balances are subject to dispute. Until these disputes are resolved and our
access charge receivables are collected, we cannot rely on these revenues as a
source of cash flow.
Cost of operating revenues for the nine months ended September 30, 1999 was
$31.4 million as compared to $10.6 million for the nine months ended September
30, 1998. The 196% increase is due to the increased number of lines in service
and installation and operational expenses associated with the expansion of our
network.
For the nine months ended September 30, 1999, selling, general and
administrative expenses totaled $27.5 million, a 143% increase over the $11.3
million for the nine months ended September 30, 1998. The increase is a result
of increased costs attributable to marketing and delivering our service and
supporting our continued network expansion.
For the nine months ended September 30, 1999, depreciation and amortization
was $12.4 million as compared to $3.1 million for the nine months ended
September 30, 1998. This increase is a result of placing additional assets in
service in accordance with the planned build-out of our network.
Gross interest expense during each nine month period ended September 30,
1999 and 1998 totaled $16.7 million. Interest capitalized for the nine months
ended September 30, 1999 increased to $2.9 million as compared to $0.6 million
for the nine months ended September 30, 1998. The increase in interest
capitalized is due to the increase in switching equipment under construction.
Gross interest expense is primarily attributable to the 13% Senior Secured Notes
due 2004 we issued in September 1997.
Interest income was $5.2 million during the nine months ended September 30,
1999 compared to $7.0 million for the nine months ended September 30, 1998. The
26% decrease is a result of the decrease in cash and investments since September
30, 1998. Cash and investments have been used to purchase switching equipment,
pay interest on the senior secured notes and fund operating losses.
We incurred net losses of $44.7 million and $22.3 million for the nine
month periods ended September 30, 1999 and 1998, respectively.
For the nine months ended September 30, 1999, we recognize an accrued
preferred stock dividend of $1.9 million, a beneficial conversion feature of
$47.5 million, and an accretion of preferred stock to redemption value of $2.8
million, all in accordance with the issuance of the Series B preferred stock
issued in May 1999. See "Note 12 -- Notes to Consolidated Financial Statements."
YEAR ENDED DECEMBER 31, 1998 VS. 1997
Total operating revenues for the year ended December 31, 1998 were $18.2
million as compared to $3.8 million for the year ended December 31, 1997. The
381% increase is a result of the installation of four additional switches, an
increase in the number of lines in service and the
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introduction of long distance service in early 1998. We provided communications
services in only Las Vegas until December 1997 when we initiated service in
Atlanta and southern California. As a result of our network expansion, during
1998 we began to offer service in Chicago and additional areas of southern
California, including Los Angeles and San Diego. We had 47,744 lines in service
as of December 31, 1998 as compared to 15,590 lines in service as of December
31, 1997, a 206% increase.
Cost of operating revenues for the year ended December 31, 1998 was $17.1
million as compared to $3.9 million for the year ended December 31, 1997. The
336% increase is due to the increased number of lines in service during 1998,
network expenses associated with initiation of long distance service in February
1998, and installation and operational expenses associated with the significant
expansion of our network.
For the year ended December 31, 1998, selling, general and administrative
expenses totaled $17.9 million, a 178% increase over the $6.4 million for the
year ended December 31, 1997. The increase in expenses resulted from increased
costs attributable to marketing of services, delivering our service and
supporting our continued network expansion.
For the year ended December 31, 1998, depreciation and amortization was
$5.2 million as compared to $1.3 million for the year ended December 31, 1997.
This increase is a result of placing additional assets in service during the
period to support our planned build-out of our network. As of December 31, 1998
we had seven operational switches and 207 collocation sites built out as
compared to three switches and 25 collocation sites as of December 31, 1997.
Interest expense for fiscal 1998 totaled $19.1 million as compared to $5.5
million for fiscal 1997. The increase is primarily attributable to a full year
of interest incurred on the senior secured notes we issued in September 1997.
Interest income was $8.8 million for the year ended December 31, 1998
compared to $2.5 million for the year ended December 31, 1997. The income is
attributable to earnings on investments made with the proceeds from the issuance
of the senior secured notes and with the proceeds from the sale of our common
and preferred stock.
We incurred net losses of $32.1 million during 1998 and $10.8 million
during 1997.
YEAR ENDED DECEMBER 31, 1996
Our operations before December 1996 were limited to start-up activities
and, as a result, our revenues and expenditures for the period were not
indicative of anticipated revenues which may be attained or expenditures which
may be incurred by us in future periods. We did not begin revenue-generating
operations until December 1996. As a result, any comparison of the year ended
December 31, 1997 with the year ended December 31, 1996 would not be meaningful.
During the year ended December 31, 1996, we generated $1,000 in operating
revenues as a result of commencing service during the month of December. We had
cost of operating revenues of $0.3 million which represents primarily fixed
costs. In addition, we incurred other operating expenses, including depreciation
and amortization, of $1.3 million in connection with the commencement of
operations and the build-out of our network. These expenses consisted primarily
of payroll expenses, professional fees, expenses related to the introduction of
initial service and a one-time write-off of purchased software.
We earned interest income in the period of $0.1 million.
As a result, we incurred a net loss in the period of $1.5 million. This
loss is primarily attributable to the expenses incurred in connection with the
initial development of our business.
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LIQUIDITY AND CAPITAL RESOURCES
Our operations require substantial capital investment for the purchase of
communications equipment and the development and installation of our network.
Capital expenditures were $47.1 million for the nine months ended September 30,
1999, $97.1 million for the year ended December 31, 1998 and $22.6 million for
the year ended December 31, 1997. We expect we will continue to require
substantial amounts of capital to fund the purchase of the equipment necessary
to continue expanding the geographic coverage of our network in our existing
markets and to develop new products and services. In addition, we expect to
enter new markets during 2000. We expect capital expenditures of approximately
$550 million over the next five years. We anticipate that the proceeds from the
sale of the Series C convertible preferred stock, this offering and the
concurrent offering and our cash currently on hand will fully fund our projected
capital expenditures over the next five years.
We continually evaluate our capital expenditure plan in light of
developments in the telecommunications industry and market acceptance of our
service offerings. As a result of this evaluation, we may decide to accelerate
or expand our capital expenditure plan. To fund an accelerated or expanded
capital expenditure plan, we would have to issue additional debt and/or equity
securities. We cannot assure you we would be successful in raising additional
capital on terms acceptable to us or at all. If we were unable to raise the
additional capital to fund an accelerated capital plan, we would be required to
delay or modify our revised plan.
From our inception through September 1997, we raised approximately $17.8
million from private sales of common stock.
In September 1997, we completed a $160.0 million offering of senior secured
notes and warrants to purchase 862,923 shares of common stock after giving
effect to anti-dilution adjustments. At the closing of the sale of the senior
secured notes, we used approximately $56.8 million of the net proceeds from the
sale of the senior secured notes to purchase a portfolio of securities that has
been pledged as security to cover the first six interest payments on the senior
secured notes. In addition, we have granted the holders of the senior secured
notes a security interest in a significant portion of our communications
equipment.
In November 1997 and January 1998, we issued an aggregate of 6,571,427
shares of Series A convertible preferred stock at $3.50 per share for net
proceeds of $21.6 million.
We completed our initial public offering of common stock on May 15, 1998.
We sold a total of 4,025,000 shares of our common stock to the public and
received net proceeds of $63.0 million. In connection with the initial public
offering of our common stock, we reduced the number of authorized and
outstanding shares of our common stock by 40%. Our outstanding shares of
preferred stock were converted into 3,942,856 shares of common stock upon our
initial public offering.
In May 1999, we issued 5,277,779 shares of Series B convertible preferred
stock at $9.00 per share for net proceeds of approximately $46.7 million.
In July 1999, we issued 5,000,000 shares of common stock and received net
proceeds, after expenses, of approximately $118.1 million. In the offering,
existing stockholders sold an additional 587,695 shares of common stock for
which we did not receive any proceeds.
In November 1999, we entered into an agreement with Providence Equity
Partners III, L.P., JK&B Capital III, L.P. and their affiliates under which we
agreed to sell 1,250,000 shares of newly issued Series C convertible preferred
stock at $28.00 per share for a total consideration of $35.0 million. The Series
C convertible preferred stock was issued in December 1999. Of the total
consideration, $4.9 million was paid by an interest bearing promissory note due
in March 2000. The
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Series C convertible preferred stock may be converted into common stock on a
one-to-one basis. See "Description of Securities -- Series C Convertible
Preferred Stock."
As of September 30, 1999, we had outstanding receivables of approximately
$12.3 million attributable to access charges billed to AT&T, Sprint, MCI
WorldCom and other long distance carriers. AT&T, Sprint and MCI WorldCom refused
to pay the full amount of the access charges billed to them. We have since
settled our dispute with MCI WorldCom; however, our disputes with AT&T and
Sprint have yet to be resolved. Of our outstanding access charge receivables as
of September 30, 1999, 46% remains in dispute. Our failure to collect from these
long distance carriers could have a material impact on our financial condition.
See "Business -- Legal Proceedings" and "Risk Factors -- We may not be able to
collect all of the access charges we have billed to long distance carriers."
The substantial capital investment required to initiate services and fund
our initial operations has exceeded our operating cash flow. This negative cash
flow from operations results from the need to establish our network in
anticipation of connecting revenue-generating customers. We expect to continue
recording negative cash flow from operations for a period of time because we are
continuing network expansion activities. We cannot assure you we will attain
break-even cash flow from operations in subsequent periods. Until sufficient
cash flow from operations is generated, we will need to use our current and
future capital resources to meet our cash flow requirements and may be required
to issue additional debt and/or equity securities. We expect our available cash
and the proceeds of the issuance of Series C convertible preferred stock, this
offering and the concurrent offering as well as future cash flow from operations
should be adequate to fund our operations and planned capital expenditures. We
cannot assure you that we will be successful in completing the concurrent
offering. If the concurrent offering is not successful or if future cash flow
from operations is not sufficient, management intends to consider alternate
forms of financing or to delay or modify some of our expansion plans.
Depending on market conditions, we may raise additional capital at any
time. However, we cannot assure you that we will be successful in raising
additional debt or equity financing on terms acceptable to us, if at all. The
indenture governing the senior secured notes and the terms of our preferred
stock impose restrictions upon our ability to incur additional debt 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." At the end of the century, those same systems should reflect 01/01/00
as being "January 1, 2000." However, a non-compliant system would read 01/01/00
as January 1, 1900.
We have been focused on year 2000 issues since our inception in 1996. Since
we are young, much of the hardware and software currently in place was purchased
with Y2K readiness in mind. However, in most cases, we have relied on
representations of our vendors as to the Y2K compliance of the hardware and
software we have purchased. Although we have not experienced any significant
year 2000 problems to date, we cannot assure you the vendor representations we
relied upon are accurate or complete or that we will have recourse against any
vendors whose representations prove misleading.
Our significant vendors, including our major communications equipment
suppliers, have assured us their applications are year 2000 compliant. Our
business also relies on other third parties. The ability of third parties upon
whom we rely to adequately address their year 2000 issues is outside our
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control. However, we are coordinating efforts with these parties to minimize the
extent to which our business will be vulnerable to their failure to remediate
their own year 2000 issues. We cannot assure you the systems of the third
parties will be modified on a timely basis. Our business, financial condition
and results of operations could be materially adversely affected by the failure
of the systems and applications of third parties to properly operate after 1999.
As of November 30, 1999, we had incurred less than $100,000 of expenses in
connection with our preparation for Y2K issues and we do not expect to incur any
significant additional expenses.
If we cannot operate effectively after December 31, 1999, we could, among
other things, face substantial claims by customers or loss of revenue due to
service interruptions, inability to fulfill contractual obligations or to bill
customers accurately and on a timely basis, as well as increased expenses
associated with litigation, stabilization of operations following critical
system failures and the execution of contingency plans. We could also experience
an inability by customers and others to pay, on a timely basis or at all,
obligations owed to us. Under these circumstances, the adverse effects, although
not quantifiable at this time, could be material.
As of the date of this prospectus, we have not experienced any material
year 2000 problems, either in our systems or in the systems of third parties
with whom we deal.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of our long-term debt bears fixed interest rates. However, the fair
market value of this debt is sensitive to changes in prevailing interest rates.
We run the risk that market rates will decline and the required payments on our
outstanding debt will exceed those based on the current market rate. We do not
use interest rate derivative instruments to manage our exposure to interest rate
changes.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants recently issued
Statement of Position or SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires start-up costs, as defined, to be expensed as
incurred and is effective for financial statements for fiscal years beginning
after December 15, 1998. We currently expense all start-up costs as incurred and
consequently, the application of SOP 98-5 will have no material impact on our
financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that all derivatives be recognized at fair value as either assets or
liabilities. SFAS No. 133 also requires an entity that elects to apply hedge
accounting to establish the method to be used in measuring the effectiveness of
the hedging derivatives and the measurement approach for determining the
ineffectiveness of the hedge at the inception of the hedge. The methods chosen
must be consistent with the entity's approach to managing risk. The standard is
effective for our 2000 fiscal year. We have adopted SFAS No. 133 during 1999.
Adoption of SFAS No. 133 has not had a material effect on us since we do not
currently use derivatives or participate in hedging activities.
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BUSINESS
MGC COMMUNICATIONS
We are a growing communications company currently offering Internet access,
voice over DSL, local dialtone, long distance and other voice and data services
primarily to small and medium size business customers. We have launched bundled
voice and high-speed data services using DSL technology in all of our current
markets. We have one of the broadest geographic service areas of any competitive
carrier providing local, long distance and data services, with 288 central
office collocation sites providing us access to approximately 16 million
addressable lines at the end of third quarter 1999. Over 200 of our central
office collocation sites are DSL capable. We currently deliver our services in
the metropolitan areas of Atlanta, Chicago, Las Vegas, southern Florida and
selected areas of southern California, including Los Angeles and San Diego. We
have interconnection agreements with five incumbent carriers: Ameritech,
BellSouth, GTE, PacBell and Sprint. At the end of the third quarter of 1999, we
had 138,400 customer lines sold, of which 117,210 lines were in service. To
rollout our network and services on a national basis, during 2000, we plan to
aggressively expand our network to include over 800 central office collocation
sites providing access to more than 35 million addressable lines.
We have announced that we plan to change our name to "Mpower Communications
Corp." in connection with our national rollout. We have commenced doing business
under the name "Mpower Communications," however, the name change is subject to
formal approval by our stockholders.
We were one of the first competitive carriers to implement a strategy of
building and owning the network equipment that controls how voice and data
transmissions originate and terminate, which we refer to as switches, while
leasing the telephone lines and cable over which the voice and data traffic are
transmitted, which we refer to as transport, from incumbent carriers. We install
our network equipment at the site of the incumbent carrier from whom we rent
standard telephone lines. These sites are referred to as collocation sites
within the telecommunications industry. We believe this strategy has allowed us
to serve a broad geographic area at a comparatively low cost while maintaining
control of the access to our customers. Having executed our strategy in the
markets we currently serve, we are well-positioned to serve the growing demand
from small and medium size business customers for communications services. For
an explanation of terms used in this prospectus to describe our network and its
components, please read the section entitled "-- Network Architecture and
Technology."
The rapid growth of the Internet has fueled demand from small and medium
size businesses for access to high-speed data services. To meet this growing
demand, we are using our current network infrastructure and DSL technology to
offer a bundled voice and high-speed data product over a single standard
telephone line. On average, DSL technology increases the transport capacity of
standard telephone lines by 24 times. By using a single standard telephone line
which we lease from the incumbent carrier to deliver a bundled voice and
high-speed data product, we expect to significantly reduce the per line costs of
providing our services. These savings should allow us to offer a value-priced
package of services to our customers.
MARKET OPPORTUNITY
We believe we have a significant market opportunity as a result of the
following factors:
Impact of the Telecommunications Act of 1996
The Telecommunications Act of 1996 allows competitive carriers to use the
existing infrastructure established by incumbent carriers, as opposed to
building a competing infrastructure at significant cost. The Telecommunications
Act requires all incumbent carriers to allow competitive
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carriers to collocate their equipment in the incumbent carrier's central
offices. This enables competitive carriers to access customers through existing
telephone line connections. The Telecommunications Act creates an incentive for
incumbent carriers that were formerly part of the Bell system to cooperate with
competitive carriers by precluding each of these incumbent carriers from
providing long distance service in its region until regulators determine there
is a significant level of competition in the incumbent carrier's local market.
See "-- Government Regulations."
Needs of Small and Medium Size Businesses for Integrated Communications
Solutions
Many small and medium size businesses have no cost-effective alternative to
dial-up modems for Internet access. As a result, these businesses must contend
with productivity limitations associated with slow transmission speeds. In
addition, to meet their communications needs, small and medium size businesses
are subject to the cost and complexity of using multiple service providers:
local dialtone providers, long distance carriers, Internet service providers and
equipment integrators. We believe these businesses can benefit significantly
from an integrated cost-effective communications solution delivered by a single
provider.
Growing Market Demand for High-Speed Data Services and E-commerce Solutions
The popularity of the Internet with consumers and the development of the
Internet as a commercial medium have driven the demand for high-speed data
services. Businesses are increasingly establishing Web sites and corporate
intranets and extranets to expand their customer reach and improve their
communications efficiency. To remain competitive, small and medium size
businesses increasingly need high-speed data and Internet connections to access
critical business information and communicate more effectively with employees,
customers, vendors and business partners. This is commonly referred to as
"e-commerce". High-speed digital connections are also becoming increasingly
important to businesses and consumers as more information and applications
become available on the Internet.
Emergence of DSL Technology
DSL technology emerged in the early 1990's and is now commercially
available. DSL technology dramatically increases the data, voice and video
carrying capacity of standard copper telephone lines. Because DSL technology
uses existing copper telephone lines, a broad network deployment can be
implemented rapidly and requires a lower initial fixed investment than some
existing alternative technologies. In addition, since a significant portion of
the expense associated with a DSL network is incurred only when a new customer
is added to the network, capital is efficiently deployed.
THE MGC SOLUTION
We believe we offer an attractive communications solution to small and
medium size business customers. In developing our solution, we have attempted to
include elements intended to create customer loyalty. Key aspects of our
solution include:
Complete Communications Solutions. We offer a value-priced complete
communications solution, including voice over DSL and high-speed Internet access
services, all on a single bill. We offer this package in all of our markets and
we plan to offer additional Internet-based e-commerce products in 2000. Our
customers have a single point of contact for a complete package of services,
eliminating the need for our customers to manage multiple vendors.
Service Reliability. We are able to offer our customers a high degree of
service reliability through efficient, timely execution of provisioning
telephone lines due to our mature relationships with five incumbent carriers in
the markets we currently serve. We believe our continued rollout of DSL
technology will enable us to further improve our service reliability by
simplifying the provisioning
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process. Moreover, our customer service center is staffed to respond promptly to
customer inquiries 24 hours a day, seven days a week. See "-- Network
Architecture and Technology."
BUSINESS STRATEGY
Rapid National Service Rollout. Our strategy is to address the greatest
percentage of our targeted customers as quickly as possible and gain market
share. To create a national presence during 2000, we plan to aggressively expand
our network to include over 800 central office collocation sites. Our central
office collocation build-out program is designed to allow us extensive coverage
in all the markets we enter. By positioning ourselves to be the first provider
of bundled voice and data services targeted to small and medium size business
customers in our markets, we expect to attract many "early adopter" customers
that are interested in high-speed Internet access and data services. See
"-- Markets."
Focused Sales and Marketing Effort. To date, we have demonstrated an
ability to sell and provision our services to small and medium size business
customers. We achieved this through a direct sales force, vendor programs,
telemarketing and targeted advertising. We plan to significantly increase our
direct sales force to provide sales coverage for our expanding geographic
market. We plan to grow our direct sales force from 128 at September 30, 1999 to
over 350 by year end 2000. Additionally, we will continue developing
relationships with third party agents or vendors as a complement to our direct
sales channels. Our simplified, packaged product set enables us to easily train
our sales force and decreases the time required to market and sell our services.
With our bundled voice and data solution, our sales force can target the small
and medium size business market segment with our total communications solution.
Completion of DSL Deployment. We are in the process of deploying our
high-speed data solution within our existing network. We have over 200 central
office collocations equipped to offer DSL services. In addition, all of our new
collocation sites will be equipped with DSL technology upon implementation. Our
physical presence in incumbent carriers' facilities allows us access to
telephone lines which is critical to deploying our DSL product set. The
integration of DSL into our existing network is accomplished by installing
advanced equipment in our host switch sites, collocation sites and customer
sites.
Targeting Small and Medium Size Businesses. Based on telephone lines in
service, we believe the small and medium size business customer base is a large
and rapidly growing segment of the communications market in the United States.
We target suburban areas of large metropolitan markets because these areas have
high concentrations of small and medium size businesses. By introducing a
package of voice and data services and focusing on small and medium size
business sales, we believe we will gain a competitive advantage over the
incumbent carrier, our primary competitor for these customers.
Customer Access Control. By connecting the standard telephone line
originating at our customer's site to our central office collocation, we
effectively place the customer on our network. This connection serves as the
platform for delivering our current and future communications services to our
customers. Any future changes our customers want to make to their services,
including purchasing more services from us, are under our direct control. The
one exception is for repairs, which are infrequent but may require the
participation of the incumbent carrier's network maintenance staff.
Capital Efficient Network. We were one of the first competitive local
exchange carriers to implement a network strategy of purchasing and installing
switches, collocating in the central offices
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of the incumbent carrier and leasing local telephone lines and cable. We believe
this network deployment strategy provides a capital efficient build-out plan and
an attractive return on our invested capital. We have installed DSL technology
across a substantial portion of our existing network which will allow us to
reduce significantly the number of telephone lines we lease. We are currently
evaluating alternative switching devices which are significantly smaller and
less expensive than the switches we have deployed to date. We believe these
switches may permit us to move the intelligence that determines where to route
traffic closer to our customers. We expect this decentralized switching approach
will allow us greater efficiencies in our network.
Sophisticated Operations Support System. We have developed a
comprehensive, proprietary operations support system to manage our business. Our
proprietary system provides integrated features addressing substantially all
aspects of our business, including customer care, billing and collections,
general ledger, payroll, fixed asset tracking, and personnel management. We
believe our system is adaptable to changing circumstances and multiple incumbent
carrier provisioning systems, and can be enhanced to support our operations
throughout our planned growth.
Timely and Accurate Provisioning for Our Customers. We believe one of the
keys to our success is effectively managing the provisioning process for new
customers. Towards this goal, we have committed significant time and resources
to designing more efficient provisioning processes, both internally and with
each of the incumbent carriers. We are in final testing of our internal
automation process whereby all new orders are provisioned through our operations
support system on a real-time basis. Since 1998, we have been developing and
implementing electronic order interfaces with all of the incumbent carriers with
which we work designed to improve provisioning performance by eliminating manual
keying of information and the need to fax paper orders back and forth. As an
illustration, we are currently provisioning the majority of our orders in Las
Vegas through an electronic interface with Sprint. This type of interface, also
known as "electronic bonding," substantially reduces the time, number of steps
and duplication of work typically involved in the provisioning process,
substantially lowering our costs and providing a more attractive solution to our
customers.
As we deploy DSL technology throughout our network, we expect the
provisioning process will become easier for us and more transparent for our
customers. With DSL technology in place, one standard telephone line will
provide enough capacity for multiple voice and data connections at the
customer's premises. Therefore, we will be provisioning fewer lines per
customer, making us significantly less dependent on the incumbent carrier for
placing our customers in service.
Co-marketing Arrangements with E-commerce Providers. To expand our product
offerings, we have begun to partner with e-commerce providers. We recently
entered into an agreement to co-market PurchasePro.com's e-business solution to
our small and medium size business customers. We believe co-marketing
arrangements will allow us to further solidify our position as a single source
provider of communications services.
Develop E-commerce Data Centers. We believe we will be able to provide an
attractive opportunity for e-commerce providers to use our network facilities to
access our customer base. To exploit this opportunity, we plan to build regional
data centers to host the servers used by e-commerce providers. To support these
data centers, we expect to offer basic security and monitoring services. We
believe by offering these services we will be able to attract e-commerce
partners and enhance the service offerings available to our customers.
Quality Customer Service. We believe providing quality customer service is
essential to offering a superior product to our customers and creating customer
loyalty. A service representative is assigned to each business customer to
coordinate conversion of service and handle any post-installation issues. In
addition, we have a centralized call service center operating 24 hours a day,
seven days a week which handles general billing, customer care and related
issues for all of our
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customers. The service representatives use our proprietary operations support
system to gain immediate access to our customers' data, enabling quick responses
to customer requests and needs at any time. This system allows us to present our
customers with one fully integrated monthly billing statement for all
communication services.
PRODUCTS AND SERVICES
To date, we have focused on offering basic telephone and data services to
our small business and residential customers. These services include our
Internet access portal known as MGCi.com, switched local dialtone, long distance
services and custom calling features such as voice mail, call waiting and call
forwarding. To capitalize on the growing demand of small and medium size
business customers for Internet and data services, we have recently introduced
our "Total Solution" package, a bundled offering of high-speed data access using
DSL technology, in all of our markets. The chart below shows the component
features of our "Total Solution" package for small and medium size business
customers:
<TABLE>
<CAPTION>
"TOTAL SOLUTION" PACKAGE
------------------------
<S> <C>
8 voice lines MGC Long Distance
Internet access at speeds up to 1.5 Mbps 500 minute increments
Unlimited custom calling features Free local calling
MGCi.com Customer premise equipment
Web Hosting Single bill and single point of contact
10 e-mail boxes
</TABLE>
MARKETS
We currently operate in Las Vegas, Atlanta, Chicago, southern Florida and
selected areas of southern California, including Los Angeles and San Diego. As
of September 30, 1999, we had 288 central office collocation sites providing
access to approximately 16 million addressable lines in these markets. The table
below shows the distribution of our central office collocation sites within
these markets.
<TABLE>
<CAPTION>
MARKET AREA COLLOCATION SITES ADDRESSABLE LINES
- ----------- ----------------- -----------------
<S> <C> <C>
Southern California.................... 147 8.3 Million
Atlanta................................ 37 2.0 Million
Chicago................................ 50 2.5 Million
Southern Florida....................... 36 2.2 Million
Las Vegas.............................. 18 1.0 Million
--- ------------
TOTALS....................... 288 16.0 MILLION
</TABLE>
To achieve a national presence, we plan to collocate in over 450 incumbent
carrier central offices during 2000. All of these collocations will be located
within the 50 largest metropolitan areas of the country, primarily in the
surrounding suburban areas. When evaluating new markets, we consider:
- The importance of the geographic area to our national presence; and
- The demographics of the market, specifically the presence of clusters of
incumbent carrier central offices with high concentrations of small and
medium size business lines.
Based on the criteria outlined above, the table below indicates the number
of collocated central office sites and approximate addressable lines we have
identified for expansion during 2000. The
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timing of our entering into new markets will depend on market conditions,
incumbent carrier cooperation and other factors. We cannot assure you we will be
able to add collocation sites at the times indicated below.
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL ADDRESSABLE PLANNED
COLLOCATION SITES LINES OPERATIONAL DATE
- -------------------- ----------- ----------------
<C> <C> <S>
50 2.0 million First Quarter 2000
60 2.4 million Second Quarter 2000
70 2.8 million Third Quarter 2000
270 10.8 million Fourth Quarter 2000
--- ------------
450 18.0 million
</TABLE>
SALES AND MARKETING
Our highly focused marketing efforts seek to generate well-managed,
profitable growth through increased market share with minimal customer turnover.
Our current sales programs include direct sales efforts, programs with agents
and vendors, telemarketing and targeted advertising directed at the small and
medium size business customer. Due to the simplicity of our bundled voice and
data solution, we will not need to incur extensive costs to train our expanding
sales force.
As of September 30, 1999, we employed 95 field sales personnel and 33
inside sales personnel. We expect the size of our sales force to increase
substantially during 2000 as we expand the geographic coverage of our network to
a national scale. During the fourth quarter of 1998, we implemented a "team"
sales approach in our Las Vegas market. We are in the process of implementing
this approach in each of our local markets. Each team consists of two field
sales representatives, one business service representative, one inside sales
representative and one field technician. The field sales representatives work
from lead lists which specifically identify small and medium size business
prospects located within our geographic service area. The inside sales
representative solicits leads and schedule appointments and, when practical,
close sales over the phone. Our business service representative acts as the
liaison between the small business customer and our operational personnel to
effect a coordinated transfer of service from the incumbent carrier's network to
our network. The field technician is responsible for the installation of the
customer premise equipment. These teams report to the city managers and
ultimately the presidents of their respective regions.
To complement our sales force, we use established telephone equipment
vendors to market our services in conjunction with equipment sales to business
customers. We believe this distribution channel will become more productive for
us in the near future with the continued rollout of our bundled voice and
high-speed data solution.
NETWORK ARCHITECTURE AND TECHNOLOGY
In building our network we have implemented a strategy where we own the
hardware that routes voice calls and data traffic, which we refer to as
switches, while leasing the telephone lines and cable over which the voice calls
and data traffic are actually transmitted, which we refer to as transport. We
use three basic types of transport to transmit our voice calls and data traffic.
First, we lease the standard telephone line from the incumbent carrier. This
allows us to move voice calls and data traffic from a customer's location to the
nearest central office owned by the incumbent carrier. Inside these central
offices, we have installed equipment that allows us to deliver the services we
sell to our customers. Second, we lease cable from other communications
companies which connect the equipment we have installed in the central office of
the incumbent carrier to our switches. Third, we
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lease additional cable from other communications companies, which connect our
switches to each other and allow us to complete our customers' long distance
calls to national and international destinations. We believe this network
strategy provides us an efficient capital deployment plan and an attractive
return on our invested capital.
We believe that leasing the standard telephone line from the incumbent
carrier's central office to the end-user provides a cost-efficient solution for
gaining control of access to our customers. Leasing costs are not incurred until
we have acquired a customer and revenue can be generated. It is our experience
that the cable required to connect our collocation equipment located at an
incumbent carriers' central office to our switching hardware and the cable
required to connect our customers' voice calls and data traffic to the Internet
and other telephones is available at reasonable prices in all of our current and
planned markets. Because the cable required to transport voice calls and data
traffic has become a readily available service from numerous other
communications companies, we have focused our efforts on owning and installing
the hardware that determines where to route voice calls and data traffic and on
selling and delivering our services to our customers.
In 1996, we installed our first switch in Las Vegas. By the end of 1998, we
had seven operational switches. All of our current switches are DMS-500 switches
manufactured by Northern Telecom. These switches offer a flexible and cost
efficient way for us to provide local and long distance services to our
customers. We are currently testing smaller and less expensive switches that
would allow us to move the hardware that determines where to route voice calls
and data traffic closer to our customers. This decentralized approach to
determining where to route voice calls and data traffic should allow us to make
more efficient use of the cable we lease to transport voice calls and data
traffic. We envision our planned expansion in the second half of 2000 and beyond
to utilize these smaller and less expensive switches which will be installed in
the central office space we rent from the incumbent carrier and will interact
fully with the DSL equipment we are currently installing.
Once we have installed equipment in the collocation sites we rent from the
incumbent carrier, we initiate service to a customer by arranging for the
incumbent carrier to physically disconnect a standard telephone line from their
equipment and reconnect the same standard telephone line to our equipment. When
the standard telephone line has been connected to our equipment, we have direct
access to the customer and can deliver our current voice and data services. Any
future changes the customer wishes to make, such as purchasing more services
from us, are under our direct control. The one exception is for certain types of
repairs, which are infrequent, but which may require the participation of the
incumbent carrier's maintenance staff.
We have increased the number of collocation sites where we have installed
equipment from nine as of December 31, 1996 to 288 as of September 30, 1999. We
believe the expertise we have developed in successfully applying for space in
these central offices, installing our equipment and maintaining the equipment
once it is installed will allow us to efficiently handle our planned expansion.
Our seven switches are connected to each other by cable which allows us to
transmit voice calls and data traffic using asynchronous transfer mode
technology. Asynchronous transfer mode technology allows both voice calls and
data traffic to be transported in digital form over a single cable connection at
high speeds and reasonable costs. The introduction of DSL technology into our
network will allow us to transport both voice calls and data traffic in digital
form on a single telephone line from a customer's location to one of our
switches.
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The diagram below depicts how our network is configured with DSL technology
in our existing markets.
[DSL technology Flow Chart]
We install DSL equipment at our collocation sites, at our switch sites and
at our customers' locations. The DSL equipment we use is manufactured by Copper
Mountain, Turnstone and Tollbridge Technologies. Where installed, this equipment
allows us to deliver multiple voice calls and data traffic over a single,
standard telephone line and is expected to provide us with substantial cost
savings. Using DSL technology, we can increase the amount of information we
carry on a standard telephone line, which we refer to as bandwidth, to up to 1.5
million bits per second or "Mbps". This bandwidth is the equivalent of 24
regular voice telephone lines. Our DSL equipment is programmed to allocate the
available bandwidth. For example, voice calls are carried at 64 thousand bits
per second or "Kbps"; if a customer has eight phone lines and all are in use at
the same time, then 512 Kbps (eight phone lines multiplied by 64 Kbps each) of
the total 1.5 Mbps are allocated for the voice calls. The remaining bandwidth,
988 Kbps, is available to carry the data traffic.
We believe this technology, when fully implemented, will significantly
reduce our customers' potential for service outages when the incumbent carrier
moves the standard telephone line from their equipment to ours. Additionally, we
believe this technology will reduce our costs since we will lease a reduced
number of standard telephone lines per customer from the incumbent carrier. For
example, if a customer today has eight voice lines, we must order from and
provision through the incumbent carrier eight individual standard telephone
lines. If the same customer were to buy our service offering which uses DSL
technology, we would only order and provision one standard telephone line from
the incumbent carrier. Also, we expect that future products and services
designed to take advantage of the increased bandwidth provided by DSL technology
will allow us to generate incremental revenue with attractive margins.
Interconnection Agreements and Competitive Carrier Certifications. We have
interconnection agreements with Sprint for Nevada, BellSouth for Georgia and
Florida, GTE and PacBell for California, Ameritech for Illinois, Bell Atlantic
for Massachusetts, New York and Pennsylvania and SBC for Texas. These agreements
expire on various dates through July 2000. In some cases, one or both parties
may be entitled to demand renegotiation of particular provisions in an existing
interconnection agreement based on intervening changes in the law. We are
certified as a competitive carrier in Illinois, Georgia, Nevada, California,
Florida and Massachusetts and have applied for competitive carrier certification
in Ohio, Texas, Michigan, Wisconsin, Indiana, North Carolina and Tennessee.
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SERVICE DEPLOYMENT AND OPERATIONS
Customer Service. We strive to provide high quality customer service
through:
- Personnel. Our customer service representatives and sales personnel are
well trained and attentive to our customers' needs.
- Call Center. Our centralized customer service center in Las Vegas
operates 24 hours a day, seven days a week. Calls from our customers are
answered and responded to with minimal wait time.
- Coordination of Service Provisioning. We coordinate service installation
with our customer and the incumbent carrier to ensure a smooth transition
of services from the incumbent carrier to us.
- Close Customer Contact. We proactively monitor our network and keep our
customers informed of installation or repair problems and allocate the
necessary resources to resolve any problems.
- Billing. We provide our customers with accurate, timely and easily
understood bills.
Process Automation. We have developed a comprehensive, proprietary
operations support system to manage our business. Our proprietary system
provides integrated features addressing substantially all aspects of our
business including customer care, billing and collections, general ledger,
payroll, fixed asset tracking and personnel management. Additionally, customer
service representatives are able to handle all customer service inquiries,
including billing questions and repair calls, with the information available
from our integrated system.
We believe our system is adaptable to changing circumstances and multiple
incumbent carrier provisioning systems and will be able to support our
operations throughout our planned growth. We are in final testing of our
internal automation process whereby all new orders are provisioned through our
operations support system on a real-time basis. Since 1998, we have been
developing and implementing electronic order interfaces with all of the
incumbent carriers with whom we work designed to improve provisioning
performance by eliminating manual keying of information and the need to fax
paper orders back and forth. As an illustration, we are currently provisioning
the majority of our orders in Las Vegas through an electronic interface with
Sprint. This type of interface, also known as "electronic bonding,"
substantially reduces the time, number of steps and duplication of work
typically involved in the provisioning process, substantially lowering our costs
and providing a more attractive solution to our customers.
The billing component of our operations support system is designed to track
and bill all forms of local service, including line and feature charges as well
as long distance charges. We can accommodate business customers desiring a
single bill for many locations, summary bills without detail or a number of
other types of customized bills. We can deliver bills to our customers in a
number of alternative media including electronic files and on-line inquiry
through our Website.
GOVERNMENT REGULATIONS
Overview
Our services are regulated at the federal, state and local level. The FCC
exercises jurisdiction over all facilities of, and services offered by,
communications common carriers like us, as long as those facilities are used in
connection with interstate or international communications. State regulatory
commissions have some jurisdiction over most of the same facilities and services
if they are used in connection with communications within states. In recent
years, there has been a dramatic change in the regulation of telephone services
at both federal and state levels as both legislative and
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regulatory bodies seek to enhance competition in both the local exchange and
interexchange services. These efforts are ongoing and many of the legislative
measures and regulations adopted are subject to judicial review. We cannot
predict the impact on us of the results of these ongoing legislative and
regulatory efforts or the outcome of any judicial review.
Federal Regulation
The FCC regulates interstate and international communications services,
including access to local telephone facilities to place and receive interstate
and international calls. We provide these services as a common carrier. The FCC
also imposes regulations on common carriers that have some degree of market
power, including incumbent carriers. The FCC imposes less regulation on common
carriers without market power including competitive carriers like us. The FCC
grants automatic authority to carriers for interstate long distance service, but
requires common carriers to receive an authorization to construct and operate
communications facilities, and to provide or resell communications services,
between the United States and international points. Both domestic and
international carriers must file tariffs for their services. With respect to our
domestic and international service offerings, we have filed tariffs with the FCC
stating the rates, terms and conditions for our interstate and international
services. Our interstate tariffs are subject to "streamlined" tariff regulations
and are generally not reviewed by the FCC before becoming effective. Our tariffs
can be amended on one day's notice. Carriers subject to the jurisdiction of the
FCC must charge just and reasonable rates and must not discriminate among like
customers for like services. The FCC imposes numerous other regulations on
carriers subject to its jurisdiction some of the most important of which are
discussed below. It also hears complaints against carriers filed by customers or
other carriers and levies various charges and fees.
The Telecommunications Act permits virtually any entity, including cable
television companies and electric and gas utilities, to enter any communications
market. The Telecommunications Act takes precedence over inconsistent state
regulation. However, entities that enter communications markets must follow
state regulations relating to safety, quality, consumer protection and other
matters. Implementation of the Telecommunications Act continues to be affected
by numerous federal and state policy rulemaking proceedings and review by
courts. We are uncertain as to how our business may be affected by these
proceedings.
The Telecommunications Act is intended to promote competition. The
Telecommunications Act opens the local services market to competition by
requiring incumbent carriers to permit interconnection to their networks and by
establishing incumbent carrier and competitive carrier obligations with respect
to:
Reciprocal Compensation. All incumbent carriers and competitive
carriers are currently required to complete calls originated by each other
under reciprocal arrangements at prices based on tariffs or negotiated
prices.
Resale. All incumbent carriers and competitive carriers are required
to permit resale of their communications services without unreasonable
restrictions or conditions. In addition, incumbent carriers are required to
offer wholesale versions of all retail services to other common carriers
for resale at discounted rates, based on the costs avoided by the incumbent
carrier by offering these services at wholesale rates.
Interconnection. All incumbent carriers and competitive carriers are
required to permit their competitors to interconnect with their facilities.
All incumbent carriers are required to permit interconnection at any
feasible point within their networks, on nondiscriminatory terms, at prices
based on cost, which may include a reasonable profit. At the option of the
carrier
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requesting interconnection, collocation of the requesting carrier's
equipment in the incumbent carriers' premises must be offered.
Unbundled Access. All incumbent carriers are required to provide
access to specified individual components of their networks, which are
sometimes referred to as unbundled network elements, on nondiscriminatory
terms and at prices based on cost, which may include a reasonable profit.
Number Portability. All incumbent carriers and competitive carriers
are required to permit users of communications services to retain their
existing telephone numbers without impairment of quality, reliability or
convenience when switching from one common carrier to another.
Dialing Parity. All incumbent carriers and competitive carriers are
required to provide "l+" equal access to competing providers of long
distance service, and to provide nondiscriminatory access to telephone
numbers, operator services, directory assistance and directory listing,
with no unreasonable dialing delays.
Access to Rights-of-Way. All incumbent carriers and competitive
carriers are required to permit competing carriers access to their poles,
ducts, conduits and rights-of-way at regulated prices.
Incumbent carriers are required to negotiate in good faith with carriers
requesting any or all of the above arrangements. If the negotiating carriers
cannot reach agreement within a predetermined amount of time, either carrier may
request arbitration of the disputed issues by the state regulatory commission.
In August 1996, the FCC established rules to implement the incumbent
carrier interconnection obligations described above. On July 18, 1997, a United
States appeals court overturned portions of these rules and narrowly interpreted
the FCC's power to establish and enforce rules implementing the
Telecommunications Act. On January 25, 1999, the United States Supreme Court
reversed the appeals court decision and confirmed the FCC's broad authority to
issue rules implementing the Telecommunications Act. Specifically, the Supreme
Court decided that:
- the FCC has jurisdiction over pricing of unbundled network elements; and
- the FCC has authority to make rules allowing a competitive carrier to
"pick and choose" among the most favorable terms from existing agreements
between an incumbent carrier and other competitive carriers.
On the other hand, the Supreme Court vacated an FCC rule which described
the network elements the incumbent carriers must provide to competitors on an
unbundled basis. This required the FCC to re-examine its rules regarding which
unbundled network elements must be made available to competitors.
On November 5, 1999, the FCC released an order reaffirming and clarifying
the obligation of incumbent carriers to provide those network elements which we
currently lease from incumbent carriers, including standard telephone lines
which are also known as local loops, network interface devices and operations
support systems. These rules are subject to appeal and many require implementing
action by state regulatory agencies. We cannot predict the outcome of any
further proceedings or predict whether the incumbent carriers or others will
challenge this ruling.
On March 31, 1999, the FCC issued an order requiring incumbent carriers to
provide alternatives to traditional physical collocation, including providing
carriers with their own dedicated spaces in which to install their equipment. In
addition, the FCC ruled that incumbent carriers must allow competitive carriers
to collocate advanced services equipment and perform their own labor in
connecting their equipment within the incumbent carrier central office. This
order has been appealed.
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On November 18, 1999, the FCC ordered incumbent carriers to share their
telephone lines with providers of high speed Internet access and other data
services. The FCC has indicated that competitive carriers may obtain access to
the high-frequency portion of a standard telephone line from the incumbent
carriers. As a result, competitive carriers will be able to provide DSL-based
services over the same telephone lines simultaneously used by the incumbent
carrier to provide voice services, and will no longer need to purchase a
separate telephone line from the incumbent carrier to provide DSL services. The
ruling could have an unfavorable effect on our business by making it easier for
some of our competitors to provide DSL services.
The Telecommunications Act also contains special provisions that replace
prior antitrust restrictions that prohibited the regional Bell operating
companies from providing long distance services and engaging in communications
equipment manufacturing. Before the passage of the Telecommunications Act, the
regional Bell operating companies and the dominant incumbent carriers were
restricted to providing services within a distinct geographical area known as a
local access and transport area. The Telecommunications Act permits the regional
Bell operating companies to provide long distance service immediately in areas
outside of their market regions and within their market region once they have
satisfied several procedural and substantive requirements, including:
- a showing that the regional Bell operating company is subject to
meaningful competition in the area in which it seeks to offer long
distance service; and
- a determination that the regional Bell operating company's entry into
long distance markets is in the public interest.
In December 1999, the FCC approved Bell Atlantic's request to provide long
distance service to its New York customers. SBC Communications recently filed a
similar request to provide long distance service to its customers in Texas and
additional requests will likely be filed in the near future. One or more of
these requests also may be approved. If regional Bell operating companies are
allowed to offer long distance services in one or more of our markets, our
business will be unfavorably affected.
The FCC has initiated a rulemaking proceeding to consider whether to permit
regional Bell operating companies to eventually offer high-speed data services
between local access and transport areas through a separate subsidiary, without
first having to demonstrate that they have met the FCC procedural and
substantive requirements referred to above. Although the FCC has not acted in
this rulemaking, in approving the merger of SBC Communications and Ameritech, it
authorized the merged entity to provide advanced data services using a separate
subsidiary provided specific conditions relating to the status of competition
are met. A similar condition was accepted by Bell Atlantic in obtaining
authority to provide long distance services in New York.
On November 9, 1999, the FCC released a decision which concluded that
advanced services, such as DSL, sold by incumbent carriers to Internet service
providers and bundled by the Internet service provider with its other services
are not subject to the resale obligations of the Act. This decision will allow
incumbent carriers to provide Internet service providers with special rate
packages for DSL on terms and conditions not available to us.
In two orders released on December 24, l996 and May 16, 1997, the FCC made
major changes in the structure of the access charges incumbent carriers impose
for the use of their facilities to originate or complete interstate and
international calls. The December 24th order permitted incumbent carriers to
lower access charges. The May 16th order granted incumbent carriers subject to
the FCC's price cap rules increased pricing flexibility upon demonstrations of
increased competition or potential competition in their markets. The manner in
which these changes are implemented could have a material effect on the amount
of switched access charges we collect from long distance carriers.
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At present we are in litigation with AT&T and Sprint over the access
charges we have billed to them. The FCC released a staff decision in July 1999
requiring AT&T to pay us the charges at our tariffed rate through March 1999.
The FCC affirmed this decision in December 1999, but this decision is subject to
judicial review.
In August 1999 the FCC adopted an order providing additional pricing
flexibility to incumbent carriers subject to price cap regulation in their
provision of interstate access services, particularly special access and
dedicated transport. Some of the actions taken by the FCC would immediately
eliminate rate scrutiny for "new services" and permit the establishment of
additional geographic zones within a market that would have separate rates.
Additional and more substantial pricing flexibility will be given to incumbent
carriers as specified levels of competition in a market are reached through the
collocation of competitive carriers and their use of competitive transport. This
flexibility will include, among other items, customer specific pricing, volume
and term discounts for some services and streamlined tariffing.
As part of the same August 1999 order, the FCC initiated another proceeding
to consider additional pricing flexibility proposals for incumbent carriers.
This proceeding also will consider the reasonableness of competitive carrier
access charges and seeks comment on whether the FCC should adopt rules to
regulate competitive carrier access charges. In addition, the FCC's rulemaking
is examining whether any statutory or regulatory constraints prevent long
distance carriers from declining to accept a competitive carrier's access
services, and if so, under what circumstances. The outcome of the rulemaking is
not possible to predict and may have an unfavorable effect on our business.
In addition, on May 21, 1999, a United States court of appeals reversed an
FCC order that had established the factors that are currently used to set annual
price caps. The court ordered the FCC to further explain the methodology it used
in establishing those factors. This proceeding is ongoing.
Incumbent carriers have been contesting whether their obligation to pay
reciprocal compensation to competitive carriers should apply to local telephone
calls from an incumbent carrier's customers to Internet service providers served
by competitive carriers. The incumbent carriers claim this traffic is interstate
in nature and should be exempt from reciprocal compensation arrangements
applicable to local and intrastate calls. Competitive carriers have contended
that their interconnection agreements with incumbent carriers provide no
exception for local calls to Internet service providers and reciprocal
compensation is applicable.
On February 26, 1999, the FCC ruled that Internet service provider traffic
is interstate in nature and within the FCC's jurisdiction but that its current
rules neither require nor prohibit the payment of reciprocal compensation for
these calls. The FCC also requested comment on federal rules to govern
compensation for these calls in the future.
Most, but not all, state commissions and several federal and state courts
have ruled that reciprocal compensation arrangements under interconnection
agreements existing prior to the FCC decision apply to calls to Internet service
providers. There are, however, ongoing disputes concerning the appropriate
treatment of Internet service provider traffic under new interconnection
agreements.
Internet service providers may be among our potential customers and adverse
decisions regarding reciprocal compensation could limit our ability to service
this group of customers profitably. While some competitive carriers target
Internet service providers in order to generate additional revenues from
reciprocal compensation charges, at the present time we do not focus our
marketing efforts on Internet service providers. In addition, given the
uncertainty as to whether reciprocal compensation is payable in connection with
calls to Internet service providers, we do not recognize revenue from calls to
Internet service providers. Therefore, the outcome of this dispute in favor of
either the incumbent carrier or competitive carrier will have minimal impact on
us.
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On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy program. The FCC's May 8, 1997 order
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.25 billion
and for services provided to rural health care providers with an annual cap of
$400 million. The FCC also expanded federal subsidies for local dialtone
services provided to low-income consumers. Providers of interstate
telecommunications service, including us, must contribute to these programs. On
July 30, 1999, the United States appeals court issued a decision partially
upholding the FCC order but precluding the FCC from basing the amount a carrier
must contribute to the subsidy program on a carrier's intrastate revenues.
Currently, the FCC is assessing contributions to these programs at 5.8% of a
provider's interstate and international revenue for the previous year. We intend
to recover our share of these costs through charges assessed directly to our
customers and participation in federally subsidized programs. On November 2,
1999, the FCC revised its proposed methodology for subsidizing service provided
by non-rural carriers in high cost areas. This action may result in further
substantial increases in the cost of the subsidy program. The net financial
effect of these regulations on us cannot be determined at this time.
In 1994, Congress adopted the Communications Assistance for Law Enforcement
Act to insure that law enforcement agencies would be able to conduct properly
authorized electronic surveillance over the new digital and wireless media as
well as traditional wireline carriers. An interim technical standard was
released in 1997 and the FCC recently required carriers to have additional
capabilities requested by law enforcement authorities and directed that the
interim standard be revised. Some in the industry believe that the cost of
providing these additional capabilities is unreasonably high and the FCC's
decision has been appealed. We are not able to predict the outcome of this
litigation or the cost of compliance with whatever standards are ultimately
developed.
State Regulation
The implementation of the Telecommunications Act is subject to numerous
state rulemaking proceedings. As a result, it is currently difficult to predict
how quickly full competition for local services, including local dialtone, will
be introduced.
To provide services within a state, we generally must obtain a certificate
of public convenience and necessity from the state regulatory agency and comply
with state requirements for telecommunications utilities, including state
tariffing requirements. To date, we have satisfied state requirements to provide
local and intrastate long distance service in Nevada, Georgia, Illinois,
California, Florida and Massachusetts, Ohio, Texas and Wisconsin and have
applied for competitive carrier certification in 14 other states and the
District of Columbia.
State regulatory agencies have jurisdiction over our facilities and
services used to provide intrastate services, including our rates. State
agencies require us to file periodic reports, pay various fees and assessments
and comply with rules governing quality of service, consumer protection and
similar issues. These agencies may also have to approve the transfer of assets
or customers located in the state, a change of control of our company or our
issuance of securities or assumption of debt. The specific requirements vary
from state to state. State regulatory agencies also must approve our
interconnection agreements with incumbent carriers. Price cap or rate of return
regulation does not apply in any of our current or planned expansion markets.
However, we cannot assure you that the imposition of new regulatory burdens in a
particular state will not affect the profitability of our services in that
state.
Prior to issuing any equity, we must obtain the approval of the State of
Georgia. Because of time constraints, we will not have obtained approval from
the State of Georgia before closing this offering and the concurrent offering.
We believe the approval will be granted and that seeking approval after
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this offering should not result in any material adverse consequences to us,
although we cannot assure you of a favorable result.
Local Regulation
Our networks must comply with numerous local regulations such as building
codes, municipal franchise requirements and licensing. These regulations vary on
a city by city and county by county basis. In some of the areas where we provide
service, we may have to comply with municipal franchise requirements and may be
required to pay license or franchise fees based on a percentage of gross revenue
or other factors. Municipalities that do not currently impose fees may seek to
impose fees in the future. We cannot assure you fees will remain at their
current levels following the expiration of existing franchises.
COMPETITION
The communications industry is highly competitive. We believe the principal
competitive factors affecting our business will be:
- pricing levels and policies,
- transmission speed,
- customer service,
- breadth of service availability,
- network security,
- ease of access and use,
- bundled service offerings,
- brand recognition,
- operating experience,
- capital availability,
- exclusive contracts,
- accurate billing, and
- variety of services.
To maintain our competitive posture, we believe we must be in a position to
reduce our prices to meet any reductions in rates by our competitors. Any
reductions could adversely affect us. Many of our current and potential
competitors have financial, personnel and other resources, including brand name
recognition, substantially greater than ours, as well as other competitive
advantages over us. In addition, competitive alternatives may result in
substantial customer turnover in the future. Many providers of communications
and networking services experience high rates of customer turnover.
A continuing trend toward consolidation of communications companies and the
formation of strategic alliances within the communications industry, as well as
the development of new technologies, could give rise to significant new
competitors. For example, WorldCom has merged with MCI Communications and now
proposes to merge with Sprint. AT&T has acquired Teleport Communications Group
Inc., a competitive carrier, and Tele-Communications, Inc., a cable,
communications and high-speed Internet services provider, and has announced its
intent to merge with another cable television company, MediaOne. Ameritech
Corporation recently merged with SBC Communications, Bell Atlantic has agreed to
merge with GTE Corporation and Qwest is seeking to
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merge with US West. These types of consolidations and other strategic alliances
could put us at a competitive disadvantage.
LOCAL DIALTONE SERVICES
Incumbent Carriers
In each of the markets we target, we will compete principally with the
incumbent carrier serving that area. We believe the regional Bell operating
companies are aggressively seeking to be able to offer long distance service in
their service territories. In December 1999, Bell Atlantic received approval to
offer long distance service in New York and announced that it would offer long
distance service beginning in January 2000. Many experts expect one or more of
the other regional Bell operating companies to be successful in entering the
long distance market in early 2000. We believe the regional Bell operating
companies expect to offset losses of market share in their local markets by
attempting to capture a large percentage of the long distance market in their
market areas, especially among residential users where their strong regional
brand names and extensive advertising campaigns may be very successful. In
addition, a continuing trend toward business combinations and alliances in the
communications industry may create significant new competitors for us.
We have not achieved and do not expect to achieve a significant market
share for any of our services. The incumbent carriers have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than ours and have the potential to subsidize
competitive services with revenues from a variety of businesses. While recent
regulatory initiatives which allow competitive carriers to interconnect with
incumbent carrier facilities provide increased business opportunities for us,
interconnection opportunities have been and likely will continue to be
accompanied by increased pricing flexibility for, and relaxation of regulatory
oversight of, the incumbent carriers.
Incumbent carriers have long-standing relationships with regulatory
authorities at the federal and state levels. The FCC recently proposed a rule
that would provide for increased pricing flexibility for incumbent carriers and
deregulation for competitive access services, either automatically or after
competitive levels are reached. If the incumbent carriers are allowed by
regulators to offer discounts to large customers through contract tariffs,
engage in aggressive volume and term discount pricing practices for their
customers, and/or seek to charge competitors excessive fees for interconnection
to their networks, our operating margins could be materially adversely affected.
Future regulatory decisions which give the incumbent carriers increased pricing
flexibility or other regulatory relief could also have a material adverse effect
on us.
Competitive Carriers/Long Distance Carriers/Other Market Entrants.
We face, and expect to continue to face, competition from long distance
carriers, including AT&T, MCI WorldCom, and Sprint, seeking to enter, reenter or
expand entry into the local exchange market. We also compete with other
competitive carriers, resellers of local dialtone services, cable television
companies, electric utilities, microwave carriers and wireless telephone system
operators.
The Telecommunications Act includes provisions which impose regulatory
requirements on all incumbent carriers and competitive carriers but grants the
FCC expanded authority to reduce the level of regulation applicable to these
common carriers. The manner in which these provisions of the Telecommunications
Act are implemented and enforced could have a material adverse effect on our
ability to successfully compete against incumbent carriers and other
communications service providers.
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The Telecommunications Act radically altered the market opportunity for
competitive carriers. Many existing competitive carriers which entered the
market before 1996 had to build a fiber infrastructure before offering services.
With the Telecommunications Act requiring unbundling of the incumbent carrier
networks, competitive carriers are now able to more rapidly enter the market by
installing switches and leasing standard telephone lines and cable.
A number of competitive carriers have entered or announced their intention
to enter one or more of our markets. We believe that not all competitive
carriers, however, are pursuing the same target customers we pursue. We intend
to keep our prices at levels below those of the incumbent carriers while
providing, in our opinion, a higher level of service and responsiveness to our
customers. Innovative packaging and pricing of basic telephone services is
expected to provide competitive differentiation for us in each of our markets.
LONG DISTANCE SERVICES
The long distance services industry is very competitive and many long
distance providers experience a high average turnover rate as customers
frequently change long distance providers in response to offerings of lower
rates or promotional incentives by competitors. Prices in the long distance
market have declined significantly in recent years and are expected to continue
to decline. We expect to face increasing competition from companies offering
long distance data and voice services over the Internet. Companies offering
these services over the Internet could enjoy a significant cost advantage
because they do not currently pay common carrier access charges or universal
service fees.
DATA AND INTERNET SERVICES
We expect the level of competition with respect to data and Internet
services to intensify in the future. We expect significant competition from:
- Incumbent Carriers. Most incumbent carriers have announced deployment of
commercial DSL services. Some incumbent carriers have announced they
intend to aggressively market these services to their residential
customers at attractive prices. In addition, most incumbent carriers are
combining their DSL service with their own Internet service provider
businesses. We believe incumbent carriers have the potential to quickly
overcome many of the issues that have delayed widespread deployment of
DSL services in the past. The incumbent carriers have an established
brand name in their service areas, possess sufficient capital to deploy
DSL services rapidly and are in a position to offer service from central
offices where we may be unable to secure collocation space. When the
regional Bell operating companies begin providing long distance service,
they may be able to offer "one stop shopping" that would be competitive
with our offerings.
- Traditional Long Distance Carriers. Many of the leading traditional long
distance carriers, including AT&T, MCI WorldCom and Sprint, are expanding
their capabilities to support high-speed, end-to-end networking services.
We expect them to offer combined data, voice and video services over
their networks. These carriers have extensive fiber networks in many
metropolitan areas that primarily provide high-speed data and voice
services to large companies. They could deploy DSL services in
combination with their current fiber networks. They also have
interconnection agreements with many incumbent carriers and have secured
collocation space from which they could begin to offer competitive DSL
services.
- Newer Long Distance Carriers. The newer long distance carriers,
including Williams Communications, Qwest Communications International and
Level 3 Communications, are building and managing high-speed networks
nationwide. They are also building direct sales forces and partnering
with Internet service providers to offer services directly to business
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customers. They could extend their existing networks and offer high-speed
services using DSL, either alone or in partnership with others.
- Cable Modem Service Providers. Cable modem service providers, like @Home
Networks and its cable partners, are offering, or are preparing to offer,
high-speed Internet access over cable networks to consumers. @Work has
positioned itself to do the same for businesses. These networks provide
high-speed data services similar to our services, and in some cases at
higher speeds. These companies use a variety of new and emerging
technologies, including point-to-point and point-to-multipoint wireless
services, satellite-based networking and high-speed wireless digital
communications.
- Internet Service Providers. Internet service providers, including Yahoo,
Earthlink, PSINet, Concentric and Verio, offer Internet portal services
which compete with our MGCi.com service. We offer basic web hosting and
e-mail services and anticipate offering an enhanced set of Internet
products in the future. The competitive Internet service providers
generally provide more features and functions than our current Internet
portal.
- Wholesale DSL Carriers. Carriers, including Covad Communications Group,
Inc., Rhythms NetConnections Inc. and NorthPoint Communications, Inc.,
have begun offering DSL services and have significant strategic equity
investors, marketing alliances and product development partners.
Many of these competitors are offering, or may soon offer, DSL technologies
and services that will directly compete with us. Please see "Risk
Factors -- Because we compete against established industry competitors with
substantially greater financial resources, we may not be able to achieve our
operating and financial objectives."
PROPERTY
In Las Vegas, we have a five year lease, expiring in 2001, with a five year
option for the site housing our switch. We also lease space in Las Vegas for our
national customer service operations, national sales personnel, Las Vegas sales
personnel and general administration functions. This lease expires in 2004. This
facility is owned by a limited liability company which is principally owned by
two of our principal stockholders and directors, Maurice J. Gallagher, Jr. and
Timothy P. Flynn.
We have recently leased office space in the Rochester, New York area and we
have moved our corporate headquarters to the Rochester area.
We also own property housing our switch facilities in Ontario, Long Beach
and San Diego, California, Chicago, Illinois, and Fort Lauderdale, Florida. Our
switch site in Atlanta, Georgia has been leased for a term expiring in 2007 with
renewal options. We have leased facilities to house our local sales and
administration staff in each market.
We place great importance on each switch facility and seek to insure
maximum security and environmental control. We believe this can be achieved most
effectively through stand-alone structures. This approach minimizes the risk of
fire or other hazards from adjacent tenants or properties.
PERSONNEL
As of February 2, 2000, we had approximately 919 employees, most of whom
were located in Las Vegas. We expect to substantially increase the number of our
employees over the next two years.
We have non-disclosure and non-compete agreements with all of our executive
employees. None of our employees are represented by a collective bargaining
agreement.
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LEGAL PROCEEDINGS
We are party to numerous state and federal administrative proceedings. In
these proceedings, we are seeking to define and/or enforce incumbent carrier
performance requirements related to:
- the cost and provisioning of those network elements we lease;
- the establishment of customer care and provisioning;
- the allocation of subsidies; and
- collocation costs and procedures.
The outcome of these proceedings will establish the rates and procedures by
which we obtain and provide leased network elements and could have a material
effect on our operating costs.
We are also involved in legal proceedings in which we are seeking to
enforce our tariffed rates for originating and terminating long distance calls.
AT&T, Sprint, MCI WorldCom and other long distance carriers refused to pay the
full amount of the long distance access charges billed to them. Access charges
represented 41% of our operating revenues in 1998 and 35% of our operating
revenues in the first nine months of 1999. Access charge revenues from AT&T,
Sprint and MCI WorldCom represented 81% of our total access charge revenues in
1998 and 75% of our access charge revenue in the first nine months of 1999. As
of September 30, 1999, we had outstanding receivables of approximately $12.3
million attributable to access charges from AT&T, Sprint, MCI WorldCom and other
long distance carriers, as compared to $8.1 million as of June 30, 1999. We have
recently settled our dispute with MCI WorldCom; however, our disputes continue
with AT&T and Sprint.
We initiated proceedings against AT&T at the FCC under an FCC procedure for
expedited settlement of disputes between common carriers. On July 16, 1999, the
FCC released a decision ordering AT&T to pay us the full amount we billed to
them for originating switched access charges from August 1998 through March 1999
at our tariffed rate. AT&T asked the FCC to review the order and in December
1999 the FCC decided not to review its previous decision. The FCC decision is
subject to appeal to a federal appeals court.
We have also filed a complaint before the FCC to obtain an order compelling
Sprint to pay our tariff rate for access charges. In January 2000, Sprint filed
a complaint against us before the FCC seeking a declaration that Sprint should
be entitled to recover any amounts it may be ordered to pay to us under our
complaint on the basis that our charges are unjust and unreasonable.
The final outcome of the disputes with AT&T and Sprint is uncertain. If we
are unable to collect from these long distance carriers, it could have a
material impact on our financial condition. See "Risk Factors -- We may not be
able to collect all of the access charges we have billed to long distance
carriers."
From time to time, we engage in other litigation and governmental
proceedings in the ordinary course of our business. We do not believe any other
pending litigation or governmental proceeding will have a material adverse
effect on our results of operations or financial condition.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their respective ages as of
January 14, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Maurice J. Gallagher, Jr....... 50 Chairman of the Board of Directors
Rolla P. Huff.................. 43 Chief Executive Officer, President, Director
Timothy P. Flynn(1)............ 49 Director
Jack L. Hancock(2)............. 69 Director
David Kronfeld................. 52 Director
Mark J. Masiello............... 32 Director
Thomas Neustaetter(1)(2)....... 47 Director
Paul J. Salem(1)(2)............ 36 Director
James Ball..................... 37 President -- Midwest Region
John Boersma................... 39 Senior Vice President -- Operations
David S. Clark................. 39 Senior Vice President -- Investor Relations
S. Gregory Clevenger........... 36 Senior Vice President -- Corporate Development
Michael R. Daley............... 38 Executive Vice President and Chief Financial Officer
Neil Hediger................... 41 Senior Vice President -- Marketing
Kent F. Heyman................. 44 Senior Vice President and General Counsel
George Longyear................ 30 President -- Southwestern Region
Mark D. Magarian............... 33 Senior Vice President -- People Services
James Mitchell................. 38 President -- Eastern Region
Mark W. Peterson............... 45 President -- Western Region
Michele Sadwick................ 33 Vice President -- Corporate Communications
Linda M. Sunbury............... 38 Senior Vice President -- Finance
</TABLE>
- -------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
MAURICE J. GALLAGHER, JR. has served as the chairman of our board of
directors since our inception. Mr. Gallagher was a founder of ValuJet Airlines,
Inc. in 1993 and served as a director of ValuJet from 1993 until November 1997
and served as vice chairman from 1994 to 1997.
ROLLA P. HUFF was elected as our chief executive officer and president and
as a member of our board of directors as of November 1, 1999. From March 1999 to
September 1999, Mr. Huff served as president and chief operating officer of
Frontier Corporation and served as executive vice president and chief financial
officer of that corporation from May 1998 to March 1999. From July 1997 to May
1998, Mr. Huff was president of AT&T Wireless for the Central U.S. region and
Mr. Huff served as senior vice president and chief financial officer of that
company from March 1995 to July 1997. From July 1994 to March 1995, Mr. Huff was
financial vice president of mergers and acquisitions for AT&T.
TIMOTHY P. FLYNN has served as a member of our board of directors since
1996. Mr. Flynn served as a member of the board of directors of ValuJet Airlines
since he participated in its founding in 1993 until November 1997. Mr. Flynn and
Mr. Gallagher are affiliated in a number of other transactions.
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JACK L. HANCOCK has served as a member of our board of directors since
1996. Mr. Hancock was vice president of systems technology and executive vice
president, product and technology for PacBell from 1988 to 1993. He has served
as a member of the boards of directors of Union Bank of California and Wittaker
Corporation since 1994.
DAVID KRONFELD was elected to serve as a member of our board of directors
in February 1998. Mr. Kronfeld is the founder of JK&B Management, L.L.C., a
venture capital firm, and has managed its affairs since 1995. Since 1989, Mr.
Kronfeld has also been a partner at Boston Capital Ventures, a venture capital
firm where he specialized in the telecommunications and software industries.
MARK J. MASIELLO was elected to serve as a member of our board of directors
in November 1999. Mr. Masiello is a principal of Providence Equity Partners,
Inc., which provides investment management services to Providence Equity
Partners III L.P. ("PEP") and has since its founding in 1998 served as a member
of Providence Equity Partners III LLC, the general partner of PEP. Mr. Masiello
has been with Providence since 1989 and he currently serves as a director of VIA
NET.WORKS, Inc., Netcom Internet Limited and Netcom Canada Inc.
THOMAS NEUSTAETTER was elected to serve as a member of our board of
directors in February 1998. Since March 1999, Mr. Neustaetter has been an
executive member of JK&B Capital. From January 1996 to December 1999, Mr.
Neustaetter was a partner of The Chatterjee Group, an investment firm which is
an affiliate of Soros Fund Management. Before joining The Chatterjee Group, he
was the president and founder of Bancroft Capital, a general consulting firm,
from December 1994 to December 1996. Mr. Neustaetter also serves as a director
of 21st Century Telecom Group, Inc., Gloss.com, Update Marketing, Selectica,
Inc. and Vector Holdings.
PAUL J. SALEM was elected to serve as a member of our board of directors in
May 1999. Since 1997, Mr. Salem served as a managing director of Providence
Equity Partners, Inc., which provides investment management services to PEP and
has since its founding in 1998 served as a member of Providence Equity Partners
III LLC, the general partner of PEP. Mr. Salem also served as a vice president
of Providence Ventures Inc. from 1992 to 1996. Mr. Salem has served as a
director of MetroNet Communications Corp. since July 1996 and as a director of
Verio, Inc. since 1996.
JAMES BALL joined our company as president -- midwest region in November
1999. From September 1998 until November 1999, Mr. Ball served as regional vice
president for a 12-city region with Chicago-based Level 3 Communications. Before
September 1998, Mr. Ball held senior management positions at Epoch Internet from
November 1997 to August 1998 and MFS Telecom from August 1993 to October 1997.
JOHN BOERSMA has served as our vice president -- operations since May 1997
and was designated senior vice president -- operations in May 1999. He served as
vice president of carrier relations for ICG Telecom Group, Inc. from 1996 to
1997. In that capacity, he was responsible for ICG Telecom's relationship with
local exchange carriers and implementation, purchase agreements and service
quality. Mr. Boersma served as vice president, northern California operations of
ICG Telecom from April 1994 to September 1996.
DAVID S. CLARK has since December 1999 served as our senior vice
president -- investor relations. Mr. Clark served as our vice
president -- marketing from May 1997 until May 1999 when he was designated
senior vice president -- sales and marketing. Mr. Clark has been in the
telecommunications industry for 11 years, with responsibilities including
engineering, purchasing, product development, client acquisition and
maintenance, marketing and advertising. From 1989 to 1997, Mr. Clark was
employed by North American Telecom, his last position being vice president of
communications services.
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<PAGE> 156
S. GREGORY CLEVENGER joined our company as senior vice
president -- corporate development in January 2000. From March 1997 to December
1999, Mr. Clevenger was vice president of investment banking at Goldman, Sachs &
Co. in the communications, media and entertainment group in Singapore and New
York. From September 1992 to March 1997, Mr. Clevenger was an associate and vice
president in the investment banking division of Morgan Stanley & Co.
Incorporated in New York, Hong Kong and Singapore in a variety of groups
including the global telecommunications group and the global project finance and
leasing group. From May 1990 to September 1992, Mr. Clevenger was an associate
and vice president at Argent Group Ltd. in New York.
MICHAEL R. DALEY joined our company as executive vice president and chief
financial officer in November 1999. From November 1998 to November 1999, Mr.
Daley served as executive vice president and chief financial officer of
Concentrix Corporation. From 1984 through ACC Corp.'s merger with Teleport
Communications Group, Inc. in 1998, Mr. Daley served in various capacities at
ACC Corp., including as executive vice president and chief financial officer
from March 1994 to October 1998 with responsibilities including operations
support, investor relations, human resources, legal, mergers and acquisitions
and business development.
NEIL HEDIGER joined our company as senior vice president -- marketing in
January 2000. From September 1995 to November 1999, Mr. Hediger served as vice
president of business communications for BellSouth and as vice president of
marketing for BellSouth business systems. From April 1991 to September 1995, he
served as director of marketing for MCI -- business markets.
KENT F. HEYMAN has served as our vice president and general counsel since
June 1996 and was designated senior vice president in December 1999. Mr. Heyman
has 18 years of legal experience, most recently as chairman of the litigation
department and senior trial counsel of the Dowling, Magarian, Aaron & Heyman law
firm. Mr. Heyman has served as a California Superior Court Judge pro tempore
presiding over trial, settlement conference and other proceedings from 1990 to
1996.
GEORGE LONGYEAR has served as our president -- southwestern region since
October 1999. From April 1998 until October, 1999, Mr. Longyear served as branch
director in our Atlanta office. Mr. Longyear has over nine years telephone
industry experience, most recently with MCI Communications from 1991 to 1997
where he held various senior sales and management positions in their local
service group and state government and university segment.
MARK D. MAGARIAN joined our company as senior vice president -- people
services in January 2000. Mr. Magarian practiced law and specialized in labor
and employment law from 1993 until December 1999.
JAMES MITCHELL has served as our president -- eastern region since February
1998. Mr. Mitchell has over nine years of telephone industry experience, serving
from 1990 to 1998 in various sales and marketing management roles with MCI, his
last position being regional sales and marketing manager for the southeast
region.
MARK W. PETERSON has served as our president -- western region since March
1997. From 1993 to 1996, Mr. Peterson was a marketing and communications
consultant and a law student. He previously served as head of corporate affairs
for WestAir Holding, Inc. from 1988 to 1992.
MICHELE SADWICK joined our company as vice president -- corporate
communications in December 1999. From April 1994 to November 1999, Ms. Sadwick
held various positions in public relations with Frontier Corporation.
LINDA M. SUNBURY has served as our vice president and principal accounting
officer since June 1996 and served as our chief financial officer from January
1998 to November 1999. Ms. Sunbury was designated senior vice president in May
1999 and since December 1999 has served as senior vice president -- finance. Ms.
Sunbury has over 15 years accounting and administrative
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experience, having held similar positions in the airline industry. Most
recently, Ms. Sunbury was vice president of administration for Business Express,
Inc. dba the Delta Connection from 1994 to 1996. While Ms. Sunbury was at
Business Express, creditors of Business Express filed an involuntary petition
for bankruptcy in January 1996. Business Express subsequently reorganized and
emerged from bankruptcy in April 1997. Before that, Ms. Sunbury served as
controller for WestAir Holding, Inc. from 1988 to 1994.
Messrs. Kronfeld and Neustaetter were initially selected to serve on our
board of directors by the holders of our Series A convertible preferred stock.
The Series A convertible preferred stock was automatically converted into common
stock upon our initial public offering.
Messrs. Salem and Masiello were selected to serve on our board of directors
by the purchasers of our Series B convertible preferred stock and Series C
convertible preferred stock.
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PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF MANAGEMENT AND BENEFICIAL OWNERS
The following table shows information known to us with respect to
beneficial ownership of common stock as of February 3, 2000, by (A) each
director, (B) all executive officers and directors as a group and (C) each
person known by us to be a beneficial owner of more than 5% of our outstanding
common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OWNERSHIP(1)
- ------------------------ --------------------- ------------
<S> <C> <C>
Providence Equity Partners III LLC(2).................. 5,003,969 17.5%
Maurice J. Gallagher, Jr., chairman of the board and
director(3).......................................... 3,312,608 14.0%
David Kronfeld, director(4)............................ 2,061,070 8.4%
Timothy P. Flynn, director(5).......................... 898,500 3.8%
Rolla P. Huff, president, chief executive officer and
director............................................. 150,000 *
Jack L. Hancock, director(6)........................... 37,200 *
Thomas Neustaetter, director........................... 8,800 *
Mark J. Masiello, director(7).......................... -- --
Paul J. Salem, director(7)............................. -- --
All executive officers and directors as a group (21
persons) (3)(4)(5)(6)(7)(8).......................... 7,089,992 28.7%
</TABLE>
- -------------------------
* Less than 1% of total.
(1) In accordance with the Commission's rules, each beneficial owner's holdings
have been calculated assuming the full exercise of options and the
conversion of all shares of convertible preferred stock held by the holder
which are currently exercisable or convertible or which will become
exercisable or convertible within 60 days after the date indicated and no
exercise of options or conversion of preferred stock held by any other
person.
(2) Includes 4,111,112 shares of Series B convertible preferred stock and
892,857 shares of Series C convertible preferred stock. The shares of
Series B convertible preferred stock and Series C convertible preferred
stock are convertible into common stock on a one-for-one basis. The address
of this beneficial owner is 901 Fleet Center, 50 Kennedy Plaza, Providence,
Rhode Island 02903.
(3) Includes options to purchase 52,000 shares of common stock which are
presently exercisable and 3,170,878 shares of common stock owned by the
various partnerships, trusts or corporations with respect to which Mr.
Gallagher is a general partner, beneficiary and/or controlling stockholder.
Also includes 44,730 shares owned by a trust for the benefit of Mr.
Gallagher's minor children with respect to which Mr. Gallagher disclaims
any beneficial ownership interest. Mr. Gallagher's address is 3291 N.
Buffalo Drive, Las Vegas, Nevada 89129.
(4) Includes 1,139,571 shares of common stock, 555,556 shares of Series B
convertible preferred stock and 357,143 shares of Series C convertible
preferred stock, all of which are owned by partnerships in which Mr.
Kronfeld is a general partner or manager of a general partner. The shares
of Series B convertible preferred stock and Series C convertible preferred
stock are convertible into common stock on a one-for-one basis. Mr.
Kronfeld's address is JK&B Management, L.L.C., 205 North Michigan, Suite
808, Chicago, Illinois 60601.
(5) Includes options to purchase 7,200 shares which are presently exercisable
or will become exercisable within 60 days after the date of this prospectus
and 102,000 shares of common stock owned by various partnerships or
corporations with respect to which Mr. Flynn is a general partner and/or
controlling stockholder.
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(6) Includes options to purchase 7,200 shares that are presently exercisable or
will become exercisable within 60 days after the date of this prospectus.
(7) Excludes 4,111,112 shares of Series B convertible preferred stock and
892,857 shares of Series C convertible preferred stock owned by Providence
Equity Partners III L.P. and its affiliates. Mr. Masiello and Mr. Salem
disclaim beneficial ownership of these shares except to the extent of their
pecuniary interest in the general partner of Providence Equity Partners III
L.P.
(8) Includes options to purchase 157,265 shares owned by executive officers not
named above which are presently exercisable or which will become
exercisable within 60 days after the date of this prospectus.
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DESCRIPTION OF SECURITIES
GENERAL -- CAPITAL STOCK
The following description is a summary of the material terms of our capital
stock. It is not a complete description of all of the terms of our capital
stock. You should read this description of our capital stock as well as the
Nevada Revised Statutes, our articles of incorporation, including the
certificates of designation of our preferred stock, and our by-laws. Copies of
our articles and by-laws have been filed as exhibits to the registration
statement of which this prospectus is a part.
Our authorized capital stock consists of 60,000,000 shares of common stock,
$.001 par value per share, and 50,000,000 shares of preferred stock, $.001 par
value per share. As of February 2, 2000, 23,557,659 shares of common stock,
5,277,779 shares of Series B convertible preferred stock and 1,250,000 shares of
Series C convertible preferred stock were outstanding and 3,642,193 shares of
common stock were subject to outstanding options and warrants. As of January 31,
2000, there were approximately 241 holders of record of the common stock, six
holders of record of the Series B convertible preferred stock and six holders of
record of Series C convertible preferred stock.
If we issue preferred stock in the future, the preferred stock will have
the rights, terms and preferences specified by our board of directors in a
certificate filed with the Secretary of State of Nevada. As of the date of this
prospectus, we have authorized the issuance of up to 5,278,000 shares of Series
B convertible preferred stock and 1,250,000 shares of Series C convertible
preferred stock with the voting, dividend, liquidation and conversion rights
described below. The issuance of preferred stock by the board of directors in
the future could adversely affect the rights of holders of our then outstanding
capital stock. For example, an issuance of preferred stock could result in a
class of securities outstanding with preferences over the common stock with
respect to dividends and liquidations and/or a class of securities with voting
rights equal to or greater than those of the common stock. We have no present
plan to issue any additional series of preferred stock other than the Series D
convertible preferred stock. See "-- Anti-Takeover Provisions of Articles of
Incorporation."
SERIES B CONVERTIBLE PREFERRED STOCK
The Series B convertible preferred stock has the following rights and
preferences:
Dividends accrued at the rate of 10% per year from their issuance on May 4,
1999 until November 21, 1999 and must be paid before any dividends may be paid
on our common stock. Effective as of November 22, 1999, we elected to terminate
the accrual of dividends since our common stock price per share exceeded $27.00
for 20 consecutive trading days. Except as described below, accrued dividends
will be paid in common stock at the time the Series B convertible preferred
stock is converted into common stock if the dividends have not been paid before
that time.
On any matter submitted to our stockholders, holders of shares of Series B
convertible preferred stock will be treated as if they hold the number of shares
of common stock into which their shares of Series B convertible preferred stock
could be converted and will be allowed to vote those shares along with the
holders of our common stock. In addition, the holders of shares of Series B
convertible preferred stock will have the right to approve any action to:
- issue preferred stock ranking equal or senior to the Series B convertible
preferred stock;
- dispose of assets in excess of a fixed dollar amount, merge or
consolidate or sell our company;
- liquidate our company;
- alter the terms of the Series B convertible preferred stock;
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- pay dividends on common stock or other securities junior to the Series B
convertible preferred stock other than dividends payable in common stock;
- enter into transactions with our affiliates other than transactions
covered by specified exceptions;
- make acquisitions in excess of a fixed dollar amount;
- incur additional debt in excess of fixed amounts;
- make material changes to our business plan;
- hire a chief executive officer;
- organize subsidiaries or enter into joint ventures unless specified
conditions are met; and
- issue additional common stock that would result in an increase in the
number of shares of common stock into which the Series B convertible
preferred stock may be converted.
If we were to take one of these restricted actions without the approval of
the holders of the Series B convertible preferred stock, the holders of the
Series B convertible preferred stock may have the right to require us to seek a
sale of our company. To avoid having to sell our company if one of the
restricted actions described above is not approved, we have the right to redeem
the Series B convertible preferred stock at predetermined prices. If we elect
not to redeem the Series B convertible preferred stock and the required sale of
our company is not effected within six months, then the holders of the Series B
convertible preferred stock, along with the holders of the Series C convertible
preferred stock if they then have similar rights, would be entitled to elect a
majority of our board of directors.
The approval rights described above will terminate if fewer than 1,759,260
shares of Series B convertible preferred stock remain outstanding and the shares
of Series B convertible preferred stock outstanding constitute less than 5% of
the outstanding common stock assuming conversion of all outstanding shares of
Series B convertible preferred stock. Based on the number of shares of common
stock to be outstanding after this offering, 5% of the common stock would be
approximately 1,650,000 shares.
The holders of the Series B convertible preferred stock have approved the
issuance of the Series C convertible preferred stock and Series D convertible
preferred stock, each of which will rank equal to the Series B convertible
preferred stock.
The holders of the Series B convertible preferred stock have the right to
representation on our board of directors as discussed below under "-- Series B
and C Preferred Stock Board Representation."
Upon our liquidation, the holders of the Series B convertible preferred
stock are entitled to receive their liquidation amount on a pro rata basis with
the holders of any series of preferred stock which ranks equally with the Series
B convertible preferred stock and before any amounts may be paid to holders of
our common stock or other junior securities. The liquidation amount will be the
greater of (a) $9.00 per share plus accrued and unpaid dividends or (b) the
amount the holders of Series B convertible preferred stock would have received
if the Series B convertible preferred stock had been converted into common
stock. The holders of the Series B convertible preferred stock have the right to
elect that a sale of our company be treated as a liquidation for these purposes.
If the liquidation or sale occurs before May 4, 2002, the accrued dividends will
not be paid to the extent the holders of Series B convertible preferred stock
will receive more than $22.50 per share.
A holder of shares of Series B convertible preferred stock may convert
those shares into common stock at any time. Initially, each share of Series B
convertible preferred stock may be converted into
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one share of common stock. The number of shares of common stock into which each
share of Series B convertible preferred stock can be converted may be adjusted
as a result of stock splits, stock dividends and other issuances of additional
stock.
After the earlier of May 24, 2000 or the date on which the holders of
Series B convertible preferred stock or Series C convertible preferred stock
exercise their demand registration rights, which are discussed below, we have
the right to require the conversion of the Series B convertible preferred stock
if our common stock price exceeds $27.00 per share for 20 consecutive trading
days. If we require conversion before May 4, 2002, no accrued dividends will be
paid.
The holders of Series B convertible preferred stock have the right to
require us to redeem the Series B convertible preferred stock after May 4, 2005
or upon a sale of our company. The redemption price will be equal to the greater
of:
- $9.00 per share plus accrued and unpaid dividends; or
- the value of the common stock into which the Series B convertible
preferred stock is then convertible.
If we fail to redeem all shares of Series B convertible preferred stock
within six months of the date specified by the holders of the Series B
convertible preferred stock, then the holders of the Series B convertible
preferred stock, along with the holders of the Series C convertible preferred
stock if they then have similar rights, will have the right to elect a majority
of our board of directors.
The purchasers of Series B convertible preferred stock have demand and
piggyback registration rights.
SERIES C CONVERTIBLE PREFERRED STOCK
The Series C convertible preferred stock, which was issued in December
1999, has the following rights and preferences:
Dividends will accrue at the rate of 10% per year, are cumulative and must
be paid before any dividends may be paid on our common stock. Except as
described below, accrued dividends will be paid in common stock at the time the
Series C convertible preferred stock is converted into common stock if the
dividends have not been paid before that time.
On any matter submitted to our stockholders, holders of shares of Series C
convertible preferred stock will be treated as if they hold the number of shares
of common stock into which their shares of Series C convertible preferred stock
could be converted and will be allowed to vote those shares along with the
holders of our common stock. In addition, the holders of shares of Series C
convertible preferred stock will have the right to approve any action to:
- issue preferred stock ranking equal or senior to the Series C convertible
preferred stock;
- dispose of assets in excess of a fixed dollar amount, merge or
consolidate or sell our company;
- liquidate our company;
- alter the terms of the Series C convertible preferred stock;
- pay dividends on common stock or other securities junior to the Series C
convertible preferred stock other than dividends payable in common stock;
- enter into transactions with our affiliates other than transactions
covered by specified exceptions;
- make acquisitions in excess of a fixed dollar amount;
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- incur additional debt in excess of fixed amounts;
- make material changes to our business plan;
- hire a chief executive officer;
- organize subsidiaries or enter into joint ventures unless specified
conditions are met; and
- issue additional common stock that would result in an increase in the
number of shares of common stock into which the Series C convertible
preferred stock may be converted.
If we were to take one of these restricted actions without the approval of
the holders of the Series C convertible preferred stock, the holders of the
Series C convertible preferred stock may have the right to require us to seek a
sale of our company. To avoid having to sell our company if one of the
restricted actions described above is not approved, we have the right to redeem
the Series C convertible preferred stock at predetermined prices. If we elect
not to redeem the Series C convertible preferred stock and the required sale of
our company is not effected within six months, then the holders of the Series C
convertible preferred stock, along with the holders of the Series B convertible
preferred stock if they then have similar rights, would be entitled to elect a
majority of our board of directors.
The approval rights described above will terminate if fewer than 416,667
shares of Series C convertible preferred stock remain outstanding.
Concurrently with the issuance of the Series C convertible preferred stock,
the purchasers of the Series C convertible preferred stock will consent to the
issuance of the Series D convertible preferred stock, which will rank equally
with the Series B convertible preferred stock and Series C convertible preferred
stock.
The holders of the Series C convertible preferred stock have the right to
representation on our board of directors as discussed below under "-- Series B
and C Preferred Stock Board Representation."
Upon our liquidation, the holders of the Series C convertible preferred
stock are entitled to receive their liquidation amount on a pro rata basis with
the holders of any series of preferred stock which ranks equally with the Series
C convertible preferred stock and before any amounts may be paid to holders of
our common stock or other junior securities. The liquidation amount will be the
greater of (a) $28.00 per share plus the greater of $2.80 per share or the
accrued and unpaid dividends or (b) the amount the holders of Series C
convertible preferred stock would have received if the Series C convertible
preferred stock had been converted into common stock. The holders of the Series
C convertible preferred stock have the right to elect that a sale of our company
be treated as a liquidation for these purposes. If the liquidation or sale
occurs before June 30, 2002, the accrued dividends will not be paid to the
extent the holders of Series C convertible preferred stock will receive more
than $58.80 per share.
A holder of shares of Series C convertible preferred stock may convert
those shares into common stock at any time. Initially, each share of Series C
convertible preferred stock may be converted into one share of common stock. The
number of shares of common stock into which each share of Series C convertible
preferred stock can be converted may be adjusted as a result of stock splits,
stock dividends and other issuances of additional stock.
After the earlier of January 19, 2001, or the date on which the holders of
Series B convertible preferred stock or Series C convertible preferred stock
exercise their demand registration rights, which are discussed below, we have
the right to require the conversion of the Series C convertible preferred stock
if our common stock price exceeds $56.00 per share for 20 consecutive trading
days.
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If we require conversion before June 30, 2002, no accrued dividends in excess of
$2.80 per share will be paid.
The holders of Series C convertible preferred stock have the right to
require us to redeem the Series C convertible preferred stock after December 30,
2005 or upon a sale of our company. The redemption price will be equal to the
greater of:
- $28.00 per share plus the greater of $2.80 per share or accrued and
unpaid dividends; or
- the value of the common stock into which the Series C convertible
preferred stock is then convertible.
If we fail to redeem all shares of Series C convertible preferred stock
within six months of the date specified by the holders of the Series C
convertible preferred stock, then the holders of the Series C convertible
preferred stock (along with the holders of the Series B convertible preferred
stock if they then have similar rights) will have the right to elect a majority
of our board of directors.
The purchasers of Series C convertible preferred stock have demand and
piggyback registration rights.
SERIES B AND C PREFERRED STOCK BOARD REPRESENTATION
The purchasers of the Series B convertible preferred stock and Series C
convertible preferred stock have the right to nominate two or more directors
depending on the size of our board of directors and the percentage of our stock
represented by the purchasers' Series B convertible preferred stock, Series C
convertible preferred stock and common stock received upon conversion of the
Series B convertible preferred stock or Series C convertible preferred stock.
The purchasers of the Series B convertible preferred stock and Series C
convertible preferred stock also have the right to have one of their board
representatives serve on each committee of our board of directors and on the
board of each of our subsidiaries. The holders of the Series B convertible
preferred stock and Series C convertible preferred stock are entitled to
nominate two directors. Paul J. Salem and Mark J. Masiello have been elected to
the board of directors after being designated by the holders of Series B
convertible preferred stock and Series C convertible preferred stock.
The right to nominate directors will terminate if fewer than 1,759,260
shares of Series B convertible preferred stock remain outstanding, fewer than
416,667 shares of Series C convertible preferred stock remain outstanding and
the shares of Series B convertible preferred stock, Series C convertible
preferred stock and common stock issued upon conversion of the Series B
convertible preferred stock or Series C convertible preferred stock constitute
less than 5% of the outstanding common stock assuming conversion of all
outstanding shares of Series B convertible preferred stock and Series C
convertible preferred stock.
SERIES D CONVERTIBLE PREFERRED STOCK
For a description of the terms of the Series D convertible preferred stock,
see "Description of Series D Convertible Preferred Stock."
OUTSTANDING WARRANTS
As of February 2, 2000, there are outstanding warrants to purchase
approximately 279,886 shares of common stock. These warrants were originally
issued in September 1997 to purchasers of units consisting of our senior secured
notes and the warrants. Each holder of a warrant may purchase shares of common
stock at a price of $.02 per share at any time on or before October 1, 2004.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and the concurrent offering, we will have
outstanding 28,028,618 shares of common stock. The 4,500,000 shares of common
stock and the estimated shares which may be issued upon conversion of the
Series D convertible preferred stock to be sold in this offering and the
concurrent offering, any additional shares sold upon exercise of the over-
allotment option granted to the underwriters, any shares of common stock which
may be issued as dividends on our Series D convertible preferred stock, the
9,612,695 shares sold in our prior public offerings, approximately 657,753
shares issued upon exercise of stock options and any common stock issued on
future stock option exercises will be freely tradable without restriction or
further registration under the Securities Act unless those shares are held by
our "affiliates" as defined by the Securities Act.
The remaining 13,258,170 shares of our common stock, plus 6,527,779 shares
of common stock which may be issued upon conversion of the Series B convertible
preferred stock and Series C convertible preferred stock, are "restricted
securities" under the Securities Act because they were issued and sold by us in
private transactions in reliance upon exemptions from registration under the
Securities Act. Restricted securities may not be sold except in compliance with
the registration requirements of the Securities Act or under an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act. After sale under Rule 144 under the Securities Act, these shares will be
freely tradable without restriction or registration under the Securities Act.
Substantially all of our restricted securities, other than the 6,527,779 shares
of common stock which may be issued upon conversion of the Series B convertible
preferred stock and Series C convertible preferred stock, currently qualify for
sale under Rule 144.
The holders of:
- approximately 7,726,701 shares of our common stock;
- 5,277,779 shares of Series B convertible preferred stock;
- 1,250,000 shares of Series C convertible preferred stock; and
- warrants to purchase approximately 279,886 shares of common stock,
excluding holders including those shares for sale in this offering.
have agreed that, for a period of 90 days from the date of this prospectus, they
will not, without the prior written consent of Salomon Smith Barney Inc.,
dispose of or hedge any shares of common stock or any securities convertible
into or exchangeable for common stock, except for the shares offered by this
prospectus. See "Underwriting." After the 90 day period, all of these securities
other than the 5,277,779 shares of Series B convertible preferred stock and
1,250,000 shares of Series C convertible preferred stock will be eligible for
sale in the public market upon compliance with Rule 144 under the Securities
Act.
Sales of a substantial amount of common stock in the public market, or the
perception that sales could occur, could reduce the price of our stock.
REGISTRATION RIGHTS OF SECURITY HOLDERS
The holders of the 5,277,779 shares of our outstanding Series B convertible
preferred stock, the holders of the 1,250,000 shares of Series C convertible
preferred stock, the holders of approximately 639,997 shares of common stock
that have been or may be acquired upon exercise of the warrants and the holders
of 1,080,470 shares of common stock received upon conversion of the Series A
convertible preferred stock upon our initial public offering have the right to
demand that their common stock be registered with the SEC.
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The holders of the 5,277,779 shares of our outstanding Series B convertible
preferred stock, the holders of the 1,250,000 shares of Series C convertible
preferred stock, the holders of approximately 639,997 shares of common stock
that have been or may be acquired upon exercise of the warrants and the holders
of an additional 1,107,471 shares of common stock have piggyback registration
rights under agreements with us. Some of these holders have elected to include
shares in this offering.
FUTURE SALE OF STOCK TO EMPLOYEES
We plan to seek to attract and retain employees in part by offering stock
options and other purchase rights for a significant number of our shares of
common stock. These plans may dilute the percentage of ownership of our then
existing stockholders.
CONTROL SHARE ACQUISITIONS
Sections 78.3791 through 78.3793 of the Nevada Revised Statutes generally
apply to any acquisition of outstanding voting securities of an issuing
corporation which results in the acquiror owning more than 20% of the issuing
corporation's then outstanding voting securities. An issuing corporation is any
Nevada corporation with at least 200 stockholders, at least 100 of which are
stockholders of record and Nevada residents, and which conducts business in
Nevada.
The securities acquired in a covered acquisition are denied voting rights
unless a majority of the security holders of the issuing corporation approve the
granting of voting rights. If permitted by the issuing corporation's articles of
incorporation or by-laws then in effect, voting securities acquired in the
covered acquisition are redeemable by the issuing corporation at the average
price paid for the securities by the acquiror if the acquiring person has not
given timely notice to the issuing corporation or if the stockholders of the
issuing corporation vote not to grant voting rights to the acquiring person's
securities.
Unless the issuing corporation's articles of incorporation or by-laws then
in effect provide otherwise, if the acquiring person acquired securities having
50% or more of the voting power of the issuing corporation's outstanding
securities and the stockholders of the issuing corporation grant voting rights
to the acquiring person, then any stockholders of the issuing corporation who
voted against granting voting rights to the acquiring person may demand that the
issuing corporation purchase, for fair value, all or any portion of his
securities.
Our articles of incorporation and by-laws do not limit the effect of these
provisions.
TRANSFER AGENT
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, New York, New York.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS
The right of the stockholders to sue any director for misconduct in
conducting our affairs is limited by our articles of incorporation and Nevada
statutes to cases for damages resulting from breaches of fiduciary duties
involving acts or omissions involving intentional misconduct, fraud, knowing
violations of the law or the unlawful payment of dividends. Ordinary negligence
is not grounds for suit. The statute does not limit the liability of directors
or officers for monetary damages under the federal securities laws.
We also have the obligation, under our by-laws, to indemnify any director
or officer of ours for expenses incurred in connection with any legal action
brought or threatened which relates to any action or omission alleged to have
been committed while acting in the scope of the person's duties.
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This indemnification is to be provided only if the person acted in good faith
and in a manner which the person reasonably believed to be in or not opposed to
our best interests. With respect to criminal actions, the indemnification is to
be provided only if the person had no reasonable cause to believe the person's
conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or other controlling persons under
the foregoing provisions, we have been informed that in the opinion of the SEC
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
ANTI-TAKEOVER PROVISIONS OF ARTICLES OF INCORPORATION
Our articles of incorporation authorize our board of directors to issue up
to 50,000,000 shares of preferred stock from time to time in one or more
designated series or classes. As of January 10, 2000, 5,278,000 shares of
preferred stock have been designated as Series B preferred stock, 5,277,779
shares of Series B preferred stock were outstanding and 1,250,000 shares of
preferred stock have been designated as Series C convertible preferred stock and
all 1,250,000 shares of Series C preferred stock were outstanding. We may also
issue up to 3,450,000 shares of Series D convertible preferred stock in this
offering. We previously issued 6,571,427 shares of Series A convertible
preferred stock which reverted to authorized but unissued shares of preferred
stock when we closed our initial public offering of common stock. Our board of
directors, without approval of the stockholders, is authorized to establish the
voting, dividend, redemption, conversion, liquidation and other provisions of a
particular series of preferred stock, which could, among other things, adversely
affect the voting power or other rights of the holders of our outstanding
capital stock and, under some circumstances, make it more difficult for a third
party to acquire, or discourage a third party from acquiring, control of our
company. Our board of directors has no present intention to authorize the
issuance of any additional series of preferred stock other than the Series D
convertible preferred stock being offered.
BOARD OF DIRECTORS
Our by-laws provide that our board of directors is divided into three
classes of directors, with each class having a number of directors as nearly
equal as possible and with the term of each class expiring in a different year.
Because only one class of directors stands for election or re-election each
year, classifying our board of directors prevents persons seeking to acquire
control of our company from electing more than a minority of directors in any
year, thereby delaying, deferring or preventing a change of control. Our by-laws
provide that our board of directors shall consist of between three and nine
members, with the exact number to be determined from time to time by our board
of directors. Our board of directors currently consists of eight directors and,
as a result, the size of each class is two or three.
STOCKHOLDER ACTION AND SPECIAL MEETINGS
Our by-laws provide that:
- all action required or permitted to be taken by our stockholders must be
effected at a duly called annual or special meeting of stockholders and
may not be effected by any consent in writing, and
- the number of directors is set by resolution of our board of directors.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company. Our by-laws provide that
special meetings of stockholders may be called by the board of directors, the
chairman of the board, the president or the holders of at least a majority of
the shares of our common stock issued and outstanding and entitled to vote.
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DESCRIPTION OF THE SERIES D CONVERTIBLE PREFERRED STOCK
The following is a summary of the material provisions of the certificate of
designation and the Series D convertible preferred stock. Copies of the
certificate of designation and the form of Series D convertible preferred stock
share certificate are available upon request at our address set forth under
"Where You Can Find More Information." This summary is not intended to be
complete and is subject to, and is qualified in its entirety by reference to,
the certificate of designation. The definitions of capitalized terms used in the
following summary that are not defined herein are defined in the certificate of
designation.
GENERAL
At the consummation of this offering, we will issue 3,000,000 shares of our
% Series D Convertible Redeemable Preferred Stock, $0.001 par value per
share. When issued, the Series D convertible preferred stock will be validly
issued, fully paid and nonassessable. The holders of the Series D convertible
preferred stock will have no preemptive or preferential right to purchase or
subscribe to stock, obligations, warrants or any other of our securities of any
class. We have applied to have the Series D convertible preferred stock approved
for listing on the Nasdaq National Market.
RANKING
The Series D convertible preferred stock will, with respect to dividend
rights and rights on liquidation, dissolution or winding-up, rank:
- junior to all our existing and future debt obligations;
- junior to "Senior Stock," which is each class of our capital stock or
series of preferred stock established after the Series D convertible
preferred stock by our board of directors that has terms which expressly
provide that the class or series will rank senior to the Series D
convertible preferred stock;
- on a parity with "Parity Stock," which is our Series B convertible
preferred stock and Series C convertible preferred stock and each class
of capital stock or series of preferred stock established after the
Series D convertible preferred stock by our board of directors that has
terms which expressly provide that the class or series will rank on a
parity with the Series D convertible preferred stock; and
- senior to "Junior Stock," which is our common stock and any other class
of our capital stock established after the Series D convertible preferred
stock by our board of directors whose terms do not expressly provide that
the class or series ranks senior to, or on a parity with, our Series D
convertible preferred stock.
While any shares of Series D convertible preferred stock are outstanding,
we may not authorize, create or increase the authorized amount of any class or
series of capital stock that ranks senior to the Series D convertible preferred
stock with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding-up without the consent of the holders of at least 66 2/3%
of the outstanding shares of Series D convertible preferred stock. We may,
however, without the consent of any holder of Series D convertible preferred
stock, create additional classes of common stock, increase the authorized number
of shares of preferred stock, increase the authorized number of shares of, issue
additional shares of or issue series of preferred stock that ranks on a parity
with, or junior to, the Series D convertible preferred stock with respect, in
each case, to the payment of dividends and amounts upon liquidation, dissolution
and winding-up. See "-- Voting Rights."
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DIVIDENDS
Subject to the rights of any holders of Senior Stock and Parity Stock,
holders of shares of Series D convertible preferred stock will be entitled to
receive, when, as and if declared by our board of directors out of our funds
which are legally available for payment, cumulative dividends at the annual rate
of % of the liquidation preference of $50 per share of Series D convertible
preferred stock. This is equivalent to $ per share annually.
Dividends on the Series D convertible preferred stock will be payable
quarterly on , , and
of each year commencing , 2000. Dividends will accrue from
the most recent date as to which dividends have been paid or, if no dividends
have been paid, from the date of the original issuance of the Series D
convertible preferred stock. Each dividend will be payable to holders of record
as they appear on our stock records at the close of business on the record date
next preceding the quarterly dividend payment date. Each record date will be
established by our board of directors and will be not more than 60 days nor less
than 15 days before the respective quarterly dividend payment date.
Dividends will be cumulative from the quarterly dividend payment date,
whether or not in any dividend period or periods we have funds legally available
for the payment of dividends. Accumulations of dividends on shares of Series D
convertible preferred stock will not bear interest. Dividends payable on the
Series D convertible preferred stock for any period greater or less than a full
quarterly dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
At our option, any dividend on the Series D convertible preferred stock
will be payable:
- in cash, or
- in shares of our common stock.
If we pay dividends in shares of common stock, the number of shares of
common stock to be issued on each dividend payment date will be determined by
dividing the total dividend to be paid on all of the outstanding shares of
Series D convertible preferred stock by the product of (x) 95% and (y) the
average of the daily closing prices of the common stock for the five consecutive
trading days ending on and including the fourth trading day before the dividend
payment date.
The transfer agent is authorized and directed in the certificate of
designation to:
- aggregate any fractional shares of common stock that are distributable as
dividends;
- sell them at the best available price; and
- distribute the proceeds to the holders of the Series D convertible
preferred stock in proportion to their respective interests.
We will pay the expenses of the transfer agent with respect to any sale of
the aggregated fractional shares, including brokerage commissions. If the sale
by the transfer agent of the aggregated fractional interests would be
restricted, we will agree with the transfer agent on other appropriate
arrangements for the cash realization of fractional interests.
All shares of common stock distributed on the related dividend payment date
in payment of dividends on the Series D convertible preferred stock will be
freely transferable without restriction under the Securities Act.
We will not declare or pay, or set apart any sum for the payment of
dividends on any outstanding share of the Series D convertible preferred stock
for any dividend period unless all dividends for all preceding dividend periods
have been declared and paid, or declared and a sufficient
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sum set apart for the payment of the dividend, on all outstanding shares of
Series D convertible preferred stock.
We will not:
(1) declare, pay or set apart funds for the payment of any dividend or
other distribution with respect to any Junior Stock; or
(2) redeem, purchase or otherwise acquire for consideration any Junior
Stock through a sinking fund or otherwise; unless:
(a) all accrued and unpaid dividends with respect to the Series D
convertible preferred stock at the time these actions are taken have
been paid or funds have been set apart for payment of these dividends;
and
(b) sufficient funds have been paid or set apart for, or a
sufficient number of shares of common stock have been reserved for, the
payment of the dividend for the current dividend period with respect to
the Series D convertible preferred stock.
We will not declare or pay any dividend on any Parity Stock unless full
cumulative dividends have been paid on the Series D convertible preferred stock
for all prior dividend periods unless the dividend declared on any Parity Stock
is declared ratably in proportion to accrued and unpaid dividends on the Series
D convertible preferred stock and the Parity Stock.
Notwithstanding anything herein to the contrary, we may:
- declare and pay dividends on Parity Stock which are payable solely in
shares of Parity Stock or Junior Stock;
- declare and pay dividends on Junior Stock which are payable solely in
shares of Junior Stock;
- declare and pay dividends on Parity Stock or Junior Stock by increasing
the liquidation value of the Parity Stock or Junior Stock, as applicable;
- repurchase, redeem or otherwise acquire Junior Stock in exchange for
Junior Stock; or
- repurchase, redeem or otherwise acquire Parity Stock in exchange for
Parity Stock or Junior Stock.
For the foreseeable future, we intend to pay all dividends on the Series D
convertible preferred stock in shares of our common stock, other than cash paid
instead of fractional shares. If, in the future, we were to consider paying cash
dividends on the Series D convertible preferred stock we would have to comply
with the restrictions contained in our debt indenture and the terms of our
outstanding series of preferred stock. See "Risk Factors--Our debt covenants and
preferred stock could limit how we conduct our business and our ability to raise
additional funds."
REDEMPTION
Mandatory Redemption
On , 2012, subject to legal availability of funds, we will
be required to redeem all of the outstanding shares of the Series D convertible
preferred stock at a redemption price, payable in cash, equal to the liquidation
preference plus accumulated and unpaid dividends, if any, whether or not
declared, to the date of redemption. We will not be required to make sinking
fund payments with respect to the Series D convertible preferred stock. The
certificate of designation for the Series D convertible preferred stock will
provide that we will take all actions required or permitted under Nevada law to
permit the redemption.
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Provisional Redemption
On or after , 2002 but before , 2003, if the
closing price of our common stock equals or exceeds 150% of the Conversion Price
for at least 20 trading days within any 30 trading day period, we may redeem
Series D convertible preferred stock (a "Provisional Redemption"). If we redeem
the Series D convertible preferred stock, the redemption price will be % of
the liquidation preference, plus accumulated and unpaid dividends, if any,
whether or not declared, to the redemption date (the "Provisional Redemption
Date").
If we undertake a Provisional Redemption, the holders of shares of Series D
convertible preferred stock called for redemption also will receive an
"additional payment" in an amount equal to the present value of the dividends
that would have been payable on the Series D convertible preferred stock for the
period from the Provisional Redemption Date to , 2003. The
present value will be calculated using a formula set forth in the certificate of
designation.
We may pay the redemption price, including any additional payment, at our
option, in cash, in shares of common stock or a combination thereof. However, we
may not pay in common stock unless we satisfy conditions specified in the
certificate of designation before the Provisional Redemption Date.
We will notify the holders of Series D convertible preferred stock not less
than 30 nor more than 60 days before any Provisional Redemption Date.
LIQUIDATION PREFERENCE
Upon our voluntary or involuntary liquidation, dissolution or winding-up,
and subject to the rights of our creditors and holders of Senior Stock and
Parity Stock, each holder of Series D convertible preferred stock will be
entitled to be paid, out of our assets available for distribution to
stockholders, an amount equal to the liquidation preference of $50 per share of
Series D convertible preferred stock held by the holder, plus accumulated and
unpaid dividends thereon to the date fixed for liquidation, dissolution or
winding-up, before any distribution is made on any Junior Stock, including our
common stock. If, upon our voluntary or involuntary liquidation, dissolution or
winding-up, there are not sufficient assets to pay the amounts payable with
respect to the Series D convertible preferred stock and all other Parity Stock
in full, all accumulated and unpaid dividends on the Series D convertible
preferred stock and all Parity Stock will be paid in full and then the holders
of the Series D convertible preferred stock and the Parity Stock will share
equally and ratably in any distribution of our assets in proportion to the other
respective amounts to which they are entitled. After payment of the full amount
of the liquidation preference of the Series D convertible preferred stock and
any accrued and unpaid dividends, the holders of shares of Series D convertible
preferred stock will not be entitled to any further participation in any
distribution of our assets.
Neither the sale, conveyance, exchange or transfer, whether for cash,
shares of stock, securities or other consideration, of all or substantially all
of our property or assets nor our consolidation or merger with or into, one or
more entities will be deemed to be a liquidation, dissolution or winding-up.
The certificate of designation will not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Series D
convertible preferred stock even though it is substantially in excess of the par
value thereof.
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VOTING RIGHTS
The holders of Series D convertible preferred stock have no voting rights,
except as otherwise required under Nevada law or as provided in the certificate
of designation.
If:
(1) dividends on the Series D convertible preferred stock are in
arrears and unpaid for six or more dividend periods, whether or not
consecutive;
(2) we fail to redeem all of the Series D convertible preferred stock
in cash on the Mandatory Redemption Date; or
(3) we fail to offer to repurchase or, if the offer to repurchase is
accepted, to repurchase shares of Series D convertible preferred stock if a
Non-Stock Change of Control occurs (each a "Voting Rights Triggering
Event");
then the holders of the outstanding shares of Series D convertible preferred
stock, voting separately and as a class together with the holders of any Parity
Stock upon which like rights have been conferred and are exercisable, will be
entitled to elect to serve on our board of directors the lesser of:
(a) two additional members to the board of directors, or
(b) that number of directors constituting at least 25% of the members of
the board of directors,
and the number of members of the board of directors will be immediately and
automatically increased by that number. The voting rights of the Series D
convertible preferred stock will continue until all Voting Rights Triggering
Events are cured or waived, at which time the term of any directors elected
pursuant to the provisions of this paragraph will terminate and the number of
directors constituting the board of directors will be immediately and
automatically decreased by that number.
Without the approval of the holders of at least 66 2/3% of the then
outstanding shares of Series D convertible preferred stock, we may not amend the
Change of Control provisions of the Series D convertible preferred stock.
Without the approval of the holders of at least a majority of the then
outstanding shares of Series D convertible preferred stock, we may not:
- amend the certificate of designation so as to affect adversely the
specified rights, preferences, privileges or voting rights of holders of
shares of the Series D convertible preferred stock;
- increase or decrease the total number of authorized shares of Series D
convertible preferred stock; or
- waive any Voting Rights Triggering Event or compliance with any provision
of the Series D convertible preferred stock.
Except as expressly set forth above,
(1) the creation, authorization or issuance of any shares of Junior
Stock or Parity Stock, including the designation of a series thereof within
the existing class of preferred stock, or
(2) the increase or decrease in the amount of authorized capital stock
of any class, including any preferred stock,
will not require the consent of the holders of Series D convertible preferred
stock and will not be deemed to affect adversely the rights, preferences,
privileges or voting rights of shares of Series D convertible preferred stock.
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CONVERSION RIGHTS
Shares of Series D convertible preferred stock will be convertible, in
whole or in part, at any time after the issue date, at the option of the holders
thereof, into shares of common stock initially at the conversion price of
$ per share, subject to adjustment as described below ("Conversion
Price"). The right to convert shares of Series D convertible preferred stock
called for redemption will terminate at the close of business on the relevant
redemption date.
Conversion of shares of Series D convertible preferred stock, or a
specified portion thereof, may be effected by delivering certificates evidencing
the shares being converted, together with written notice of conversion and a
proper assignment of the certificates to us or in blank, to the office or agency
to be maintained by us for that purpose. Initially, Continental Stock Transfer &
Trust Company will maintain that office for us.
Each conversion will be deemed to have been effected immediately before the
close of business on the date on which the certificates for shares of Series D
convertible preferred stock have been surrendered to, and, if applicable,
payment of an amount equal to the dividends payable on the shares received by,
us. We will issue a certificate evidencing the common stock distributed upon
conversion as soon as reasonably practical after the conversion date.
All shares of common stock distributed upon conversion will be freely
transferable without restriction under the Securities Act.
Holders of shares of Series D convertible preferred stock at the close of
business on a record date will be entitled to receive the dividend payable on
the corresponding dividend payment date notwithstanding the conversion of the
shares following the record date and before the dividend payment date. However,
shares of Series D convertible preferred stock surrendered for conversion during
the period between the close of business on any record date and the opening of
business on the corresponding payment date, must be accompanied by payment of an
amount equal to the dividend payable on the shares on the dividend payment date
unless the shares are converted after the issuance of a notice of redemption
with respect to a redemption date during the period between the record date and
the dividend payment date. A holder of shares of Series D convertible preferred
stock on a record date who tenders the shares for conversion on the dividend
payment date will receive the dividend payable on the dividend payment date and
the converting holder need not include payment of the amount of the dividend
upon surrender of the shares for conversion. Except as provided above, we will
make no payment or allowance for unpaid dividends, whether or not in arrears, on
converted shares.
Fractional shares of common stock will not be issued upon conversion but,
instead, we will pay a cash adjustment based on the closing price of the common
stock on the business day before the conversion date.
The Conversion Price is subject to adjustment upon certain events,
including:
(1) any redemption payment or payment of a dividend or other
distribution payable in shares of common stock to all holders of any class
of our capital stock, other than the issuance of shares of common stock in
connection with the payment:
(a) in redemption for, of dividends on or on the conversion of the
Series D convertible preferred stock,
(b) in redemption for, of dividends on or on the conversion of the
Series B convertible preferred stock, Series C convertible preferred
stock or Parity Stock, in accordance with the terms thereof as in effect
on the issue date of the Series D convertible preferred stock, or
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(c) to all holders of the Series D convertible preferred stock
based on the number of shares of common stock into which the Series D
convertible preferred stock is then convertible;
(2) any issuance to all holders of shares of our common stock of
rights, options or warrants entitling them to subscribe for or purchase
shares of common stock or securities convertible into or exchangeable for
shares of our common stock at less than market value as of the date of
conversion or exchange; provided no adjustment will be made if the holder
of shares of the Series D convertible preferred stock would be entitled to
receive the rights, options or warrants upon conversion of the Series D
convertible preferred stock into common stock and, provided further, if the
rights, options or warrants are only exercisable if certain triggering
events occur, then the Conversion Price will not be adjusted until the
triggering events occur;
(3) any subdivision, combination or reclassification of common stock;
(4) any distribution to all holders of our common stock consisting
exclusively of cash that, when aggregated with:
(a) all other cash distributions made within the then preceding 12
months in respect of which no adjustment has been made, and
(b) any cash and the fair market value of other consideration paid
or payable in respect of any tender offer by us or any of our
subsidiaries for shares of our common stock concluded within the then
preceding 12 months in respect of which no adjustment has been made,
exceeds 15% of our market capitalization, after excluding any cash
distributed in a transaction involving:
(x) our merger or consolidation,
(y) the sale or transfer to another corporation of substantially
all of our assets, or
(z) any statutory exchange of securities with another
corporation, in which no adjustment to the Conversion Price is made
pursuant to the last paragraph under the caption Conversion Rights;
(5) the completion of a tender or exchange offer by us or any of our
subsidiaries for shares of our common stock that involves an aggregate
consideration that, together with:
(a) any cash and other consideration payable in a tender or
exchange offer by us or any of our subsidiaries for shares of our common
stock expiring within the then preceding 12 months in respect of which
no adjustment has been made, and
(b) the aggregate amount of any cash distributions referred to in
clause 4 above to all holders of shares of our common stock within the
then preceding 12 months in respect of which no adjustments have been
made,
exceeds 15% of our market capitalization immediately before the expiration
of the tender offer where the tender offer price or exchange offer price
per share of our common stock is less than the closing price per share of
our common stock on the date after the tender offer or exchange offer
expires; or
(6) a distribution to all holders of our common stock of evidences of
indebtedness, shares of capital stock other than our common stock or
assets, including securities, but excluding those dividends and those
issuances of rights, options, warrants and other distributions for which an
adjustment to the Conversion Price as referred to above is applicable.
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No adjustment of the Conversion Price will be required to be made:
- until cumulative adjustments amount to one percent of the Conversion
Price, or
- with respect to rights, options or warrants issued pursuant to certain
of our employee benefit plans.
We also may from time to time decrease the Conversion Price by any amount
for any period of at least 20 days, so long as the decrease is irrevocable
during the period. We will give at least 15 days' notice of any such decrease.
In addition, we will be permitted to reduce the Conversion Price in order to
make any stock dividend, subdivision of shares, distribution of rights to
purchase stock or securities or distribution of securities convertible into or
exchangeable for stock not taxable to the recipients. If we elect to reduce the
Conversion Price, we will comply with the requirements of Rule 14e-1 under the
Exchange Act, and any other securities laws and regulations, if and to the
extent they are applicable. See "Federal Tax Considerations."
If at any time we distribute property to our stockholders and the
distribution would be taxable as a dividend for federal income tax purposes and,
pursuant to the antidilution provisions described above or under the caption
"-- Change of Control," the Conversion Price of the Series D convertible
preferred stock is reduced, the reduction may be deemed to be the receipt of
taxable income by holders of the Series D convertible preferred stock. See
"Federal Tax Considerations."
If we distribute rights, options or warrants, other than those referred to
in clause 2 above, to all holders of common stock and do not distribute them to
the holders of the Series D convertible preferred stock, so long as the rights,
options or warrants have not expired or been redeemed, the holder of any shares
of Series D convertible preferred stock surrendered for conversion will be
entitled to receive a number of rights, options or warrants equal to:
(1) for each share of common stock issued upon conversion of the
Series D convertible preferred stock, the number of rights, options or
warrants which a holder of a share of common stock is then entitled, if the
conversion occurs on or before the distribution of separate certificates
evidencing the rights, options or warrants, and
(2) the number of rights, options or warrants which the holder of
Series D Convertible Preferred Stock would have received had the holder
converted the Series D convertible preferred stock into common stock
immediately before the distribution of certificates, if the conversion
occurs after the distribution of certificates evidencing the rights,
options or warrants.
Except as stated above or under the caption "-- Change of Control," the
Conversion Price will not be adjusted for the issuance of common stock or any
securities convertible into or exchangeable for common stock or carrying the
right to purchase any of the foregoing, in exchange for cash, property or
services.
In case of:
(1) our merger or consolidation;
(2) any sale or transfer to another corporation of our property as an
entirety or substantially as an entirety; or
(3) any statutory exchange of securities with another corporation,
other than in connection with a merger or acquisition (each of the above,
an "Exchange Event");
there will be no adjustment of the Conversion Price unless the Exchange Event
causes a Common Stock Change of Control (as defined under the caption "-- Change
of Control").
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Upon the occurrence of an Exchange Event, other than a merger or
consolidation in which:
(1) we are the continuing corporation, and
(2) the common stock outstanding immediately before the merger or
consolidation is not exchanged for cash, securities or other property of
another corporation,
and subject to any adjustment to the Conversion Price if the Exchange Event
causes a Common Stock Change of Control, each share of the then outstanding
Series D convertible preferred stock will, without the consent of the holder,
become convertible only into the kind and amount of securities, cash or other
property receivable upon the Exchange Event by a holder of the number of shares
of common stock into which the Series D convertible preferred stock was
convertible immediately before the Exchange Event, assuming the holder of common
stock failed to exercise any rights of election as to the kind or amount of
securities, cash or other property receivable upon the Exchange Event.
In the case of a cash merger of us into another company or any other cash
transaction of the type mentioned above, the effect of these provisions would be
that after the transaction each share of Series D convertible preferred stock
would be convertible at the Conversion Price then in effect into the amount of
cash a holder of a share of Series D convertible preferred stock would have been
entitled to receive had the share of Series D convertible preferred stock been
converted into common stock immediately before the effective date of the cash
merger or transaction. Depending upon the terms of the cash merger or
transaction, this amount could be more or less than the liquidation preference
of the Series D convertible preferred stock.
EXPIRATION OF CONVERSION RIGHTS
On or after , 2003, we may, at our option, cancel the conversion
rights of the Series D convertible preferred stock. We may exercise this option
if the closing price of our common stock equals or exceeds 140% of the
Conversion Price for at least 20 trading days within any 30 trading day period.
In order for us to exercise this option, we must issue a press release for
publication on the Dow Jones News Service, or a comparable news service, before
the opening of business on the second trading day after any period in which the
condition in the preceding sentence has been met. The press release will
announce that we are canceling the conversion rights of the Series D convertible
preferred stock and the date the conversion rights will expire. The press
release will also provide the Conversion Price and the closing price of our
common stock, each as of the close of business of the previous day.
We must notify the holders of the Series D convertible preferred stock of
the expiration of their conversion rights by first-class mail not more than four
business days after we issue the press release. We will select the date upon
which the conversion rights will expire, which date will be not less than 30 nor
more than 60 days after the date we issue the press release. The conversion
rights will terminate at the close of business on the expiration date.
CHANGE OF CONTROL
Definitions
A "Change of Control" shall be deemed to have occurred at the time of:
(1) the sale, lease, transfer, conveyance or other disposition, other
than by way of merger or consolidation, in one or a series of related
transactions, of all or substantially all our assets to any "person," as
that term is used in Section 13(d)(3) of the Exchange Act;
(2) the adoption of a plan relating to our liquidation, dissolution or
winding-up;
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(3) the closing of any transaction, including any merger or
consolidation, as a result of which any "person" (as defined above) other
than any Permitted Holder becomes the beneficial owner (as that term is
defined in Rules 13d-3 and 13d-5 promulgated under the Exchange Act),
directly or indirectly, of more than 50% of our voting stock;
(4) the first day on which the Permitted Holders collectively become
the beneficial owner (as that term is defined in Rules 13d-3 and 13d-5
promulgated under the Exchange Act), directly or indirectly, of more than
70% of our voting stock; or
(5) the first day on which a majority of the members of our board of
directors are not Continuing Directors, as defined in the certificate of
designation.
"Permitted Holders" means:
(1) Providence Equity Partners Inc., JK&B Capital, L.P. or any of
their affiliates;
(2) any of Maurice J. Gallagher, Jr., Timothy P. Flynn, Rolla P. Huff
or their respective spouses or lineal descendants and their respective
spouses (collectively, the "Individual Family Holders") whether acting in
their own name or as a majority of persons having the power to exercise the
voting rights attached to, or having investment power over, shares held by
others;
(3) any affiliate of any member of the Individual Family Holders;
(4) any trust principally for the benefit of one or more members of
the Individual Family Holders, whether or not any member of the Individual
Family Holders is a trustee of the trust; and
(5) any charitable foundation whose majority of members, trustees or
directors, as the case may be, are persons referred to in (2) above.
The term "Common Stock Change of Control" means any Change of Control in
which more than 50% of the value of the consideration received by holders of our
common stock, as determined in good faith by our board of directors, consists of
common stock of another company that for each of the 10 consecutive trading days
ending on and including the record date of the transaction resulting in the
Change of Control has been admitted for listing or admitted for listing subject
to notice of issuance on a national securities exchange or quoted on the Nasdaq
National Market; provided a Change of Control will not be a Common Stock Change
of Control unless either:
(1) we continue to exist after the occurrence of the Change of Control
and the outstanding shares of Series D convertible preferred stock continue
to exist as outstanding shares of Series D convertible preferred stock; or
(2) not later than the occurrence of the Change of Control, the
outstanding shares of Series D convertible preferred stock are converted
into or exchanged for shares of convertible preferred stock of a
corporation succeeding to our business, which convertible preferred stock
has powers, preferences and relative, participating, optional or other
rights, and qualifications, limitations and restrictions, substantially
similar to those of the Series D convertible preferred stock.
The term "Non-Stock Change of Control" means any Change of Control other
than a Common Stock Change of Control.
Non-Stock Change of Control
If a Non-Stock Change of Control occurs, each holder of Series D
convertible preferred stock will have the right, at the holder's option, to
require us to repurchase all of its shares of Series D convertible preferred
stock. If the terms of our outstanding indebtedness restrict our ability to
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repurchase the Series D convertible preferred stock following a Non-Stock Change
of Control, each holder of shares of Series D convertible preferred stock will
have the right to convert the shares of Series D convertible preferred stock
into shares of common stock at the conversion price specified below.
Within 30 days after the occurrence of a Non-Stock Change of Control, we
are obligated to give to all holders of shares of Series D convertible preferred
stock notice (the "Company Notice") of the occurrence of the Non-Stock Change of
Control and of the repurchase right or conversion right arising as a result
thereof. We must also deliver a copy of the Company Notice to our transfer
agent.
The Company Notice will specify:
- the date, which must be no earlier than 30 nor later than 60 days after
the date of the notice, on which we will repurchase or convert any
validly tendered shares of Series D convertible preferred stock (the
"Repurchase Date"); and
- the repurchase price or conversion price.
In the event of a repurchase, any validly tendered shares will be
repurchased at a price equal to 100% of the liquidation preference of the Series
D convertible preferred stock, together with accumulated and unpaid dividends,
if any, whether or not declared, to the Repurchase Date (the "Repurchase
Price").
We may, at our option, instead of paying the Repurchase Price in cash, pay
the Repurchase Price in common stock valued at 95% of the average of the daily
closing prices of the common stock for the five trading days immediately
preceding and including the third day before the Repurchase Date; provided that
we may not pay in common stock unless we satisfy conditions specified in the
certificate of designation prior to the Repurchase Date.
The conversion price for each share of Series D convertible preferred stock
tendered on the Repurchase Date will be determined by dividing the liquidation
preference of the Series D convertible preferred stock, together with
accumulated and unpaid dividends, if any, whether or not declared, to the
Repurchase Date, by 95% of the average of the daily closing prices of the common
stock for the five trading days immediately preceding and including the third
day before the Repurchase Date.
To exercise the repurchase right or conversion right, a holder of shares of
Series D convertible preferred stock must deliver, on or before the 30(th) day
after the date of the Company Notice, written notice to the transfer agent of
the holder's exercise of the repurchase right or conversion right, together with
the shares of Series D convertible preferred stock with respect to which the
right is being exercised.
Common Stock Change of Control
If a Common Stock Change of Control occurs, each share of the Series D
convertible preferred stock will be convertible solely into common stock of the
kind received by holders of our common stock as the result of the Common Stock
Change of Control and the Conversion Price in effect will be adjusted
immediately after the Change of Control as described below.
If:
(1) a Common Stock Change of Control occurs;
(2) 100% of the consideration received by a holder of our common stock
is common stock of the successor, acquiror or other third party, with cash,
if any, being paid only with respect to any fractional interests resulting
from the Common Stock Change of Control; and
(3) all our common stock is exchanged for, converted into, or acquired
for, common stock (and cash with respect to fractional interests) of the
successor, acquiror or other third party;
then, the Conversion Price will be adjusted by multiplying the Conversion Price
by a fraction, of which the numerator will be one and the denominator will be
the number of shares of common stock
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of the successor, acquiror, or other third party received by a holder of one
share of our common stock as a result of the Common Stock Change of Control.
If a Common Stock Change of Control occurs and all the conditions listed in
the previous paragraph are not met, the Conversion Price will be adjusted by
multiplying the Conversion Price by a fraction, of which the numerator will be
the Purchaser Stock Price and the denominator will be the average of the closing
prices for our common stock during the 10 trading days ending on and including
the record date for determining the holders of common stock entitled to receive
cash, securities, property or other assets in connection with the Common Stock
Change of Control, as adjusted in good faith by our board of directors to
appropriately reflect any of the events referred to in clauses (1) through (6)
under the heading "-- Conversion Rights."
The term "Purchaser Stock Price" means the product of (x) the number of
shares of common stock received as consideration for each share of our common
stock, and (y) the average of the closing prices for the common stock received
as consideration for the ten consecutive trading days ending on and including
the record date for the determination of the holders of our common stock
entitled to receive consideration in the Common Stock Change of Control, or, if
there is no record date, the date on which the holders of our common stock have
the right to receive the consideration, in each case, as adjusted in good faith
by our board of directors to appropriately reflect any of the events referred to
in clauses (1) through (6) under the heading "-- Conversion Rights"; provided,
if no closing prices exist, then the Purchaser Stock Price will be set at a
price determined in good faith by our board of directors.
The foregoing Conversion Price adjustments will apply in situations where
more than 50% of the value received by holders of our common stock consists of
common stock of another company that has been admitted for listing on a national
securities exchange or quoted on the Nasdaq National Market. If consideration
for our common stock is solely common stock of another company, each share of
Series D convertible preferred stock will be convertible into the same number of
shares of common stock of the other company receivable by a holder of the number
of shares of our common stock into which a share of Series D convertible
preferred stock was convertible immediately before the transaction. If
consideration for the common stock consists only partly of common stock of
another company, each share of Series D convertible preferred stock will be
convertible into shares of common stock of the other company with a value equal
to the value of the shares of our common stock into which a share of Series D
convertible preferred stock was convertible immediately before the transaction.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Without the consent of the holders of at least a majority of the
outstanding shares of Series D convertible preferred stock, we may not
consolidate with or merge with or into any other person or convey, transfer or
lease our properties and assets substantially as an entirety to any person
unless certain conditions are met and:
(1)(a) the successor, transferee or lessee is organized under the laws
of the United States, any state thereof or the District of Columbia and (b)
the shares of Series D convertible preferred stock will become shares of
the successor, transferee or lessee, having in respect of the successor,
transferee or lessee the same powers, preferences and relative,
participating, optional or other special rights and the qualifications,
limitations or restrictions thereon, as the Series D convertible preferred
stock had immediately before the transaction; or
(2)(a) the consideration received by holders of our common stock
consists entirely of cash and (b) each share of Series D convertible
preferred stock is converted into the right to receive an amount of cash at
least equal to the greater of:
(x) the liquidation preference, plus accumulated and unpaid
dividends thereon, if any, whether declared or undeclared, to the date
the transaction is completed; and
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(y) the amount of cash which would have been received by the holder
if the share of Series D convertible preferred stock had been converted
into common stock immediately before the completion of the transaction;
or
(3)(a) the consideration received by holders of our common stock in
respect of each share of our common stock has a value which, for any five
trading days during the period of ten consecutive trading days after we
publicly announce the consolidation, merger, transfer or lease, equals or
exceeds 140% of the conversion price in effect on the date we publicly
announce the consolidation, merger, transfer or lease, and (b) the
consolidated net worth of the successor, transferee or lessee immediately
before the consolidation, merger, transfer or lease equals or exceeds two
times our consolidated net worth immediately before the consolidation,
merger, transfer or lease.
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not we are required to file reports with the SEC, if any shares
of Series D convertible preferred stock are outstanding, we will file with the
SEC all reports and other information we would be required to file with the SEC
by Sections 13(a) or 15(d) under the Exchange Act. See "Where You Can Find More
Information." We will supply each holder of Series D convertible preferred
stock, upon request, without cost to the holder, copies of these reports or
other information.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
The transfer agent, registrar, dividend disbursing agent and redemption
agent for the shares of Series D convertible preferred stock will be Continental
Stock Transfer & Trust Company.
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FEDERAL TAX CONSIDERATIONS
The following summary of all material federal income tax consequences
relevant to the purchase, ownership and disposition of our Series D convertible
preferred stock and common stock is based on the opinion of Ellis, Funk,
Goldberg, Labovitz & Dokson, P.C., our counsel. A copy of the opinion has been
filed as an exhibit to this registration statement. The following summary is not
binding on the Internal Revenue Service and we cannot assure you the Internal
Revenue Service will take a similar view with respect to the tax consequences
described below. The opinion of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
states that the following summary accurately describes the material federal
income tax considerations in this prospectus.
This summary is based on the current provisions of the Internal Revenue
Code of 1986, as amended, Treasury regulations and judicial and administrative
authority, all of which are subject to change, possibly on a retroactive basis.
This summary applies only to investors who hold our Series D convertible
preferred stock or common stock as capital assets, within the meaning of section
1221 of the Internal Revenue Code. This summary does not discuss the tax
consequences to special classes of investors, including:
- brokers or dealers in securities or currencies,
- financial institutions,
- tax-exempt entities,
- life insurance companies,
- persons holding our Series D convertible preferred stock or common stock
as a part of a hedging, short sale or conversion transaction or a
straddle,
- investors whose functional currency is not the United States dollar,
- persons who hold our Series D convertible preferred stock or common stock
through partnerships or other pass-through entities, or
- except as specifically noted, foreign holders and certain U.S.
expatriates.
State, local and foreign tax consequences of ownership of our Series D
convertible preferred stock and common stock are not summarized.
We have not requested, and do not intend to request, any rulings from the
Internal Revenue Service concerning the federal tax consequences of an
investment in our Series D convertible preferred stock or common stock. You are
advised to consult with your own tax advisor regarding the consequences of
acquiring, holding or disposing of our Series D convertible preferred stock or
common stock in light of current tax laws, your particular investment
circumstances, and the application of state, local and foreign tax laws.
When we refer in the summary to a "United States Holder," we mean a
beneficial owner of Series D convertible preferred stock or common stock that
is:
- a citizen or resident of the United States for United States federal
income tax purposes;
- a corporation created or organized in the United States or under the laws
of the United States or of any political subdivision thereof;
- an estate whose income is includible in gross income for United States
federal income tax purposes regardless of its source; or
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- a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust.
When we refer in the summary to a "Non-United States Holder," we mean a
beneficial owner of Series D convertible preferred stock or common stock that is
not a United States Holder.
UNITED STATES HOLDERS
Distributions
We have the right to pay distributions on the Series D convertible
preferred stock in cash or in shares of our common stock. If we distribute our
common stock, the distribution will be subject to federal income tax to the same
extent as a cash distribution. The amount of the distribution for federal income
tax purposes will be the fair market value of the common stock on the date the
distribution is paid, which may be different than the price we used to determine
the number of shares of common stock to be distributed in payment of the
dividend.
A cash distribution on the Series D convertible preferred stock or common
stock will be treated as a dividend to the extent of our current or accumulated
earnings and profits allocable to the distribution as determined under U.S.
federal income tax principles. The amount of our earnings and profits at any
time will depend upon our future actions and financial performance. If the
amount of the distribution exceeds our current and accumulated earnings and
profits allocable to the distribution, the distribution will be treated as a
nontaxable return of capital and will be applied against and reduce your
adjusted tax basis in the stock, but not below zero. The reduction in tax basis
will increase the amount of any gain, or reduce the amount of any loss, which
you would otherwise realize on the sale or other taxable disposition of the
stock. If the distribution exceeds both our current and accumulated earnings and
profits allocable to the distribution and your adjusted tax basis in your stock,
the excess will be treated as capital gain and will be either long-term or
short-term capital gain depending on your holding period for the stock.
Corporate investors in our Series D convertible preferred stock or common
stock generally should be eligible for the 70% dividends-received deduction with
respect to the portion of any distribution on the stock taxable as a dividend.
However, corporate investors should consider certain provisions that may limit
the availability of the dividends-received deduction, including:
- the 46-day holding period required by section 246(c) of the Internal
Revenue Code,
- the rules in section 246A of the Internal Revenue Code that reduce the
dividends-received deduction for dividends on certain debt-financed
stock, and
- the rules in section 1059 of the Internal Revenue Code that reduce the
basis of stock in respect of certain extraordinary dividends.
Corporate investors should also consider the effect of the dividends-received
deduction on the determination of alternative minimum tax liability.
Redemption for cash or common stock
If we redeem our Series D convertible preferred stock for cash, the
redemption will be taxable to you. The redemption generally will be treated as a
sale or exchange if you do not own, actually or constructively within the
meaning of section 318 of the Internal Revenue Code, any of our stock other than
the redeemed Series D convertible preferred stock. If you do own, actually or
constructively, other stock of ours, a cash redemption of your Series D
convertible preferred stock
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may be taxable in accordance with the treatment described above for
distributions. The treatment as a distribution will not apply if the redemption:
(1) is "substantially disproportionate" with respect to you under section
302(b)(2) of the Internal Revenue Code, or
(2) is "not essentially equivalent to a dividend" under section 302(b)(1)
of the Internal Revenue Code.
A distribution to you will be "not essentially equivalent to a dividend" if it
results in a meaningful reduction in your stock interest in us, which should be
the case if:
- your proportionate ownership interest, taking into account any actual
ownership of stock and any stock constructively owned, is reduced,
- your relative stock interest in us is minimal, and
- you exercise no control over our business affairs.
If a cash redemption of your Series D convertible preferred stock is
treated as a sale or exchange, it will result in capital gain or loss equal to
the difference between the amount of cash received and your adjusted tax basis
in the Series D convertible preferred stock redeemed, except to the extent that
the redemption price includes unpaid dividends which we declare before the
redemption. The capital gain or loss will be long term if you have held the
Series D convertible preferred stock for more than one year. Any cash you
receive in discharge of dividend arrearages on the Series D convertible
preferred stock will be treated as a distribution on the Series D convertible
preferred stock to the extent of the dividends in arrears, taxable in accordance
with the treatment described above for distributions.
If the cash you receive on redemption of your Series D convertible
preferred stock is taxed as a dividend, your tax basis (reduced for amounts, if
any, treated as return of capital) in the redeemed Series D convertible
preferred stock will be transferred to any remaining other stock of ours you
own, subject, in the case of a corporate taxpayer, to reduction or possible gain
recognition under section 1059 of the Internal Revenue Code in an amount equal
to the nontaxed portion of the dividend. If you do not actually own any other of
our stock, having a remaining stock interest only constructively, you may lose
the benefit of your tax basis in the Series D convertible preferred stock but
the tax basis may be shifted to the stock of the related person whose stock you
constructively own.
If we redeem our Series D convertible preferred stock for common stock, the
exchange should constitute a recapitalization within the meaning of Section
368(a)(1)(E) of the Internal Revenue Code. You will not recognize gain or loss
on the exchange unless some of the common stock is received in discharge of
dividend arrearages, in which case the redemption will be treated as a
distribution on the Series D convertible preferred stock to the extent of the
dividends in arrears. The amount constituting a distribution will be taxed as a
dividend to the extent of our current or accumulated earnings and profits
allocable to the distribution, in accordance with the treatment described above
for distributions. Your tax basis in our common stock received pursuant to the
redemption generally will equal your tax basis in the Series D convertible
preferred stock surrendered in exchange, and your holding period for the common
stock generally will include the period you held your Series D convertible
preferred stock. However, the tax basis of common stock received in discharge of
dividend arrearages will be its fair market value on the date received and the
holding period of that stock will commence on the day after its receipt. If you
receive cash instead of a fractional share of common stock, you will be treated
for federal income tax purposes as if you had received the fractional share and
then we redeemed it for cash. That deemed redemption should
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result in capital gain or loss equal to the difference between the amount of
cash received and your adjusted tax basis in the fractional share of common
stock redeemed.
If we redeem our Series D convertible preferred stock for common stock and
cash (other than cash paid instead of a fractional share of common stock), you
will not recognize any loss on the exchange. You may recognize gain on the
exchange to the extent the amount of cash and the fair market value of the
common stock received (other than any amount treated as received in discharge of
dividend arrearages) exceeds your adjusted tax basis in the Series D convertible
preferred stock redeemed; however, the gain you recognize will be limited to the
amount of cash you receive. This gain should generally be capital gain, but it
may be treated as dividend income if a redemption of your Series D convertible
preferred stock for cash would have been treated as "essentially equivalent to a
dividend" as described above.
Under certain circumstances, section 305(c) of the Internal Revenue Code
requires that any excess of the redemption price of preferred stock over its
issue price be treated as constructively distributed on a periodic basis prior
to actual receipt. These rules will apply to the mandatory redemption if the
liquidation preference of the Series D convertible preferred stock exceeds the
issue price by more than .25% of the liquidation preference multiplied by the
number of complete years to the mandatory redemption date. The constructive
distribution rules will not apply to our provisional redemption rights if:
- you are not "related" to us within the meaning of Treasury regulations
under section 305(c),
- there are no plans, arrangements or agreements that effectively require
or are intended to compel us to exercise our provisional redemption
rights, and
- our exercise of the right to redeem would not reduce the yield of the
Series D convertible preferred stock, as determined under the
regulations.
We intend to take the position that the existence of our provisional redemption
rights does not result in a constructive distribution under section 305(c).
Conversion
You generally will not recognize gain or loss on conversion of shares of
Series D convertible preferred stock into our common stock, except with respect
to any cash paid for fractional shares of common stock. However, you may
recognize gain or dividend income to the extent there are dividends in arrears
on your stock at the time of conversion into common stock. Your tax basis in the
common stock received upon conversion of Series D convertible preferred stock
generally will be equal to your tax basis in the Series D convertible preferred
stock converted and the holding period of the common stock generally will
include your holding period for the Series D convertible preferred stock.
However, the tax basis of any common stock received on conversion which is
treated as a dividend will be equal to its fair market value on the date of the
distribution and the holding period of that common stock will commence on the
day after its receipt.
You may be deemed to have received a constructive distribution of stock
taxable as a dividend if the conversion ratio of the Series D convertible
preferred stock is adjusted to reflect a cash or property distribution on our
common stock or to prevent dilution in the case of certain issuances of rights
or warrants to purchase common stock at below market prices. Although an
adjustment to the conversion price made pursuant to a bona fide reasonable
adjustment formula which has the effect of preventing the dilution of your
interest in our company generally will not be considered to result in a
constructive distribution of stock, some of the possible adjustments could
trigger this rule. If a nonqualifying adjustment is made, or if we fail to make
an adjustment in certain cases, you might be deemed to have received a taxable
stock dividend. If so, the amount of the dividend to be included in
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income would be the fair market value of the additional common stock to which
you would be entitled by reason of the increase in your proportionate equity
interest in our company.
Sale or other taxable disposition
If you sell or dispose of your Series D convertible preferred stock or
common stock in a taxable transaction other than a redemption or conversion by
us, you will recognize capital gain or loss equal to the difference between the
amount of cash and the fair market value of property received and your tax basis
in the Series D convertible preferred stock or common stock. The gain or loss
will be long-term capital gain or loss if your holding period for the stock
exceeds one year. For corporate taxpayers, long-term capital gains are taxed at
the same rate as ordinary income. For individual taxpayers, net capital
gains -- the excess of the taxpayer's net long-term capital gains over his net
short-term capital losses -- are subject to a maximum tax rate of 20%.
NON-UNITED STATES HOLDERS
Distributions
Distributions received by you as a Non-United States Holder in respect of
the Series D convertible preferred stock, whether in cash or shares of common
stock, and distributions in respect of common stock, to the extent considered
dividends for U.S. federal income tax purposes, generally will be subject to
withholding of United States federal income tax at a 30% rate or at a lower rate
specified by an applicable income tax treaty, unless the dividend is effectively
connected with your conduct of a trade or business within the United States or,
where a tax treaty applies, is attributable to a United States permanent
establishment you maintain. For distributions of common stock, any amounts we
withhold will reduce the value of the common stock distributed to you. If the
dividend is effectively connected with your conduct of a trade or business
within the United States or, where a tax treaty applies, is attributable to your
United States permanent establishment, the dividend will be subject to federal
income tax on a net income basis at applicable graduated individual or corporate
rates and will be exempt from the 30% withholding tax.
In addition to the graduated rate described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business or, where a tax treaty applies, are attributable to
your United States permanent establishment may, under some circumstances, be
subject to an additional "branch profits tax" at a 30% rate or at a lower rate
specified by an applicable income tax treaty.
For purposes of obtaining a reduced rate of withholding under an income tax
treaty, you will be required to provide information concerning your country of
residence and entitlement to tax treaty benefits. If you claim exemption from
withholding with respect to dividends effectively connected with your conduct of
a business within the United States, you must provide appropriate certification,
currently Internal Revenue Service Form 4224, to us or our paying agent. If you
are eligible for a reduced rate of U.S. federal withholding tax, you may obtain
a refund of any excess withheld amounts by timely filing an appropriate claim
for refund.
If a distribution exceeds our current and accumulated earnings and profits
allocable to the distribution, it will be treated first as a return of your tax
basis in the stock to the extent of your basis and then as gain from the sale of
a capital asset, which would be taxable as described below. Any withholding tax
on distributions in excess of our current and accumulated earnings and profits
is refundable to you upon the timely filing of an appropriate claim for refund
with the Internal Revenue Service.
Under currently applicable Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of that
country, unless the payor has knowledge to the contrary, for purposes of the
withholding discussed above, and, under the current interpretation of
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these Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. Under Treasury regulations currently scheduled to be effective
with respect to dividends paid after December 31, 2000, a Non-United States
Holder of our stock who wishes to claim the benefit of an applicable treaty
rate, and to avoid backup withholding as discussed below, will be required to
satisfy applicable certification and other requirements. However, under either
set of regulations, some payments to foreign partnerships and other fiscally
transparent entities may not be eligible for a reduced rate of withholding tax
under an applicable income tax treaty.
Disposition of Series D convertible preferred stock or common stock
Generally, you will not be subject to United States federal income tax on
any gain recognized upon the sale or other disposition of Series D convertible
preferred stock or common stock. However, you will be subject to federal income
tax on the gain if:
(1) the gain is effectively connected with your United States trade
or, if a tax treaty applies, attributable to your United States permanent
establishment;
(2) you are an individual who is a former citizen of the United States
who lost United States citizenship within the preceding ten-year period, or
a former long-term resident of the United States who relinquished United
States residency on or after February 6, 1995, and the loss of citizenship
or permanent residency had as one of its principal purposes the avoidance
of United States tax; or
(3) you are a non-resident alien individual, you are present in the
United States for 183 or more days in the taxable year of disposition and
either (a) you have a "tax home" in the United States for United States
federal income tax purposes or (b) the gain is attributable to an office or
other fixed place of business you maintain in the United States.
You will also be subject to federal income tax on any gain from the sale of
our Series D convertible preferred stock or common stock if we are or have been
a "United States real property holding corporation" within the meaning of
section 897(c)(2) of the Internal Revenue Code at any time you held the stock,
or within the 5-year period preceding the sale of the stock if you hold the
stock for more than five years. We believe:
- we are not now a "United States real property holding corporation,"
- we have not been a "United States real property holding corporation" at
any time since we were formed, and
- it is unlikely we will become a "United States real property holding
corporation."
If we were a "United States real property holding corporation" or were to become
a "United States real property holding corporation," you would be subject to
U.S. income tax on any gain from your sale of Series D convertible preferred
stock or from your sale of common stock if you beneficially own, or owned at any
time during the specified 5-year period, more than 5 percent of the total fair
market value of the class of stock you sold.
Redemption and conversion of Series D convertible preferred stock
As a Non-United States Holder, you generally will not recognize any gain or
loss for United States federal income tax purposes upon conversion of Series D
convertible preferred stock into common stock, except with respect to any cash
paid instead of fractional shares of common stock, which would be subject to the
rules described under "Disposition of Series D convertible preferred stock or
common stock." However, you may recognize gain or dividend income to the extent
there are dividends in arrears on the Series D convertible preferred stock at
the time of conversion into common stock.
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A redemption of Series D convertible preferred stock may result in a
capital gain or loss or dividend income. See "United States
Holders -- Redemption for cash or common stock." To the extent the redemption
results in a dividend, the tax consequences are described in "Non-United States
Holders -- Distributions." To the extent the redemption results in capital gain,
the tax consequences are described in "Non-United States Holders -- Disposition
of Series D convertible preferred stock or common stock."
Federal estate taxes
If you are an individual Non-United States Holder, Series D convertible
preferred stock or common stock you hold or are treated as owning at the time of
your death will be included in your United States gross estate for United States
federal estate tax purposes and may be subject to United States federal estate
tax, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We generally will be required to report to certain holders of our Series D
convertible preferred stock or common stock and to the Internal Revenue Service
the amount of any dividends paid to the holder in each calendar year and the
amounts of tax withheld, if any, with respect to the dividend payments. Copies
of the information returns reporting the dividends and withholding may also be
made available to the tax authorities in the country in which a Non-United
States Holder resides under the provisions of an applicable income tax treaty.
Each holder of Series D convertible preferred stock or common stock, other
than an exempt holder such as:
- a corporation, tax-exempt organization, qualified pension or
profit-sharing trust,
- an individual retirement account, or
- a nonresident alien individual who provides certification as to his or
her status as a nonresident,
will be required to provide, under penalties of perjury, a certification setting
forth:
- the holder's name, address, correct federal taxpayer identification
number, and
- a statement that the holder is not subject to backup withholding.
If a nonexempt holder fails to provide the required certification, we will
be required to withhold 31% of the amount otherwise payable to the holder, and
remit the withheld amount to the Internal Revenue Service as a credit against
the holder's federal income tax liability. However, no backup withholding will
be required with respect to any payment subject to the 30% United States
withholding tax discussed above. You should consult your own tax advisor
regarding your qualification for exemption from backup withholding and the
procedure for obtaining any applicable exemption.
The Internal Revenue Service has finalized Treasury regulations regarding
the backup withholding and information rules which are effective for payments
made after December 31, 2000, subject to certain transition rules. In general,
these regulations unify certification procedures and forms and clarify and
modify reliance standards. Among other provisions, these regulations also
include the new provisions discussed below regarding sales of stock outside the
United States by or for a broker. A Non-United States Holder should consult its
own tax advisor regarding the application of the new regulations.
Payment of the proceeds of a sale of Series D convertible preferred stock
or common stock by or through a United States office of a broker is subject to
both backup withholding and information reporting unless the beneficial owner
certifies under penalties of perjury that it is a Non-United States
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Holder or otherwise establishes an exemption. In general, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
Series D convertible preferred stock or common stock by or through a foreign
office of a broker. If, however, the broker is, for United States federal income
tax purposes:
- a United States person,
- a "controlled foreign corporation,"
- a foreign person that derives 50% or more of its gross income for a
certain period from the conduct of a trade or business in the United
States, or
- for taxable years beginning after December 31, 2000, a foreign
partnership in which one or more United States persons, in the aggregate,
own more than 50% of the income or capital interests in the partnership
or if the partnership is engaged in a trade or business in the United
States,
payment of the proceeds will be subject to information reporting, but not backup
withholding, unless
- the broker has documentary evidence in its records that the beneficial
owner is a Non-United States Holder and certain other conditions are met,
or
- the beneficial owner otherwise establishes an exemption.
For payments after December 31, 2000, certification will be required in the
case of the disposition of shares of Series D convertible preferred stock or
common stock held in an offshore account if the disposition is made through a
foreign broker described in the immediately preceeding paragraph.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against the holder's United States federal income tax
liability provided the required information is furnished to the Internal Revenue
Service.
The foregoing discussion is for general information and is not tax advice.
Accordingly, each prospective holder of Series D convertible preferred stock or
common stock should consult its tax advisor as to the particular tax
consequences to it of the Series D convertible preferred stock and common stock,
including the applicability and effect of any state, local or foreign income tax
laws, and any recent or prospective changes in applicable tax laws.
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UNDERWRITING
Under the terms and conditions stated in the underwriting agreement dated
the date of this prospectus, each underwriter named below has severally agreed
to purchase, and we have agreed to sell to each underwriter named below, the
number of shares set forth opposite the name of the underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Salomon Smith Barney Inc. ..................................
Bear, Stearns & Co. Inc. ...................................
Goldman, Sachs & Co. .......................................
ING Barings LLC.............................................
Warburg Dillon Read LLC.....................................
---------
Total..................................................... 3,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., Bear, Stearns & Co.
Inc., Goldman, Sachs & Co., ING Barings LLC and Warburg Dillon Read LLC are
acting as representatives, propose to offer some of the shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and these dealers may reallow, a concession not in excess of $ per
share on sales to certain other dealers. If all of the shares are not sold at
the initial offering price, the representatives may change the public offering
price and the other selling terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 450,000 additional shares of
Series D convertible preferred stock at the public offering price less the
underwriting discount. The underwriters may exercise this option solely for the
purpose of covering over-allotments, if any, in connection with this offering.
To the extent this option is exercised, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares
approximately proportionate to the underwriter's initial purchase commitment.
Our officers and directors and certain other stockholders have agreed that,
for a period of 90 days from the date of this prospectus, they will not, without
the prior written consent of Salomon Smith Barney Inc., dispose of or hedge any
shares of common stock or any securities convertible into or exchangeable for
common stock, except for the shares offered by this prospectus.
In addition, we have agreed that, for a period of 90 days from the date of
this prospectus, we will not, without the prior written consent of Salomon Smith
Barney Inc., dispose of or hedge any shares of common stock or any securities
convertible into or exchangeable for common stock, except for:
- the shares of Series D preferred stock offered by this prospectus;
- the shares of common stock offered in the concurrent offering;
- any shares of common stock which may be issued by us upon exercise of
outstanding warrants and conversion of outstanding convertible preferred
stock;
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- any shares of common stock which may be issued as dividends on or upon
the conversion of the Series D convertible preferred stock offered by
this prospectus; and
- shares issued and options granted under our existing stock option plan.
Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these lock-up agreements at any time without notice.
Because certain indirect affiliates of the underwriters have beneficial
ownership interests in Providence Equity Partners III L.P., which acquired
shares of our Series C convertible preferred stock, Providence Equity Partners
III L.P. has agreed not to dispose of or hedge 14,912 shares of our Series C
convertible preferred stock, or any shares of common stock issuable upon
conversion of these shares of our Series C convertible preferred stock, for a
period of one year from the date of this prospectus.
The common stock is quoted on the Nasdaq National Market under the symbol
"MPWR" (previously "MGCX"). We have applied to have the Series D convertible
preferred stock listed on the Nasdaq National Market under the symbol "MPWRP".
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of Series D convertible preferred stock.
<TABLE>
<CAPTION>
PAID BY US
-----------------------------
NO EXERCISE FULL EXERCISE
------------ -------------
<S> <C> <C>
Per share.......................................... $ $
Total.............................................. $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of Series D convertible preferred
stock and/or common stock in the open market. These transactions may include
over-allotment, syndicate covering transactions and stabilizing transactions.
Over-allotment involves syndicate sales of Series D convertible preferred stock
in excess of the number of shares to be purchased by the underwriters in the
offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the Series D convertible preferred stock in
the open market after the distribution has been completed to cover syndicate
short positions. Stabilizing transactions consist of certain bids or purchases
of Series D convertible preferred stock and/or common stock made for the purpose
of preventing or retarding a decline in the market price of the Series D
convertible preferred stock and/or common stock while the offering is in
progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of the Series D convertible
preferred stock and/or common stock to be higher than the price that otherwise
would exist in the open market in the absence of these transactions. These
transactions may be effected on the Nasdaq National Market or in the
over-the-counter market, or otherwise and, if commenced, may be discontinued at
any time.
In addition, in connection with this offering, certain of the underwriters
and selling group members may engage in passive market making transactions in
the common stock on the Nasdaq National Market, before the pricing and
completion of the offering. Passive market making consists of displaying bids on
the Nasdaq National Market no higher than the bid prices of independent market
makers and making purchases at prices no higher than those independent bids and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the common stock
86
<PAGE> 191
during a specified period and must be discontinued when the limit is reached.
Passive market making may cause the price of the common stock to be higher than
the price that otherwise would exist in the open market in the absence of these
transactions. If passive market making is commenced, it may be discontinued at
any time.
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $395,000.
The underwriters named herein are also acting as the underwriters of the
concurrent offering. An affiliate of ING Barings LLC provides cash management
services to us for which it receives customary fees. Bear, Stearns & Co. Inc.
issued a fairness opinion in connection with the issuance of the Series C
convertible preferred stock for which they received a customary fee. The
representatives have performed certain other investment banking and advisory
services for us for which they have received customary fees. The representatives
may, from time to time, engage in transactions with and perform services for us
in the ordinary course of business.
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
LEGAL MATTERS
Various legal matters regarding the validity of the preferred stock offered
by this prospectus will be passed upon for us by Ellis, Funk, Goldberg, Labovitz
& Dokson, P.C., Atlanta, Georgia. Shareholders of Ellis, Funk, Goldberg,
Labovitz & Dokson, P.C. own approximately 17,950 shares of our common stock.
Kronish Lieb Weiner & Hellman LLP, New York, New York is acting as counsel to
the underwriters in connection with various legal matters relative to the
preferred stock offered by this prospectus.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP and KPMG LLP, independent
public accountants, and are included herein in reliance upon the authority of
these firms as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We must comply with the periodic reporting and other information
requirements of the Exchange Act and file reports, proxy statements and other
information with the SEC. Copies of our periodic reports and proxy statements
and of other information filed by us with the SEC may be inspected at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at its regional offices located at the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor, New York, New York 10007. The SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding us. The address of the SEC's Web site is
http://www.sec.gov. Our Internet address is http://www.mgci.com.
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act covering the securities being offered. This prospectus does not
contain all the information included in the registration statement, parts of
which are omitted as allowed by the rules of the SEC. For further information
about us and the securities offered, please refer to the registration statement.
The registration statement may be inspected and copied, at prescribed rates, at
the SEC's public reference facilities at the addresses shown above. Statements
made in this prospectus concerning the contents of any document referred to in
this prospectus are not necessarily complete. With respect to each document
filed with the SEC as an exhibit to the registration statement, you should refer
to the exhibit for a more complete description of the matter involved.
87
<PAGE> 192
The following documents filed by us with the SEC are incorporated into this
prospectus by reference:
- our Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
- our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999;
- our Current Reports on Form 8-K dated July 19, 1999 and October 14, 1999;
and
- all reports filed by us to comply with Section 13(a) or 15(d) of the
Exchange Act since the end of the quarter covered by our Quarterly Report
on Form 10-Q for our quarter ended September 30, 1999.
All documents filed by us as required by Section 13(a), 13(c), 14, or 15(d)
of the Exchange Act after the date of this prospectus are incorporated by
reference in this prospectus and are made a part of this prospectus from the
date of filing of these documents.
Any statement contained in a document incorporated by reference in this
prospectus shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this prospectus or in any
other subsequently filed document which also is incorporated by reference
modifies or supersedes an earlier statement. Any earlier statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
IN OR DELIVERED WITH THIS PROSPECTUS. THESE DOCUMENTS ARE AVAILABLE TO YOU
WITHOUT CHARGE UPON YOUR WRITTEN OR ORAL REQUEST. TO REQUEST THESE DOCUMENTS,
PLEASE CONTACT KENT F. HEYMAN, ESQ., SENIOR VICE PRESIDENT AND GENERAL COUNSEL,
MGC COMMUNICATIONS, INC., 171 SULLY'S TRAIL, SUITE 202, PITTSFORD, NEW YORK
14534 (TELEPHONE 716-218-6540).
88
<PAGE> 193
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MGC COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Independent Auditors' Report................................ F-3
Consolidated Balance Sheets as of September 30, 1999 (as
restated) (unaudited) and December 31, 1998 and 1997...... F-4
Consolidated Statements of Operations for the nine months
ended September 30, 1999 and 1998 (as restated)
(unaudited) and for the years ended December 31, 1998,
1997 and 1996............................................. F-5
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity for the nine months ended September
30, 1999 (as restated) (unaudited) and for the years ended
December 31, 1998, 1997 and 1996.......................... F-6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 (unaudited) and for the
years ended December 31, 1998, 1997 and 1996.............. F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 194
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
MGC Communications, Inc.:
We have audited the accompanying consolidated balance sheets of MGC
Communications, Inc. (a Nevada corporation) and subsidiary (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, redeemable preferred stock and stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MGC Communications, Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 2, 1999
F-2
<PAGE> 195
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MGC Communications, Inc.
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of MGC Communications, Inc. for the year ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and the cash flows of MGC
Communications, Inc. for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Las Vegas, Nevada
August 18, 1997
F-3
<PAGE> 196
MGC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
(AS RESTATED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 93,224 $ 11,886 $ 45,054
Investments held-to-maturity.............................. -- -- 7,797
Investments available-for-sale............................ 50,177 9,851 --
Restricted investments.................................... 30,375 20,797 18,482
Accounts receivable, less allowance for doubtful accounts
of $478, $257 and $216.................................. 16,145 6,360 1,200
Prepaid expenses.......................................... 599 208 277
-------- -------- --------
Total current assets............................... 190,520 49,102 72,810
Property and equipment, net................................. 151,159 116,380 24,617
Investments held-to-maturity................................ -- -- 49,913
Investments available-for-sale.............................. 35,560 63,212 --
Restricted investments...................................... -- 18,582 39,092
Deferred financing costs, net of accumulated amortization of
$1,686, $1,065 and $198................................... 4,093 4,714 5,448
Other assets................................................ 482 129 97
-------- -------- --------
Total assets....................................... $381,814 $252,119 $191,977
======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................ $ 283 $ 332 $ 381
Accounts payable:
Trade..................................................... 8,912 5,314 462
Property and equipment.................................... 15,276 18,577 3,123
Accrued interest............................................ 10,400 5,200 5,328
Accrued other expenses...................................... 8,492 2,473 786
-------- -------- --------
Total current liabilities.......................... 43,363 31,896 10,080
Senior Secured Notes, net of unamortized discount of $2,875,
$3,307 and $3,882......................................... 157,125 156,693 156,118
Other long-term debt........................................ 269 270 138
-------- -------- --------
Total liabilities.................................. 200,757 188,859 166,336
-------- -------- --------
Commitments and contingencies
Redeemable preferred stock:
8% Series A Convertible Preferred Stock, 6,571,450 shares
authorized, 5,148,570 issued and outstanding at December
31, 1997................................................ -- -- 16,665
10% Series B Convertible Preferred Stock, 5,278,000 shares
authorized and 5,277,779 issued and outstanding......... 49,452 -- --
Stockholders' equity:
Preferred stock, 44,722,221 shares authorized but
unissued................................................ -- -- --
Common stock, $0.001 par value, 60,000,000 shares
authorized, 22,810,060, 17,190,428 and 8,799,600 issued,
22,800,920, 17,190,428 and 8,799,600 shares
outstanding............................................. 23 17 9
Additional paid-in capital................................ 223,240 108,991 22,118
Accumulated deficit....................................... (89,136) (44,392) (12,463)
Less: treasury stock...................................... (76) -- --
-------- -------- --------
134,051 64,616 9,664
Accumulated other comprehensive income.................... (360) 817 --
Notes receivable from stockholders for issuance of common
stock................................................... (2,086) (2,173) (688)
-------- -------- --------
Total stockholders' equity......................... 131,605 63,260 8,976
-------- -------- --------
Total liabilities, redeemable preferred stock and
stockholders' equity............................. $381,814 $252,119 $191,977
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 197
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------------------
1999 1998 1998 1997 1996
------------- ---------- ---------- --------- -------
(AS RESTATED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues:
Telecommunication services...... $ 34,922 $ 11,772 $ 18,249 $ 3,791 $ 1
---------- ---------- ---------- --------- -------
Operating expenses:
Cost of operating revenues
(excluding depreciation)..... 31,449 10,575 17,129 3,928 305
Selling, general and
administrative............... 27,469 11,250 17,877 6,440 841
Depreciation and amortization... 12,406 3,149 5,238 1,274 54
Write-off of purchased
software..................... -- -- -- -- 355
---------- ---------- ---------- --------- -------
71,324 24,974 40,244 11,642 1,555
---------- ---------- ---------- --------- -------
Loss from operations......... (36,402) (13,202) (21,995) (7,851) (1,554)
Other income (expense):
Gain on sale of investments..... 252 -- 223 -- --
Interest income................. 5,228 6,989 8,771 2,507 63
Interest expense................ (13,822) (16,080) (19,064) (5,492) --
---------- ---------- ---------- --------- -------
Net loss..................... (44,744) (22,293) (32,065) (10,836) (1,491)
Accrued preferred stock
dividend........................ (1,926) -- -- (136) --
Value of preferred stock
beneficial conversion feature... (47,500) -- -- -- --
Accretion of preferred stock to
redemption value................ (2,789) -- -- -- --
---------- ---------- ---------- --------- -------
Net loss applicable to common
stockholders.................... $ (96,959) $ (22,293) $ (32,065) $ (10,972) $(1,491)
========== ========== ========== ========= =======
Basic and diluted loss per share
of common stock................. $ (5.19) $ (1.69) $ (2.26) $ (1.30) $ (2.11)
========== ========== ========== ========= =======
Basic and diluted weighted average
shares outstanding.............. 18,670,645 13,171,681 14,178,729 8,458,991 707,359
========== ========== ========== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 198
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
--------------------- ------------------- PAID-IN ACCUMULATED ---------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
---------- -------- ---------- ------ ---------- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996........ -- $ -- 240,000 $-- $ 1 $ -- -- $ --
Common stock issued for services
contributed by stockholder...... -- -- 480,000 1 1 -- -- --
Common stock issued for cash...... -- -- 6,456,000 6 12,274 -- -- --
Net loss.......................... -- -- -- -- -- (1,491) -- --
---------- -------- ---------- --- -------- -------- ------ ----
BALANCE AT DECEMBER 31, 1996...... -- -- 7,176,000 7 12,276 (1,491) -- --
Common stock issued for cash...... -- -- 1,458,600 2 4,860 -- -- --
Common stock issued for notes
receivable...................... -- -- 165,000 -- 688 -- -- --
Proceeds from offering allocated
to warrants..................... -- -- -- -- 3,885 -- -- --
Warrants issued for common stock
commitment...................... -- -- -- -- 409 -- -- --
Net loss.......................... -- -- -- -- -- (10,836) -- --
8% Series A Convertible Preferred
Stock issued for cash........... 5,148,570 16,665 -- -- -- -- -- --
Accrued preferred stock
dividend........................ -- -- -- -- -- (136) -- --
---------- -------- ---------- --- -------- -------- ------ ----
BALANCE AT DECEMBER 31, 1997...... 5,148,570 16,665 8,799,600 9 22,118 (12,463) -- --
Common stock issued for cash...... -- -- 100,680 -- 774 -- -- --
Common stock issued for notes
receivable...................... -- -- 189,000 -- 1,485 -- -- --
Warrants and options exercised for
common stock.................... -- -- 133,309 -- 14 -- -- --
8% Series A Convertible Preferred
Stock issued for cash........... 1,422,857 4,980 -- -- -- -- -- --
Accrued preferred stock
dividend........................ -- -- -- -- -- (654) -- --
Common stock issued for cash...... -- -- 4,025,000 4 62,959 -- -- --
Conversion of preferred stock to
common stock.................... (6,571,427) (21,645) 3,942,839 4 21,641 790 -- --
Unrealized gain on investments
available-for-sale.............. -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- (32,065) -- --
---------- -------- ---------- --- -------- -------- ------ ----
BALANCE AT DECEMBER 31, 1998...... -- -- 17,190,428 17 108,991 (44,392) -- --
Unrealized loss on investments
available-for-sale.............. -- -- -- -- -- -- -- --
Common stock issued............... -- -- 5,027,001 5 118,309 -- -- --
Warrants and options exercised for
common stock.................... -- -- 592,631 1 655 -- -- --
Payments on stockholder's note.... -- -- -- -- -- -- -- --
Repurchase of common stock........ -- -- (9,140) -- -- -- 9,140 (76)
10% Series B Convertible Preferred
Stock issued for cash........... 5,277,779 46,663 -- -- -- -- -- --
Accrued preferred stock
dividend........................ -- -- -- -- (1,926) -- -- --
Value of preferred stock
beneficial conversion feature... -- -- -- -- (47,500) -- -- --
Value of preferred stock
beneficial conversion feature... -- -- -- -- 47,500 -- -- --
Accretion of preferred stock to
redemption value................ -- 2,789 -- -- (2,789) -- -- --
Net loss.......................... -- -- -- -- -- (44,744) -- --
---------- -------- ---------- --- -------- -------- ------ ----
BALANCE AT SEPTEMBER 30, 1999
(unaudited) (as restated)....... 5,277,779 $ 49,452 22,800,920 $23 $223,240 $(89,136) 9,140 $(76)
========== ======== ========== === ======== ======== ====== ====
<CAPTION>
NOTES
RECEIVABLE FROM ACCUMULATED
STOCKHOLDERS FOR OTHER TOTAL
ISSUANCE OF COMPREHENSIVE STOCKHOLDERS'
COMMON STOCK INCOME EQUITY
----------------- ------------- --------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1996........ $ -- $ -- $ 1
Common stock issued for services
contributed by stockholder...... -- -- 2
Common stock issued for cash...... -- -- 12,280
Net loss.......................... -- -- (1,491)
------- ------- --------
BALANCE AT DECEMBER 31, 1996...... -- -- 10,792
Common stock issued for cash...... -- -- 4,862
Common stock issued for notes
receivable...................... (688) -- --
Proceeds from offering allocated
to warrants..................... -- -- 3,885
Warrants issued for common stock
commitment...................... -- -- 409
Net loss.......................... -- -- (10,836)
8% Series A Convertible Preferred
Stock issued for cash........... -- -- --
Accrued preferred stock
dividend........................ -- -- (136)
------- ------- --------
BALANCE AT DECEMBER 31, 1997...... (688) -- 8,976
Common stock issued for cash...... -- -- 774
Common stock issued for notes
receivable...................... (1,485) -- --
Warrants and options exercised for
common stock.................... -- -- 14
8% Series A Convertible Preferred
Stock issued for cash........... -- -- --
Accrued preferred stock
dividend........................ -- -- (654)
Common stock issued for cash...... -- -- 62,963
Conversion of preferred stock to
common stock.................... -- -- 22,435
Unrealized gain on investments
available-for-sale.............. -- 817 817
Net loss.......................... -- -- (32,065)
------- ------- --------
BALANCE AT DECEMBER 31, 1998...... (2,173) 817 63,260
Unrealized loss on investments
available-for-sale.............. -- (1,177) (1,177)
Common stock issued............... -- -- 118,314
Warrants and options exercised for
common stock.................... -- -- 656
Payments on stockholder's note.... 11 -- 11
Repurchase of common stock........ 76 -- --
10% Series B Convertible Preferred
Stock issued for cash........... -- -- --
Accrued preferred stock
dividend........................ -- -- (1,926)
Value of preferred stock
beneficial conversion feature... -- -- (47,500)
Value of preferred stock
beneficial conversion feature... -- -- 47,500
Accretion of preferred stock to
redemption value................ -- -- (2,789)
Net loss.......................... -- -- (44,744)
------- ------- --------
BALANCE AT SEPTEMBER 30, 1999
(unaudited) (as restated)....... $(2,086) $ (360) $131,605
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 199
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ---------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(44,744) $(22,293) $(32,065) $ (10,836) $ (1,491)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 12,406 3,149 5,238 1,274 54
Write-off of purchased software......................... -- -- -- -- 355
Gain on sale of investments............................. (252) -- (223) -- --
Amortization of debt discount........................... 432 431 575 144 --
Amortization of deferred financing costs................ 621 658 867 198 --
Stock issued for services rendered...................... -- -- -- -- 2
Changes in assets and liabilities:
Increase in accounts receivable, net.................... (9,785) (2,531) (5,160) (1,190) (9)
(Increase) decrease in prepaid expenses and other....... (391) 47 69 (254) (23)
Increase in other assets................................ (403) (40) (32) (91) (5)
Increase in accounts payable -- trade................... 3,598 2,862 4,852 386 76
Increase in accrued interest and other expenses......... 9,292 8,644 1,695 5,879 99
-------- -------- -------- --------- --------
Net cash used in operating activities................. (29,226) (9,073) (24,184) (4,490) (942)
-------- -------- -------- --------- --------
Cash flows from investing activities:
Purchase of property and equipment, net of payables....... (46,888) (58,681) (81,597) (20,207) (2,287)
Decrease in accounts payable-property
and equipment........................................... (3,301) -- -- -- --
Purchase of investments held-to-maturity.................. -- (42,622) (42,622) (57,710) --
Sale (purchase) of investments available-for-sale, net.... (13,599) -- 28,309 --
Sale (purchase) sale of restricted investments............ 9,004 8,355 18,195 (57,574) --
-------- -------- -------- --------- --------
Net cash used in investing activities................. (54,784) (92,948) (77,715) (135,491) (2,287)
-------- -------- -------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of Senior Secured Notes net of
discount of $4,026...................................... -- -- -- 155,974 --
Costs associated with issuance of Senior Secured Notes and
warrants................................................ -- (133) (133) (5,237) --
Proceeds from issuance of 8% Series A Convertible
Preferred Stock, net of issuance costs.................. -- 4,980 4,980 16,665 --
Proceeds from issuance of 10% Series B Convertible
Preferred Stock, net of issuance costs.................. 46,663 -- -- -- --
Proceeds from issuance of warrants........................ -- -- -- 3,885 --
(Payments) proceeds on other long term debt, net.......... (296) (210) 133 (164) --
Proceeds received on stockholders note.................... 11 -- -- -- --
Proceeds from issuance of common stock.................... 118,970 63,750 63,751 6,015 11,126
-------- -------- -------- --------- --------
Net cash provided by financing activities............. 165,348 68,387 68,731 177,138 11,126
-------- -------- -------- --------- --------
Net (decrease) increase in cash....................... 81,338 (33,634) (33,168) 37,157 7,897
Cash and cash equivalents at beginning of period............ 11,886 45,054 45,054 7,897 --
-------- -------- -------- --------- --------
Cash and cash equivalents at the end of period.............. 93,224 11,420 $ 11,886 $ 45,054 $ 7,897
-------- -------- -------- --------- --------
Supplemental schedule of non-cash investing and financing
activities:
Stock issued for services rendered........................ $ -- $ -- $ -- $ -- $ 2
======== ======== ======== ========= ========
Increase in property and equipment purchases included in
accounts/notes payable -- property and equipment........ $ 247 $ 8,455 $ 15,504 $ 2,434 $ 1,372
======== ======== ======== ========= ========
Stock issued (repurchased) for notes receivable........... $ (76) $ 1,485 $ 1,485 $ 688 $ --
======== ======== ======== ========= ========
Warrants issued as consideration in debt offering
capitalized as deferred financing costs................. $ -- $ -- $ -- $ 409 $ --
======== ======== ======== ========= ========
Increase in accrued preferred stock dividends............. $ 1,926 $ -- $ -- $ 136 $ --
======== ======== ======== ========= ========
Other disclosures:
Cash paid for interest net of amounts capitalized......... $ 7,570 $ 10,996 $ 19,192 $ 164 $ --
======== ======== ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 200
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 IS
UNAUDITED)
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements of MGC Communications,
Inc. (the "Company"), 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 have been eliminated.
The Company was organized on October 16, 1995 as a competitive local
exchange carrier to provide low cost alternative communication services to
residential and small business users through the utilization of Company owned
switches and network architecture leased from incumbent local exchange carriers.
During the year ended December 31, 1998, the Company operated in Las Vegas,
Atlanta, Chicago, southern Florida, and selected areas of southern California
including Los Angeles and San Diego with substantially all of its operating
revenues being derived from the Las Vegas, southern California, and Atlanta
operations.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The financial statements for the nine months ended September 30, 1999 and
1998 and the related amounts in the Notes to Consolidated Financial Statements
are unaudited, but in the opinion of management reflect all normal and recurring
adjustments necessary for a fair presentation of the results of those periods.
REVENUE RECOGNITION
The Company recognizes operating revenues from the sale of communication
services including local dialtone, long distance, Internet access and data
services. Operating revenues are also recognized from installation charges as
well as from access charges billed to other long distance carriers for utilizing
the Company's network. Telecommunication revenues and accounts receivable are
recognized when calls are terminated or when the installation services are
completed. Accounts receivable include both billed and unbilled amounts and are
reduced by an estimate for uncollectible amounts. 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 nine months ended September 30, 1999 and 1998 and the
years ended December 31, 1998, 1997 and 1996, the Company has recognized in
operating revenues switched access revenues of approximately $12.1 million, $4.7
million, $7.4 million, $.7 million and $0, respectively. These revenue amounts
exclude $6.3 million, $1.8 million, $3.2 million, $0.2 million and $0 of billed
services which have not been recorded as revenue in the accompanying
consolidated statements of operations for the nine months ended September 30,
1999 and 1998 and the years ended December 31, 1998, 1997 and 1996. Included in
trade accounts receivable in the accompanying balance sheets as of September 30,
1999 and December 31, 1998 and 1997 are receivables related to switched access
of approximately $12.3 million, $3.6 million and $.7 million, respectively.
CASH AND CASH EQUIVALENTS
The Company considers short-term investments with a remaining maturity of
three months or less at the date of purchase to be cash equivalents.
F-8
<PAGE> 201
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED INVESTMENTS
Restricted investments consist of U.S. Treasury Notes which are restricted
in that they must be used for the repayment of interest on certain debt and are
stated at amortized cost plus accrued interest. Management designated these
investments as held-to-maturity securities in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The carrying value of the
restricted investments approximates the fair value.
ADVERTISING COSTS
The Company expenses advertising costs in the period incurred. For the
years ended December 31, 1998, 1997 and 1996, the Company had expensed
advertising costs of $810,000, $125,000 and $0, respectively.
INVESTMENTS
Investments classified as available-for-sale at December 31, 1998 were
classified as held-to-maturity as of December 31, 1997. During the fourth
quarter of 1998, the Company sold investments, previously classified as
held-to-maturity, prior to their maturity date. In accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
classification of these investments has been appropriately changed in the
accompanying consolidated financial statements.
During 1998, the Company sold $28.3 million in investments held for sale
and recorded $0.8 million in unrealized gains as part of other comprehensive
income for the year ended December 31, 1998. The Company was not able to
continue to hold these securities to maturity and was required to sell these
securities to fund capital expenditures in 1998.
Available-for-sale securities represent investments principally in
commercial paper and government securities. The commercial paper reflected as of
December 31, 1998 matures in March of 1999 and the government securities mature
periodically through September 30, 2001. The unamortized cost basis of these
investments at December 31, 1998 is approximately $72,246,000. The cost basis
for which the realized gain was calculated on available-for-sale securities was
$72,023,000 using the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Direct and indirect costs of construction are capitalized, and
include $3,175,000 and $188,000 of interest costs related to construction during
1998 and 1997, respectively. Depreciation is computed using the straight-line
method over estimated useful lives beginning in the month an asset is put into
service.
F-9
<PAGE> 202
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Buildings................................ 40 years
Telecommunications and other switching
equipment.............................. 5-10 years
Computer hardware and software........... 3-5 years
Office furniture & equipment............. 3-5 years
Leasehold improvements................... the lesser of the estimated useful lives
or term of lease
</TABLE>
The Company capitalizes costs associated with the design, deployment and
expansion of the Company's network including internally and externally developed
software. Capitalized external software costs include the actual costs to
purchase software from vendors. Capitalized internal software costs generally
include personnel and related costs incurred in the enhancement and
implementation of purchased software packages. Capitalized internal labor costs
for the nine months ended September 30, 1999 and for the years ended December
31, 1998 and 1997 were $826,000, $0 and $0, respectively.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized to interest expense over the life of
the related financing using the effective interest method.
INCOME TAXES
The Company has applied the provisions of SFAS No. 109, "Accounting for
Income Taxes," which requires the recognition of deferred tax assets and
liabilities for the consequences of temporary differences between amounts
reported for financial reporting and income tax purposes. SFAS No. 109 requires
recognition of a future tax benefit of net operating loss carryforwards and
certain other temporary differences to the extent that realization of such
benefit is more likely than not; otherwise, a valuation allowance is applied.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. SFAS No. 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. At December 31, 1998
and 1997, the carrying value of all financial instruments (accounts receivable,
accounts payable and long-term debt) approximates fair value due to the short
term nature of the instruments or interest rates, which are comparable with
current rates.
LONG-LIVED ASSETS
Management periodically evaluates the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value of the assets may
exceed the undiscounted future net cash flow expected to be generated by such
assets. To the extent the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized down to the asset's fair value based on the
present value of the discounted cash flows of the related
F-10
<PAGE> 203
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
asset or other relevant measures. Management believes no material impairment in
the value of long-lived assets exists at December 31, 1998 or 1997.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued 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 is effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company has adopted SFAS No. 130 as
reflected in the accompanying consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures 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
in only one segment, communications services, and hence, separate segment
reporting is not applicable.
The American Institute of Certified Public Accountants recently issued
Statement of Position ("SOP") 98-5, "Reporting 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 consolidated financial statements.
CONCENTRATION OF SUPPLIERS
The Company currently leases its transport capacity from a limited number
of suppliers and is dependent upon the availability of collocation space and
fiber optic transmission facilities owned by the suppliers. The Company is
currently vulnerable to the risk of renewing favorable supplier contracts,
timeliness of the supplier in processing the Company's orders for customers and
is at risk with regard to regulatory agreements that govern the rates to be
charged to the Company.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
RECLASSIFICATION
Certain reclassifications, which have no effect on net income, have been
made in the prior period financial statements to conform to the current
presentation.
(2) PLAN OF OPERATIONS
In September 1997, the Company completed an offering of units consisting of
in the aggregate $160 million of 13% Senior Secured Notes due in 2004 (the
"Notes") and warrants to purchase shares of common stock, as discussed in Note
4. During May and June 1998, the Company sold an
F-11
<PAGE> 204
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate of 4,025,000 shares of common stock at $17.00 per share as discussed
in Note 5. The Company expects to continue its expansion into new markets and
its development of new services. The Company expects to fund its capital
requirements through existing resources, debt or equity financing and internally
generated funds.
Management recognizes the Company must generate additional resources or
consider modifications to its expansion plans. To the extent the Company is
unable to achieve its funding plan, management has contingency plans which
include curtailing capital expenditure activities, reducing infrastructure costs
associated with expansion and development plans and achieving profitable
operations as soon as practicable. However, no assurance can be given the
Company will be successful in raising additional capital, achieving profitable
results, or entering into new markets.
Management also recognizes certain risks are inherent to the industry. 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 suitable interconnect agreements
with the incumbent carriers, obtain an acceptable level of cooperation from the
incumbent carriers, all in a timely manner, at reasonable cost and on
satisfactory terms and conditions, as well as competitive, regulatory,
legislative and judicial developments that could materially affect the Company's
future results.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1999 1998 1997
------------- -------- -------
<S> <C> <C> <C>
Buildings and property....................... $ 5,298 $ 2,653 $ 278
Switching equipment.......................... 113,132 57,045 21,621
Leasehold improvements....................... 860 740 956
Computer hardware and software............... 3,629 2,218 1,404
Office equipment and vehicles................ 1,532 901 300
-------- -------- -------
124,451 63,557 24,559
Less accumulated depreciation and
amortization............................... (18,834) (6,555) (1,317)
-------- -------- -------
105,617 57,002 23,242
Switching equipment under construction....... 45,542 59,378 1,375
-------- -------- -------
Net property and equipment................. $151,159 $116,380 $24,617
======== ======== =======
</TABLE>
F-12
<PAGE> 205
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT
Long-term borrowings at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
13% Senior Secured Notes, due October 1, 2004, net of
unamortized discount of $3,307 and $3,882............... $156,693 $156,118
10% note payable in monthly installments through February
1999.................................................... 225 441
Other..................................................... 377 78
-------- --------
157,295 156,637
Less current portion...................................... (332) (381)
-------- --------
$156,963 $156,256
======== ========
</TABLE>
Maturities of long-term debt for each of the next six years ending December
31, consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999...................................................... $ 332
2000...................................................... 174
2001...................................................... 96
2002...................................................... --
2003...................................................... --
2004...................................................... 156,693
--------
$157,295
========
</TABLE>
In September 1997, the Company completed an offering of units consisting of
in the aggregate $160 million of 13% Senior Secured Notes due in 2004 and
warrants to purchase 774,720 shares of common stock (collectively the "1997
Offering").
The Notes bear interest at the rate of 13% per annum, payable semi-annually
in arrears on April 1 and October 1, commencing April 1, 1998. As set forth in
the Indenture pursuant to which the Notes were issued the Company is required to
hold in a trust account sufficient funds to provide for payment in full of
interest on the Notes through October 1, 2000. The accompanying consolidated
financial statements reflect approximately $39.4 million as restricted
investments as security for the interest payments on the Notes. In addition, the
Notes are secured by a security interest in certain telecommunications equipment
owned by the Company or which may be acquired in the future. As of December 31,
1998, the Notes were secured by a security interest in telecommunications
equipment with a net book value of $85.3 million.
The Company has recorded the commitment fee as non-cash consideration in
connection with the 1997 Offering. The value of the warrants issued as a
commitment fee was determined based on a value of the Company's common stock at
$4.68 per share less the exercise price of $.02 per share specified in the
warrant agreement. All such warrants were exercised in January and February
1998.
F-13
<PAGE> 206
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Notes may be redeemed at the option of the Company, in whole or in
part, on or after October 1, 2001, at a premium declining to par in 2003, plus
accrued and unpaid interest and liquidated damages, if any, through the
redemption date as follows:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001................................................. 106.50
2002................................................. 103.25
2003 and thereafter.................................. 100.00
</TABLE>
In the event of a sale by the Company prior to October 1, 2000 of its
capital stock in one or more equity offerings, up to a maximum of 35% of the
aggregate principal amount of the Notes originally issued may, at the option of
the Company, be redeemed from the net cash proceeds at a redemption price equal
to 113% of the principal amount, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date, provided at least 65% of the aggregate
principal amount of Notes originally issued remains outstanding immediately
after the occurrence of such redemption. As of the date of these consolidated
financial statements, management has no intention of redeeming the Notes prior
to their stated redemption date.
The Indenture contains certain covenants that among other things, limit the
ability of the Company and its restricted subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, engage
in sale and lease back transactions, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its restricted
subsidiaries, conduct certain lines of business, issue or sell equity interests
of the Company's restricted subsidiaries or enter into certain mergers and
consolidations. As of December 31, 1998, management believes it is in compliance
with all debt covenants.
In January 1998, the Company filed a registration statement offering to
exchange the Notes for 13% Series B Senior Secured Notes due 2004 under the
Securities Act of 1933, as amended. Terms of the 13% Series B Senior Secured
Notes due 2004 are substantially the same as the Notes. The exchange was
consummated in March 1998.
In conjunction with the 1997 Offering, the Company engaged an
investment-banking firm that determined a value for each warrant and share of
common stock. Consistent with this determination, the Company has allocated a
portion of the 1997 Offering proceeds to the warrants based on a value of $4.68
per share of common stock less the exercise price of $.02 per share specified in
the warrant agreement.
The warrants are currently exercisable and expire on October 1, 2004. The
agreement pursuant to which the warrants were issued required an anti-dilution
adjustment if the November 1997 preferred stock offering was consummated at a
price less than $5.00 per share. As further discussed in Note 5, the Company
completed the November 1997 preferred stock offering for $3.50 per share.
Accordingly, the number of shares issuable upon exercise of the warrants was
increased from 774,200 to 862,923. This increase has been reflected in the
accompanying consolidated financial statements as of December 31, 1998 and 1997.
Expenses allocated to the warrants in connection with the 1997 Offering were
$141,000.
In conjunction with the 1997 Offering, certain persons deposited an
aggregate of $15.0 million in escrow (the "Common Stock Commitment"), which
funds were to have been applied to the purchase of shares of Common Stock in the
event the Company failed to sell at least $15.0 million of preferred
F-14
<PAGE> 207
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock within a certain period of time. Since sufficient preferred stock was
issued within the time period, the investors received a return of their funds
contributed to escrow. As a commitment fee for the Common Stock Commitment, the
Company issued to all such persons contributing to the escrow funds warrants to
purchase an aggregate of 90,000 shares of Common Stock at $.02 per share.
In conjunction with the 1997 Offering, the authorized capital stock of the
Company was increased to 60,000,000 shares of common stock, $.001 par value per
share, and 50,000,000 shares of preferred stock, $.001 par value per share.
Associated with the 1997 Offering, expenses of $68,000 were paid to a
related party for charter services in 1997.
(5) REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
COMMON STOCK
On December 6, 1996, the Board of Directors approved a four-hundred-for-one
stock split, effected in the form of a stock dividend distributed on December
31, 1996 to shareholders of record as of June 8, 1996. All share and per share
data presented in the consolidated financial statements and notes thereto have
been retroactively restated to give effect to this stock split.
During 1995, in exchange for expending cash to incorporate the Company, a
shareholder received 240,000 shares of $.001 par value common stock valued at
$.0042 per share. The Company capitalized the value of the issued shares as
organization costs included in other assets in the accompanying consolidated
financial statements, which costs are being amortized over 60 months using the
straight-line method.
In April 1996, the Company issued 480,000 shares of $.001 par value common
stock valued at $.0042 per share in exchange for services rendered by a
stockholder.
During 1996, NevTEL LLC ("LLC") was formed for the purpose of funding the
development stage of MGC Communications, Inc. In June 1996, the Company and LLC
entered into an agreement whereby LLC would acquire 3,696,000 shares of $.001
par value common stock of the Company for $.83 per share. The agreement called
for LLC to advance funds for operating expenses incurred by the Company (to be
applied against the purchase price of the stock) until the Company produced
operating revenues, at which time the remaining purchase price would be remitted
to the Company, the Company's common stock would be issued to LLC owners and LLC
would terminate. The agreement stipulated that the funds advanced for operating
expenses were to be paid back to LLC if the Company did not generate operating
revenue by December 31, 1996. The Company began revenue generating activities in
December 1996. The shares were issued to LLC owners on December 31, 1996, at
which time LLC terminated and the remaining purchase price was owed to the
Company. Such amount was transferred to the Company in February 1997 and is
classified as amounts receivable for shares issued at December 31, 1996.
In December 1996, the Company offered 4,068,600 shares of $.001 par value
common stock at $3.33 per share through a private placement. In connection with
this offering, the Company issued 1,308,600 shares and 2,760,000 shares of $.001
par value common stock and received proceeds of $4,362,000 and $9,200,000 during
the years ended December 31, 1997 and 1996, respectively.
In June 1997, the Company approved agreements with two key members of
management granting them rights to purchase a total of 150,000 shares at $3.33
per share and 165,000 shares at $4.17 per share. In both cases, the Company
retains the right to repurchase these shares at their cost
F-15
<PAGE> 208
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the event of termination of employment for any reason and has agreed to
finance the purchase price of the shares purchased at $4.17 per share over a
period of three years. During September 1997, the members of management
exercised their rights and the respective aforementioned shares were issued. The
Company received $500,000 for the 150,000 shares issued at $3.33 per share. The
$688,000 owed to the Company for the 165,000 shares issued at $4.17 per share
has been classified in the accompanying consolidated statements of redeemable
preferred stock and stockholders' equity as notes receivable from stockholders
for issuance of common stock.
During 1998, the Company issued 100,680 shares of $.001 par value common
stock at prices ranging from $5.83 to $8.33 per share, for total proceeds to the
Company of $774,000.
During 1998, the Company approved agreements with 11 key members of
management to purchase a total of 189,000 shares of common stock. The purchase
price of these shares ranged from $5.83 to $8.33 per share. In each case, the
Company retains the right to repurchase these shares at their cost in the event
of termination of employment for any reason and has agreed to finance a portion
of the purchase price of the shares over a period of three years. The $1,485,000
owed to the Company is classified in the accompanying statements of redeemable
preferred stock and stockholders' equity as notes receivable from stockholders
for issuance of common stock.
During May and June 1998, the Company sold 4,025,000 shares of common stock
at $17.00 per share pursuant to a registration statement on Form S-1, which was
declared effective by the Securities and Exchange Commission on May 11, 1998. In
connection with the initial public offering of the Company's common stock, the
Company effected a six for ten reverse stock split, which has been reflected in
the accompanying consolidated financial statements. In addition to the reverse
stock split, the Company's 6,571,427 outstanding shares of 8% Series A
Convertible Preferred Stock (the "Series A Preferred Stock") as discussed below,
were converted to 3,942,839 shares of the Company's common stock upon completion
of the initial public offering. The conversion of the Series A Preferred Stock
has been reflected in the accompanying consolidated financial statements.
REDEEMABLE PREFERRED STOCK
The Company has authorized the issuance of up to 50,000,000 shares of
preferred stock. In November 1997, the Company designated 6,571,450 shares as 8%
Series A Convertible Preferred Stock.
In November 1997, the Company completed a private placement offering in
which 5,148,570 shares of the Series A Preferred Stock were issued at $3.50 per
share, for total proceeds to the Company of approximately $16.7 million, net of
expenses.
In January 1998, the Company completed an additional private placement
offering in which 1,422,857 shares of Series A Preferred Stock were issued at
$3.50 per share for total proceeds to the Company of approximately $5.0 million,
net of expenses. The terms of the offering were substantially identical to those
of the previous preferred stock offering.
Each share of Series A Preferred Stock was automatically converted into
common stock on a six for ten basis upon the consummation of the Company's IPO.
In accordance with the terms of the Series A Preferred Stock, the accrued
dividends were reversed at the time of conversion.
(6) STOCK OPTION PLAN
In June 1996, the Company adopted a stock option plan which allows the
Board of Directors to grant incentives to employees in the form of incentive
stock options and non-qualified stock options.
F-16
<PAGE> 209
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the Company had reserved 1,440,000 shares of common
stock to be issued under the plan. In March 1998, the Board of Directors
approved an additional 1,200,000 shares of common stock to be issued under the
plan.
In July 1998, the Company filed a registration statement on Form S-8 to
register the shares of the Company's common stock reserved for issuance under
the MGC Communications, Inc. Stock Option Plan.
Under the plan, substantially all options have been granted to employees at
a price equal to the then-current market price, as estimated by management, and
vest primarily over a 5-year period. All options expire within ten years of the
date of grant.
Stock option transactions during 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1995.......................... -- --
Granted................................................... 811,860 $1.35
Canceled.................................................. (30,000) $1.67
---------
Outstanding at December 31, 1996.......................... 781,860 $1.35
Granted................................................... 274,560 $5.78
Canceled.................................................. (3,300) $5.08
---------
Outstanding at December 31, 1997.......................... 1,053,120 $2.50
Granted................................................... 865,700 $8.48
Exercised................................................. (7,380) $1.77
Canceled.................................................. (85,240) $5.84
---------
Outstanding at December 31, 1998.......................... 1,826,200 $5.18
=========
Exercisable at December 31, 1996.......................... 11,760 $3.33
=========
Exercisable at December 31, 1997.......................... 165,720 $1.47
=========
Exercisable at December 31, 1998.......................... 378,660 $2.07
=========
</TABLE>
For options granted during the year ended December 31, 1998, the weighted
average fair value of options on the date of grant, estimated using the
Black-Scholes option pricing model, was $6.70 using the following assumptions:
dividend yield of 0%; expected option life of 6.5 years; and risk free interest
rate of 5.06% and an expected volatility of 80.5%.
The weighted average fair value of the options issued during the years
ended December 31, 1997 and 1996, substantially all of which were granted at a
price equal to the then current market price as estimated by management, was
estimated to be $4.03 and $.92, respectively, using an option pricing model with
the following assumptions: dividend yield of 0%; expected option life of 6.5
years; and risk free interest rate at December 31, 1997 and 1996 of 5.06% and
6.12%, respectively.
F-17
<PAGE> 210
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT DEC. 31, CONTRACTUAL EXERCISE AT DEC. 31, EXERCISE
EXERCISE PRICE 1998 LIFE PRICE 1998 PRICE
- ---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.83 to $3.50 745,980 7.38 years $ 1.33 320,400 $1.37
$5.00 to $6.50 488,920 8.97 years $ 5.99 56,760 $5.84
$7.50 to $10.00 496,800 9.58 years $ 8.45 1,500 $8.33
$12.50 to $17.00 94,500 9.44 years $14.10 -- $ --
--------- -------
$0.83 to $17.00 1,826,200 8.51 years $ 5.18 378,660 $2.07
========= =======
</TABLE>
The Company applied Accounting Principles Board Opinion No. 25 in
accounting for its plan. No compensation expense was recognized for the years
ended December 31, 1998, 1997 and 1996. Had the Company determined compensation
expense using the fair value based method defined in SFAS No. 123, the Company's
loss for the years then ended would have increased by $565,000, $7,000 and
$10,000, respectively.
(7) LOSS PER SHARE
SFAS No. 128, "Earnings Per Share," requires the Company to calculate its
earnings per share based on basic and diluted earnings per share, as defined.
Basic and diluted loss per share for the years ended December 31, 1998, 1997 and
1996 were computed by dividing net loss applicable to common stockholders by the
weighted average number of shares of common stock outstanding.
The Company's warrants, preferred stock and stock options granted and
issued during 1998, 1997 and 1996, and outstanding as of December 31, 1998 and
1997, are antidilutive and have been excluded from the diluted loss per share
calculation for the years ended December 31, 1998, 1997 and 1996. Had the
Company shown the effects of dilution, the warrants, preferred stock and options
would have added an additional 1.8 million, 1.6 million and 0.5 million shares
to the weighted average shares outstanding for the years ended December 31,
1998, 1997 and 1996, respectively.
F-18
<PAGE> 211
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
The net deferred tax asset as of December 31, 1998 and 1997 is as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred Tax Asset
Net operating loss carry-forward......................... $ 17,804 $ 4,529
Start-up expenditures.................................... 164 220
Other.................................................... 534 141
-------- -------
18,502 4,890
Less: valuation allowance................................ (15,517) (4,309)
-------- -------
Net deferred tax asset................................... 2,985 581
-------- -------
Deferred Tax Liability
Excess of tax depreciation over book..................... 2,769 481
Other.................................................... 216 100
-------- -------
Net deferred tax liability............................... 2,985 581
-------- -------
Net........................................................ $ -- $ --
======== =======
</TABLE>
SFAS No. 109 requires recognition of the future tax benefit of these assets
to the extent realization of such benefits is more likely than not; otherwise, a
valuation allowance is applied. At December 31, 1998 and 1997, the Company
determined that $15,517,000 and $4,309,000, respectively, of tax benefits did
not meet the realization criteria because of the Company's historical operating
results. Accordingly, a valuation allowance was applied to reserve against the
applicable deferred tax asset.
At December 31, 1998 and 1997, the Company had net operating loss
carry-forwards available for income tax purposes of approximately $50,869,000
and $12,940,000, respectively, which expire principally from 2011 to 2018.
(9) COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company has entered into various leasing agreements for its switching
facilities, offices, and office equipment. The facility which houses the
Company's headquarters in Las Vegas is owned by an entity principally owned by
two of the Company's principal stockholders and directors. Management believes
the terms and conditions of this agreement are equal to the terms which would be
available from an unaffiliated lessor.
F-19
<PAGE> 212
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease obligations in effect as of December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
Payments during the year ending December 31:
1999...................................................... $1,389
2000...................................................... 1,272
2001...................................................... 1,166
2002...................................................... 977
2003...................................................... 159
Thereafter................................................ 342
------
$5,305
======
</TABLE>
Rent expense was $850,000, $207,000 and $33,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, of which $614,000 was paid to a
related party during 1998.
PURCHASE COMMITMENTS
In the ordinary course of business, the Company enters into purchase
agreements with its vendors of telecommunications equipment. As of September 30,
1999 and December 31, 1998, the Company had a total for all vendors of
approximately $53.4 million and $15.4 million, respectively, of remaining
purchase commitments for purchases of switching equipment.
LITIGATION
The Company is party to various legal proceedings, most of which relate to
routine matters incidental to its business. Management does not believe that the
outcome of such proceedings will have a material adverse effect on the Company's
financial position or results of operations.
INTERCONNECTION AGREEMENTS
The Company has interconnection agreements with five incumbent local
exchange carriers. These agreements expire on various dates through July 2000.
The Company is dependent on the cooperation of the incumbent local exchange
carriers to provide access service for the origination and termination of its
local and long distance traffic. Historically, these access charges can make up
a significant percentage of the overall cost of providing these services. To the
extent the access services of the local exchange carriers are used, the Company
and its customers are subject to the quality of service, equipment failures and
service interruptions of the local exchange carriers.
(10) 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 operating revenues related
to the Sprint (Nevada) interconnection agreement at amounts which 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 $3.4 million, $1.7 million and $1.1 million at September
30, 1999, December 31, 1998 and 1997, respectively, has not been recorded in the
accompanying consolidated financial statements.
F-20
<PAGE> 213
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management believes that the resolution of this matter will not have an adverse
effect on the Company's consolidated financial position, results of operations,
or liquidity.
(11) RELATED PARTY TRANSACTION
In May 1997, the Company entered into an agreement with a company, the
owner of which is a former officer and current stockholder of the Company, for
the purchase of certain computer software pursuant to which the Company paid the
contract price of $600,000 in six equal monthly installments beginning July 1,
1997. In addition, the Company has paid $656,000 and $40,000 during 1998 and
1997, respectively, under such agreement to support and maintain the Company's
proprietary operations support system. Management believes the terms and
conditions of this agreement are equal to the terms which would be available
from an unaffiliated party.
(12) SUBSEQUENT EVENTS (UNAUDITED)
PREFERRED STOCK OFFERINGS
On April 5, 1999, the Company entered into a Securities Purchase Agreement
with Providence Equity Partners III L.P. ("Providence"), JK&B Capital III L.P.
("JK&B III") and Wind Point Partners III L.P. ("Wind Point") under which
Providence, JK&B III and Wind Point and their affiliates (the "Purchasers")
agreed to purchase 5,277,779 shares of newly issued Series B Convertible
Preferred Stock ("Series B Preferred Stock") at $9.00 per share(the
"Transaction") for a total consideration of $47.5 million. The Transaction was
consummated on May 4, 1999. Net proceeds to the Company were approximately $46.5
million.
Dividends accrued on the Series B Preferred Stock at the rate of 10% per
annum from the issue date until November 21, 1999 and are payable in preference
to any dividends that may be paid with respect to the Company's Common Stock.
Effective as of November 22, 1999, the Company elected to terminate the accrual
of dividends since the Company's stock price exceeded $27.00 per share for 20
consecutive trading days (the "Market Threshold").
The Series B Preferred Stock is convertible into Common Stock at any time
at the option of the holder. Initially, the conversion price is $9.00 per share
and each share of Series B Preferred Stock is convertible into one share of
Common Stock. The conversion price is subject to adjustment as a result of stock
splits, stock dividends and certain other issuances of additional stock.
The Series B Preferred Stock was issued in May 1999 with a beneficial
conversion feature totaling $47.5 million measured as the difference between the
conversion price of $9 per share and the fair value of the underlying common
stock at the time of issuance, limited by the total amount of the proceeds of
the preferred stock issued.
After the earlier of May 24, 2000 or the date on which the holders of
Series B Preferred Stock exercise their demand registration rights, the Company
has the right to require the conversion of the Series B Preferred Stock if the
Company's stock price exceeds the Market Threshold referenced above. If the
Company requires conversion within three years after closing, no accrued
dividends will be paid.
Each balance sheet date, the Company records a pro rata accretion of the
Series B Preferred Stock to its anticipated redemption value. Such accretion is
based on the market value of the common stock at the balance sheet date, not to
exceed $27 per share based on the Market Threshold. For the nine months ended
September 30, 1999, the Company recorded accretion of $2.8 million which has
been recorded as an increase in redeemable preferred stock.
F-21
<PAGE> 214
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The holders of Series B Preferred Stock have the right to require us to
redeem the Series B Preferred Stock after May 4, 2005 or upon a sale of the
Company. The redemption price will be equal to the greater of (x) $9.00 per
share plus accrued and unpaid dividends, or (y) the value of the common stock
into which the Series B Preferred Stock is then convertible. If the Company
fails to redeem all shares of Series B Preferred Stock within six months of the
date specified by the holders of the Series B Preferred Stock, then the holders
of the Series B Preferred Stock, along with the holders of the Series C
Preferred Stock if they then have similar rights, will have the right to elect a
majority of the Company's Board of Directors.
In November 1999, the Company entered into an agreement with Providence,
JK&B III and their affiliates (the "Purchasers") under which the Purchasers are
to purchase 1,250,000 shares of newly issued Series C Convertible Preferred
Stock at $28.00 per share for a total consideration of $35.0 million. Of the
total consideration, $4.9 million was paid by an interest-bearing promissory
note due in March 2000. The transaction was consummated on December 30, 1999.
Dividends will accrue on the Series C Preferred Stock 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. No accrued dividends in
excess of $2.80 per share will be paid if the Company requires conversion of the
Series C Preferred Stock within 30 months of issuance. Conversion may be
required by the Company if the Company's stock price exceeds $56.00 per share
for 20 consecutive trading days.
The Series C Preferred Stock is convertible into Common Stock at any time
at the option of the holder. Initially, the conversion price is $28.00 per share
and each share of Series C Preferred Stock is convertible into one share of
Common Stock. The conversion price is subject to adjustment as a result of stock
splits, stock dividends and certain other issuances of additional stock.
The Series C Preferred Stock was issued in December 1999 with a beneficial
conversion feature totaling $25.0 million measured as the difference between the
conversion price of $28 per share and the fair value of the underlying common
stock at the time of issuance. The Company will record a pro rata accretion of
the Series C Preferred Stock to its anticipated redemption value. Such accretion
will be based on the market value of the common stock at the balance sheet date,
not to exceed $56 per share based on the Market Threshold.
The holders of Series C Preferred Stock have the right to require the
Company to redeem the Series C Preferred Stock after six years after issuance or
upon a sale of the Company. The redemption price will be equal to the greater of
(x) $28.00 per share plus the greater of $2.80 per share or accrued and unpaid
dividends, or (y) the value of the Common Stock into which the Series C
Preferred Stock is then convertible.
If the Company fails to redeem all shares of Series C Preferred Stock
within six months of the date specified by the holders of the Series C Preferred
Stock, then the holders of the Series C Preferred Stock, along with the holders
of the Series B Preferred Stock if they then have similar rights, will have the
right to elect a majority of the Company's Board of Directors.
The Series B Preferred Stock and Series C Preferred Stock will vote along
with the Common Stock on an as-converted basis. The holders of the Series B
Preferred Stock and Series C Preferred Stock have the right to nominate two or
more directors depending on the size of the Company's Board of Directors and the
percentage of the Company's stock represented by the outstanding Series B
Preferred Stock and Series C Preferred Stock. The holders of the Series B
Preferred Stock
F-22
<PAGE> 215
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and Series C Preferred Stock also have the right to have their Board
representative serve on each committee of the Company's Board and on the Board
of each of the Company's subsidiaries.
The Company's previously reported financial statements for the nine months
ended September 30, 1999 have been restated to reflect the above accretion of
anticipated redemption value and beneficial conversion feature with respect to
the Series B Preferred Stock. The effect of the restatement was to increase the
net loss applicable to common stockholders and basic and diluted loss per share
of common stock as follows:
<TABLE>
<CAPTION>
BASIC AND DILUTED
NET LOSS APPLICABLE TO LOSS PER SHARE
COMMON STOCKHOLDERS OF COMMON STOCK
---------------------- -----------------
<S> <C> <C>
As previously reported...................................... $(46,670) $(2.50)
Accretion of Series B Preferred Stock....................... (2,789) (0.15)
Value of preferred stock beneficial conversion feature...... (47,500) (2.55)
-------- ------
As restated................................................. $(96,959) $(5.19)
======== ======
</TABLE>
COMMON STOCK OFFERING
In July 1999, the Company issued 5,000,000 shares of common stock and
received net proceeds, after expenses, of approximately $118.1 million. In this
offering, existing shareholders sold an additional 587,695 shares of common
stock for which the Company did not receive any proceeds.
F-23
<PAGE> 216
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
<PAGE> 217
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 SHARES
MGC COMMUNICATIONS, INC.
% SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK
[MGC LOGO]
------------
PROSPECTUS
, 2000
------------
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
ING BARINGS
WARBURG DILLON READ LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 218
MGC COMMUNICATIONS, INC.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The fees and expenses to be paid in connection with this offering are as
follows:
<TABLE>
<S> <C>
SEC filing fee.............................................. $119,827
NASD filing fee............................................. 30,500
NASDAQ listing fee*......................................... 77,750
Accounting fees and expenses*............................... 150,000
Legal fees and expenses*.................................... 200,000
Printing expenses*.......................................... 350,000
Miscellaneous*.............................................. 106,923
----------
Total............................................. $1,035,000
==========
</TABLE>
- ---------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The articles of incorporation of the Company provide that directors of the
Company will not be personally liable for monetary damages to the Company for
certain breaches of their fiduciary duty as directors to the fullest extent
allowable by Nevada law. Under current Nevada law, directors would remain liable
for: (i) acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law, and (ii) approval of certain illegal dividends or
redemptions. In appropriate circumstances, equitable remedies or nonmonetary
relief, such as an injunction, will remain available to a stockholder seeking
redress from any such violation. In addition, the provision applies only to
claims against a director arising out of his role as a director and not in any
other capacity (such as an officer or employee of the Company).
The Company also has the obligation, pursuant to its by-laws, to indemnify
any director or officer of the Company for all expenses incurred by them in
connection with any legal action brought or threatened against such person for
or on account of any action or omission alleged to have been committed while
acting in the course and scope of the person's duties, if the person acted in
good faith and in a manner which the person reasonably believed to be in or not
opposed to the best interests of the Company, and with respect to criminal
actions, had no reasonable cause to believe the person's conduct was unlawful,
provided that such indemnification is made pursuant to then existing provisions
of Nevada Revised Statutes at the time of any such indemnification.
II-1
<PAGE> 219
ITEM 16. EXHIBITS
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. AND DESCRIPTION
---------------------------
<S> <C>
1.1 Underwriting Agreement for Common Stock.
1.2 Underwriting Agreement for % Series D Convertible
Preferred Stock.
4.1 Articles of Incorporation and Amendments.(1)
4.2 By-laws.(2)
4.3 Stockholders' Agreement dated as of November 26, 1997, among
the Company, Maurice J. Gallagher, Jr., Nield J. Montgomery
and certain investors identified therein.(1)
4.4 Indenture dated as of September 29, 1997, between the
Company and Marine Midland Bank, as Trustee.(1)
4.5 Warrant Registration Rights Agreement dated as of September
29, 1997, among the Company, Bear, Stearns & Co. Inc. and
Furman Selz LLC.(1)
4.6 Form of Amended and Restated Certificate of Designation of
Series B Convertible Preferred Stock.(3)
4.7 Form of Amended and Restated Registration Rights Agreement
dated , 1999, among the Company and the
purchasers of Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock.(3)
4.8 Form of Amended and Restated Securityholders' Agreement
dated , 1999, among the Company, the purchasers
of Series B Convertible Preferred Stock and certain
stockholders of the Company.(3)
4.9 Certificate of Change in Authorized Capital of MGC
Communications, Inc.(4)
4.10 Form of Certificate of Designation of Series C Convertible
Preferred Stock.(3)
4.11 Certificate of Designation of Series D Convertible Preferred
Stock.
5.1 Legal Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson,
P.C.
8.1 Tax Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson,
P.C.
12.1 Ratio of earnings to fixed charges and preferred
dividends.(3)
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG LLP.
24.1 Power of Attorney.(3)
</TABLE>
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4, registration number 333-33837, filed with the Commission on August 18,
1997, and amendments thereto.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1, registration statement number 333-49085, filed with the Commission on
April 1, 1998, and amendments thereto.
(3) Previously filed with this registration statement.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-3, registration statement number 333-79963, filed with the Commission on
June 3, 1999, and amendments thereto.
II-2
<PAGE> 220
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933:
(1) the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, then the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE> 221
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 3 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Rochester, State of New York on the 4th day of February, 2000.
MGC COMMUNICATIONS, INC.
By: /s/ ROLLA P. HUFF
--------------------------------------
Rolla P. Huff, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated.
<TABLE>
<S> <C> <C>
/s/ ROLLA P. HUFF February 4, 2000
- ---------------------------------------------------
Rolla P. Huff, President
(Chief Executive Officer) and Director
/s/ MICHAEL R. DALEY February 4, 2000
- ---------------------------------------------------
Michael R. Daley, Executive Vice President (Chief
Financial Officer)
/s/ LINDA M. SUNBURY February 4, 2000
- ---------------------------------------------------
Linda M. Sunbury, Senior Vice President
(Principal Accounting Officer)
/s/ MAURICE J. GALLAGHER, JR.* February 4, 2000
- ---------------------------------------------------
Maurice J. Gallagher, Jr., Director
(Chairman of the Board)
/s/ TIMOTHY P. FLYNN* February 4, 2000
- ---------------------------------------------------
Timothy P. Flynn, Director
February , 2000
- ---------------------------------------------------
Jack L. Hancock, Director
/s/ DAVID KRONFELD* February 4, 2000
- ---------------------------------------------------
David Kronfeld, Director
February , 2000
- ---------------------------------------------------
Mark J. Masiello, Director
/s/ THOMAS NEUSTAETTER* February 4, 2000
- ---------------------------------------------------
Thomas Neustaetter, Director
February , 2000
- ---------------------------------------------------
Paul J. Salem, Director
* /s/ MICHAEL R. DALEY
- ---------------------------------------------------
By: Michael R. Daley as Attorney-in-fact
</TABLE>
II-4
<PAGE> 222
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. AND DESCRIPTION PAGE
--------------------------- ----
<S> <C> <C>
1.1 Underwriting Agreement for Common Stock.
1.2 Underwriting Agreement for % Series D Convertible
Preferred Stock.
4.1 Articles of Incorporation and Amendments.(1)
4.2 By-laws.(2)
4.3 Stockholders' Agreement dated as of November 26, 1997, among
the Company, Maurice J. Gallagher, Jr., Nield J. Montgomery
and certain investors identified therein.(1)
4.4 Indenture dated as of September 29, 1997, between the
Company and Marine Midland Bank, as Trustee.(1)
4.5 Warrant Registration Rights Agreement dated as of September
29, 1997, among the Company, Bear, Stearns & Co. Inc. and
Furman Selz LLC.(1)
4.6 Form of Amended and Restated Certificate of Designation of
Series B Convertible Preferred Stock.(3)
4.7 Form of Amended and Restated Registration Rights Agreement
dated , 1999, among the Company and the
purchasers of Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock.(3)
4.8 Form of Amended and Restated Securityholders' Agreement
dated , 1999, among the Company, the purchasers
of Series B Convertible Preferred Stock and certain
stockholders of the Company.(3)
4.9 Certificate of Change in Authorized Capital of MGC
Communications, Inc.(4)
4.10 Form of Certificate of Designation of Series C Convertible
Preferred Stock.(3)
4.11 Certificate of Designation of Series D Convertible Preferred
Stock.
5.1 Legal Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson,
P.C.
8.1 Tax Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson,
P.C.
12.1 Ratio of earnings to fixed charges and preferred
dividends.(3)
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG LLP.
24.1 Power of Attorney.(3)
</TABLE>
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4, registration number 333-33837, filed with the Commission on August 18,
1997, and amendments thereto.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1, registration statement number 333-49085, filed with the Commission on
April 1, 1998, and amendments thereto.
(3) Previously filed with this registration statement.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-3, registration statement number 333-79963, filed with the Commission on
June 3, 1999, and amendments thereto.
<PAGE> 1
Exhibit 1.1
KLWH DRAFT
2/2/00
MGC Communications, Inc.
[ ] Shares
Common Stock
($0.001 par value per share)
UNDERWRITING AGREEMENT
New York, New York
, 2000
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
ING Barings LLC
Warburg Dillon Read LLC
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
MGC Communications, Inc., a corporation organized under the
laws of the State of Nevada (the "Company"), proposes to sell to the several
underwriters named in Schedule I hereto (the "Underwriters"), for whom you (the
"Representatives") are acting as joint lead representatives, [ ] shares of
Common Stock, $ 0.001 par value per share ("Common Stock") of the Company, and
the persons named in Schedule II hereto (the "Selling Stockholders") propose to
sell to the several Underwriters [ ] shares of Common Stock (said shares to be
issued and sold by the Company and shares to be sold by the Selling Stockholders
collectively being hereinafter called the "Underwritten Securities"). The
Company also proposes to grant to the Underwriters an option to purchase up to
[ ] additional
1
<PAGE> 2
shares of Common Stock to cover over-allotments (the "Option Securities"; the
Option Securities, together with the Underwritten Securities, being hereinafter
called the "Securities"). To the extent there are no additional Underwriters
listed on Schedule I other than you, the term Representatives as used herein
shall mean you, as Underwriters, and the terms Representatives and Underwriters
shall mean either the singular or plural as the context requires. In addition,
to the extent that there is more than one Selling Stockholder named in Schedule
II, the term Selling Stockholders shall mean either the singular or plural. The
use of the neuter in this Agreement shall include the feminine and masculine
wherever appropriate. Any reference herein to the Registration Statement, a
Preliminary Prospectus or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein pursuant to Item 12 of Form S-3
which were filed under the Exchange Act on or before the Effective Date of the
Registration Statement or the issue date of such Preliminary Prospectus or the
Prospectus, as the case may be; and any reference herein to the terms "amend",
"amendment" or "supplement" with respect to the Registration Statement, any
Preliminary Prospectus or the Prospectus shall be deemed to refer to and include
the filing of any document under the Exchange Act after the Effective Date of
the Registration Statement, or the issue date of any Preliminary Prospectus or
the Prospectus, as the case may be, deemed to be incorporated therein by
reference. Certain terms used herein are defined in Section 17 hereof.
1. Representations and Warranties.
(i) The Company represents and warrants to, and agrees with,
each Underwriter as set forth below in this Section 1.
(a) The Company and the transactions contemplated by this
Agreement meet the requirements for use of Form S-3 under the Act and
the Company has prepared and filed with the Commission a registration
statement (file number 333-91353) on Form S-3, including a related
preliminary prospectus, for registration under the Act of the offering
and sale of the Securities. The Company may have filed one or more
amendments thereto, including a related preliminary prospectus, each of
which has previously been furnished to you. The Company will next file
with the Commission one of the following: either (1) prior to the
Effective Date of such registration statement, a further amendment to
such registration statement (including the form of final prospectus) or
(2) after the Effective Date of such registration statement, a final
prospectus in accordance with Rules 430A and 424(b). In the case of
clause (2), the Company has included in such registration statement, as
amended at the Effective Date, all information (other than Rule 430A
Information) required by the Act and the rules thereunder to be
included in such registration statement and the Prospectus. As filed,
such amendment and form of final prospectus, or such final prospectus,
shall contain all Rule 430A Information, together with all other such
required information, and, except to the extent the Representatives
shall agree in writing to a modification, shall be in all substantive
respects in the form furnished to you prior to the Execution Time or,
to the extent not completed at the Execution Time, shall contain only
such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company has
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<PAGE> 3
advised you, prior to the Execution Time, will be included or made
therein. Each Preliminary Prospectus and Prospectus filed as part of
such registration statement, as part of any amendment thereto or
pursuant to Rule 424, if filed by electronic transmission pursuant to
Regulation S-T under the Act, was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and
sales of the Securities (except as may be permitted by Regulation S-T
under the Securities Act).
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any date on which Option Securities are purchased, if such date
is not the Closing Date (a "settlement date"), the Prospectus (and any
supplements thereto) will, comply in all material respects with the
applicable requirements of the Act and the Exchange Act and the
respective rules thereunder; on the Effective Date and at the Execution
Time, the Registration Statement did not or will not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; and, on the Effective Date, the
Prospectus, if not filed pursuant to Rule 424(b), will not, and on the
date of any filing pursuant to Rule 424(b) and on the Closing Date and
any settlement date, the Prospectus (together with any supplement
thereto) will not, include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the Company makes no
representations or warranties as to the information contained in or
omitted from the Registration Statement or the Prospectus (or any
supplement thereto) in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Underwriter
through the Representatives specifically for inclusion in the
Registration Statement or the Prospectus (or any supplement thereto).
(c) Each of the Company and each subsidiary of the Company
(each a "Subsidiary" and collectively the "Subsidiaries") has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or
organized with full corporate power and authority to own or lease, as
the case may be, and to operate its properties and conduct its business
as described in the Prospectus. Each of the Company and the
Subsidiaries (x) has all authorizations, approvals, orders, licenses
and permits of and from regulatory and government officials, bodies and
tribunals, necessary to own or lease its properties or to conduct its
business as described in the Prospectus and (y) is duly qualified to do
business as a foreign corporation and is in good standing under the
laws of each jurisdiction which requires such qualification, except, in
the case of clauses (x) and (y), where the failure to have such
authorizations, approvals, orders, licenses or permits or to be so
qualified could not reasonably be expected to, individually or in the
aggregate, have a material adverse effect on the condition (financial
or otherwise), prospects, earnings, business or properties of the
Company and the Subsidiaries, taken as a whole (a "Material Adverse
Effect"), whether
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<PAGE> 4
or not arising from transactions in the ordinary course of business, or
as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(d) All the outstanding shares of capital stock of each
Subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable, and all outstanding shares of capital
stock of the Subsidiaries are owned by the Company either directly or
through wholly owned Subsidiaries free and clear of any perfected
security interest or any other security interests, claims, liens or
encumbrances. Except for the capital stock of the Subsidiaries, neither
the Company nor any Subsidiary owns or holds any interest in any
corporation, partnership, trust or association, joint venture or other
entity.
(e) The Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; the outstanding shares of capital stock (including the
Securities being sold hereunder by the Selling Stockholders) have been
duly and validly authorized and issued and are fully paid and
nonassessable; the Securities being sold hereunder by the Company have
been duly and validly authorized, and, when issued and delivered to and
paid for by the Underwriters pursuant to this Agreement, will be
validly issued, fully paid and nonassessable; the certificates for the
Securities are in valid and sufficient form; the holders of outstanding
shares of capital stock of the Company are not entitled to preemptive
or other rights to subscribe for the Securities; and, except as set
forth in the Prospectus, no options, warrants or other rights to
purchase, agreements or other obligations to issue, or rights to
convert any obligations into or exchange any securities for, shares of
capital stock of or ownership interests in the Company or any
Subsidiary are outstanding.
(f) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not
described or filed as required; there is no action, suit, inquiry or
investigation, pending or threatened, by or before any court,
governmental agency, authority or body or arbitrator, including,
without limitation, before the Federal Communications Commission (the
"FCC"), or any statute, law, rule, regulation, injunction, order or
decree, in each case, affecting the business of the Company or any
Subsidiary of a character required to be described in the Registration
Statement or Prospectus which is not described; and the statements in
the Prospectus under the headings "Business - Government Regulation"
and "Business - Legal Proceedings" fairly summarize the matters therein
described.
(g) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement, and to consummate the transactions contemplated hereby,
including, without limitation, the corporate power and authority to
issue, sell and deliver the Securities to be sold by the Company as
provided herein. This Agreement has been duly authorized, executed and
delivered by the
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<PAGE> 5
Company and constitutes a valid and binding obligation of the Company
enforceable in accordance with its terms except insofar as
indemnification and contribution provisions may be limited by
applicable law or equitable principles and subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally and subject to
general principles of equity.
(h) Neither the Company nor any Subsidiary is and, after
giving effect to the offering and sale of the Securities and the
application of the proceeds thereof as described in the Prospectus,
will not be (x) an "investment company" as defined in the Investment
Company Act of 1940, as amended, or (y) a "holding company" or a
"subsidiary company" or an "affiliate" of a holding company within the
meaning of the Public Utility Holding Company Act of 1935, as amended.
(i) No consent, approval, authorization, filing with or order
of (i) any court or governmental agency or body (including, without
limitation, the FCC) or (ii) any other person is required in connection
with the transactions contemplated herein, except (x) such as have been
obtained under the Act, such as may be required under the blue sky laws
of any jurisdiction in connection with the purchase and distribution of
the Securities by the Underwriters in the manner contemplated herein
and in the Prospectus and such as may be required by the National
Association of Securities Dealers, Inc. ("NASD"), (y) such as have been
obtained or (z) where the failure to obtain any such consent, approval,
authorization or order or to have made any such filing would not
reasonably be expected to result in a Material Adverse Effect, whether
or not arising from transactions in the ordinary course of business.
(j) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation of the terms or provisions of, or a default under
(or an event that with notice or lapse of time or both would constitute
a default under) or the imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any Subsidiary pursuant
to, (i) the charter or bylaws of the Company or any Subsidiary, (ii)
the terms of any indenture, contract, lease, mortgage, deed of trust,
note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company or any
Subsidiary is a party or by which any of them may be bound or to which
any of them or their respective property is subject, or (iii) any
statute, law, rule, regulation, judgment, order or decree applicable to
the Company or any Subsidiary of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or any Subsidiary or any of its or
their respective properties, except that the Company has not received
written approval from the Georgia Public Service Commission as to the
sale of the Securities and except in the case of clauses (ii) and (iii)
for such conflicts, breaches, violations, defaults or impositions of
liens, charges or encumbrances that would not, singly or in the
aggregate, have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business.
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<PAGE> 6
(k) Except for the Selling Stockholders including Securities
in the Registration Statement, no holders of securities of the Company
have rights to the registration of such securities under the
Registration Statement.
(l) The consolidated historical financial statements and
schedules of the Company and its consolidated subsidiaries included in
the Prospectus and the Registration Statement present fairly in all
material respects the financial condition, results of operations and
cash flows of the Company as of the dates and for the periods
indicated, comply as to form with the applicable accounting
requirements of the Act and have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as otherwise noted therein).
The financial information set forth under the captions "Prospectus
Summary - Summary Consolidated Financial and Operating Data,"
"Dilution," "Capitalization," "Selected Consolidated Financial and
Operating Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Prospectus and Registration
Statement fairly present, on the basis stated in the Prospectus and the
Registration Statement, the information included therein. The as
adjusted financial information included in the Prospectus and the
Registration Statement includes assumptions that provide a reasonable
basis for presenting the significant effects directly attributable to
the transactions and events described therein and the related
adjustments give appropriate effect to those assumptions. The as
adjusted information included in the Prospectus and the Registration
Statement complies as to form in all material respects with the
applicable accounting requirements of Regulation S-X under the Act and
the related adjustments have been properly applied to the historical
amounts in the compilation of such information.
(m) Except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto), (i) no action, suit,
investigation or proceeding by or before any court or governmental
agency, authority or body or any arbitrator involving the Company or
any Subsidiary or any of their respective property is pending or, to
the knowledge of the Company, threatened, (ii) no statute, rule,
regulation or order has been enacted, adopted or issued by any
governmental agency or has been proposed by any governmental body and
(iii) no injunction, restraining order or order of any nature to which
the Company or any Subsidiary is or may be subject or to which the
business, assets or property of the Company or any Subsidiary are or
may be subject, has been issued that (x) could reasonably be expected
to have a material adverse effect on the performance of this Agreement
or the consummation of any of the transactions contemplated hereby or
(y) could reasonably be expected to have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business.
(n) Each of the Company and each Subsidiary owns or leases all
such properties as are necessary to the conduct of its operations as
presently conducted.
(o) Neither the Company nor any Subsidiary is in violation or
default of (i) any provision of its charter or bylaws, (ii) the terms
of any indenture, contract, lease,
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<PAGE> 7
mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which it is
a party or bound or to which its property is subject, or (iii) any
statute, law, rule, regulation, judgment, order or decree of any court,
regulatory body, administrative agency, governmental body, arbitrator
or other authority having jurisdiction over the Company or the
Subsidiaries or any of their properties, as applicable, except, in the
case of clauses (ii) and (iii) for any such violations or defaults that
could not reasonably be expected to have a Material Adverse Effect,
whether on not arising from transactions in the ordinary course of
business, or which are set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(p) To the knowledge of the Company, KPMG LLC and Arthur
Andersen LLP, who have certified certain financial statements of the
Company and its consolidated subsidiaries and delivered their report
with respect to the audited consolidated financial statements and
schedules included in the Prospectus, are independent public
accountants with respect to the Company within the meaning of the Act
and the applicable published rules and regulations thereunder.
(q) There are no transfer taxes or other similar fees or
charges under federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance by the Company
or sale by the Company of the Securities.
(r) Each of the Company and the Subsidiaries has filed all
foreign, federal, state and local tax returns that are required to be
filed or has requested extensions thereof (except in any case in which
the failure so to file would not have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business) and has paid all taxes required to be paid by it and any
other assessment, fine or penalty levied against it, to the extent that
any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good
faith or as would not have a Material Adverse Effect, whether or not
arising from transactions in the ordinary course of business. To the
knowledge of the Company, there are no material proposed additional tax
assessments against the Company, any Subsidiary or the assets or
property of the Company or any Subsidiary.
(s) No labor problem or dispute with the employees of the
Company or any Subsidiary exists or is threatened or imminent, and the
Company is not aware of any existing or imminent labor disturbance by
the employees of any of its or the Subsidiaries' principal suppliers,
contractors or customers, that could reasonably be expected to result
in a Material Adverse Effect, whether or not arising from transactions
in the ordinary course of business; To the knowledge of the Company, no
union representation question existing with respect to the employees of
the Company or any Subsidiary that could reasonably be expected to
result in a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business; to the knowledge of
the Company, no
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<PAGE> 8
collective bargaining organizing activities are taking place with
respect to the Company or any Subsidiary; none of the Company or any
Subsidiary has violated (A) any federal, state or local law or foreign
law relating to discrimination in hiring, promotion or pay of
employees, (B) any applicable wage or hour laws or (C) any provision of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the rules and regulations thereunder, which in the case
of clauses (A), (B) or (C) above could reasonably be expected to result
in a Material Adverse Effect, whether or not arising from transactions
in the ordinary course of business.
(t) The Company and each Subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and
in such amounts as are prudent and customary in the businesses in which
they are engaged; all policies of insurance and fidelity or surety
bonds insuring the Company or any Subsidiary or their respective
businesses, assets, employees, officers and directors are in full force
and effect; the Company and the Subsidiaries are in compliance with the
terms of such policies and instruments in all material respects; and
there are no claims by the Company or any Subsidiary under any such
policy or instrument as to which any insurance company is denying
liability or defending under a reservation of rights clause; neither
the Company nor any Subsidiary has been refused any insurance coverage
sought or applied for; and neither the Company nor any Subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business.
(u) No Subsidiary is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any
other distribution on such Subsidiary's capital stock, from repaying to
the Company any loans or advances to such Subsidiary from the Company
or from transferring any of such Subsidiary's property or assets to the
Company or any other Subsidiary, except as described in or contemplated
by the Prospectus.
(v) The Company and the Subsidiaries possess all licenses,
certificates, permits and other authorizations ("Licenses") issued by,
and have made all declarations and filings with, the appropriate
federal, state or foreign regulatory authorities, including, without
limitation, the FCC, necessary to conduct their respective businesses,
and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any License
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would reasonably be expected to have a
Material Adverse Effect, whether or not arising from transactions in
the ordinary course of business; the Company and the Subsidiaries have
fulfilled or performed all of their obligations with respect to all
Licenses possessed by any of them, except where the failure to so
fulfill and perform would not, singly or in the aggregate, reasonably
be expected to have a Material Adverse Effect, whether or not arising
from transactions in the ordinary
8
<PAGE> 9
course of business, or as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto); no event has occurred
which allows, or after notice or lapse of time, or both, would allow,
revocation or termination of any License or result in any other
material impairment of the rights of any holder of such License, except
where such revocation or termination would not, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business, or as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto); and the Licenses contain no
restrictions on the Company or any Subsidiary except where such
restrictions would not reasonably be expected to have a Material
Adverse Effect, whether or not arising from transactions in the
ordinary course of business, or as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(w) The Company and the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to
any differences.
(x) The Company has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(y) The Company and the Subsidiaries are (i) in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received and are in
compliance with all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective
businesses and (iii) have not received notice of any actual or
potential liability for the investigation or remediation of any
disposal or release of hazardous or toxic substances or wastes,
pollutants or contaminants, except where such non-compliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals, or liability would not, individually or in the
aggregate, have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business. Neither the Company
nor any Subsidiary has been named as a "potentially responsible party"
under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended.
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(z) In the ordinary course of its business, the Company
periodically reviews the effect of Environmental Laws on the business,
operations and properties of the Company and the Subsidiaries, in the
course of which it identifies and evaluates associated costs and
liabilities (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance
with Environmental Laws, or any permit, license or approval, any
related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company
has reasonably concluded that such associated costs and liabilities
would not, singly or in the aggregate, have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business.
(aa) No employee pension benefit plan (within the meaning of
Section 3(2) of ERISA, but excluding any "multiemployer plan" within
the meaning of Section 3(37) of ERISA) established or maintained by the
Company or any Subsidiary or to which the Company or any Subsidiary has
made contributions, which is subject to Part 3 or Subtitle B of Title I
of ERISA, or Section 412 of the Internal Revenue Code of 1986 (the
"Code"), had an accumulated funding deficiency (as such term is defined
in Section 302 of ERISA or Section 412 of the Code), whether or not
waived, as of the last day of the most recent plan year of such plan
heretofore ended for which an excise tax is due (or would be due if
such deficiency were not waived). Each of the Company and the
Subsidiaries has made all contributions required to be made by it to
any "multiemployer pension plan" (within the meaning of Section 3(37)
of ERISA). Neither the Company nor any Subsidiary nor any Related
Person (as such term is defined below) has incurred, or is expecting to
incur, any withdrawal liability (determined under Section 4201 of
ERISA) with respect to any plan covered by Title IV of ERISA and in
respect of which the Company or any Subsidiary or a Related Person is
an "employer" as defined in Section 3(5) of ERISA, and to the Company's
knowledge, there has not been any "reportable event" (within the
meaning of Section 4043 of ERISA and regulations thereunder, other than
an event for which the 30-day notice requirement has been waived), or
any other event or condition which presents a material risk of the
termination of any such plan, including, but not limited to, a
termination by action of the Pension Benefit Guaranty Corporation,
which termination would create a material liability of the Company or
any Subsidiary or a Related Person to the Pension Benefit Guaranty
Corporation. "Related Person" shall mean any trade or business (whether
or not incorporated) which is under common control (as defined in
Section 414(b) and (c) of the Code) with the Company within the meaning
of Section 4001(b) of ERISA. As of the last day of the most recent plan
year heretofore ended of each employee benefit plan described in the
preceding sentence (other than a "multiemployer plan"), the present
value of all accrued benefits under each such employee benefit plan
(calculated on the basis of the actuarial assumptions specified in the
most recent actuarial valuation for each such plan) did not exceed the
fair market value of the assets of such plan allocable to such benefits
by more than $1,000,000. Neither any employee pension benefit plan
(excluding any "multiemployer plan" within the meaning of Section 3(37)
of ERISA) established or maintained by the Company or any Subsidiary or
to which the Company or any
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<PAGE> 11
Subsidiary has made contributions, nor any trust created thereunder,
nor any trustee or administrator thereof (including the Company), has
engaged in any non-exempt prohibited transaction (as described in
Section 406 of ERISA or in Section 4975 of the Code) that could subject
the Company or any Subsidiary either directly or indirectly through an
obligation to indemnify to any material tax or material penalty on
prohibited transactions imposed under said Section 4975 of the Code or
under ERISA. Each employee benefit plan described in the preceding
sentence is in compliance in all material respects with all applicable
provisions of ERISA and the Code, except for plan amendments required
or permitted by such statutes as to which applicable grace periods for
making such amendments have not expired, and each of the Company and
the Subsidiaries has made, accrued or provided for all contributions
heretofore required to be made by the Company and the Subsidiaries and
each of the Company and the Subsidiaries has complied in all material
respects with the continuation coverage requirements of Title X of the
Consolidated Omnibus Budget Act of 1985, as amended. The execution and
delivery of this Agreement and the sale of the Securities will not
involve any prohibited transaction within the meaning of Section 406 of
ERISA or Section 4975 of the Code. Neither the Company nor any
Subsidiary has any material "expected post-retirement benefit
obligation" (within the meaning of Financial Accounting Standards Board
Statement No. 106). The consummation of the transactions contemplated
by this Agreement (including, without limitation, the provisions of the
Prospectus described under the heading "How We Intend to Use the
Proceeds of this Offering") will not result in any material payment
(including, without limitation, severance, golden parachute or other)
becoming due from the Company to any employee of the Company or any
Subsidiary as a consequence of such transaction.
(bb) The Company and the Subsidiaries own, possess, license or
have other rights to use, on reasonable terms, all patents, patent
applications, trade and service marks, trade and service mark
registrations, trade names, copyrights, licenses, inventions, trade
secrets, technology, know-how and other intellectual property
(collectively, the "Intellectual Property") necessary for the conduct
of the Company's business as now conducted or as proposed in the
Prospectus to be conducted free and clear of and without violating any
right, claimed right, charge, encumbrance, pledge, security interest,
restriction or lien of any kind of any other person and none of the
Company or any Subsidiary has received any notice of infringement of or
conflict with asserted rights of others with respect to any of the
foregoing except as could not reasonably be expected to have a Material
Adverse Effect, whether or not arising from transactions in the
ordinary course of business. The use of the Intellectual Property in
connection with the business and operations of the Company and the
Subsidiaries does not infringe on the rights of any person, except as
could not reasonably be expected to have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business.
(cc) None of the Company or any Subsidiary, or to the
knowledge of the Company, any of their respective officers, directors,
partners, employees, agents or affiliates or any other person acting on
behalf of the Company or any Subsidiary has,
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<PAGE> 12
directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or
agent of a customer or supplier, official or employee of any
governmental agency (domestic or foreign), instrumentality of any
government (domestic or foreign) or any political party or candidate
for office (domestic or foreign) or other person who was, is or may be
in a position to help or hinder the business of the Company or any
Subsidiary (or assist the Company or any Subsidiary in connection with
any actual or proposed transaction) which (i) might subject the Company
or any Subsidiary, or any other individual or entity to any damage or
penalty in any civil, criminal or governmental litigation or proceeding
(domestic or foreign), (ii) if not given in the past, might have had a
Material Adverse Effect or (iii) if not continued in the future, might
have a Material Adverse Effect.
(dd) The Company (i) does not have any material lending or
other relationship with any bank or lending affiliate of Salomon Smith
Barney Holdings Inc. and (ii) does not intend to use any of the
proceeds from the sale of the Securities hereunder to repay any
outstanding debt owed to any affiliate of Salomon Smith Barney Holdings
Inc.
(ee) The Company and the Subsidiaries have implemented a
comprehensive, detailed program to analyze and address the risk that
the computer hardware and software used by them may be unable to
recognize and properly execute date-sensitive functions involving
certain dates prior to and any dates after December 31, 1999 (the "Year
2000 Problem"). The Company and the Subsidiaries have not experienced
any Year 2000 Problems and the Company is not aware, after due inquiry,
of any Year 2000 Problems at any supplier, vendor, customer or
financial service organization used or serviced by the Company and the
Subsidiaries, other than Year 2000 Problems which will not have a
Material Adverse Effect. The Company is in compliance with the
Commissions Release No. 333-7558 related to Year 2000 disclosure.
(ff) The Company has complied with all of its obligations as
set forth in (i) the Warrant Registration Rights Agreement, dated as of
September 29, 1997, by and among the Company, Bear, Stearns & Co. Inc.
and Furman Selz LLC, (ii) the Stockholders Agreement, dated as of
November 26, 1997, by and among the Company and the persons listed
therein, (iii) the Series B Preferred Stock Registration Rights
Agreement, dated as of May 4, 1999, as amended to date, by and among
the Company and the persons listed therein, and (iv) the Agreement and
Plan of Merger, dated as of March 15, 1999, by and among the Company,
LJ.Net, Inc., MGC LJ.Net, Inc., Patrick Chicas and James Thompson.
(gg) Each holder of five percent or more of the total issued
and outstanding capital stock of the Company (assuming conversion of
all outstanding shares of the Company's Series B Convertible Preferred
Stock and Series C Convertible Preferred Stock) is listed on Schedule
III to this Agreement.
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<PAGE> 13
(hh) The addressable line estimates included in the Prospectus
are based on or derived from independent sources which the Company
believes to be reliable and accurate.
(ii) The issuance of the Securities will not result in any
holder of any outstanding security convertible into or exchangeable for
common stock or any option, right or warrant to purchase common stock
or any security convertible into or exchangeable for Common Stock being
entitled to purchase additional shares of Common Stock or to purchase
shares of Common Stock at a lower price per share upon exercise,
conversion or exchange of such outstanding security.
Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters in connection
with the offering of the Securities shall be deemed a representation and
warranty by the Company, as to matters covered thereby, to each Underwriter.
(ii) Each Selling Stockholder represents and warrants to, and
agrees with, each Underwriter that:
(a) Such Selling Stockholder is the record and beneficial
owner of the Securities to be sold by it hereunder free and clear of
all liens, encumbrances, equities and claims and has duly endorsed such
Securities in blank, and, assuming that each Underwriter acquires its
interest in the Securities it has purchased from such Selling
Stockholder without notice of any adverse claim (within the meaning of
Section 8-105 of the New York Uniform Commercial Code ("UCC")), each
Underwriter that has purchased such Securities delivered on the Closing
Date to The Depository Trust Company or other securities intermediary
by making payment therefor as provided herein, and that has had such
Securities credited to the securities account or accounts of such
Underwriters maintained with The Depository Trust Company or such other
securities intermediary will have acquired a security entitlement
(within the meaning of Section 8-102(a)(17) of the UCC) to such
Securities purchased by such Underwriter, and no action based on an
adverse claim (within the meaning of Section 8-105 of the UCC) may be
asserted against such Underwriter with respect to such Securities.
(b) Such Selling Stockholder has not taken, directly or
indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result, under the Exchange Act
or otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities.
(c) Certificates in negotiable form for such Selling
Stockholder's Securities have been placed in custody, for delivery
pursuant to the terms of this Agreement, under a Custody Agreement and
Power of Attorney duly authorized (if applicable) executed and
delivered by such Selling Stockholder, in the form heretofore furnished
to you (the "Custody Agreement") with Continental Stock Transfer &
Trust Company, as Custodian (the "Custodian"); the Securities
represented by the certificates so held in custody for each
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<PAGE> 14
Selling Stockholder are subject to the interests hereunder of the
Underwriters; the arrangements for custody and delivery of such
certificates, made by such Selling Stockholder hereunder and under the
Custody Agreement, are not subject to termination by any acts of such
Selling Stockholder, or by operation of law, whether by the death or
incapacity of such Selling Stockholder or the occurrence of any other
event; and if any such death, incapacity or any other such event shall
occur before the delivery of such Securities hereunder, certificates
for the Securities will be delivered by the Custodian in accordance
with the terms and conditions of this Agreement and the Custody
Agreement as if such death, incapacity or other event had not occurred,
regardless of whether or not the Custodian shall have received notice
of such death, incapacity or other event.
(d) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by such
Selling Stockholder of the transactions contemplated herein, except
such as may have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection with
the purchase and distribution of the Securities by the Underwriters and
such other approvals as have been obtained.
(e) Neither the sale of the Securities being sold by such
Selling Stockholder nor the consummation of any other of the
transactions herein contemplated by such Selling Stockholder or the
fulfillment of the terms hereof by such Selling Stockholder will
conflict with, result in a breach or violation of, or constitute a
default under any law or the charter or bylaws or comparable
organizational document of such Selling Stockholder, if such Selling
Stockholder is not an individual, or the terms of any indenture or
other agreement or instrument to which such Selling Stockholder or any
of its subsidiaries is a party or bound, or any judgment, order or
decree applicable to such Selling Stockholder or any of its
subsidiaries of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Stockholder or any of its subsidiaries.
(f) Such Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in this Section
1 are not true and correct, is familiar with the Registration Statement
and has no knowledge of any material fact, condition or information not
disclosed in the Prospectus or any supplement thereto which has
adversely affected or may adversely affect the business of the Company
or any Subsidiary; and the sale of Securities by such Selling
Stockholder pursuant hereto is not prompted by any information
concerning the Company or any Subsidiary which is not set forth in the
Prospectus or any supplement thereto.
(g) In respect of any statements in or omissions from the
Registration Statement or the Prospectus or any supplements thereto
made in reliance upon and in conformity with information furnished in
writing to the Company by any Selling Stockholder specifically for use
in connection with the preparation thereof, such Selling
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<PAGE> 15
Stockholder hereby makes the same representations and warranties to
each Underwriter as the Company makes to such Underwriter under
paragraph (i)(b) of this Section.
Any certificate signed by any officer, partner, trustee or
similar person of any Selling Stockholder (or by such Selling Stockholder, if an
individual) and delivered to the Representatives or counsel for the Underwriters
in connection with the offering of the Securities shall be deemed a
representation and warranty by such Selling Stockholder, as to matters covered
thereby, to each Underwriter.
2. Purchase and Sale. Subject to the terms and conditions and
in reliance upon the representations and warranties herein set forth, the
Company and the Selling Stockholders agree, severally and not jointly, to sell
to each Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and the Selling Stockholders, at a purchase price of
$[ ] per share, the amount of the Underwritten Securities set forth opposite
such Underwriter's name in Schedule I hereto.
(a) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby
grants an option to the several Underwriters to purchase, severally and
not jointly, up to [ ] Option Securities at the same purchase price per
share as the Underwriters shall pay for the Underwritten Securities.
Said option may be exercised only to cover over-allotments in the sale
of the Underwritten Securities by the Underwriters. Said option may be
exercised in whole or in part at any time (but not more than once) on
or before the 30th day after the date of the Prospectus upon written or
telegraphic notice by the Representatives to the Company setting forth
the number of shares of the Option Securities as to which the several
Underwriters are exercising the option and the settlement date. The
number of Option Securities to be purchased by each Underwriter shall
be the same percentage of the total number of shares of the Option
Securities to be purchased by the several Underwriters as such
Underwriter is purchasing of the Underwritten Securities, subject to
such adjustments as you in your absolute discretion shall make to
eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
[ ] , 2000, or at such time on such later date not more than three
Business Days after the foregoing date as the Representatives shall designate,
which date and time may be postponed by agreement among the Representatives, the
Company and the Selling Stockholders or as provided in Section 9 hereof (such
date and time of delivery and payment for the Securities being herein called the
"Closing Date"). Delivery of the Securities shall be made to the Representatives
for the respective accounts of the several Underwriters against payment by the
several Underwriters through the Representatives of the respective aggregate
purchase prices of the Securities being sold by the Company and each of the
Selling Stockholders to or upon the order of the Company and the Selling
Stockholders by wire
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<PAGE> 16
transfer payable in same-day funds to the accounts specified by the Company and
the Selling Stockholders. Delivery of the Underwritten Securities and the Option
Securities shall be made through the facilities of The Depository Trust Company
unless the Representatives shall otherwise instruct.
Each Selling Stockholder will pay all applicable state
transfer taxes, if any, involved in the transfer to the several Underwriters of
the Securities to be purchased by them from such Selling Stockholder and the
respective Underwriters will pay any additional stock transfer taxes involved in
further transfers.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company will deliver
the Option Securities (at the expense of the Company) to the Representatives, at
388 Greenwich Street, New York, New York, on the date specified by the
Representatives (which shall be within three Business Days after exercise of
said option) for the respective accounts of the several Underwriters, against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of the Company by wire transfer payable in
same-day funds to the accounts specified by the Company. If settlement for the
Option Securities occurs after the Closing Date, the Company will deliver to the
Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof (excluding Sections 6(d) and
6(g)).
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. Agreements.
(i) The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment to
the Registration Statement or supplement to the Prospectus or any Rule
462(b) Registration Statement unless the Company has furnished you a
copy for your review prior to filing and will not file any such
proposed amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
cause the Prospectus, properly completed, and any supplement thereto to
be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the Representatives of such timely filing. The Company
will promptly advise the Representatives (1) when the Registration
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<PAGE> 17
Statement, if not effective at the Execution Time, shall have become
effective, (2) when the Prospectus, and any supplement thereto, shall
have been filed (if required) with the Commission pursuant to Rule
424(b) or when any Rule 462(b) Registration Statement shall have been
filed with the Commission, (3) when, prior to termination of the
offering of the Securities, any amendment to the Registration Statement
shall have been filed or become effective, (4) of any request by the
Commission or its staff for any amendment of the Registration
Statement, or any Rule 462(b) Registration Statement, or for any
supplement to the Prospectus or for any additional information, (5) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution or
threatening of any proceeding for that purpose and (6) of the receipt
by the Company of any notification with respect to the suspension of
the qualification of the Securities for sale in any jurisdiction or the
institution or threatening of any proceeding for such purpose. The
Company will use its best efforts to prevent the issuance of any such
stop order or the suspension of any such qualification and, if issued,
to obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall
be necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act or the Exchange Act or the respective
rules thereunder, the Company promptly will (1) notify the
Representatives of such event, (2) prepare and file with the
Commission, subject to the second sentence of paragraph (i)(a) of this
Section 5, an amendment or supplement which will correct such statement
or omission or effect such compliance and (3) supply any supplemented
Prospectus to you in such quantities as you may reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(d) The Company will furnish to the Representatives and
counsel for the Underwriters, without charge, signed copies of the
Registration Statement (including exhibits thereto) and to each other
Underwriter a copy of the Registration Statement (without exhibits
thereto) and, so long as delivery of a prospectus by an Underwriter or
dealer may be required by the Act, as many copies of each Preliminary
Prospectus and the Prospectus and any supplement thereto as the
Representatives may reasonably request. The Company will pay the
expenses of printing or other production of all documents relating to
the offering.
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<PAGE> 18
(e) The Company will cooperate and assist in any filings
required to be made with the NASD and in the performance of any due
diligence investigation by any broker/dealer participating in the sale
of the Securities.
(f) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the Representatives may designate, will maintain such
qualifications in effect so long as required for the distribution of
the Securities and will pay any fee of the NASD, in connection with its
review of the offering; provided that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not
now so qualified or to take any action that would subject it to
taxation or to service of process in suits, other than those arising
out of the offering or sale of the Securities, in any jurisdiction
where it is not now so subject.
(g) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., offer, sell, contract to sell, pledge, or
otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due to
cash settlement or otherwise) by the Company or any affiliate of the
Company or any person in privity with the Company or any affiliate of
the Company) directly or indirectly, including the filing (or
participation in the filing) of a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act, any other shares of capital
stock of the Company or any securities convertible into, or exercisable
or exchangeable for, such capital stock; or publicly announce an
intention to effect any such transaction, for a period of 90 days after
the date of this Agreement, provided, however, that (i) the Company may
issue and sell Common Stock pursuant to any employee stock option plan,
stock ownership plan or dividend reinvestment plan of the Company in
effect at the Execution Time, (ii) the Company may issue Common Stock
issuable upon the conversion of securities or the exercise of warrants
outstanding at the Execution Time, (iii) the Company may issue and sell
up to [ ] shares of [ ]% Series D Convertible Preferred Stock (the
"Series D Preferred Stock"), which have been registered by the Company
on the Registration Statement, and may issue Common Stock upon the
conversion of such shares of Series D Preferred Stock and as payment of
dividends on such shares of Series D Preferred Stock, all in accordance
with the terms of the Certificate of Designation as filed by the
Company as Exhibit 4.11 to the Registration Statement, (iv) the Company
may offer to issue, but may not issue, Common Stock to any one or more
Persons in connection with the acquisition by the Company, by
consolidation, merger, sale or otherwise, of all or any portion of the
assets or outstanding voting securities of such Person, and (v) the
Company may file one registration statement under the Act relating to
the sale of Common Stock in connection with the exercise of demand
registration rights by stockholders of the Company which have been
granted demand registration rights by the Company pursuant to one or
more written agreements entered into prior to the date of this
Agreement, and otherwise in accordance with the
18
<PAGE> 19
provisions of such agreements; provided, however, that such
registration statement shall not be declared effective until the
expiration of the period of 90 days after the date of this Agreement.
(h) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(i) The Company will apply the proceeds from the sale of the
Securities as set forth under the heading "How We Intend to Use the
Proceeds of this Offering" in the Prospectus.
(j) The Company will do and perform all things required or
necessary to be done and performed under this Agreement by it prior to
the Closing Date and to satisfy all conditions precedent on its part to
the delivery of the Securities.
(k) Prior to the Closing Date, the Company will furnish to the
Underwriters, as soon as they have been prepared in the ordinary course
by the Company, copies of any unaudited interim financial statements of
the Company, for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the
Prospectus.
(ii) Each Selling Stockholder agrees with the several
Underwriters that:
(a) Such Selling Stockholder will not, without the prior
written consent of Salomon Smith Barney Inc., offer, sell, contract to
sell, pledge or otherwise dispose of, (or enter into any transaction
which is designed to, or might reasonably be expected to, result in the
disposition (whether by actual disposition or effective economic
disposition due to cash settlement or otherwise) by the Company or any
affiliate of the Company or any person in privity with the Company or
any affiliate of the Company) directly or indirectly, or file (or
participate in the filing of) a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act with respect to, any shares
of capital stock of the Company or any securities convertible into or
exercisable or exchangeable for such capital stock, or publicly
announce an intention to effect any such transaction, for a period of
90 days after the date of this Agreement, other than shares of Common
Stock disposed of as bona fide gifts approved by Salomon Smith Barney
Inc.
(b) Such Selling Stockholder will not take any action designed
to or which has constituted or which might reasonably be expected to
cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
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<PAGE> 20
(c) Such Selling Stockholder will advise you promptly, and if
requested by you, will confirm such advice in writing, so long as
delivery of a prospectus relating to the Securities by an underwriter
or dealer may be required under the Act, of (i) any material change in
the Company's condition (financial or otherwise), prospects, earnings,
business or properties, (ii) any change in information in the
Registration Statement or the Prospectus relating to such Selling
Stockholder or (iii) any new material information relating to the
Company or relating to any matter stated in the Prospectus which comes
to the attention of such Selling Stockholder.
6. Conditions to the Obligations of the Underwriters. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Company and the Selling Stockholders made in any certificates pursuant to
the provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder and, subject to the final
sentence of Section 3 hereof, to the following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become
effective not later than (i) 6:00 PM New York City time on the date of
determination of the public offering price, if such determination
occurred at or prior to 3:00 PM New York City time on such date or (ii)
9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after
3:00 PM New York City time on such date; if filing of the Prospectus,
or any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the manner and
within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have requested and caused Ellis, Funk,
Goldberg, Labovitz & Dokson, P.C., counsel for the Company, to have
furnished to the Representatives their opinion, dated the Closing Date
and addressed to the Representatives, to the effect that:
(i) Each of the Company and the Subsidiaries has been
duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction in which it
is chartered or organized, with full corporate power and
authority to own or lease, as the case may be, and to operate
its properties and conduct its business as described in the
Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each
jurisdiction which requires such qualification and where the
failure
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<PAGE> 21
to be so qualified could reasonably be expected to,
individually or in the aggregate, have a Material Adverse
Effect, whether or not arising from transactions in the
ordinary course of business.
(ii) All the outstanding shares of capital stock of
each Subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and were not
issued in violation of or subject to any preemptive or similar
rights under the Nevada Revised Statutes, or known to us,
after reasonable inquiry. All outstanding shares of capital
stock of the Subsidiaries are owned by the Company either
directly or through wholly owned Subsidiaries free and clear
of any perfected security interest and, to our knowledge,
after due inquiry, any other security interest, claim, lien or
encumbrance. Except for the capital stock of the Subsidiaries,
to our knowledge, neither the Company nor any Subsidiary owns
or holds any interest in any corporation, partnership, trust
or association, joint venture or other entity.
(iii) The Company's authorized equity capitalization
is as set forth in the Prospectus; the capital stock of the
Company conforms in all material respects to the description
thereof contained in the Prospectus; the outstanding shares of
capital stock (including the Securities being sold hereunder
by the Selling Stockholders) have been duly and validly
authorized and issued and are fully paid and nonassessable;
the Securities being sold hereunder by the Company have been
duly and validly authorized, and, when issued and delivered to
and paid for by the Underwriters pursuant to this Agreement,
will be validly issued, fully paid and nonassessable; the
certificates for the Securities are in valid and sufficient
form; the holders of outstanding shares of capital stock of
the Company are not entitled to preemptive or other rights to
subscribe for the Securities; and, to our knowledge after
reasonable inquiry, except as set forth in the Prospectus, no
options, warrants or other rights to purchase, agreements or
other obligations to issue, or rights to convert any
obligations into or exchange any securities for, shares of
capital stock of or ownership interests in the Company or any
Subsidiary are outstanding.
(iv) To our knowledge, there is no pending or
threatened action, suit, investigation or proceeding by or
before any court or governmental agency, authority or body or
any arbitrator or any statute, law, rule, regulation,
injunction, judgement or order, in each case, affecting or
involving the Company or any Subsidiary or any of their
respective property of a character required to be disclosed in
the Registration Statement or Prospectus which is not
adequately disclosed in the Prospectus. There is no franchise,
contract or other document of a character required to be
described in the Registration Statement or Prospectus, or to
be filed as an exhibit thereto, which is not described or
filed as required. The statements in the Prospectus under the
headings "Description of Securities," "Description of the
Series D Convertible Preferred Stock" and "Business - Legal
Proceedings" fairly summarize the matters therein described.
Insofar as statements
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<PAGE> 22
in the Prospectus (other than statements addressed in the
opinion of Kelley Drye & Warren LLP) purport to summarize the
provisions of laws, rules, regulations, proposed rules,
proposed regulations, orders, judgments, decrees, contracts,
agreements, instruments, leases or licenses, such statements
accurately reflect the status of such provisions purported to
be summarized and are correct in all material respects.
(v) The Registration Statement has become effective
under the Act; any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b);
to our knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued, no proceedings
for that purpose have been instituted or threatened and the
Registration Statement and the Prospectus and the documents
filed under the Act and the Exchange Act and incorporated by
reference in the Registration Statement and the Prospectus
(other than the financial statements, notes and schedules
thereto and other financial and accounting information
contained therein or incorporated therein by reference, as to
which we express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the
Exchange Act and the respective rules thereunder.
(vi) The Company has all requisite corporate power
and authority to execute, deliver and perform its obligations
under this Agreement to consummate the transactions
contemplated hereby, including, without limitation, the
corporate power and authority to issue, sell and deliver the
Securities to be sold by the Company as provided herein. This
Agreement has been duly authorized, executed and delivered by
the Company.
(vii) Neither the Company nor any Subsidiary is and,
after giving effect to the offering and sale of the Securities
and the application of the proceeds thereof as described in
the Prospectus, will not be (x) an "investment company" as
defined in the Investment Company Act of 1940, as amended, or
(y) a "holding company" or a "subsidiary company" or an
"affiliate" of a holding company within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
(viii) No consent, approval, authorization, filing
with or order of any court or governmental agency or body is
required in connection with the transactions contemplated
herein, except (a) such as have been obtained under the Act,
(b) such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution
of the Securities by the Underwriters in the manner
contemplated in this Agreement and in the Prospectus and such
as may be required by the NASD (as to which we express no
opinion), (c) such as may be required from the FCC or any
State Telecommunications Agencies (as to which we express no
opinion), (d) such other approvals (specified in such opinion)
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<PAGE> 23
as have been obtained and (e) where the failure to obtain such
consent, approval, authorization or order would not, singly or
in the aggregate, have a Material Adverse Effect, whether or
not arising from transactions in the ordinary course of
business. To our knowledge, after reasonable inquiry, no
consents or waivers from any other person are required in
connection with the transactions contemplated herein, other
than such consents and waivers (specified in such opinion) as
have been obtained.
(ix) Neither the issue and sale of the Securities,
nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of the terms or
provisions of, or a default under (or an event that with
notice or lapse of time or both would constitute a default
under) or the imposition of any lien, charge or encumbrance
upon any property or assets of the Company or the Subsidiaries
pursuant to, (i) the charter or bylaws of the Company or any
Subsidiary, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or
other agreement, obligation, condition, covenant or instrument
known to us to which the Company or any Subsidiary is a party
or by which any of them may be bound or to which any of them
or their respective property is subject, or (iii) any local,
state, federal or administrative statute, rule or regulation
(other than Telecommunications Laws, as to which we express no
opinion) applicable to the Company or any Subsidiary or any of
their respective assets or properties or (iv) any judgment,
order or decree of any court or governmental agency or
authority having jurisdiction over the Company or any
Subsidiary or any of their assets or properties known to us
(other than any which may have been issued by the FCC or State
Telecommunications Agencies, as to which we express no
opinion), except in the case of clauses (ii), (iii) and (iv)
for such conflicts, breaches, violations, defaults or
impositions of liens, charges or encumbrances that would not,
singly or in the aggregate, have a Material Adverse Effect,
whether or not arising from transactions in the ordinary
course of business.
(x) Except as set forth in or contemplated in the
Prospectus, to our knowledge, after reasonable inquiry, (i) no
action, suit, investigation or proceeding (other than
proceedings before the FCC or State Telecommunications
Agencies, as to which we express no opinion) by or before any
court or governmental agency, authority or body or any
arbitrator involving the Company or any Subsidiary or any of
their respective property is pending or threatened (ii) no
statute, rule, regulation or order has been enacted, adopted
or issued by any governmental agency or has been proposed by
any governmental body (except that we express no opinion with
respect to Telecommunications Laws) and (iii) no injunction,
restraining order or order of any nature to which the Company
or any Subsidiary is or may be subject or to which the
business, assets, or property of the Company or any Subsidiary
are or may be subject, has been issued (other than any which
may have been issued by the FCC or State Telecommunications
Agencies,
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<PAGE> 24
as to which we express no opinion) that (i) could reasonably
be expected to have a material adverse effect on the
performance of this Agreement or the consummation of any of
the transactions contemplated hereby or (ii) could reasonably
be expected to have a Material Adverse Effect, whether or not
arising from transactions in the ordinary course of business.
(xi) Except for the Selling Stockholders including
Securities in the Registration Statement, no holders of
securities of the Company have rights to the registration of
such securities under the Registration Statement.
(xii) The Company's Notification Form for Listing
Additional Shares on the Nasdaq National Market has been
filed.
(xiii) We are not aware of any order directed to any
document incorporated by reference in the Registration
Statement which has been issued by the Commission or any
challenge that has been made by the Commission as to the
accuracy or adequacy of any such document.
(xiv) No holder of any outstanding shares of the
Company's capital stock are entitled to any rights pursuant to
Sections 78.3791 through 78.3793 of the Nevada Revised
Statutes.
(xv) The issuance of the Securities will not result
in any holder of any security convertible into or exchangeable
for shares of Common Stock or any outstanding option, right or
warrant to purchase shares of Common Stock or any security
convertible into or exchangeable for shares of Common Stock
being entitled to purchase additional shares of Common Stock
or to purchase shares of Common Stock at a lower price per
share upon exercise, conversion or exchange of such
outstanding security.
(xvi) We have participated in conferences with
officers and other representatives of the Company,
representatives of the independent certified public
accountants of the Company and the Underwriters and their
representatives at which the contents of the Prospectus and
the Registration Statement and any amendment thereof or
supplement thereto and related matters were discussed and,
although we have not undertaken to investigate or verify
independently, and do not assume any responsibility for, the
accuracy, completeness or fairness of the statements contained
in the Prospectus and the Registration Statement or any
amendment thereof or supplement thereto (except as indicated
above), on the basis of the foregoing, no facts have come to
our attention which led us to believe that on the Effective
Date, the Execution Time or the date the Registration
Statement was last deemed amended the Registration Statement
contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or
that
24
<PAGE> 25
the Prospectus as of its date and on the Closing Date included
or includes any untrue statement of a material fact or omitted
or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading (in each case, other than
the financial statements and related notes, the financial
statement schedules and other financial and accounting
information contained therein, as to which we express no
opinion).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other
than the State of Georgia, the laws of the State of Nevada governing
corporations or the federal laws of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion of
other counsel of good standing whom they believe to be reliable and who
are satisfactory to counsel for the Underwriters and (B) as to matters
of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and public officials. References to the
Prospectus in this paragraph (b) include any supplements thereto at the
Closing Date.
(c) The Company shall have requested and caused Kelly Drye &
Warren LLP, telecommunications counsel for the Company, to have
furnished to the Representatives their opinion, dated the Closing Date
and addressed to the Representatives, to the effect that:
(i) All of the licenses, permits and authorizations
required by the FCC for the provision of telecommunications
services by the Company and the Subsidiaries, as such services
are described in the Prospectus and the Registration
Statement, have been issued to and are validly held by the
Company and the Subsidiaries. All of the licenses, permits and
authorizations required by any "state commissions" as defined
in Section 3 of the Communications Act of 1934, as amended
(the "State Telecommunications Agencies") for the provision of
telecommunications services by the Company and the
Subsidiaries, as such services are described in the Prospectus
and the Registration Statement, have been issued to and, to
our knowledge, are validly held by the Company and the
Subsidiaries, except where the failure to obtain or hold such
license, permit or authority would not have a Material Adverse
Effect. All such licenses, permits and authorizations are in
full force and effect and, to our knowledge, the Company and
the Subsidiaries are in compliance in all material respects
with each such license, permit or authorization.
(ii) Neither the Company nor any Subsidiary is the
subject of any proceeding (including a rule making
proceeding), pending complaint or investigation, or, to our
knowledge, any threatened complaint or investigation, before
the FCC, or, to our knowledge, of any proceeding (including a
rule making proceeding), pending complaint or investigation,
or any threatened complaint or investigation, before the State
Telecommunications Agencies (x) based, in each case, on any
alleged violation of any statutes governing the FCC
(including,
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<PAGE> 26
without limitation, the Communications Act of 1934, as
amended, and the Telecommunications Act of 1996, as amended)
or the State Telecommunications Agencies and the orders, rules
and regulations promulgated thereunder (the
"Telecommunications Laws") by the Company or any Subsidiary in
connection with their provision of or failure to provide
telecommunications services of a character required to be
disclosed in the Registration Statement which is not disclosed
in the Registration Statement , (y) that is likely to result
in denial of any pending application of the Company or of any
Subsidiary for any license, permit or authorization granted by
the FCC or any State Telecommunications Agencies or (z) except
for proceedings of general applicability or as set forth in
the Prospectus, that could result in the revocation,
materially adverse modification or suspension of any such
license, permit or authorization.
(iii) The statements in the Registration Statement
under the headings of "Risk Factors - Our services are highly
regulated and changes in current or future laws or regulations
could restrict the way we operate our business," "Business
Legal Proceedings" and "Business - Regulation," insofar as
such statements summarize applicable provisions of the
Telecommunications Laws or litigation arising therefrom or
related thereto, fairly and accurately summarize the matters
therein described and, to our knowledge, do not omit a
material fact necessary to make the statements contained
therein not misleading.
(iv) The Company and the Subsidiaries have the
consents, approvals, authorizations, licenses, certificates,
permits, or orders of the FCC or the State Telecommunications
Agencies, if any is required, for the consummation of the
transactions contemplated in the Registration Statement,
except where the failure to obtain the consents, approvals,
authorizations, licenses, certificates, permits or orders
would not have a Material Adverse Effect.
(v) Neither the execution and delivery of the
Underwriting Agreement nor the sale of the Securities
contemplated thereby will conflict with or result in a
violation of any Telecommunications Laws applicable to the
Company or the Subsidiaries, except where the conflict with or
the violation of any Telecommunications Laws would not have a
Material Adverse Effect.
(vi) In connection with our representation of the
Company and the Subsidiaries, except as disclosed in the
Registration Statement or the Prospectus, we have not become
aware of any Telecommunications Laws that could reasonably be
expected to have a Material Adverse Effect. The foregoing
assumes that the Company and the Subsidiaries currently are in
substantial compliance with all material Telecommunications
Laws applicable to them except as disclosed in the
Registration Statement or the Prospectus.
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<PAGE> 27
In rendering such opinion, such counsel may state that it
expresses no opinion with respect to matters other than those arising
under Telecommunications Laws and may rely as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of
the Company and public officials. References to the Prospectus in this
paragraph (c) include any supplements thereto at the Closing Date.
(d) Each Selling Stockholder shall have furnished to the
Representatives the opinion of counsel for such Selling Stockholder
dated the Closing Date and addressed to the Representatives and
otherwise in form and substance reasonably satisfactory to the
Representatives.
(e) The Representatives shall have received from Kronish Lieb
Weiner & Hellman LLP, counsel for the Underwriters, such opinion or
opinions, dated the Closing Date and addressed to the Representatives,
with respect to the issuance and sale of the Securities, the
Registration Statement, the Prospectus (together with any supplement
thereto) and other related matters as the Representatives may
reasonably require, and the Company and each Selling Stockholder shall
have furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(f) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the
Prospectus, any supplements to the Prospectus and this Agreement and
that:
(i) the representations and warranties of the Company
in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as
if made on the Closing Date and the Company has complied with
all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing
Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included or incorporated by reference in the
Prospectus (exclusive of any supplement thereto), there has
been no material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the
Company and the Subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
27
<PAGE> 28
(g) Each Selling Stockholder shall have furnished to the
Representatives a certificate, signed by an authorized officer,
partner, trustee or similar person of such Selling Stockholder (or by
such Selling Stockholder, if an individual), dated the Closing Date, to
the effect that the signer of such certificate has carefully examined
the Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and that the representations and
warranties of such Selling Stockholder in this Agreement are true and
correct in all material respects on and as of the Closing Date to the
same effect as if made on the Closing Date.
(h) The Company shall have requested and caused Arthur
Andersen LLP, to have furnished to the Representatives, at the
Execution Time and at the Closing Date, letters, dated respectively as
of the Execution Time and as of the Closing Date, in form and substance
satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the Exchange
Act and the respective applicable rules and regulations adopted by the
Commission thereunder and that they have performed a review of the
unaudited interim financial information of the Company for the
nine-month period ended September 30, 1999 and as at September 30,
1999, in accordance with Statement on Auditing Standards No. 71, and
stating in effect that:
(i) in their opinion the audited consolidated
financial statements and financial statement schedules
included or incorporated by reference in the Registration
Statement and the Prospectus and reported on by them comply as
to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and
the related rules and regulations adopted by the Commission;
(ii) on the basis of a reading of the latest
unaudited consolidated financial statements made available by
the Company and the Subsidiaries; their limited review, in
accordance with standards established under Statement on
Auditing Standards No. 71, of the unaudited interim financial
information for the nine-month period ended September 30,
1999, and as at September 30, 1999; carrying out certain
specified procedures (but not an examination in accordance
with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the
comments set forth in such letter; a reading of the minutes of
the meetings of the stockholders, directors and audit
committees of the Company and the Subsidiaries; and inquiries
of certain officials of the Company who have responsibility
for financial and accounting matters of the Company and the
Subsidiaries as to transactions and events subsequent to
September 30, 1999 nothing came to their attention which
caused them to believe that:
(1) any unaudited financial statements
included or incorporated by reference in the
Registration Statement and the Prospectus do not
28
<PAGE> 29
comply as to form in all material respects with
applicable accounting requirements of the Act and
with the related rules and regulations adopted by the
Commission with respect to financial statements
included or incorporated by reference in quarterly
reports on Form 10-Q under the Exchange Act; and said
unaudited financial statements are not in conformity
with generally accepted accounting principles applied
on a basis substantially consistent with that of the
audited financial statements included or incorporated
by reference in the Registration Statement and the
Prospectus;
(2) with respect to the period subsequent to
September 30, 1999, there were any changes, at a
specified date not more than five days prior to the
date of the letter, in the long-term debt of the
Company and the Subsidiaries or capital stock of the
Company or decreases in the stockholders' equity of
the Company (except for activity related to warrant
exercises and employee stock option exercises) as
compared with the amounts shown on the September 30,
1999 consolidated balance sheet included or
incorporated by reference in the Registration
Statement and the Prospectus, or for the period from
October 1, 1999 to such specified date there were any
decreases, as compared with the corresponding period
in the preceding year, in operating revenues or net
loss of the Company, except in all instances for
changes or decreases set forth in such letter, in
which case the letter shall be accompanied by an
explanation by the Company as to the significance
thereof unless said explanation is not deemed
necessary by the Representatives;
(3) the information included or incorporated
by reference in the Registration Statement and
Prospectus in response to Regulation S-K, Item 301
(Selected Financial Data), Item 302 (Supplementary
Financial Information), Item 402 (Executive
Compensation) and Item 503(d) (Ratio of Earnings to
Fixed Charges) is not in conformity with the
applicable disclosure requirements of Regulation S-K;
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and its Subsidiaries) set forth in the Registration
Statement and the Prospectus and in Exhibit 12 to the
Registration Statement, including the information set forth
under the captions "Prospectus Summary - Summary Consolidated
Financial and Operating Data," "Capitalization," "Dilution,"
"Selected Consolidated Financial and Operating Data" and
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Prospectus, the information
included in Items 1, 2, 6, 7, 7A and 11 of the Company's
Annual Report on Form 10-K, incorporated by reference
29
<PAGE> 30
in the Registration Statement and the Prospectus, the
information included in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
included in each of the Company's Quarterly Reports on Form
10-Q, incorporated by reference in the Registration Statement
and the Prospectus, and the information included in the press
releases announcing the Company's second quarter and third
quarter results filed as exhibits to the Company's Current
Reports on Form 8-K incorporated by reference in the
Registration Statement and the Prospectus agrees with the
accounting records of the Company and its subsidiaries,
excluding any questions of legal interpretation.
References to the Prospectus in this paragraph (h) include any
supplement thereto at the date of the letter.
(i) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (x) any change or
decrease specified in the letter or letters referred to in paragraph
(h) of this Section 6 or (y) any change, or any development involving a
prospective change, in or affecting the condition (financial or
otherwise), earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement thereto)
the effect of which, in any case referred to in clause (x) or (y)
above, is, in the sole judgment of the Representatives, so material and
adverse as to make it impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the
Registration Statement (exclusive of any amendment thereof) and the
Prospectus (exclusive of any supplement thereto).
(j) Prior to the Closing Date, the Company and the Selling
Stockholders shall have furnished to the Representatives such further
information, certificates and documents as the Representatives may
reasonably request.
(k) Subsequent to the Execution Time, there shall not have
been any decrease in the rating of any of the Company's debt securities
by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Act) or any notice given
of any intended or potential decrease in any such rating or of a
possible change in any such rating that does not indicate the direction
of the possible change.
(l) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A
hereto from each officer and director of the Company and each
stockholder listed on Schedule III hereto addressed to the
Representatives.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and
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<PAGE> 31
certificates mentioned above or elsewhere in this Agreement shall not be in all
material respects reasonably satisfactory in form and substance to the
Representatives and counsel for the Underwriters, this Agreement and all
obligations of the Underwriters hereunder may be canceled at, or at any time
prior to, the Closing Date by the Representatives. Notice of such cancellation
shall be given to the Company and each Selling Stockholder in writing or by
telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall
be delivered at the office of Kronish Lieb Weiner & Hellman LLP, counsel for the
Underwriters, at 1114 Avenue of the Americas, 46th Floor, New York, New York
10036, on the Closing Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company or any Selling
Stockholders to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally through Salomon Smith Barney Inc. on demand
for all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the proposed
purchase and sale of the Securities. If the Company is required to make any
payments to the Underwriters under this Section 7 because of any Selling
Stockholder's refusal, inability or failure to satisfy any condition to the
obligations of the Underwriters set forth in Section 6, the Selling Stockholders
pro rata in proportion to the percentage of Securities to be sold by each shall
reimburse the Company on demand for all amounts so paid.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person who controls any Underwriter
within the meaning of either the Act or the Exchange Act against any and all
losses, claims, damages or liabilities, joint or several, to which they or any
of them may become subject under the Act, the Exchange Act or other federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration of
the Securities as originally filed or in any amendment thereof, or in any
Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
31
<PAGE> 32
the Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion therein. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
(b) Each Selling Stockholder severally agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers
who signs the Registration Statement, each Underwriter, the directors,
officers, employees and agents of each Underwriter and each person who
controls the Company or any Underwriter within the meaning of either
the Act or the Exchange Act and each other Selling Stockholder, if any,
to the same extent as the foregoing indemnity from the Company to each
Underwriter, but only (x) with reference to written information
furnished to the Company by or on behalf of such Selling Stockholder
specifically for inclusion in the documents referred to in the
foregoing indemnity or (y) which arise out of or are based upon a
breach of the representations and warranties made by such Selling
Stockholder in Section 1(ii)(a) of this Agreement. This indemnity
agreement will be in addition to any liability which any Selling
Stockholder may otherwise have.
(c) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of
its officers who signs the Registration Statement, and each person who
controls the Company within the meaning of either the Act or the
Exchange Act and each Selling Stockholder, to the same extent as the
foregoing indemnity to each Underwriter, but only with reference to
written information relating to such Underwriter furnished to the
Company by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the documents referred to in the
foregoing indemnity; provided, however, that in no case shall any
Underwriter (except as may be provided in any agreement among
underwriters relating to the offering of the Securities) be responsible
for any amount in excess of the underwriting discount or commission
applicable to the Securities purchased by such Underwriter hereunder.
This indemnity agreement will be in addition to any liability which any
Underwriter may otherwise have. The Company and each Selling
Stockholder acknowledge that the statements set forth in the last
paragraph of the cover page regarding delivery of the Securities and,
under the heading "Underwriting", (i) the list of Underwriters and
their respective participations in the sale of the Securities, (ii) the
sentences related to concessions and reallowances and (iii) the
paragraphs related to stabilization, syndicate covering transactions
and penalty bids in any Preliminary Prospectus and the Prospectus
constitute the only information furnished in writing by or on behalf of
the several Underwriters for inclusion in any Preliminary Prospectus or
the Prospectus.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party
in writing of the commencement thereof; but the failure so to notify
the indemnifying party (i) will not relieve it from liability under
paragraph (a), (b)
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<PAGE> 33
or (c) above unless and to the extent it did not otherwise learn of
such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will
not, in any event, relieve the indemnifying party from any obligations
to any indemnified party other than the indemnification obligation
provided in paragraph (a), (b) or (c) above. The indemnifying party
shall be entitled to appoint counsel of the indemnifying party's choice
at the indemnifying party's expense to represent the indemnified party
in any action for which indemnification is sought (in which case the
indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or
parties except as set forth below); provided, however, that such
counsel shall be reasonably satisfactory to the indemnified party.
Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party
shall have the right to employ separate counsel (including local
counsel), and the indemnifying party shall bear the reasonable fees,
costs and expenses of such separate counsel if (i) the use of counsel
chosen by the indemnifying party to represent the indemnified party
would present such counsel with a conflict of interest, (ii) the actual
or potential defendants in, or targets of, any such action include both
the indemnified party and the indemnifying party and the indemnified
party shall have reasonably concluded that there may be legal defenses
available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii)
the indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of the institution of such
action or (iv) the indemnifying party shall authorize the indemnified
party to employ separate counsel at the expense of the indemnifying
party. It is understood, however, that the Company shall, in connection
with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and
expenses of only one separate firm of attorneys (in addition to any
local counsel) at any time for all such Underwriters and controlling
persons, which firm shall be designated in writing by Salomon Smith
Barney. An indemnifying party shall not be liable under this Section 8
to any indemnified party regarding any settlement or compromise or
consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim
or action) unless such settlement, compromise or consent is consented
to by such indemnifying party, which consent shall not be unreasonably
withheld.
(e) In the event that the indemnity provided in paragraph (a),
(b) or (c) of this Section 8 is unavailable to or insufficient to hold
harmless an indemnified party for any reason, the Company, the Selling
Stockholders and the Underwriters agree to contribute to the aggregate
losses, claims, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating or
defending same) (collectively "Losses") to which the Company, one or
more of the Selling Stockholders and one or more of the Underwriters
may be subject in such proportion as is appropriate
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<PAGE> 34
to reflect the relative benefits received by the Company, by the
Selling Stockholders and by the Underwriters from the offering of the
Securities; provided, however, that in no case shall any Underwriter
(except as may be provided in any agreement among underwriters relating
to the offering of the Securities) be responsible for any amount in
excess of the underwriting discount or commission applicable to the
Securities purchased by such Underwriter hereunder. If the allocation
provided by the immediately preceding sentence is unavailable for any
reason, the Company, the Selling Stockholders and the Underwriters
shall contribute in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company,
of the Selling Stockholders and of the Underwriters in connection with
the statements or omissions which resulted in such Losses as well as
any other relevant equitable considerations. Benefits received by the
Company and by the Selling Stockholders shall be deemed to be equal to
the total net proceeds from the offering (before deducting expenses)
received by each of them, and benefits received by the Underwriters
shall be deemed to be equal to the total underwriting discounts and
commissions, in each case as set forth on the cover page of the
Prospectus. Relative fault shall be determined by reference to, among
other things, whether any untrue or any alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information provided by the Company or the Selling
Stockholders on the one hand or the Underwriters on the other, the
intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such untrue statement
or omission. The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contribution were
determined by pro rata allocation or any other method of allocation
which does not take account of the equitable considerations referred to
above. Notwithstanding the provisions of this paragraph (e), no person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls an Underwriter within the
meaning of either the Act or the Exchange Act and each director,
officer, employee and agent of an Underwriter shall have the same
rights to contribution as such Underwriter, and each person who
controls the Company within the meaning of either the Act or the
Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the
same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (e).
(f) The liability of each Selling Stockholder under such
Selling Stockholder's representations and warranties contained in
Section 1 hereof and under the indemnity and contribution agreements
contained in this Section 8 shall be limited to an amount equal to the
initial public offering price of the Securities sold by such Selling
Stockholder to the Underwriters.
9. Default by an Underwriter. If any one or more Underwriters
shall fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance
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<PAGE> 35
of its or their obligations under this Agreement, the remaining Underwriters
shall be obligated severally to take up and pay for (in the respective
proportions which the amount of Securities set forth opposite their names in
Schedule I hereto bears to the aggregate amount of Securities set forth opposite
the names of all the remaining Underwriters) the Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase; provided, however,
that in the event that the aggregate amount of Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase shall exceed 10% of
the aggregate amount of Securities set forth in Schedule I hereto, the remaining
Underwriters shall have the right to purchase all, but shall not be under any
obligation to purchase any, of the Securities, and if such nondefaulting
Underwriters do not purchase all the Securities, this Agreement will terminate
without liability to any nondefaulting Underwriter, the Selling Stockholders or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the Representatives shall determine in order that the
required changes in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability, if any, to
the Company, the Selling Stockholders and any nondefaulting Underwriter for
damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if at any
time prior to such time (i) trading in the Company's Common Stock shall have
been suspended by the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or limited or minimum prices shall have been
established on such Exchange or the Nasdaq National Market, (ii) a banking
moratorium shall have been declared either by federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war, or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the sole judgment of the Representatives, impractical or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the Prospectus (exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each Selling Stockholder and of the Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter,
any Selling Stockholder or the Company or any of the officers, directors,
employees, agents or controlling persons referred to in Section 8 hereof, and
will survive delivery of and payment for the Securities. The provisions of
Sections 7 and 8 hereof shall survive the termination or cancellation of this
Agreement.
12. Notices. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel
(fax no.: (212) 816-7912) and confirmed to the
35
<PAGE> 36
General Counsel, Salomon Smith Barney Inc., at 388 Greenwich Street, New York,
New York, 10013, Attention: General Counsel; or, if sent to the Company, will be
mailed, delivered or telefaxed to MGC Communications, Inc., Attention: Chief
Financial Officer (fax no.:(716) 218- 0881) and confirmed to it at MGC
Communications, Inc., 171 Sully's Trail, Suite 202, Pittsford, New York 14534,
Attention: Chief Financial Officer, with a copy to Ellis, Funk, Goldberg,
Labovitz & Dokson, P.C., One Securities Centre, Suite 400, 3490 Piedmont Road,
Atlanta, Georgia 30305; or if sent to any Selling Stockholder, will be mailed,
delivered or telefaxed and confirmed to it at the address set forth in Schedule
II hereto.
13. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and no other person will have any right or obligation
hereunder.
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for
convenience only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or trust
companies are authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange
Commission.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments thereto and
any Rule 462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
36
<PAGE> 37
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(i)(a) above and any preliminary prospectus included
in the Registration Statement at the Effective Date that omits Rule 430A
Information.
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the Execution Time
or, if no filing pursuant to Rule 424(b) is required, shall mean the form of
final prospectus relating to the Securities included in the Registration
Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(i)(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become effective) and, in the
event any post-effective amendment thereto or any Rule 462(b) Registration
Statement becomes effective prior to the Closing Date, shall also mean such
registration statement as so amended or such Rule 462(b) Registration Statement,
as the case may be. Such term shall include any Rule 430A Information deemed to
be included therein at the Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating to
the offering covered by the registration statement referred to in Section 1(a)
hereof.
[Signature Pages Follow]
37
<PAGE> 38
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company and the several Underwriters.
Very truly yours,
MGC Communications, Inc.
By: __________________________________
Name:
Title:
Attorney-in-Fact for the Selling Stockholders
By: __________________________________
Name:
Title:
<PAGE> 39
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
ING Barings LLC
Warburg Dillon Read LLC
By: Salomon Smith Barney Inc.
By: ___________________________________
Name:
Title:
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
<PAGE> 40
SCHEDULE I
NUMBER OF UNDERWRITTEN SECURITIES TO
UNDERWRITERS BE PURCHASED
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
ING Barings LLC
Warburg Dillon Read LLC
___________________________________
Total .....................................===================================
<PAGE> 41
SCHEDULE II
NUMBER OF UNDERWRITTEN
SECURITIES TO BE SOLD
SELLING STOCKHOLDERS:
The High Yield Plus Fund 2,696
c/o Wellington Management Company, LLP
200 State Street, 10th Floor
Boston, MA 02109
Telecopier: (617) 790-8711
John & Mary R. Markle Foundation 539
c/o Wellington Management Company, LLP
200 State Street, 10th Floor
Boston, MA 02109
Telecopier: (617) 790-8711
State Boston Retirement Board 1,348
c/o Wellington Management Company, LLP
200 State Street, 10th Floor
Boston, MA 02109
Telecopier: (617) 790-8711
The New American High Inc. Fund 8,089
c/o Wellington Management Company, LLP
200 State Street, 10th Floor
Boston, MA 02109
Telecopier: (617) 790-8711
Teachers' Retirement System of Louisiana 1,348
c/o Wellington Management Company, LLP
200 State Street, 10th Floor
Boston, MA 02109
Telecopier: (617) 790-8711
Wellington Trust Company NA WTC CIP 269
High Yield
c/o Wellington Management Company, LLP
200 State Street, 10th Floor
Boston, MA 02109
Telecopier: (617) 790-8711
Wellington Trust Company NA WTC CTF 808
High Yield
c/o Wellington Management Company, LLP
200 State Street, 10th Floor
Boston, MA 02109
Telecopier: (617) 790-8711
Wintergreen Partners L.P. 269
c/o Wellington Management Company, LLP
200 State Street, 10th Floor
Boston, MA 02109
Telecopier: (617) 790-8711
Wintergreen Investors (Bermuda) L.P. 269
c/o Wellington Management Company, LLP
200 State Street, 10th Floor
Boston, MA 02109
Telecopier: (617) 790-8711
Tate & Lyle Pension Fund
c/o Wellington Management Company, LLP 1,887
200 State Street, 10th Floor
Boston, MA 02109
Telecopier: (617) 790-8711
Pilgrim High Yield Fund
Two Renaissance Square 10,178
40 N. Central Avenue, Suite 1200
Phoenix, AZ 85004
Telecopier: (602) 417-8255
-------------
Total............................................... 29,048
=============
<PAGE> 42
SCHEDULE III
Providence Equity Partners III LLC
JK&B Capital, L.P.
<PAGE> 43
Exhibit A
[LETTERHEAD OF OFFICER, DIRECTOR OR MAJOR STOCKHOLDER OF CORPORATION]
MGC Communications, Inc.
Public Offering of Common Stock
[DATE]
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
ING Barings LLC
Warburg Dillon Read LLC
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with: (i)
the proposed Underwriting Agreement (the "Common Stock Underwriting Agreement"),
between MGC Communications, Inc., a Nevada corporation (the "Company"), and each
of you as representatives of a group of Underwriters named therein, relating to
an underwritten public offering of Common Stock, $0.001 par value (the "Common
Stock"), of the Company and (ii) the proposed Underwriting Agreement (the
"Preferred Stock Underwriting Agreement"), between the Company and each of you
as representatives of a group of Underwriters named therein, relating to an
underwritten public offering of ___% Series D Convertible Preferred Stock,
$0.001 par value (the "Series D Preferred Stock"), of the Company
In order to induce you and the other Underwriters to enter
into the Common Stock Underwriting Agreement and/or the Preferred Stock
Underwriting Agreement, the undersigned will not, without the prior written
consent of Salomon Smith Barney Inc., offer, sell, contract to sell, pledge or
otherwise dispose of, (or enter into any transaction which is designed to, or
might reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing or participation in the filing of a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 90 days beginning on
the later of the date the Common
<PAGE> 44
Stock Underwriting Agreement is executed or the date the Preferred Stock
Underwriting Agreement is executed, other than shares of Common Stock disposed
of as bona fide gifts approved by Salomon Smith Barney Inc.
If for any reason both the Common Stock Underwriting Agreement
and the Preferred Stock Underwriting Agreement shall be terminated prior to the
Closing Date (as defined in the Common Stock Underwriting Agreement and
Preferred Stock Underwriting Agreement), the agreement set forth above shall
likewise be terminated.
Yours very truly,
[SIGNATURE OF OFFICER, DIRECTOR OR MAJOR
STOCKHOLDER]
[NAME AND ADDRESS OF OFFICER, DIRECTOR OR MAJOR
STOCKHOLDER]
<PAGE> 1
Exhibit 1.2
KLWH DRAFT
1/6/00
MGC Communications, Inc.
[ ] Shares
[ ]% Series D Convertible Preferred Stock
($0.001 par value per share)
UNDERWRITING AGREEMENT
New York, New York
, 2000
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
ING Barings LLC
Warburg Dillon Read LLC
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
MGC Communications, Inc., a corporation organized under the
laws of the State of Nevada (the "Company"), proposes to sell to the several
underwriters named in Schedule I hereto (the "Underwriters"), for whom you (the
"Representatives") are acting as joint lead representatives, [ ] shares (the
"Underwritten Securities") of [ ]% Series D Convertible Preferred Stock, $ 0.001
par value per share, of the Company ("Series D Preferred Stock"). The Company
also proposes to grant to the Underwriters an option to purchase up to [ ]
additional shares of Series D Preferred Stock to cover over-allotments (the
"Option Securities"; the Option Securities, together with the Underwritten
Securities, being hereinafter called the
1
<PAGE> 2
"Securities"). To the extent there are no additional Underwriters listed on
Schedule I other than you, the term Representatives as used herein shall mean
you, as Underwriters, and the terms Representatives and Underwriters shall mean
either the singular or plural as the context requires. Any reference herein to
the Registration Statement, a Preliminary Prospectus or the Prospectus shall be
deemed to refer to and include the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 which were filed under the Exchange Act on or
before the Effective Date of the Registration Statement or the issue date of
such Preliminary Prospectus or the Prospectus, as the case may be; and any
reference herein to the terms "amend", "amendment" or "supplement" with respect
to the Registration Statement, any Preliminary Prospectus or the Prospectus
shall be deemed to refer to and include the filing of any document under the
Exchange Act after the Effective Date of the Registration Statement, or the
issue date of any Preliminary Prospectus or the Prospectus, as the case may be,
deemed to be incorporated therein by reference. Certain terms used herein are
defined in Section 17 hereof.
1. Representations and Warranties. The Company represents and
warrants to, and agrees with, each Underwriter as set forth below in this
Section 1.
(a) The Company and the transactions contemplated by this
Agreement meet the requirements for use of Form S-3 under the Act and
the Company has prepared and filed with the Commission a registration
statement (file number 333-91353) on Form S-3, including a related
preliminary prospectus, for registration under the Act of the offering
and sale of the Securities. The Company may have filed one or more
amendments thereto, including a related preliminary prospectus, each of
which has previously been furnished to you. The Company will next file
with the Commission one of the following: either (1) prior to the
Effective Date of such registration statement, a further amendment to
such registration statement (including the form of final prospectus) or
(2) after the Effective Date of such registration statement, a final
prospectus in accordance with Rules 430A and 424(b). In the case of
clause (2), the Company has included in such registration statement, as
amended at the Effective Date, all information (other than Rule 430A
Information) required by the Act and the rules thereunder to be
included in such registration statement and the Prospectus. As filed,
such amendment and form of final prospectus, or such final prospectus,
shall contain all Rule 430A Information, together with all other such
required information, and, except to the extent the Representatives
shall agree in writing to a modification, shall be in all substantive
respects in the form furnished to you prior to the Execution Time or,
to the extent not completed at the Execution Time, shall contain only
such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company has
advised you, prior to the Execution Time, will be included or made
therein. Each Preliminary Prospectus and Prospectus filed as part of
such registration statement, as part of any amendment thereto or
pursuant to Rule 424, if filed by electronic transmission pursuant to
Regulation S-T under the Act, was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and
sales of the Securities (except as may be permitted by Regulation S-T
under the Securities Act).
2
<PAGE> 3
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any date on which Option Securities are purchased, if such date
is not the Closing Date (a "settlement date"), the Prospectus (and any
supplements thereto) will, comply in all material respects with the
applicable requirements of the Act and the Exchange Act and the
respective rules thereunder; on the Effective Date and at the Execution
Time, the Registration Statement did not or will not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; and, on the Effective Date, the
Prospectus, if not filed pursuant to Rule 424(b), will not, and on the
date of any filing pursuant to Rule 424(b) and on the Closing Date and
any settlement date, the Prospectus (together with any supplement
thereto) will not, include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the Company makes no
representations or warranties as to the information contained in or
omitted from the Registration Statement or the Prospectus (or any
supplement thereto) in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Underwriter
through the Representatives specifically for inclusion in the
Registration Statement or the Prospectus (or any supplement thereto).
(c) Each of the Company and each subsidiary of the Company
(each a "Subsidiary" and collectively the "Subsidiaries") has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or
organized with full corporate power and authority to own or lease, as
the case may be, and to operate its properties and conduct its business
as described in the Prospectus. Each of the Company and the
Subsidiaries (x) has all authorizations, approvals, orders, licenses
and permits of and from regulatory and government officials, bodies and
tribunals, necessary to own or lease its properties or to conduct its
business as described in the Prospectus and (y) is duly qualified to do
business as a foreign corporation and is in good standing under the
laws of each jurisdiction which requires such qualification, except, in
the case of clauses (x) and (y), where the failure to have such
authorizations, approvals, orders, licenses or permits or to be so
qualified could not reasonably be expected to, individually or in the
aggregate, have a material adverse effect on the condition (financial
or otherwise), prospects, earnings, business or properties of the
Company and the Subsidiaries, taken as a whole (a "Material Adverse
Effect"), whether or not arising from transactions in the ordinary
course of business, or as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(d) All the outstanding shares of capital stock of each
Subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable, and all outstanding shares of capital
stock of the Subsidiaries are owned by the Company either directly or
through wholly owned Subsidiaries free and clear of any perfected
security interest or any other security interests, claims, liens or
encumbrances. Except for the
3
<PAGE> 4
capital stock of the Subsidiaries, neither the Company nor any
Subsidiary owns or holds any interest in any corporation, partnership,
trust or association, joint venture or other entity.
(e) The Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; the outstanding shares of capital stock have been duly and
validly authorized and issued and are fully paid and nonassessable; the
Securities being sold hereunder have been duly and validly authorized,
and, when issued and delivered to and paid for by the Underwriters
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable and entitled to the rights, privileges and preferences
set forth in the Certificate of Designations filed by the Company as
exhibit 4.11 to the Registration Statement (the "Certificate of
Designation"); the Securities are duly listed for quotation, subject to
official notice of issuance, on the Nasdaq National Market; the
certificates for the Securities are in valid and sufficient form; the
holders of outstanding shares of capital stock of the Company are not
entitled to preemptive or other rights to subscribe for the Securities;
and, except as set forth in the Prospectus, no options, warrants or
other rights to purchase, agreements or other obligations to issue, or
rights to convert any obligations into or exchange any securities for,
shares of capital stock of or ownership interests in the Company or any
Subsidiary are outstanding.
(f) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not
described or filed as required; there is no action, suit, inquiry or
investigation, pending or threatened, by or before any court,
governmental agency, authority or body or arbitrator, including,
without limitation, before the Federal Communications Commission (the
"FCC"), or any statute, law, rule, regulation, injunction, order or
decree, in each case, affecting the business of the Company or any
Subsidiary of a character required to be described in the Registration
Statement or Prospectus which is not described; and the statements in
the Prospectus under the headings "Federal Tax Considerations,"
"Business - Government Regulation" and "Business - Legal Proceedings"
fairly summarize the matters therein described.
(g) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement, and to consummate the transactions contemplated hereby,
including, without limitation, the corporate power and authority to
issue, sell and deliver the Securities to be sold by the Company as
provided herein. This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding obligation
of the Company enforceable in accordance with its terms except insofar
as indemnification and contribution provisions may be limited by
applicable law or equitable principles and subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally and subject to
general principles of equity. The Certificate of Designation has been
duly authorized by all necessary corporate action and any
4
<PAGE> 5
necessary stockholder action and, on or prior to the Closing Date, will
be duly executed by the Company and filed with the Secretary of State
of the State of Nevada and will conform in all material respects to the
description thereof in the Prospectus.
(h) Neither the Company nor any Subsidiary is and, after
giving effect to the offering and sale of the Securities and the
application of the proceeds thereof as described in the Prospectus,
will not be (x) an "investment company" as defined in the Investment
Company Act of 1940, as amended, or (y) a "holding company" or a
"subsidiary company" or an "affiliate" of a holding company within the
meaning of the Public Utility Holding Company Act of 1935, as amended.
(i) No consent, approval, authorization, filing with or order
of (i) any court or governmental agency or body (including, without
limitation, the FCC) or (ii) any other person is required in connection
with the transactions contemplated herein, except (x) such as have been
obtained under the Act, such as may be required under the blue sky laws
of any jurisdiction in connection with the purchase and distribution of
the Securities by the Underwriters in the manner contemplated herein
and in the Prospectus and such as may be required by the National
Association of Securities Dealers, Inc. ("NASD"), (y) such as have been
obtained or (z) where the failure to obtain any such consent, approval,
authorization or order or to have made any such filing would not
reasonably be expected to result in a Material Adverse Effect, whether
or not arising from transactions in the ordinary course of business.
(j) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation of the terms or provisions of, or a default under
(or an event that with notice or lapse of time or both would constitute
a default under) or the imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any Subsidiary pursuant
to, (i) the charter or bylaws of the Company or any Subsidiary, (ii)
the terms of any indenture, contract, lease, mortgage, deed of trust,
note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company or any
Subsidiary is a party or by which any of them may be bound or to which
any of them or their respective property is subject, or (iii) any
statute, law, rule, regulation, judgment, order or decree applicable to
the Company or any Subsidiary of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or any Subsidiary or any of its or
their respective properties, except that the Company has not received
written approval from the Georgia Public Service Commission as to the
sale of the Securities and except in the case of clauses (ii) and (iii)
for such conflicts, breaches, violations, defaults or impositions of
liens, charges or encumbrances that would not, singly or in the
aggregate, have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business.
5
<PAGE> 6
(k) Except for the selling stockholders named in the
Registration Statement, no holders of securities of the Company have
rights to the registration of such securities under the Registration
Statement.
(l) The consolidated historical financial statements and
schedules of the Company and its consolidated subsidiaries included in
the Prospectus and the Registration Statement present fairly in all
material respects the financial condition, results of operations and
cash flows of the Company as of the dates and for the periods
indicated, comply as to form with the applicable accounting
requirements of the Act and have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as otherwise noted therein).
The financial information set forth under the captions "Prospectus
Summary - Summary Consolidated Financial and Operating Data,"
"Capitalization," "Selected Consolidated Financial and Operating Data"
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Prospectus and Registration Statement
fairly present, on the basis stated in the Prospectus and the
Registration Statement, the information included therein. The as
adjusted financial information included in the Prospectus and the
Registration Statement includes assumptions that provide a reasonable
basis for presenting the significant effects directly attributable to
the transactions and events described therein and the related
adjustments give appropriate effect to those assumptions. The as
adjusted information included in the Prospectus and the Registration
Statement complies as to form in all material respects with the
applicable accounting requirements of Regulation S-X under the Act and
the related adjustments have been properly applied to the historical
amounts in the compilation of such information.
(m) Except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto), (i) no action, suit,
investigation or proceeding by or before any court or governmental
agency, authority or body or any arbitrator involving the Company or
any Subsidiary or any of their respective property is pending or, to
the knowledge of the Company, threatened, (ii) no statute, rule,
regulation or order has been enacted, adopted or issued by any
governmental agency or has been proposed by any governmental body and
(iii) no injunction, restraining order or order of any nature to which
the Company or any Subsidiary is or may be subject or to which the
business, assets or property of the Company or any Subsidiary are or
may be subject, has been issued that (x) could reasonably be expected
to have a material adverse effect on the performance of this Agreement
or the consummation of any of the transactions contemplated hereby or
(y) could reasonably be expected to have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business.
(n) Each of the Company and each Subsidiary owns or leases all
such properties as are necessary to the conduct of its operations as
presently conducted.
(o) Neither the Company nor any Subsidiary is in violation or
default of (i) any provision of its charter or bylaws, (ii) the terms
of any indenture, contract, lease,
6
<PAGE> 7
mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which it is
a party or bound or to which its property is subject, or (iii) any
statute, law, rule, regulation, judgment, order or decree of any court,
regulatory body, administrative agency, governmental body, arbitrator
or other authority having jurisdiction over the Company or the
Subsidiaries or any of their properties, as applicable, except, in the
case of clauses (ii) and (iii) for any such violations or defaults that
could not reasonably be expected to have a Material Adverse Effect,
whether on not arising from transactions in the ordinary course of
business, or which are set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(p) To the knowledge of the Company, KPMG LLC and Arthur
Andersen LLP, who have certified certain financial statements of the
Company and its consolidated subsidiaries and delivered their report
with respect to the audited consolidated financial statements and
schedules included in the Prospectus, are independent public
accountants with respect to the Company within the meaning of the Act
and the applicable published rules and regulations thereunder.
(q) There are no transfer taxes or other similar fees or
charges under federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance by the Company
or sale by the Company of the Securities.
(r) Each of the Company and the Subsidiaries has filed all
foreign, federal, state and local tax returns that are required to be
filed or has requested extensions thereof (except in any case in which
the failure so to file would not have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business) and has paid all taxes required to be paid by it and any
other assessment, fine or penalty levied against it, to the extent that
any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good
faith or as would not have a Material Adverse Effect, whether or not
arising from transactions in the ordinary course of business. To the
knowledge of the Company, there are no material proposed additional tax
assessments against the Company, any Subsidiary or the assets or
property of the Company or any Subsidiary.
(s) No labor problem or dispute with the employees of the
Company or any Subsidiary exists or is threatened or imminent, and the
Company is not aware of any existing or imminent labor disturbance by
the employees of any of its or the Subsidiaries' principal suppliers,
contractors or customers, that could reasonably be expected to result
in a Material Adverse Effect, whether or not arising from transactions
in the ordinary course of business; To the knowledge of the Company, no
union representation question existing with respect to the employees of
the Company or any Subsidiary that could reasonably be expected to
result in a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business; to the knowledge of
the Company, no
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<PAGE> 8
collective bargaining organizing activities are taking place with
respect to the Company or any Subsidiary; none of the Company or any
Subsidiary has violated (A) any federal, state or local law or foreign
law relating to discrimination in hiring, promotion or pay of
employees, (B) any applicable wage or hour laws or (C) any provision of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the rules and regulations thereunder, which in the case
of clauses (A), (B) or (C) above could reasonably be expected to result
in a Material Adverse Effect, whether or not arising from transactions
in the ordinary course of business.
(t) The Company and each Subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and
in such amounts as are prudent and customary in the businesses in which
they are engaged; all policies of insurance and fidelity or surety
bonds insuring the Company or any Subsidiary or their respective
businesses, assets, employees, officers and directors are in full force
and effect; the Company and the Subsidiaries are in compliance with the
terms of such policies and instruments in all material respects; and
there are no claims by the Company or any Subsidiary under any such
policy or instrument as to which any insurance company is denying
liability or defending under a reservation of rights clause; neither
the Company nor any Subsidiary has been refused any insurance coverage
sought or applied for; and neither the Company nor any Subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business.
(u) No Subsidiary is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any
other distribution on such Subsidiary's capital stock, from repaying to
the Company any loans or advances to such Subsidiary from the Company
or from transferring any of such Subsidiary's property or assets to the
Company or any other Subsidiary, except as described in or contemplated
by the Prospectus.
(v) The Company and the Subsidiaries possess all licenses,
certificates, permits and other authorizations ("Licenses") issued by,
and have made all declarations and filings with, the appropriate
federal, state or foreign regulatory authorities, including, without
limitation, the FCC, necessary to conduct their respective businesses,
and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any License
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would reasonably be expected to have a
Material Adverse Effect, whether or not arising from transactions in
the ordinary course of business; the Company and the Subsidiaries have
fulfilled or performed all of their obligations with respect to all
Licenses possessed by any of them, except where the failure to so
fulfill and perform would not, singly or in the aggregate, reasonably
be expected to have a Material Adverse Effect, whether or not arising
from transactions in the ordinary
8
<PAGE> 9
course of business, or as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto); no event has occurred
which allows, or after notice or lapse of time, or both, would allow,
revocation or termination of any License or result in any other
material impairment of the rights of any holder of such License, except
where such revocation or termination would not, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business, or as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto); and the Licenses contain no
restrictions on the Company or any Subsidiary except where such
restrictions would not reasonably be expected to have a Material
Adverse Effect, whether or not arising from transactions in the
ordinary course of business, or as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(w) The Company and the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to
any differences.
(x) The Company has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(y) The Company and the Subsidiaries are (i) in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received and are in
compliance with all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective
businesses and (iii) have not received notice of any actual or
potential liability for the investigation or remediation of any
disposal or release of hazardous or toxic substances or wastes,
pollutants or contaminants, except where such non-compliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals, or liability would not, individually or in the
aggregate, have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business. Neither the Company
nor any Subsidiary has been named as a "potentially responsible party"
under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended.
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<PAGE> 10
(z) In the ordinary course of its business, the Company
periodically reviews the effect of Environmental Laws on the business,
operations and properties of the Company and the Subsidiaries, in the
course of which it identifies and evaluates associated costs and
liabilities (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance
with Environmental Laws, or any permit, license or approval, any
related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company
has reasonably concluded that such associated costs and liabilities
would not, singly or in the aggregate, have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business.
(aa) No employee pension benefit plan (within the meaning of
Section 3(2) of ERISA, but excluding any "multiemployer plan" within
the meaning of Section 3(37) of ERISA) established or maintained by the
Company or any Subsidiary or to which the Company or any Subsidiary has
made contributions, which is subject to Part 3 or Subtitle B of Title I
of ERISA, or Section 412 of the Internal Revenue Code of 1986 (the
"Code"), had an accumulated funding deficiency (as such term is defined
in Section 302 of ERISA or Section 412 of the Code), whether or not
waived, as of the last day of the most recent plan year of such plan
heretofore ended for which an excise tax is due (or would be due if
such deficiency were not waived). Each of the Company and the
Subsidiaries has made all contributions required to be made by it to
any "multiemployer pension plan" (within the meaning of Section 3(37)
of ERISA). Neither the Company nor any Subsidiary nor any Related
Person (as such term is defined below) has incurred, or is expecting to
incur, any withdrawal liability (determined under Section 4201 of
ERISA) with respect to any plan covered by Title IV of ERISA and in
respect of which the Company or any Subsidiary or a Related Person is
an "employer" as defined in Section 3(5) of ERISA, and to the Company's
knowledge, there has not been any "reportable event" (within the
meaning of Section 4043 of ERISA and regulations thereunder, other than
an event for which the 30-day notice requirement has been waived), or
any other event or condition which presents a material risk of the
termination of any such plan, including, but not limited to, a
termination by action of the Pension Benefit Guaranty Corporation,
which termination would create a material liability of the Company or
any Subsidiary or a Related Person to the Pension Benefit Guaranty
Corporation. "Related Person" shall mean any trade or business (whether
or not incorporated) which is under common control (as defined in
Section 414(b) and (c) of the Code) with the Company within the meaning
of Section 4001(b) of ERISA. As of the last day of the most recent plan
year heretofore ended of each employee benefit plan described in the
preceding sentence (other than a "multiemployer plan"), the present
value of all accrued benefits under each such employee benefit plan
(calculated on the basis of the actuarial assumptions specified in the
most recent actuarial valuation for each such plan) did not exceed the
fair market value of the assets of such plan allocable to such benefits
by more than $1,000,000. Neither any employee pension benefit plan
(excluding any "multiemployer plan" within the meaning of Section 3(37)
of ERISA) established or maintained by the Company or any Subsidiary or
to which the Company or any
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<PAGE> 11
Subsidiary has made contributions, nor any trust created thereunder,
nor any trustee or administrator thereof (including the Company), has
engaged in any non-exempt prohibited transaction (as described in
Section 406 of ERISA or in Section 4975 of the Code) that could subject
the Company or any Subsidiary either directly or indirectly through an
obligation to indemnify to any material tax or material penalty on
prohibited transactions imposed under said Section 4975 of the Code or
under ERISA. Each employee benefit plan described in the preceding
sentence is in compliance in all material respects with all applicable
provisions of ERISA and the Code, except for plan amendments required
or permitted by such statutes as to which applicable grace periods for
making such amendments have not expired, and each of the Company and
the Subsidiaries has made, accrued or provided for all contributions
heretofore required to be made by the Company and the Subsidiaries and
each of the Company and the Subsidiaries has complied in all material
respects with the continuation coverage requirements of Title X of the
Consolidated Omnibus Budget Act of 1985, as amended. The execution and
delivery of this Agreement and the sale of the Securities will not
involve any prohibited transaction within the meaning of Section 406 of
ERISA or Section 4975 of the Code. Neither the Company nor any
Subsidiary has any material "expected post-retirement benefit
obligation" (within the meaning of Financial Accounting Standards Board
Statement No. 106). The consummation of the transactions contemplated
by this Agreement (including, without limitation, the provisions of the
Prospectus described under the heading "How We Intend to Use the
Proceeds of this Offering") will not result in any material payment
(including, without limitation, severance, golden parachute or other)
becoming due from the Company to any employee of the Company or any
Subsidiary as a consequence of such transaction.
(bb) The Company and the Subsidiaries own, possess, license or
have other rights to use, on reasonable terms, all patents, patent
applications, trade and service marks, trade and service mark
registrations, trade names, copyrights, licenses, inventions, trade
secrets, technology, know-how and other intellectual property
(collectively, the "Intellectual Property") necessary for the conduct
of the Company's business as now conducted or as proposed in the
Prospectus to be conducted free and clear of and without violating any
right, claimed right, charge, encumbrance, pledge, security interest,
restriction or lien of any kind of any other person and none of the
Company or any Subsidiary has received any notice of infringement of or
conflict with asserted rights of others with respect to any of the
foregoing except as could not reasonably be expected to have a Material
Adverse Effect, whether or not arising from transactions in the
ordinary course of business. The use of the Intellectual Property in
connection with the business and operations of the Company and the
Subsidiaries does not infringe on the rights of any person, except as
could not reasonably be expected to have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business.
(cc) None of the Company or any Subsidiary, or to the
knowledge of the Company, any of their respective officers, directors,
partners, employees, agents or affiliates or any other person acting on
behalf of the Company or any Subsidiary has,
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<PAGE> 12
directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or
agent of a customer or supplier, official or employee of any
governmental agency (domestic or foreign), instrumentality of any
government (domestic or foreign) or any political party or candidate
for office (domestic or foreign) or other person who was, is or may be
in a position to help or hinder the business of the Company or any
Subsidiary (or assist the Company or any Subsidiary in connection with
any actual or proposed transaction) which (i) might subject the Company
or any Subsidiary, or any other individual or entity to any damage or
penalty in any civil, criminal or governmental litigation or proceeding
(domestic or foreign), (ii) if not given in the past, might have had a
Material Adverse Effect or (iii) if not continued in the future, might
have a Material Adverse Effect.
(dd) The Company (i) does not have any material lending or
other relationship with any bank or lending affiliate of Salomon Smith
Barney Holdings Inc. and (ii) does not intend to use any of the
proceeds from the sale of the Securities hereunder to repay any
outstanding debt owed to any affiliate of Salomon Smith Barney Holdings
Inc.
(ee) The Company and the Subsidiaries have implemented a
comprehensive, detailed program to analyze and address the risk that
the computer hardware and software used by them may be unable to
recognize and properly execute date-sensitive functions involving
certain dates prior to and any dates after December 31, 1999 (the "Year
2000 Problem"). The Company and the Subsidiaries have not experienced
any Year 2000 Problems and the Company is not aware, after due inquiry,
of any Year 2000 Problems at any supplier, vendor, customer or
financial service organization used or serviced by the Company and the
Subsidiaries, other than Year 2000 Problems which will not have a
Material Adverse Effect. The Company is in compliance with the
Commissions Release No. 333-7558 related to Year 2000 disclosure.
(ff) The Company has complied with all of its obligations as
set forth in (i) the Warrant Registration Rights Agreement, dated as of
September 29, 1997, by and among the Company, Bear, Stearns & Co. Inc.
and Furman Selz LLC, (ii) the Stockholders Agreement, dated as of
November 26, 1997, by and among the Company and the persons listed
therein, (iii) the Series B Preferred Stock Registration Rights
Agreement, dated as of May 4, 1999, as amended to date, by and among
the Company and the persons listed therein, and (iv) the Agreement and
Plan of Merger, dated as of March 15, 1999, by and among the Company,
LJ.Net, Inc., MGC LJ.Net, Inc., Patrick Chicas and James Thompson.
(gg) Each holder of five percent or more of the total issued
and outstanding capital stock of the Company (assuming conversion of
all outstanding shares of the Company's Series B Convertible Preferred
Stock and Series C Convertible Preferred Stock) is listed on Schedule
II to this Agreement.
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<PAGE> 13
(hh) The addressable line estimates included in the Prospectus
are based on or derived from independent sources which the Company
believes to be reliable and accurate.
(ii) None of (x) the issuance of the Securities, (y) the
conversion of the Series D Preferred Stock into Common Stock in
accordance with the terms of the Certificate of Designation or (z) the
issuance of shares of Common Stock as payment of dividends on the
Series D Preferred Stock in accordance with the terms of the
Certificate of Designation will result in any holder of any outstanding
security convertible into or exchangeable for Common Stock or any
option, right or warrant to purchase Common Stock or any security
convertible into or exchangeable for Common Stock being entitled to
purchase additional shares of Common Stock or to purchase shares of
Common Stock at a lower price per share upon exercise, conversion or
exchange of such outstanding security.
Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters in connection
with the offering of the Securities shall be deemed a representation and
warranty by the Company, as to matters covered thereby, to each Underwriter.
2. Purchase and Sale. Subject to the terms and conditions and
in reliance upon the representations and warranties herein set forth, the
Company agrees, to sell to each Underwriter, and each Underwriter agrees,
severally and not jointly, to purchase from the Company at a purchase price of
$[ ] per share, the amount of the Underwritten Securities set forth opposite
such Underwriter's name in Schedule I hereto.
(a) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby
grants an option to the several Underwriters to purchase, severally and
not jointly, up to [ ] Option Securities at the same purchase price per
share as the Underwriters shall pay for the Underwritten Securities.
Said option may be exercised only to cover over-allotments in the sale
of the Underwritten Securities by the Underwriters. Said option may be
exercised in whole or in part at any time (but not more than once) on
or before the 30th day after the date of the Prospectus upon written or
telegraphic notice by the Representatives to the Company setting forth
the number of shares of the Option Securities as to which the several
Underwriters are exercising the option and the settlement date. The
number of Option Securities to be purchased by each Underwriter shall
be the same percentage of the total number of shares of the Option
Securities to be purchased by the several Underwriters as such
Underwriter is purchasing of the Underwritten Securities, subject to
such adjustments as you in your absolute discretion shall make to
eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at
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<PAGE> 14
10:00 AM, New York City time, on [ ] , 2000, or at such time on such later
date not more than three Business Days after the foregoing date as the
Representatives shall designate, which date and time may be postponed by
agreement between the Representatives and the Company or as provided in Section
9 hereof (such date and time of delivery and payment for the Securities being
herein called the "Closing Date"). Delivery of the Securities shall be made to
the Representatives for the respective accounts of the several Underwriters
against payment by the several Underwriters through the Representatives of the
purchase price thereof to or upon the order of the Company by wire transfer
payable in same-day funds to an account specified by the Company. Delivery of
the Underwritten Securities and the Option Securities shall be made through the
facilities of The Depository Trust Company unless the Representatives shall
otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company will deliver
the Option Securities (at the expense of the Company) to the Representatives, at
388 Greenwich Street, New York, New York, on the date specified by the
Representatives (which shall be within three Business Days after exercise of
said option) for the respective accounts of the several Underwriters, against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of the Company by wire transfer payable in
same-day funds to the accounts specified by the Company. If settlement for the
Option Securities occurs after the Closing Date, the Company will deliver to the
Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. Agreements. The Company agrees with the several
Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment to
the Registration Statement or supplement to the Prospectus or any Rule
462(b) Registration Statement unless the Company has furnished you a
copy for your review prior to filing and will not file any such
proposed amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
cause the Prospectus, properly completed, and any supplement thereto to
be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the Representatives of such timely filing. The Company
will promptly advise the Representatives (1) when the Registration
Statement, if not effective at the Execution Time, shall have become
effective, (2) when
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<PAGE> 15
the Prospectus, and any supplement thereto, shall have been filed (if
required) with the Commission pursuant to Rule 424(b) or when any Rule
462(b) Registration Statement shall have been filed with the
Commission, (3) when, prior to termination of the offering of the
Securities, any amendment to the Registration Statement shall have been
filed or become effective, (4) of any request by the Commission or its
staff for any amendment of the Registration Statement, or any Rule
462(b) Registration Statement, or for any supplement to the Prospectus
or for any additional information, (5) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any
proceeding for that purpose and (6) of the receipt by the Company of
any notification with respect to the suspension of the qualification of
the Securities for sale in any jurisdiction or the institution or
threatening of any proceeding for such purpose. The Company will use
its best efforts to prevent the issuance of any such stop order or the
suspension of any such qualification and, if issued, to obtain as soon
as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall
be necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act or the Exchange Act or the respective
rules thereunder, the Company promptly will (1) notify the
Representatives of such event, (2) prepare and file with the
Commission, subject to the second sentence of paragraph (a) of this
Section 5, an amendment or supplement which will correct such statement
or omission or effect such compliance and (3) supply any supplemented
Prospectus to you in such quantities as you may reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(d) The Company will furnish to the Representatives and
counsel for the Underwriters, without charge, signed copies of the
Registration Statement (including exhibits thereto) and to each other
Underwriter a copy of the Registration Statement (without exhibits
thereto) and, so long as delivery of a prospectus by an Underwriter or
dealer may be required by the Act, as many copies of each Preliminary
Prospectus and the Prospectus and any supplement thereto as the
Representatives may reasonably request. The Company will pay the
expenses of printing or other production of all documents relating to
the offering.
(e) The Company will cooperate and assist in any filings
required to be made with the NASD and in the performance of any due
diligence investigation by any broker/dealer participating in the sale
of the Securities.
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<PAGE> 16
(f) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the Representatives may designate, will maintain such
qualifications in effect so long as required for the distribution of
the Securities and will pay any fee of the NASD, in connection with its
review of the offering; provided that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not
now so qualified or to take any action that would subject it to
taxation or to service of process in suits, other than those arising
out of the offering or sale of the Securities, in any jurisdiction
where it is not now so subject.
(g) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., offer, sell, contract to sell, pledge, or
otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due to
cash settlement or otherwise) by the Company or any affiliate of the
Company or any person in privity with the Company or any affiliate of
the Company) directly or indirectly, including the filing (or
participation in the filing) of a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act, any other shares of capital
stock of the Company or any securities convertible into, or exercisable
or exchangeable for, such capital stock or publicly announce an
intention to effect any such transaction, for a period of 90 days after
the date of this Agreement, provided, however, that (i) the Company may
issue and sell common stock, $0.001 par value per share, of the Company
("Common Stock") pursuant to any employee stock option plan, stock
ownership plan or dividend reinvestment plan of the Company in effect
at the Execution Time, (ii) the Company may issue Common Stock issuable
upon the conversion of securities or the exercise of warrants
outstanding at the Execution Time, (iii) the Company may issue and sell
up to [ ] shares of Common Stock, which have been registered by the
Company on the Registration Statement, (iv) the Company may issue
Common Stock upon the conversion of shares of Series D Preferred Stock
and as payment of dividends on shares of Series D Preferred Stock, all
in accordance with the terms of the Certificate of Designation, (v) the
Company may offer to issue, but may not issue, Common Stock to any one
or more Persons in connection with the acquisition by the Company, by
consolidation, merger, sale or otherwise, of all or any portion of the
assets or outstanding voting securities of such Person, and (vi) the
Company may file one registration statement under the Act relating to
the sale of Common Stock in connection with the exercise of demand
registration rights by stockholders of the Company which have been
granted demand registration rights by the Company pursuant to one or
more written agreements entered into prior to the date of this
Agreement, and otherwise in accordance with the provisions of such
agreements; provided, however, that such registration statement shall
not be declared effective until the expiration of the period of 90 days
after the date of this Agreement.
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<PAGE> 17
(h) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(i) The Company will apply the proceeds from the sale of the
Securities as set forth under the heading "How We Intend to Use the
Proceeds of this Offering" in the Prospectus.
(j) The Company will do and perform all things required or
necessary to be done and performed under this Agreement by it prior to
the Closing Date and to satisfy all conditions precedent on its part to
the delivery of the Securities.
(k) Prior to the Closing Date, the Company will furnish to the
Underwriters, as soon as they have been prepared in the ordinary course
by the Company, copies of any unaudited interim financial statements of
the Company, for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the
Prospectus.
6. Conditions to the Obligations of the Underwriters. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company contained herein as of
the Execution Time, the Closing Date and any settlement date pursuant to Section
3 hereof, to the accuracy of the statements of the Company made in any
certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become
effective not later than (i) 6:00 PM New York City time on the date of
determination of the public offering price, if such determination
occurred at or prior to 3:00 PM New York City time on such date or (ii)
9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after
3:00 PM New York City time on such date; if filing of the Prospectus,
or any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the manner and
within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have requested and caused Ellis, Funk,
Goldberg, Labovitz & Dokson, P.C., counsel for the Company, to have
furnished to the Representatives their opinion, dated the Closing Date
and addressed to the Representatives, to the effect that:
17
<PAGE> 18
(i) Each of the Company and the Subsidiaries has been
duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction in which it
is chartered or organized, with full corporate power and
authority to own or lease, as the case may be, and to operate
its properties and conduct its business as described in the
Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each
jurisdiction which requires such qualification and where the
failure to be so qualified could reasonably be expected to,
individually or in the aggregate, have a Material Adverse
Effect, whether or not arising from transactions in the
ordinary course of business.
(ii) All the outstanding shares of capital stock of
each Subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and were not
issued in violation of or subject to any preemptive or similar
rights under the Nevada Revised Statutes, or known to us,
after reasonable inquiry. All outstanding shares of capital
stock of the Subsidiaries are owned by the Company either
directly or through wholly owned Subsidiaries free and clear
of any perfected security interest and, to our knowledge,
after due inquiry, any other security interest, claim, lien or
encumbrance. Except for the capital stock of the Subsidiaries,
to our knowledge, neither the Company nor any Subsidiary owns
or holds any interest in any corporation, partnership, trust
or association, joint venture or other entity.
(iii) The Company's authorized equity capitalization
is as set forth in the Prospectus; the capital stock of the
Company conforms in all material respects to the description
thereof contained in the Prospectus; the outstanding shares of
capital stock have been duly and validly authorized and issued
and are fully paid and nonassessable; the Securities being
sold hereunder have been duly and validly authorized, and,
when issued and delivered to and paid for by the Underwriters
pursuant to this Agreement, will be validly issued, fully paid
and nonassessable and entitled to the rights, privileges and
preferences set forth in the Certificate of Designation; the
Securities are duly listed for quotation, subject to official
notice of issuance, on the Nasdaq National Market; the
certificates for the Securities are in valid and sufficient
form; the holders of outstanding shares of capital stock of
the Company are not entitled to preemptive or other rights to
subscribe for the Securities; and, to our knowledge after
reasonable inquiry, except as set forth in the Prospectus, no
options, warrants or other rights to purchase, agreements or
other obligations to issue, or rights to convert any
obligations into or exchange any securities for, shares of
capital stock of or ownership interests in the Company or any
Subsidiary are outstanding.
(iv) To our knowledge, there is no pending or
threatened action, suit, investigation or proceeding by or
before any court or governmental agency, authority or body or
any arbitrator or any statute, law, rule, regulation,
injunction,
18
<PAGE> 19
judgement or order, in each case, affecting or involving the
Company or any Subsidiary or any of their respective property
of a character required to be disclosed in the Registration
Statement or Prospectus which is not adequately disclosed in
the Prospectus. There is no franchise, contract or other
document of a character required to be described in the
Registration Statement or Prospectus, or to be filed as an
exhibit thereto, which is not described or filed as required.
The statements in the Prospectus under the headings "Federal
Tax Considerations," "Description of Securities," "Description
of the Series D Convertible Preferred Stock" and "Business -
Legal Proceedings" fairly summarize the matters therein
described. Insofar as statements in the Prospectus (other than
statements addressed in the opinion of Kelley Drye & Warren
LLP) purport to summarize the provisions of laws, rules,
regulations, proposed rules, proposed regulations, orders,
judgments, decrees, contracts, agreements, instruments, leases
or licenses, such statements accurately reflect the status of
such provisions purported to be summarized and are correct in
all material respects.
(v) The Registration Statement has become effective
under the Act; any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b);
to our knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued, no proceedings
for that purpose have been instituted or threatened and the
Registration Statement and the Prospectus and the documents
filed under the Act and the Exchange Act and incorporated by
reference in the Registration Statement and the Prospectus
(other than the financial statements, notes and schedules
thereto and other financial and accounting information
contained therein or incorporated therein by reference, as to
which we express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the
Exchange Act and the respective rules thereunder.
(vi) The Company has all requisite corporate power
and authority to execute, deliver and perform its obligations
under this Agreement to consummate the transactions
contemplated hereby, including, without limitation, the
corporate power and authority to issue, sell and deliver the
Securities to be sold by the Company as provided herein. This
Agreement has been duly authorized, executed and delivered by
the Company. The Certificate of Designation has been duly
authorized by all necessary corporate action and any necessary
stockholder action, has been duly executed by the Company and
filed with the Secretary of State of the State of Nevada.
(vii) Neither the Company nor any Subsidiary is and,
after giving effect to the offering and sale of the Securities
and the application of the proceeds thereof as described in
the Prospectus, will not be (x) an "investment company" as
defined in the Investment Company Act of 1940, as amended, or
(y) a "holding company" or a "subsidiary company" or an
"affiliate" of a holding company
19
<PAGE> 20
within the meaning of the Public Utility Holding Company Act
of 1935, as amended.
(viii) No consent, approval, authorization, filing
with or order of any court or governmental agency or body is
required in connection with the transactions contemplated
herein, except (a) such as have been obtained under the Act,
(b) such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution
of the Securities by the Underwriters in the manner
contemplated in this Agreement and in the Prospectus and such
as may be required by the NASD (as to which we express no
opinion), (c) such as may be required from the FCC or any
State Telecommunications Agencies (as to which we express no
opinion), (d) such other approvals (specified in such opinion)
as have been obtained and (e) where the failure to obtain such
consent, approval, authorization or order would not, singly or
in the aggregate, have a Material Adverse Effect, whether or
not arising from transactions in the ordinary course of
business. To our knowledge, after reasonable inquiry, no
consents or waivers from any other person are required in
connection with the transactions contemplated herein, other
than such consents and waivers (specified in such opinion) as
have been obtained.
(ix) Neither the issue and sale of the Securities,
nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of the terms or
provisions of, or a default under (or an event that with
notice or lapse of time or both would constitute a default
under) or the imposition of any lien, charge or encumbrance
upon any property or assets of the Company or the Subsidiaries
pursuant to, (i) the charter or bylaws of the Company or any
Subsidiary, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or
other agreement, obligation, condition, covenant or instrument
known to us to which the Company or any Subsidiary is a party
or by which any of them may be bound or to which any of them
or their respective property is subject, or (iii) any local,
state, federal or administrative statute, rule or regulation
(other than Telecommunications Laws, as to which we express no
opinion) applicable to the Company or any Subsidiary or any of
their respective assets or properties or (iv) any judgment,
order or decree of any court or governmental agency or
authority having jurisdiction over the Company or any
Subsidiary or any of their assets or properties known to us
(other than any which may have been issued by the FCC or State
Telecommunications Agencies, as to which we express no
opinion), except in the case of clauses (ii), (iii) and (iv)
for such conflicts, breaches, violations, defaults or
impositions of liens, charges or encumbrances that would not,
singly or in the aggregate, have a Material Adverse Effect,
whether or not arising from transactions in the ordinary
course of business.
20
<PAGE> 21
(x) Except as set forth in or contemplated in the
Prospectus, to our knowledge, after reasonable inquiry, (i) no
action, suit, investigation or proceeding (other than
proceedings before the FCC or State Telecommunications
Agencies, as to which we express no opinion) by or before any
court or governmental agency, authority or body or any
arbitrator involving the Company or any Subsidiary or any of
their respective property is pending or threatened (ii) no
statute, rule, regulation or order has been enacted, adopted
or issued by any governmental agency or has been proposed by
any governmental body (except that we express no opinion with
respect to Telecommunications Laws) and (iii) no injunction,
restraining order or order of any nature to which the Company
or any Subsidiary is or may be subject or to which the
business, assets, or property of the Company or any Subsidiary
are or may be subject, has been issued (other than any which
may have been issued by the FCC or State Telecommunications
Agencies, as to which we express no opinion) that (i) could
reasonably be expected to have a material adverse effect on
the performance of this Agreement or the consummation of any
of the transactions contemplated hereby or (ii) could
reasonably be expected to have a Material Adverse Effect,
whether or not arising from transactions in the ordinary
course of business.
(xi) Except for the selling stockholders named in the
Registration Statement, no holders of securities of the
Company have rights to the registration of such securities
under the Registration Statement.
(xii) We are not aware of any order directed to any
document incorporated by reference in the Registration
Statement which has been issued by the Commission or any
challenge that has been made by the Commission as to the
accuracy or adequacy of any such document.
(xiii) No holder of any outstanding shares of the
Company's capital stock are entitled to any rights pursuant to
Sections 78.3791 through 78.3793 of the Nevada Revised
Statutes.
(xiv) Based on the laws in effect on the date hereof,
the shares of Common Stock issuable as dividends on the Series
D Preferred Stock in accordance with the provisions of the
Certificate of Designation and the shares of Common Stock
issuable upon conversion of the Series D Preferred Stock in
accordance with the provisions of the Certificate of
Designation will be freely tradable securities within the
meaning of the Act assuming such shares are not held by
affiliates of the Company within the meaning of the Act.
(xv) None of the (a) issuance of the Securities, (b)
the conversion of the Series D Preferred Stock into Common
Stock in accordance with the provisions of the Certificate of
Designation or (c) the issuance of Common Stock as payment of
dividends on the Series D Preferred Stock in accordance with
the provisions
21
<PAGE> 22
of the Certificate of Designation will result in any holder of
any security convertible into or exchangeable for shares of
Common Stock or any outstanding option, right or warrant to
purchase shares of Common Stock or any security convertible
into or exchangeable for shares of Common Stock being entitled
to purchase additional shares of Common Stock or to purchase
shares of Common Stock at a lower price per share upon
exercise, conversion or exchange of such outstanding security.
(xvi) We have participated in conferences with
officers and other representatives of the Company,
representatives of the independent certified public
accountants of the Company and the Underwriters and their
representatives at which the contents of the Prospectus and
the Registration Statement and any amendment thereof or
supplement thereto and related matters were discussed and,
although we have not undertaken to investigate or verify
independently, and do not assume any responsibility for, the
accuracy, completeness or fairness of the statements contained
in the Prospectus and the Registration Statement or any
amendment thereof or supplement thereto (except as indicated
above), on the basis of the foregoing, no facts have come to
our attention which led us to believe that on the Effective
Date, the Execution Time or the date the Registration
Statement was last deemed amended the Registration Statement
contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or
that the Prospectus as of its date and on the Closing Date
included or includes any untrue statement of a material fact
or omitted or omits to state a material fact necessary to make
the statements therein, in the light of the circumstances
under which they were made, not misleading (in each case,
other than the financial statements and related notes, the
financial statement schedules and other financial and
accounting information contained therein, as to which we
express no opinion).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other
than the State of Georgia, the laws of the State of Nevada governing
corporations or the federal laws of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion of
other counsel of good standing whom they believe to be reliable and who
are satisfactory to counsel for the Underwriters and (B) as to matters
of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and public officials. References to the
Prospectus in this paragraph (b) include any supplements thereto at the
Closing Date.
(c) The Company shall have requested and caused Kelly Drye &
Warren LLP, telecommunications counsel for the Company, to have
furnished to the Representatives their opinion, dated the Closing Date
and addressed to the Representatives, to the effect that:
22
<PAGE> 23
(i) All of the licenses, permits and authorizations
required by the FCC for the provision of telecommunications
services by the Company and the Subsidiaries, as such services
are described in the Prospectus and the Registration
Statement, have been issued to and are validly held by the
Company and the Subsidiaries. All of the licenses, permits and
authorizations required by any "state commissions" as defined
in Section 3 of the Communications Act of 1934, as amended
(the "State Telecommunications Agencies") for the provision of
telecommunications services by the Company and the
Subsidiaries, as such services are described in the Prospectus
and the Registration Statement, have been issued to and, to
our knowledge, are validly held by the Company and the
Subsidiaries, except where the failure to obtain or hold such
license, permit or authority would not have a Material Adverse
Effect. All such licenses, permits and authorizations are in
full force and effect and, to our knowledge, the Company and
the Subsidiaries are in compliance in all material respects
with each such license, permit or authorization.
(ii) Neither the Company nor any Subsidiary is the
subject of any proceeding (including a rule making
proceeding), pending complaint or investigation, or, to our
knowledge, any threatened complaint or investigation, before
the FCC, or, to our knowledge, of any proceeding (including a
rule making proceeding), pending complaint or investigation,
or any threatened complaint or investigation, before the State
Telecommunications Agencies (x) based, in each case, on any
alleged violation of any statutes governing the FCC
(including, without limitation, the Communications Act of
1934, as amended, and the Telecommunications Act of 1996, as
amended) or the State Telecommunications Agencies and the
orders, rules and regulations promulgated thereunder (the
"Telecommunications Laws") by the Company or any Subsidiary in
connection with their provision of or failure to provide
telecommunications services of a character required to be
disclosed in the Registration Statement which is not disclosed
in the Registration Statement , (y) that is likely to result
in denial of any pending application of the Company or of any
Subsidiary for any license, permit or authorization granted by
the FCC or any State Telecommunications Agencies or (z) except
for proceedings of general applicability or as set forth in
the Prospectus, that could result in the revocation,
materially adverse modification or suspension of any such
license, permit or authorization.
(iii) The statements in the Registration Statement
under the headings of "Risk Factors - Our services are highly
regulated and changes in current or future laws or regulations
could restrict the way we operate our business," "Business
Legal Proceedings" and "Business - Regulation," insofar as
such statements summarize applicable provisions of the
Telecommunications Laws or litigation arising therefrom or
related thereto, fairly and accurately summarize the matters
therein described and to our knowledge, do not omit a material
fact necessary to make the statements contained therein not
misleading.
23
<PAGE> 24
(iv) The Company and the Subsidiaries have the
consents, approvals, authorizations, licenses, certificates,
permits, or orders of the FCC or the State Telecommunications
Agencies, if any is required, for the consummation of the
transactions contemplated in the Registration Statement,
except where the failure to obtain the consents, approvals,
authorizations, licenses, certificates, permits or orders
would not have a Material Adverse Effect.
(v) Neither the execution and delivery of the
Underwriting Agreement nor the sale of the Securities
contemplated thereby will conflict with or result in a
violation of any Telecommunications Laws applicable to the
Company or the Subsidiaries, except where the conflict with or
the violation of any Telecommunications Laws would not have a
Material Adverse Effect.
(vi) In connection with our representation of the
Company and the Subsidiaries, except as disclosed in the
Registration Statement or the Prospectus, we have not become
aware of any Telecommunications Laws that could reasonably be
expected to have a Material Adverse Effect. The foregoing
assumes that the Company and the Subsidiaries currently are in
substantial compliance with all material Telecommunications
Laws applicable to them except as disclosed in the
Registration Statement or the Prospectus.
In rendering such opinion, such counsel may state that it
expresses no opinion with respect to matters other than those arising
under Telecommunications Laws and may rely as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of
the Company and public officials. References to the Prospectus in this
paragraph (c) include any supplements thereto at the Closing Date.
(d) The Representatives shall have received from Kronish Lieb
Weiner & Hellman LLP, counsel for the Underwriters, such opinion or
opinions, dated the Closing Date and addressed to the Representatives,
with respect to the issuance and sale of the Securities, the
Registration Statement, the Prospectus (together with any supplement
thereto) and other related matters as the Representatives may
reasonably require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them
to pass upon such matters.
(e) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the
Prospectus, any supplements to the Prospectus and this Agreement and
that:
(i) the representations and warranties of the Company
in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as
if made on the Closing Date and the Company has
24
<PAGE> 25
complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or
prior to the Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included or incorporated by reference in the
Prospectus (exclusive of any supplement thereto), there has
been no material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the
Company and the Subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(f) The Company shall have requested and caused Arthur
Andersen LLP, to have furnished to the Representatives, at the
Execution Time and at the Closing Date, letters, dated respectively as
of the Execution Time and as of the Closing Date, in form and substance
satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the Exchange
Act and the respective applicable rules and regulations adopted by the
Commission thereunder and that they have performed a review of the
unaudited interim financial information of the Company for the
nine-month period ended September 30, 1999 and as at September 30,
1999, in accordance with Statement on Auditing Standards No. 71, and
stating in effect that:
(i) in their opinion the audited consolidated
financial statements and financial statement schedules
included or incorporated by reference in the Registration
Statement and the Prospectus and reported on by them comply as
to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and
the related rules and regulations adopted by the Commission;
(ii) on the basis of a reading of the latest
unaudited consolidated financial statements made available by
the Company and the Subsidiaries; their limited review, in
accordance with standards established under Statement on
Auditing Standards No. 71, of the unaudited interim financial
information for the nine-month period ended September 30,
1999, and as at September 30, 1999; carrying out certain
specified procedures (but not an examination in accordance
with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the
comments set forth in such letter; a reading of the minutes of
the meetings of the stockholders, directors and audit
committees of the Company and the Subsidiaries; and inquiries
of certain officials of the Company who have responsibility
for financial and accounting matters of the Company and the
Subsidiaries as to transactions and
25
<PAGE> 26
events subsequent to September 30, 1999 nothing came to their
attention which caused them to believe that:
(1) any unaudited financial statements
included or incorporated by reference in the
Registration Statement and the Prospectus do not
comply as to form in all material respects with
applicable accounting requirements of the Act and
with the related rules and regulations adopted by the
Commission with respect to financial statements
included or incorporated by reference in quarterly
reports on Form 10-Q under the Exchange Act; and said
unaudited financial statements are not in conformity
with generally accepted accounting principles applied
on a basis substantially consistent with that of the
audited financial statements included or incorporated
by reference in the Registration Statement and the
Prospectus;
(2) with respect to the period subsequent to
September 30, 1999, there were any changes, at a
specified date not more than five days prior to the
date of the letter, in the long-term debt of the
Company and the Subsidiaries or capital stock of the
Company or decreases in the stockholders' equity of
the Company (except for activity related to warrant
exercises and employee stock option exercises) as
compared with the amounts shown on the September 30,
1999 consolidated balance sheet included or
incorporated by reference in the Registration
Statement and the Prospectus, or for the period from
October 1, 1999 to such specified date there were any
decreases, as compared with the corresponding period
in the preceding year, in operating revenues or net
loss of the Company, except in all instances for
changes or decreases set forth in such letter, in
which case the letter shall be accompanied by an
explanation by the Company as to the significance
thereof unless said explanation is not deemed
necessary by the Representatives;
(3) the information included or incorporated
by reference in the Registration Statement and
Prospectus in response to Regulation S-K, Item 301
(Selected Financial Data), Item 302 (Supplementary
Financial Information), Item 402 (Executive
Compensation) and Item 503(d) (Ratio of Earnings to
Fixed Charges) is not in conformity with the
applicable disclosure requirements of Regulation S-K;
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and its Subsidiaries) set forth in the Registration
Statement and the Prospectus and in Exhibit 12 to the
Registration Statement, including the information set forth
under the captions
26
<PAGE> 27
"Prospectus Summary - Summary Consolidated Financial and
Operating Data," "Capitalization," "Selected Consolidated
Financial and Operating Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in
the Prospectus, the information included in Items 1, 2, 6, 7,
7A and 11 of the Company's Annual Report on Form 10-K,
incorporated by reference in the Registration Statement and
the Prospectus, the information included in the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" included in each of the Company's Quarterly
Reports on Form 10-Q, incorporated by reference in the
Registration Statement and the Prospectus, and the information
included in the press releases announcing the Company's second
quarter and third quarter results filed as exhibits to the
Company's Current Reports on Form 8-K incorporated by
reference in the Registration Statement and the Prospectus
agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation.
References to the Prospectus in this paragraph (f) include any
supplement thereto at the date of the letter.
(g) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (x) any change or
decrease specified in the letter or letters referred to in paragraph
(f) of this Section 6 or (y) any change, or any development involving a
prospective change, in or affecting the condition (financial or
otherwise), earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement thereto)
the effect of which, in any case referred to in clause (x) or (y)
above, is, in the sole judgment of the Representatives, so material and
adverse as to make it impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the
Registration Statement (exclusive of any amendment thereof) and the
Prospectus (exclusive of any supplement thereto).
(h) Prior to the Closing Date, the Company shall have
furnished to the Representatives such further information, certificates
and documents as the Representatives may reasonably request.
(i) Subsequent to the Execution Time, there shall not have
been any decrease in the rating of any of the Company's debt securities
by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Act) or any notice given
of any intended or potential decrease in any such rating or of a
possible change in any such rating that does not indicate the direction
of the possible change.
(j) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A
hereto from each officer
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<PAGE> 28
and director of the Company and each stockholder listed on Schedule II
hereto addressed to the Representatives.
(k) The Securities shall have been listed and admitted and
authorized for quotation on the Nasdaq National Market and satisfactory
evidence of such actions shall have been provided to the
Representatives.
(l) The Certificate of Designation shall have been filed with
the Secretary of State of the State of Nevada and satisfactory evidence
thereof shall have been provided to the Representatives.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company in
writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall
be delivered at the office of Kronish Lieb Weiner & Hellman LLP, counsel for the
Underwriters, at 1114 Avenue of the Americas, 46th Floor, New York, New York
10036, on the Closing Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally through Salomon Smith Barney Inc. on demand for all out-of-pocket
expenses (including reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Securities.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person who controls any Underwriter
within the meaning of either the Act or the Exchange Act, against any and all
losses, claims, damages or liabilities, joint or several, to which they or any
of them may become subject under the Act, the Exchange Act or other federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration of
the Securities as originally filed or in any amendment thereof, or in any
Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a
28
<PAGE> 29
material fact required to be stated therein or necessary to make the statements
therein not misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter through the Representatives specifically for inclusion therein.
This indemnity agreement will be in addition to any liability which the Company
may otherwise have.
(b) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of
its officers who signs the Registration Statement, and each person who
controls the Company within the meaning of either the Act or the
Exchange Act to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only with reference to written
information relating to such Underwriter furnished to the Company by or
on behalf of such Underwriter through the Representatives specifically
for inclusion in the documents referred to in the foregoing indemnity
provided, however, that in no case shall any Underwriter (except as may
be provided in any agreement among underwriters relating to the
offering of the Securities) be responsible for any amount in excess of
the underwriting discount or commission applicable to the Securities
purchased by such Underwriter hereunder. This indemnity agreement will
be in addition to any liability which any Underwriter may otherwise
have. The Company acknowledges that the statements set forth in the
last paragraph of the cover page regarding delivery of the Securities
and, under the heading "Underwriting", (i) the list of Underwriters and
their respective participation in the sale of the Securities, (ii) the
sentences related to concessions and reallowances and (iii) the
paragraphs related to stabilization, syndicate covering transactions
and penalty bids in any Preliminary Prospectus and the Prospectus
constitute the only information furnished in writing by or on behalf of
the several Underwriters for inclusion in any Preliminary Prospectus or
the Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party
in writing of the commencement thereof; but the failure so to notify
the indemnifying party (i) will not relieve it from liability under
paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the
forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a) or (b) above. The indemnifying
party shall be entitled to appoint counsel of the indemnifying party's
choice at the indemnifying party's expense to represent the indemnified
party in any action for which indemnification is sought (in which case
the
29
<PAGE> 30
indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or
parties except as set forth below); provided, however, that such
counsel shall be reasonably satisfactory to the indemnified party.
Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party
shall have the right to employ separate counsel (including local
counsel), and the indemnifying party shall bear the reasonable fees,
costs and expenses of such separate counsel if (i) the use of counsel
chosen by the indemnifying party to represent the indemnified party
would present such counsel with a conflict of interest, (ii) the actual
or potential defendants in, or targets of, any such action include both
the indemnified party and the indemnifying party and the indemnified
party shall have reasonably concluded that there may be legal defenses
available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii)
the indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of the institution of such
action or (iv) the indemnifying party shall authorize the indemnified
party to employ separate counsel at the expense of the indemnifying
party. It is understood, however, that the Company shall, in connection
with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and
expenses of only one separate firm of attorneys (in addition to any
local counsel) at any time for all such Underwriters and controlling
persons, which firm shall be designated in writing by Salomon Smith
Barney. An indemnifying party shall not be liable under this Section 8
to any indemnified party regarding any settlement or compromise or
consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim
or action) unless such settlement, compromise or consent is consented
to by such indemnifying party, which consent shall not be unreasonably
withheld.
(d) In the event that the indemnity provided in paragraph (a)
or (b) of this Section 8 is unavailable to or insufficient to hold
harmless an indemnified party for any reason, the Company and the
Underwriters severally agree to contribute to the aggregate losses,
claims, damages and liabilities (including legal or other expenses
reasonably incurred in connection with investigating or defending same)
(collectively "Losses") to which the Company and one or more of the
Underwriters may be subject in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand
and by the Underwriters on the other from the offering of the
Securities; provided, however, that in no case shall any Underwriter
(except as may be provided in any agreement among underwriters relating
to the offering of the Securities) be responsible for any amount in
excess of the underwriting discount or commission applicable to the
Securities purchased by such Underwriter hereunder. If the allocation
provided by the immediately preceding sentence is unavailable for any
reason, the Company and the Underwriters severally shall contribute in
such proportion as is
30
<PAGE> 31
appropriate to reflect not only such relative benefits but also the
relative fault of the Company on the one hand and of the Underwriters
on the other in connection with the statements or omissions which
resulted in such Losses as well as any other relevant equitable
considerations. Benefits received by the Company shall be deemed to be
equal to the total net proceeds from the offering (before deducting
expenses) received by it, and benefits received by the Underwriters
shall be deemed to be equal to the total underwriting discounts and
commissions, in each case as set forth on the cover page of the
Prospectus. Relative fault shall be determined by reference to, among
other things, whether any untrue or any alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information provided by the Company on the one hand or
the Underwriters on the other, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any other method
of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person who
controls an Underwriter within the meaning of either the Act or the
Exchange Act and each director, officer, employee and agent of an
Underwriter shall have the same rights to contribution as such
Underwriter, and each person who controls the Company within the
meaning of either the Act or the Exchange Act, each officer of the
Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as
the Company, subject in each case to the applicable terms and
conditions of this paragraph (d).
9. Default by an Underwriter. If any one or more Underwriters
shall fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the Representatives shall determine in order that the
required changes in the Registration Statement and the Prospectus or in any
other documents or arrangements may be
31
<PAGE> 32
effected. Nothing contained in this Agreement shall relieve any defaulting
Underwriter of its liability, if any, to the Company and any nondefaulting
Underwriter for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if at any
time prior to such time (i) trading in the Company's Common Stock shall have
been suspended by the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or limited or minimum prices shall have been
established on such Exchange or the Nasdaq National Market, (ii) a banking
moratorium shall have been declared either by federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war, or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the sole judgment of the Representatives, impractical or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the Prospectus (exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors, employees, agents or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the Securities.
The provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel
(fax no.: (716) 218-0881) and confirmed to the General Counsel, Salomon Smith
Barney Inc., at 388 Greenwich Street, New York, New York, 10013, Attention:
General Counsel; or, if sent to the Company, will be mailed, delivered or
telefaxed to MGC Communications, Inc., Attention: Chief Financial Officer (fax
no.:[ ] ) and confirmed to it at MGC Communications, Inc., 171 Sully's
Trail, Suite 202, Pittsford, New York 14534, Attention: Chief Financial Officer,
with a copy to Ellis, Funk, Goldberg, Labovitz & Dokson, P.C., One Securities
Centre, Suite 400, 3490 Piedmont Road, Atlanta, Georgia 30305.
13. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and no other person will have any right or obligation
hereunder.
32
<PAGE> 33
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for
convenience only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or trust
companies are authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange
Commission.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments thereto and
any Rule 462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above and any preliminary prospectus included in
the Registration Statement at the Effective Date that omits Rule 430A
Information.
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the Execution Time
or, if no filing pursuant to Rule 424(b) is required, shall mean the form of
final prospectus relating to the Securities included in the Registration
Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution
33
<PAGE> 34
Time (or, if not effective at the Execution Time, in the form in which it shall
become effective) and, in the event any post-effective amendment thereto or any
Rule 462(b) Registration Statement becomes effective prior to the Closing Date,
shall also mean such registration statement as so amended or such Rule 462(b)
Registration Statement, as the case may be. Such term shall include any Rule
430A Information deemed to be included therein at the Effective Date as provided
by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating to
the offering covered by the registration statement referred to in Section 1(a)
hereof.
[Signature Pages Follow]
34
<PAGE> 35
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company and the several Underwriters.
Very truly yours,
MGC Communications, Inc.
By: _______________________
Name:
Title:
<PAGE> 36
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
ING Barings LLC
Warburg Dillon Read LLC
By: Salomon Smith Barney Inc.
By:_______________________________
Name:
Title:
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
<PAGE> 37
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF UNDERWRITTEN SECURITIES TO
UNDERWRITERS BE PURCHASED
- ------------ ------------------------------------
<S> <C>
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
ING Barings LLC
Warburg Dillon Read LLC
------------------------------------
Total................................. ====================================
</TABLE>
<PAGE> 38
SCHEDULE II
Providence Equity Partners III L.P.
JK&B Capital, L.P.
<PAGE> 39
Exhibit A
[LETTERHEAD OF OFFICER, DIRECTOR OR MAJOR STOCKHOLDER OF CORPORATION]
MGC Communications, Inc.
Public Offering of [ ]% Series D Convertible Preferred Stock
[DATE]
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
ING Barings LLC
Warburg Dillon Read LLC
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with: (i)
the proposed Underwriting Agreement (the "Common Stock Underwriting Agreement"),
between MGC Communications, Inc., a Nevada corporation (the "Company"), and each
of you as representatives of a group of Underwriters named therein, relating to
an underwritten public offering of Common Stock, $0.001 par value (the "Common
Stock"), of the Company and (ii) the proposed Underwriting Agreement (the
"Preferred Stock Underwriting Agreement"), between the Company and each of you
as representatives of a group of Underwriters named therein, relating to an
underwritten public offering of ___% Series D Convertible Preferred Stock,
$0.001 par value (the "Series D Preferred Stock"), of the Company
In order to induce you and the other Underwriters to enter
into the Common Stock Underwriting Agreement and/or the Preferred Stock
Underwriting Agreement, the undersigned will not, without the prior written
consent of Salomon Smith Barney Inc., offer, sell, contract to sell, pledge or
otherwise dispose of, (or enter into any transaction which is designed to, or
might reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing or participation in the filing of a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect
<PAGE> 40
any such transaction, for a period of 90 days beginning on the later of the date
the Common Stock Underwriting Agreement is executed or the date the Preferred
Stock Underwriting Agreement is executed, other than shares of Common Stock
disposed of as bona fide gifts approved by Salomon Smith Barney Inc.
If for any reason both the Common Stock Underwriting Agreement
and the Preferred Stock Underwriting Agreement shall be terminated prior to the
Closing Date (as defined in the Common Stock Underwriting Agreement and
Preferred Stock Underwriting Agreement), the agreement set forth above shall
likewise be terminated.
Yours very truly,
[SIGNATURE OF OFFICER, DIRECTOR OR MAJOR
STOCKHOLDER]
[NAME AND ADDRESS OF OFFICER, DIRECTOR OR MAJOR
STOCKHOLDER]
<PAGE> 1
Exhibit 4.11
MGC COMMUNICATIONS, INC.
[__]% SERIES D 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 "Company"), a corporation organized and
existing under the General Corporation Law of the State of Nevada, does hereby
certify that, pursuant to authority conferred upon the board of directors of the
Company (the "Board of Directors") by its Articles of Incorporation, as amended
(the "Articles"), 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 (the "Resolution") which remains in full force and effect:
RESOLVED that pursuant to the authority vested in the Board of
Directors by its Articles, the Board of Directors does hereby create, authorize
and provide for the issuance of [___]% Series D Cumulative Convertible Preferred
Stock, par value $0.001 per share, with a liquidation preference of $50.00 per
share, consisting of [3,450,000] shares having the designations, preferences,
relative, participating, optional and other special rights and the
qualifications, limitations and restrictions thereof that are set forth in this
Resolution as follows:
(a) Designation. There is hereby created out of the authorized and
unissued shares of Preferred Stock of the Company a series of Preferred Stock
designated as the[ ___]% Series D Cumulative Convertible Preferred Stock (the
"Series D Preferred Stock"). The number of shares constituting the Series D
Preferred Stock shall be [3,450,000]. The liquidation preference of the Series D
Preferred Stock shall be $50.00 per share (the "Liquidation Preference").
Capitalized terms used herein but not defined shall have the meanings assigned
to them in paragraph (l).
(b) Rank. The Series D Preferred Stock will, with respect to dividend
rights and rights on liquidation, winding-up and dissolution, rank (i) senior to
all classes of Common Stock and to each other class of Capital Stock of the
Company or series of Preferred Stock of the Company established hereafter by the
Board of Directors of the Company, the terms of which do not expressly provide
that such class or series ranks senior to, or on a parity with, the Series D
Preferred Stock as to dividend rights and rights on liquidation, winding-up and
dissolution of the
<PAGE> 2
Company (collectively referred to, together with all classes of Common Stock of
the Company, as "Junior Stock"); (ii) on a parity with the Company's Series B
Preferred Stock and Series C Preferred Stock and each class of Capital Stock of
the Company or series of Preferred Stock of the Company established hereafter by
the Board of Directors of the Company, the terms of which expressly provide that
such class or series will rank on a parity with the Series D Preferred Stock as
to dividend rights and rights on liquidation, winding-up and dissolution
(collectively referred to, together with the Company's Series B Preferred Stock
and Series C Preferred Stock, as "Parity Stock"); and (iii) junior to each class
of Capital Stock of the Company or series of Preferred Stock of the Company
established hereafter by the Board of Directors of the Company, the terms of
which expressly provide that such class or series will rank senior to the Series
D Preferred Stock as to dividend rights or rights on liquidation, winding-up and
dissolution of the Company (collectively referred to as "Senior Stock").
(c) Dividends.
(i) Subject to the rights of any holders of Senior Stock or
Parity Stock, Holders of the outstanding shares of Series D Preferred Stock will
be entitled to receive, when, as and if declared by the Board of Directors of
the Company, out of funds legally available therefor, dividends on each share of
the Series D Preferred Stock at a rate per annum equal to [____]% of the
Liquidation Preference of such share payable quarterly (each such quarterly
period being herein called a "Dividend Period"). All dividends on the Series D
Preferred Stock, to the extent accrued, shall be cumulative, whether or not
earned or declared, on a daily basis from the last date through which dividends
have been paid or, if no dividends have been paid, from the Issue Date, and
shall be payable quarterly in arrears on [_________, _________, __________ and
_________] of each year (each a "Dividend Payment Date"), commencing on
[__________], 2000 to Holders of record as they appear on the stock register of
the Company at the close of business on the Record Date (as defined hereinafter)
immediately preceding the relevant Dividend Payment Date. No interest or sum of
money or other property or securities in lieu of interest will be payable in
respect of any accumulated and unpaid dividends. "Record Date" means, with
respect to a Dividend Payment Date, the date established by the Board of
Directors as the record date therefor, which date shall, in any event, be a date
that is not more than 60 calendar days nor less than 15 calendar days before
such Dividend Payment Date.
Any dividend on the Series D Preferred Stock shall be, at the
option of the Company, payable (A) in cash or (B) through the delivery of a
number of shares of the Company's Common Stock (dividends paid or payable in
Common Stock are hereinafter referred to as "Dividend Common Stock") equal to
the total dividend amount divided by the applicable Discounted Current Market
Value (as defined below) of the Common Stock. No fractional shares of Common
Stock shall be issued as a dividend on the Series D Preferred Stock. Instead,
the Company shall pay to the Transfer Agent for distribution to the Holders as
provided herein cash in lieu of the fractional portion of one share which may
result from the computation of the number of shares of Dividend Common Stock as
set forth in the first sentence of this paragraph
2
<PAGE> 3
in an amount equal to the same fraction of the last sales price of a share of
Common Stock on the Nasdaq National Market (or the principal national securities
exchange or other securities market on which the Common Stock is then being
traded) on the fourth Trading Day immediately preceding the Dividend Payment
Date. The Transfer Agent is hereby authorized to aggregate any fractional shares
of Common Stock that would otherwise be distributable as dividends, and to sell
them at the best available price and distribute the proceeds to the Holders
thereof in proportion to their respective interests. The Company shall reimburse
the Transfer Agent for any expenses incurred with respect to such sale,
including brokerage commissions. If the Company is precluded from paying cash
for fractional shares, it shall pay cash to the Holders for the fractional
shares when it becomes legally and contractually able to pay such cash.
The "Discounted Current Market Value" of the Common Stock with
respect to a Dividend Payment Date means the product of (x) 95% and (y) the
"Market Average Value" relating to such Dividend Payment Date. The "Market
Average Value" shall equal the average of the daily closing prices of the Common
Stock for the five consecutive Trading Days ending on (and including) the fourth
Trading Day preceding such Dividend Payment Date. The closing price for each
Trading Day will be the last sales price on such date on the Nasdaq National
Market (or the principal securities exchange or other securities market on which
the Common Stock is then being traded). "Trading Day" means any day on which the
Common Stock is traded for any period on the Nasdaq National Market (or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded).
(ii) All dividends paid with respect to shares of the Series D
Preferred Stock pursuant to paragraph (c)(i) shall be paid pro rata to the
Holders entitled thereto.
(iii) Dividends shall accrue whether or not the Company has
earnings or profits, whether or not there are funds legally available for the
payment of such dividends and whether or not dividends are declared. Dividends
shall accumulate to the extent that such dividends are not paid on the Dividend
Payment Date to which they relate. No dividend whatsoever shall be declared or
paid upon, or any sum set apart for the payment of dividends upon, any
outstanding share of the Series D Preferred Stock with respect to any Dividend
Period unless all dividends for all preceding Dividend Periods have been
declared and paid or declared and a sufficient sum set apart for the payment of
such dividend, upon all outstanding shares of Series D Preferred Stock. No
dividend will be declared or paid on any Parity Stock unless full cumulative
dividends have been paid on the Series D Preferred Stock for all prior Dividend
Periods; provided, however, if accrued dividends on the Series D Preferred Stock
for all prior Dividend Periods have not been paid in full, then any dividend
declared for any dividend period on any Parity Stock will be declared ratably in
proportion to accrued and unpaid dividends on the Series D Preferred Stock and
such Parity Stock and if dividends on any Parity Stock are due and payable and
have not been paid in full, then any dividend declared for any Dividend Period
on the Series D Preferred Stock will be declared ratably in proportion to
accrued and unpaid dividends on the Series D Preferred Stock and such Parity
Stock. The Company shall take all
3
<PAGE> 4
actions required or permitted under the General Corporate Law of the State of
Nevada to permit the payment of dividends on the Series D Preferred Stock.
(iv) The Company will not (A) declare, pay or set apart funds
for the payment of any dividend or other distribution with respect to any Junior
Stock or (B) redeem, purchase or otherwise acquire for consideration any Junior
Stock through a sinking fund or otherwise, unless (1) all accrued and unpaid
dividends with respect to the Series D Preferred Stock at the time such
dividends are payable have been paid or funds have been set apart for payment of
such dividends and (2) sufficient funds have been paid or set apart for, or a
sufficient number of shares of Common Stock have been reserved for, the payment
of the dividend for the current Dividend Period with respect to the Series D
Preferred Stock. Notwithstanding anything in this Certificate of Designation to
the contrary, the Company may declare and pay dividends on Parity Stock which
are payable solely in additional shares of or by the increase in the liquidation
value of Parity Stock or Junior Stock or on Junior Stock which are payable in
additional shares of or by the increase in the liquidation value of Junior
Stock, as applicable, or repurchase, redeem or otherwise acquire Junior Stock in
exchange for Junior Stock and Parity Stock in exchange for Parity Stock or
Junior Stock.
(v) Dividends for any past Dividend Period may be declared and
paid at any time, without reference to any regular Dividend Payment Date, to
Holders of record on a date established by the Board of Directors as the record
date therefor, which date shall be no more than 15 Business Days and no less
than one Business Day prior to the date of payment thereof, as such date may be
fixed by the Board of Directors of the Company.
(vi) Dividends payable on the Series D Preferred Stock for any
period other than a full Dividend Period shall be computed on the basis of a
360-day year consisting of twelve 30-day months. If a Dividend Payment Date is
not a Business Day, payment of dividends shall be made on the next succeeding
Business Day and dividends accruing for the intervening period shall be paid on
the next succeeding Dividend Payment Date.
(d) Liquidation Preference.
(i) Upon any voluntary or involuntary liquidation, dissolution
or winding-up of the Company, and subject to the rights of holders of Senior
Stock and Parity Stock, each Holder of Series D Preferred Stock shall be
entitled to be paid, out of the assets of the Company available for distribution
to its stockholders, an amount equal to the Liquidation Preference for each
share of Series D Preferred Stock held by such Holder, plus, without
duplication, an amount in cash equal to all accumulated and unpaid dividends
(whether declared or undeclared) thereon to the date fixed for liquidation,
dissolution or winding-up, before any distribution is made on any Junior Stock.
If, upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, there are not sufficient assets to pay the amounts payable with
respect to the Series D Preferred Stock and all Parity Stock in full, all
accumulated and unpaid dividends on the Series
4
<PAGE> 5
D Preferred Stock and all Parity Stock will be paid in full and then the Holders
of Series D Preferred Stock and the holders of Parity Stock will share ratably
(in proportion to the other amounts that would be payable on such shares of
Series D Preferred Stock and the Parity Stock, respectively, if all amounts
payable thereon had been paid in full) in any distribution of assets of the
Company to which each is entitled. If, upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, there are not sufficient
assets to pay all accumulated and unpaid dividends in full, then the Holders of
the Series D Preferred Stock and the holders of Parity Stock will share ratably
(in proportion to the respective accumulated and unpaid dividends) in any
distribution of assets of the Company to which each is entitled. After payment
of the full amount of the Liquidation Preference of the outstanding shares of
Series D Preferred Stock (plus any accumulated and unpaid dividends), the
Holders of shares of Series D Preferred Stock will not be entitled to any
further participation in any distribution of assets of the Company.
(ii) For the purposes of this paragraph (d), neither the sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with or into one or more
other entities shall be deemed to be a liquidation, dissolution or winding-up of
the Company.
(e) Redemption.
(i) (A) Mandatory Redemption. On [_______], 2012 (the
"Mandatory Redemption Date"), the Company shall be required to redeem, subject
to the legal availability of funds therefor, all outstanding shares of Series D
Preferred Stock at a price in cash equal to the Liquidation Preference thereof,
plus accumulated and unpaid dividends, if any, whether declared or undeclared,
to the Mandatory Redemption Date (the "Mandatory Redemption Price"). The Company
shall not be required to make sinking fund payments with respect to the Series D
Preferred Stock. The Company shall take all actions required or permitted under
the laws of the State of Nevada to permit such redemption.
(B) Provisional Redemption. The Series D Preferred
Stock may be redeemed, in whole or in part, at the option of the Company at a
redemption price of [_]% of the Liquidation Preference, plus accumulated and
unpaid dividends, if any, whether declared or undeclared, to the date fixed for
such redemption (the "Provisional Redemption Date") (the foregoing amounts,
together with the Additional Payment, as hereinafter defined, being the
"Provisional Redemption Price"), on or after [________], 2002, but prior to
[________], 2003, if the closing price of the Common Stock equals or exceeds
150% of the Conversion Price for at least 20 Trading Days within any 30 Trading
Day period (such redemption, a "Provisional Redemption"). In the event that the
Company undertakes a Provisional Redemption, the Holders of shares of Series D
Preferred Stock that are called for Provisional Redemption will also receive a
payment (the "Additional Payment") in an amount equal to the present value
(calculated using
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the bond equivalent yield on U.S. Treasury notes or bills having a term nearest
in length to that of the Additional Period (as hereinafter defined) as of the
day immediately preceding the date on which a notice of Provisional Redemption
is mailed to the Holders) of the aggregate amount of the dividends that would
thereafter have been payable on the Series D Preferred Stock (whether or not
such dividends have been declared) for the period from the Provisional
Redemption Date to [________ __], 2003 (such period being referred to as the
"Additional Period").
The Provisional Redemption Price shall be, at the
option of the Company, payable (v) in cash, (w) through the delivery of a number
of shares of Common Stock equal to the Provisional Redemption Price divided by
the Provisional Redemption Value (as defined below) of the Common Stock or (x)
any combination of (v) and (w). The "Provisional Redemption Value" of the Common
Stock with respect to a Provisional Redemption Date means the product of (y) 95%
and (z) the average of the daily closing prices of the Common Stock for the five
consecutive Trading Days ending on (and including) the fourth Trading Day
preceding such Provisional Redemption Date. The closing price for each Trading
Day will be the last sales price on such date on the Nasdaq National Market (or
the principal securities exchange or other securities market on which the Common
Stock is then being traded). No fractional shares of Common Stock shall be
issued in connection with the payment of the Provisional Redemption Price.
Instead, the Company shall pay to the Transfer Agent for distribution to the
Holders as provided herein cash in lieu of the fractional portion of one share
which may result from the computation of the number of shares of Common Stock to
be paid as set forth in the first two sentences of this paragraph in an amount
equal to the same fraction of the last sales price of a share of Common Stock on
the Nasdaq National Market (or the principal national securities exchange or
other securities market on which the Common Stock is then being traded) on the
fourth Trading Day immediately preceding the Provisional Redemption Date. The
Transfer Agent is hereby authorized to aggregate any fractional shares of Common
Stock that would otherwise be distributed in connection with the payment of the
Provisional Redemption Price, and to sell them at the best available price and
distribute the proceeds to the Holders thereof in proportion to their respective
interests. The Company shall reimburse the Transfer Agent for any expenses
incurred with respect to such sale, including brokerage commissions. If the
Company is precluded from paying cash for fractional shares, it shall pay cash
to the Holders for the fractional shares when it becomes legally and
contractually able to pay such cash.
The Company may elect to pay the Provisional Redemption Price by
delivering shares of Common Stock only if:
(i) The shares of Common Stock of the Company to be issued as
payment of the Provisional Redemption Price (x) shall not require registration
under any federal securities law before such shares may be freely transferable
without being subject to any transfer restrictions under the Securities Act or,
if such registration is required, such registration shall be completed and shall
become effective prior to the Provisional Redemption Date, and (y) shall not
require registration with or approval of any governmental authority under any
state law or any other
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<PAGE> 7
federal law before such shares may be validly issued or delivered or if such
registration is required or such approval must be obtained, such registration
shall be completed or such approval shall be obtained prior to the Provisional
Redemption Date;
(ii) The shares of Common Stock of the Company to be issued
are, or shall have been, approved for listing on the Nasdaq National Market or
the New York Stock Exchange or listed on another national securities exchange,
in any case, prior to the Provisional Redemption Date; and
(iii) All shares of Common Stock of the Company which may be
issued as payment of the Provisional Redemption Price will be issued out of the
Company's authorized but unissued Common Stock and, will upon issue, be duly and
validly issued and fully paid and non-assessable and free of any preemptive or
similar rights.
(C) In the case of any partial Provisional
Redemption, selection of the Series D Preferred Stock for redemption will be
made by the Company in compliance with the requirements of the principal
national securities exchange, if any, on which the Series D Preferred Stock is
listed, or if the Series D Preferred Stock is not listed on a national
securities exchange, on a pro rata basis, by lot or such other method as the
Company, in its sole discretion, shall deem fair and appropriate; provided,
however, that the Company may redeem all the shares held by Holders of fewer
than 100 shares (or all of the shares held by the Holders who would hold less
than 100 shares as a result of such redemption) as may be determined by the
Company.
(D) In the case of a Mandatory Redemption Date or
Provisional Redemption Date falling after a Record Date and prior to the related
Dividend Payment Date, the Holders of the Series D Preferred Stock at the close
of business on such Record Date will be entitled to receive the dividend payable
on such shares on the corresponding Dividend Payment Date, notwithstanding the
redemption of such shares following such Record Date. Except as provided for in
the preceding sentence, no payment or allowance will be made for accrued
dividends on any shares of Series D Preferred Stock called for redemption.
(ii) Procedure for Redemption. (A) On and after the Mandatory
Redemption Date or Provisional Redemption Date, as the case may be, unless the
Company defaults in the payment of the applicable redemption price, dividends
will cease to accumulate on shares of Series D Preferred Stock called for
redemption and all rights of Holders of such shares will terminate except for
the right to receive the Mandatory Redemption Price or Provisional Redemption
Price, as the case may be, without interest.
(B) With respect to a redemption pursuant to
paragraph (e)(i) (A) or (B), the Company will send a written notice of
redemption by first class mail to each Holder of record of shares of Series D
Preferred Stock, not fewer than 30 days nor more than 60 days prior to the
Mandatory Redemption Date or Provisional Redemption Date, as applicable, at its
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<PAGE> 8
registered address (the "Redemption Notice"); provided, however, that neither
the failure to give such notice nor any deficiency therein shall affect the
validity of the procedure for the redemption of any shares of Series D Preferred
Stock to be redeemed except as to the Holder or Holders to whom the Company has
failed to give said notice or except as to the Holder or Holders whose notice
was defective. The Redemption Notice shall state:
(1) that the redemption is pursuant to paragraph
(e)(i) (A) or (B) hereof, as applicable;
(2) the Mandatory Redemption Price or Provisional
Redemption Price, as applicable and, in the case of a Provisional Redemption,
whether the Provisional Redemption Price will be paid in cash, through the
delivery of shares of Common Stock, or a combination thereof (and, if a
combination thereof, stating the percentages of the total Provisional Redemption
Price that will be paid in cash and in shares of Common Stock);
(3) in the case of a Provisional Redemption as to
which all or a portion of the Provisional Redemption Price is to be paid through
the delivery of shares of Common Stock, that the determination of the number of
shares of Common Stock to be delivered shall be calculated as set forth in
paragraph (e)(i)(B);
(4) whether all or less than all the outstanding
shares of the Series D Preferred Stock are to be redeemed and the total number
of shares of the Series D Preferred Stock being redeemed;
(5) the Mandatory Redemption Date or Provisional
Redemption Date, as applicable;
(6) that the Holder is to surrender to the Company,
in the manner, at the place or places designated, his certificate or
certificates representing the shares of Series D Preferred Stock to be redeemed;
and
(7) that dividends on the shares of the Series D
Preferred Stock to be redeemed shall cease to accumulate on such Mandatory
Redemption Date or Provisional Redemption Date, as the case may be, unless the
Company defaults in the payment of the Mandatory Redemption Price or Provisional
Redemption Price, as the case may be.
(C) Each Holder of Series D Preferred Stock shall
surrender the certificate or certificates representing such shares of Series D
Preferred Stock to the Company, duly endorsed (or otherwise in proper form for
transfer, as determined by the Company), in the manner and at the place
designated in the Redemption Notice, and the full Mandatory Redemption Price or
Provisional Redemption Price, as applicable, for such shares shall be payable in
cash and/or shares of Common Stock, as the case may be, on the Mandatory
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<PAGE> 9
Redemption Date or Provisional Redemption Date, as applicable, to the person
whose name appears on such certificate or certificates as the owner thereof, and
each surrendered certificate shall be canceled and retired. In the event that
less than all of the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares.
(D) The Company shall comply with any securities laws
and regulations, to the extent such laws and regulations are applicable, in
connection with any mandatory or provisional redemption.
(f) Voting Rights.
(A) The Holders of Series D Preferred Stock shall not
be entitled to vote on any matter required or permitted to be voted upon by the
stockholders of the Company, except as otherwise required under Nevada law or as
hereinafter provided.
(B) (1) If (x) dividends on the Series D Preferred
Stock are in arrears and unpaid for six or more Dividend Periods (whether or not
consecutive), (y) the Company has not redeemed in cash all of the outstanding
shares of Series D Preferred Stock on the Mandatory Redemption Date, or (z)
after the occurrence of a Non-Stock Change of Control, the Company fails to
offer to repurchase or convert the Series D Preferred Stock in accordance with
the terms of paragraph (g)(H)(2) or fails to repurchase or convert any shares of
Series D Preferred Stock accepting such offer on the Repurchase Date (each a
"Voting Rights Triggering Event"), then the Holders of the then outstanding
shares of Series D Preferred Stock (together with the holders of Parity Stock
upon which like rights have been conferred and are exercisable), voting
separately and as a class, shall have the right and power to elect to serve on
the Board of Directors the lesser of (x) two additional members to the Board of
Directors or (y) that number of directors constituting at least 25% of the
members of the Board of Directors, and the number of members of the Board of
Directors shall, subject to paragraph (f)(B)(5), be immediately and
automatically increased by such number.
(2) The voting rights set forth in paragraph
(f)(B)(1) above will continue until such time as all dividends in arrears on the
Series D Preferred Stock are paid in full or all Voting Rights Triggering Events
are cured or waived, at which time the term of any directors elected pursuant to
the provisions of paragraph (f)(B)(1) above (subject to the right of holders of
any other Preferred Stock to elect directors pursuant to the terms of the
instruments governing such Preferred Stock) shall terminate forthwith and the
number of directors constituting the Board of Directors shall be decreased by
such number (until the occurrence of any subsequent Voting Rights Triggering
Event).
At any time after voting power to elect directors shall have
become vested and be continuing in the Holders of Series D Preferred Stock
(together with the holders of Parity Stock upon which like rights have been
conferred and are exercisable) pursuant to paragraph (f)(B)(1)
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<PAGE> 10
hereof, or if vacancies shall exist in the offices of directors elected by such
holders, a proper officer of the Company may, and upon the written request of
the Holders of record of at least 25% of the shares of Series D Preferred Stock
then outstanding or the holders of 25% of the shares of Parity Stock then
outstanding upon which like rights have been conferred and are exercisable
addressed to the secretary of the Company shall, call a special meeting of the
Holders of Series D Preferred Stock and the holders of such Parity Stock for the
purpose of electing the directors which such holders are entitled to elect
pursuant to the terms hereof; provided, however, that no such special meeting
shall be called if the next annual meeting of stockholders of the Company is to
be held less than 60 days and more than 30 days after the voting power to elect
directors shall have become vested, in which case such meeting shall be deemed
to have been called for such next annual meeting. If such meeting shall not be
called by a proper officer of the Company within 20 days after personal service
to the secretary of the Company at its principal executive offices, then the
Holders of record of at least 25% of the outstanding shares of Series D
Preferred Stock or the holders of 25% of the shares of Parity Stock upon which
like rights have been conferred and are exercisable may designate in writing one
of their members to call such meeting at the expense of the Company, and such
meeting may be called by the person so designated upon the notice required for
the annual meetings of stockholders of the Company and shall be held at the
place for holding the annual meetings of stockholders. Any holder of Series D
Preferred Stock or such Parity Stock so designated shall have, and the Company
shall provide, access to the lists of Holders of Series D Preferred Stock and
the holders of such Parity Stock to be called pursuant to the provisions hereof.
If no special meeting of the Holders of Series D Preferred Stock and the holders
of such Parity Stock is called as provided in this paragraph (f)(B), then such
meeting shall be deemed to have been called for the next annual meeting of
stockholders of the Company or special meeting of the holders of any other
Capital Stock of the Company.
(3) At any meeting held for the purposes of electing
directors at which the Holders of Series D Preferred Stock (together with the
holders of Parity Stock upon which like rights have been conferred and are
exercisable) shall have the right, voting together as a separate class, to elect
directors as aforesaid, the presence in person or by proxy of the holders of at
least a majority in voting power of the outstanding shares of Series D Preferred
Stock (and such Parity Stock) shall be required to constitute a quorum thereof.
(4) Any vacancy occurring in the office of a director
elected by the Holders of Series D Preferred Stock (and such Parity Stock) may
be filled by the remaining director elected by the Holders of Series D Preferred
Stock (and such Parity Stock) unless and until such vacancy shall be filled by
the Holders of Series D Preferred Stock (and such Parity Stock).
(5) If an event occurs at any time that results in
the holders of any Parity Stock (other than the holders of the Series B
Preferred Stock or the Series C Preferred Stock) having voting rights to elect
directors to the Board of Directors, then Holders of Series D Preferred Stock
shall, whether or not such event otherwise constitutes a Voting Rights
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<PAGE> 11
Triggering Event pursuant to paragraph (f)(B)(1), have the voting rights set
forth in paragraphs (f)(B)(1) and (f)(B)(2), and such event shall be deemed (for
purposes of this paragraph (f) only) to constitute a Voting Rights Triggering
Event. In addition, in the event that during a time in which directors elected
by the Holders of Series D Preferred Stock pursuant to this paragraph (f)(B) are
serving on the Board of Directors ("Previously-Elected Directors") an event
occurs that results in holders of Parity Stock (other than the holders of the
Series B Preferred Stock or the Series C Preferred Stock) having voting rights
to elect (voting together with the Holders of Series D Preferred Stock) at least
two directors to the Board of Directors, the Holders of Series D Preferred Stock
shall vote together with the holders of such Parity Stock to elect such new
directors, and upon the election of the new directors the Previously-Elected
Directors shall (unless such Previously-Elected Directors are elected as new
directors) cease to serve on the Board of Directors.
(C) (1) So long as any shares of the Series D
Preferred Stock are outstanding, the Company will not (i) authorize, create (by
way of reclassification or otherwise), increase the authorized amount of or
issue any class or series of Senior Stock or any obligation or security
convertible into, exchangeable for or evidencing the right to purchase shares of
any class or series of Senior Stock, or (ii) amend the provisions of
paragraph(g)(H) hereof, without the affirmative vote or consent of Holders of at
least two-thirds of the shares of Series D Preferred Stock then outstanding,
voting or consenting, as the case may be, as one class, given in person or by
proxy, either in writing or by resolution adopted at an annual or special
meeting. However, without the consent of any Holder of Series D Preferred Stock,
the Company may increase the authorized number of shares of, issue additional
shares of or create additional classes of Common Stock, increase the authorized
number of shares of Preferred Stock or issue a series of Parity Stock or Junior
Stock.
(2) So long as any shares of the Series D Preferred
Stock are outstanding, the Company will not (i) amend this Certificate of
Designation, either directly or indirectly, or through merger or consolidation
with another entity, so as to affect adversely the specified rights,
preferences, privileges or voting rights of Holders of shares of Series D
Preferred Stock or to increase or decrease the aggregate number of authorized
shares of Series D Preferred Stock or (ii) waive any Voting Right Triggering
Event or compliance with any provision hereof without the affirmative vote or
consent of Holders of at least a majority of the issued and outstanding shares
of Series D Preferred Stock, voting or consenting, as the case may be, as one
class, given in person or by proxy, either in writing or by resolution adopted
at an annual or special meeting.
(3) So long as any shares of the Series D Preferred
Stock are outstanding, without the consent of each Holder affected, an amendment
or waiver of the Articles or of this Certificate of Designation may not (with
respect to any shares of Series D Preferred Stock held by a non-consenting
Holder) (i) alter the voting rights with respect to the Series D Preferred Stock
(other than the waiver of a Voting Rights Triggering Event as provided in
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paragraph (f)(C)(2)) or reduce the number of shares of Series D Preferred Stock
whose holders must consent to an amendment, supplement or waiver; (ii) reduce
the Liquidation Preference of or alter the provisions with respect to the
redemption of the Series D Preferred Stock; (iii) reduce the rate of or change
the time for payment of dividends on any share of Series D Preferred Stock; (iv)
make any share of Series D Preferred Stock payable in any form other than that
stated in this Certificate of Designation; (v) after the occurrence of a Change
of Control, amend the provisions of paragraph (g)(H) hereof; or (vi) make any
change in the amendment and waiver provisions of this paragraph (f)(C)(3).
(4) Notwithstanding the foregoing, the Company when
authorized by resolutions of its Board of Directors may amend or supplement this
Certificate of Designation without the consent of any Holder to (i) cure any
ambiguity, defect or inconsistency or (ii) make any other change provided that
such amendments or supplements shall not adversely affect the interests of the
Holders.
(5) Except as set forth in paragraph (f)(C)(1) or (2)
above, (x) the creation, authorization or issuance of any shares of any Junior
Stock or Parity Stock, including the designation of a series of Preferred Stock,
or (y) the increase or decrease in the amount of authorized Capital Stock of any
class, including Preferred Stock, shall not require the consent of Holders of
Series D Preferred Stock and shall not be deemed to affect adversely the
interests, rights, preferences, privileges or voting rights of shares of Series
D Preferred Stock.
(D) In any case in which the Holders of Series D
Preferred Stock shall be entitled to vote pursuant to this paragraph (f) or
pursuant to Nevada law, each Holder of Series D Preferred Stock entitled to vote
with respect to such matters shall be entitled to one vote for each share of
Series D Preferred Stock held; provided that any shares of Series D Preferred
Stock that are held by the Company or by any Person controlled by the Company
shall not entitle the Holders thereof to any votes with respect thereto. For
purposes of this provision, "controlled by," as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting equity securities, by agreement or otherwise.
(g) Conversion.
(A) (1) Except as set forth in paragraph (g)(A)(2)
below, at any time after the Issue Date, at the option of the Holder thereof,
any share of Series D Preferred Stock may be converted into such number of fully
paid and nonassessable shares of Common Stock (calculated as to each conversion
to the nearest 1/10 of a share), as equals the Liquidation Preference divided by
the Conversion Price, determined as hereinafter provided, in effect at the time
of conversion. In case a share of Series D Preferred Stock is called for
redemption, such conversion right in respect of the share of Series D Preferred
Stock so called shall expire at the
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close of business on the Mandatory Redemption Date or Provisional Redemption
Date, as applicable, unless the Company defaults in making the payment due upon
redemption.
(2) On or after [_________], 2003, if the closing
price of the Common Stock equals or exceeds 140% of the then current Conversion
Price, as hereinafter provided, for at least 20 Trading Days within any 30
consecutive Trading Day period, then the Company shall have the right, at its
option, to cancel the conversion rights of the Holders of the Series D Preferred
Stock described in the paragraph above (the "Conversion Rights"). The closing
price for each Trading Day will be the last sales price on such date on the
Nasdaq National Market (or the principal national securities market or exchange
on which the Common Stock is then being traded). The Company may exercise such
right by issuing a press release for publication on the Dow Jones News Service
(or a comparable news service) prior to the opening of business on the second
Trading Day after any period in which the condition in the preceding sentence
has been met. The press release shall announce that (i) the Company is canceling
the Conversion Rights of the Series D Preferred Stock and (ii) the date such
Conversion Rights will expire (the "Expiration Date"). The press release shall
also provide the Conversion Price and the closing price of the Common Stock,
each as of the close of business of the previous Trading Day. The Company must
notify the Holders of the Series D Convertible Preferred Stock of the expiration
of the Conversion Rights by first-class mail not more than four business days
after the issuance of the press release, provided, however, that neither the
failure to give such notice nor any deficiency therein shall affect the validity
of the procedure for the elimination of conversion rights except with respect to
the Holder or Holders to whom the Company failed to give such notice or whose
notice was defective. The Company will select the date upon which the Conversion
Rights will expire, which date will be not less than 30 nor more that 60 days
after the date of the issuance of the press release. The Conversion Rights of
the Holders of the Series D Convertible Preferred Stock will terminate at the
close of business of the Expiration Date.
(3) The price at which Common Stock shall be
delivered upon conversion (herein called the "Conversion Price") shall be
initially $[________] per share of Common Stock. The Conversion Price shall be
adjusted in certain instances as provided in paragraph (g)(D) or paragraph
(g)(H).
(B) In order to exercise the conversion privilege
provided for in paragraph (g)(A)(1), the Holder of any share of Series D
Preferred Stock to be converted shall surrender the certificate for such share
of Series D Preferred Stock, duly endorsed or assigned to the Company or in
blank, at the office of the Transfer Agent or at any office or agency of the
Company maintained for that purpose, accompanied by written notice to the
Company in the form of Exhibit B that the Holder elects to convert such share of
Series D Preferred Stock or, if fewer than all the shares of Series D Preferred
Stock represented by a single share certificate are to be converted, the number
of shares represented thereby to be converted. Such notice shall also contain
the office or the address to which the Company should deliver shares of Common
Stock issuable upon conversion (and any other payments or certificates related
thereto).
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Holders of shares of Series D Preferred Stock at the close of
business on a Record Date will be entitled to receive the dividend payable on
such shares on the corresponding Dividend Payment Date notwithstanding the
conversion of such shares following such Record Date and prior to such Dividend
Payment Date. However, shares of Series D Preferred Stock surrendered for
conversion during the period between the close of business on any Record Date
and the opening of business on the corresponding Dividend Payment Date (except
shares converted after the issuance of a notice of redemption with respect to a
redemption date during such period, which will be entitled to such dividend)
must be accompanied by payment of an amount equal to the dividend payable on
such shares on such Dividend Payment Date. A Holder of shares of Series D
Preferred Stock on a Record Date who (or whose transferee) tenders any such
shares for conversion into shares of Common Stock on such Dividend Payment Date
will receive the dividend payable by the Company on such shares of Series D
Preferred Stock on such date, and the converting Holder need not include payment
of the amount of such dividend upon surrender of shares of Series D Preferred
Stock for conversion. Except as provided above, the Company will make no payment
or allowance for unpaid dividends, whether or not in arrears, on converted
shares.
Shares of Series D Preferred Stock shall be deemed to have
been converted immediately prior to the close of business on the date such
shares of Series D Preferred Stock are surrendered for conversion in accordance
with the foregoing provisions, and at such time the rights of the Holders of
such shares of Series D Preferred Stock as Holders shall cease, and the person
or persons entitled to receive the Common Stock issuable upon conversion shall
be treated for all purposes as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver to such office or agency as the converting
Holder shall have designated in its written notice to the Company a certificate
or certificates for the number of full shares of Common Stock issuable upon
conversion, together with payment in lieu of any fraction of a share, as
provided in paragraph (g)(C) hereof.
In the case of any conversion of fewer than all the shares of
Series D Preferred Stock evidenced by a certificate, upon such conversion the
Company shall execute and the Transfer Agent shall authenticate and deliver to
the Holder thereof (at the address designated by such Holder), at the expense of
the Company, a new certificate or certificates representing the number of
unconverted shares of Series D Preferred Stock.
(C) No fractional shares of Common Stock shall be
issued upon the conversion of a share of Series D Preferred Stock. If more than
one share of Series D Preferred Stock shall be surrendered for conversion at one
time by the same Holder, the number of full shares of Common Stock which shall
be issuable upon conversion thereof shall be computed on the basis of the
aggregate shares of Series D Preferred Stock so surrendered. Instead of any
fractional share of Common Stock which would otherwise be issuable upon
conversion of any
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share of Series D Preferred Stock, the Company shall pay a cash adjustment in
respect of such fraction in an amount equal to the same fraction of the last
sales price of a share of Common Stock on the Nasdaq National Market (or the
principal national securities exchange or other securities market on which the
Common Stock is then being traded) on the last Trading Day immediately preceding
the day of conversion.
(D) The Conversion Price shall be adjusted from time
to time by the Company as follows, each a "Conversion Price Adjustment Event"
(the variables have the definitions set forth in paragraph (g)(D)(7) below):
(1) If the Company shall make any redemption payment
or payment of a dividend or other distribution payable in shares of Common Stock
to all holders of any class of Capital Stock of the Company, other than the
issuance of shares of Common Stock in connection with the payment (1) in
redemption for, of dividends on, or upon the conversion of, the Series D
Preferred Stock, (2) in redemption for, of dividends on, or upon the conversion
of the Series B Preferred Stock, Series C Preferred Stock or any Parity Stock in
accordance with the Certificates of Designation governing such securities, or
(3) to all Holders of the Series D Preferred Stock based upon the number of
shares of Common Stock into which the Series D Preferred Stock is then
convertible, then the Conversion Price in effect immediately prior to such event
shall be adjusted pursuant to the formula: X/Y multiplied by CP=ACP.
(2) If the Company shall issue to all holders of
shares of Common Stock rights, options or warrants entitling them to subscribe
for or purchase shares of Common Stock or securities convertible into or
exchangeable for shares of Common Stock at an exercise price that is less than
the closing price of a share of Common Stock on the Nasdaq National Market (or
the principal national securities exchange or other securities market on which
the Common Stock is then being traded) on the last Trading Day immediately
preceding the date of issuance of such rights, options or warrants, then the
Conversion Price in effect immediately prior to such event shall be adjusted
pursuant to the formula: X/X+(U((ClosePrice- EP)/ClosePrice)) multiplied by
CP=ACP; provided, however, that no adjustment will be made with respect to such
a distribution if the Holder of shares of the Series D Preferred Stock would be
entitled to receive such rights, options or warrants at any time on or before
the conversion at any time of shares of the Series D Preferred Stock into Common
Stock and provided, further, that if such rights, options or warrants are only
exercisable upon the occurrence of certain triggering events, then the
Conversion Price will not be adjusted until such triggering events occur. If any
options, warrants or other rights of the nature described in this paragraph
(g)(D)(2) ("Rights") expire without exercise or conversion, the Conversion Price
will be readjusted to the Conversion Price which would otherwise be in effect
had the adjustment made upon the issuance of such Rights been made on the basis
of delivery of only the number of shares of Common Stock actually delivered upon
the exercise or conversion of such Rights.
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(3) In the case of any subdivision, combination or
reclassification of the Common Stock, then the Conversion Price in effect
immediately prior to such event shall be adjusted pursuant to the formula: X/Y
multiplied by CP=ACP.
(4) If the Company shall make any distribution
consisting exclusively of cash (excluding any cash distributed in a transaction
for which paragraph (g)(D)(12) below is applicable) to all holders of shares of
Common Stock (which distribution is not also being made to the Holders of Series
D Preferred Stock based on the number of shares of Common Stock into which the
Series D Preferred Stock is then convertible) in an aggregate amount that,
combined together with (1) all other such cash distributions made within the
then-preceding 12 months in respect of which no adjustment has been made and (2)
any cash and the fair market value (as determined by the Board of Directors in
good faith pursuant to a resolution) of other consideration paid or payable in
respect of any tender offer by the Company or any of its subsidiaries for shares
of Common Stock concluded within the then-preceding 12 months in respect of
which no adjustment has been made, exceeds 15% of the Company's Pre-Distribution
Market Capitalization (as defined in paragraph (g)(D)(7) below), then the
Conversion Price in effect immediately prior to such event shall be adjusted
pursuant to the formula: CP- (CP multiplied by ((Cash-15% PDMC)/PDMC))=ACP.
There will be no adjustment to the Conversion Price if (Cash-15% PDMC) is less
than or equal to zero.
(5) In the case of the completion of a tender or
exchange offer made by the Company or any of its subsidiaries for shares of
Common Stock (i) that involves an aggregate consideration that, together with
(1) any cash and other consideration payable in a tender or exchange offer by
the Company or any of its subsidiaries for shares of Common Stock expiring
within the then-preceding 12 months in respect of which no adjustment has been
made and (2) the aggregate amount of any such cash distributions referred to in
paragraph (g)(D)(4) above to all holders of shares of Common Stock within the
then-preceding 12 months in respect of which no adjustments have been made,
exceeds 15% of the Company's Post-Tender Market Capitalization (as defined in
paragraph (g)(D)(7) below) and (ii) where the tender offer price or exchange
offer price per share of Common Stock is greater than the closing price of the
Common Stock on the Trading Day immediately succeeding the Expiration Time, then
the Conversion Price in effect immediately prior to such event shall be adjusted
pursuant to the formula: CP multiplied by ((EX multiplied by TotSh)/(TPur +
(NetSh multiplied by EX))) = ACP. There will be no adjustment to the Conversion
Price if the tender offer price or exchange offer price per share of Common
Stock is less than or equal to EX or if TOff is not greater than 15% of PTMC.
(6) If the Company shall make a distribution to all
holders of Common Stock (which distribution is not also being made to the
Holders of the Series D Preferred Stock based on the number of shares of Common
Stock into which the Series D Preferred Stock is then convertible) consisting of
(i) evidences of indebtedness, (ii) shares of Capital Stock of the Company other
than Common Stock, or (iii) assets other than cash, including securities, but
excluding those dividends and those issuances of rights, options, warrants and
other
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<PAGE> 17
distributions for which an adjustment to the Conversion Price as referred to
above is applicable (other than in connection with a merger effected solely to
reflect a change in the jurisdiction of incorporation of the Company), then the
Conversion Price in effect immediately prior to such event shall be adjusted
pursuant to the formula: CP-(Value/#Sh)=ACP.
(7) Variables. In the preceding descriptions, the
variables have the following definitions:
"U" equals the number of shares of Common Stock underlying all
rights, options or warrants issued to holders of Common Stock pursuant to
paragraph (g)(D)(2) above entitling such holders to subscribe for or purchase
shares of Common Stock or securities convertible into or exchangeable for shares
of Common Stock issued in the Conversion Price Adjustment Event;
"X" equals the total number of shares of Common Stock
outstanding immediately prior to the Conversion Price Adjustment Event
(excluding unexercised options, warrants or rights);
"Y" equals the total number of shares of Common Stock
outstanding immediately after the Conversion Price Adjustment Event (excluding
unexercised options, warrants or rights);
"Cash" equals the sum of (a) any distribution consisting
exclusively of cash (excluding any cash distributed upon a merger or
consolidation to which paragraph (g)(D)(12) below applies) to all holders of
shares of Common Stock (which distribution is not also being made to the Holders
of Series D Preferred Stock based upon the number of shares of Common Stock into
which the Series D Preferred Stock is then convertible) and (b) all other such
all-cash distributions made within the then-preceding 12 months in respect of
which no adjustment has been made and (c) any cash and the fair market value of
other consideration (as determined by the Board of Directors in good faith and
pursuant to a resolution) paid or payable in respect of any tender offer by the
Company or any of its subsidiaries for shares of any class of Common Stock
concluded within the then-preceding 12 months in respect of which no adjustment
has been made pursuant to paragraph (g)(D)(4) or (5);
"ClosePrice" means, with respect to any date, the last sales
price of a share of Common Stock on the Nasdaq National Market (or the principal
national securities exchange or other securities market on which the Common
Stock is then being traded) on the last Trading Day immediately preceding such
date;
"EP" equals the exercise price or other consideration to be
paid by the holder upon the conversion or exchange of "U";
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<PAGE> 18
"EX" equals the closing price of the Common Stock on the
Trading Day immediately succeeding the Expiration Time;
"Expiration Time" means, with respect to a tender or exchange
offer giving rise to a Conversion Price Adjustment Event pursuant to paragraph
(g)(D)(5), the last time that tenders of shares of Common Stock could have been
made pursuant to the terms of such tender or exchange offer (as the same may be
amended);
"NetSh" means a number of shares of Common Stock equal to (a)
TotSh minus (b) Purchased Shares;
"PDMC" or "Pre-Distribution Market Capitalization" means, with
respect to a Conversion Price Adjustment Event pursuant to paragraph (g)(D)(4),
an amount equal to the product of (a) the ClosePrice of the Common Stock as of
the record date with respect to the distribution constituting such Conversion
Price Adjustment Event multiplied by (b) the number of shares of Common Stock
outstanding at the close of business on the record date for such distribution;
"PTMC" or "Post-Tender Market Capitalization" means, with
respect to a Conversion Price Adjustment Event pursuant to paragraph (g)(D)(5),
an amount equal to the product of (a) EX multiplied by (b) TotSh;
"Purchased Shares" means, in connection with a tender or
exchange offer giving rise to a Conversion Price Adjustment Event pursuant to
paragraph (g)(D)(5), the number of shares of Common Stock accepted (up to any
maximum number of such shares specified in the terms of such tender or exchange
offer) and validly tendered and not withdrawn as of the Expiration Time;
"#Sh" equals the number of shares of Common Stock receiving
the distribution contemplated in paragraph (g)(D)(6);
"TOff" equals the sum of (a) the aggregate consideration paid
by the Company or any of its subsidiaries for shares of Common Stock in a tender
or exchange offer made by the Company or any of its subsidiaries for shares of
Common Stock and (b) any cash or other consideration payable in a tender or
exchange offer by the Company or any of its subsidiaries for shares of Common
Stock expiring within the then- preceding 12 months in respect of which no
adjustment has been made and (c) the aggregate amount of any such all-cash
distributions referred to in paragraph (g)(D)(4) to all holders of shares of
Common Stock within the then-preceding 12 months in respect of which no
adjustments have been made;
"TotSh" equals the total number of shares of Common Stock
outstanding (including any shares tendered in the tender or exchange offer) at
the Expiration Time;
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"TPur" equals the product of (a) the fair market value (as
determined by the Board of Directors in good faith pursuant to a resolution) of
the consideration payable for one share of Common Stock under the terms of the
tender or exchange offer giving rise to a Conversion Price Adjustment Event
pursuant to paragraph (g)(D)(5) multiplied by (b) the number of Purchased
Shares;
"Value" equals the aggregate fair market value of the
distribution described in paragraph (g)(D)(6), as determined in good faith by
the Board of Directors of the Company pursuant to a resolution;
"CP" equals the Conversion Price immediately prior to the
Conversion Price Adjustment Event;
"ACP" equals the Conversion Price immediately after the
Conversion Price Adjustment Event.
An adjustment made pursuant to paragraph (g)(D) shall become
effective: (A) in the case of a Conversion Price Adjustment Event described in
paragraph (g)(D)(1), (2), (4) or (6), immediately following the close of
business on the record date for the determination of holders of Common Stock
entitled to participate in such event; or (B) in the case of a Conversion Price
Adjustment Event described in paragraph (g)(D)(3), the close of business on the
day upon which such corporate action becomes effective; or (C) in the case of a
Conversion Price Adjustment Event described in paragraph (g)(D)(5), the close of
business on the Trading Day immediately succeeding the Expiration Time of such
tender offer or exchange offer.
(8) De Minimis Adjustments. No adjustment in the
Conversion Price shall be required (a) unless such adjustment would require an
increase or decrease of at least 1% in such price or (b) with respect to rights,
options or warrants issued pursuant to the Company's employee benefit plans;
provided, however, that any adjustments which by reason of paragraph
(g)(D)(8)(a) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this paragraph
(g)(D)(8) shall be made by the Company and shall be made to the nearest cent or
to the nearest one-hundredth of a share, as the case may be. No adjustment need
be made for a change in the par value or no par value of the Common Stock.
(9) Reductions in Conversion Price. The Company shall
be entitled to make such reductions in the Conversion Price, in addition to
those required by this paragraph (g)(D), as the Company in its discretion shall
determine to be advisable in order that any stock dividends, subdivision of
shares, distribution of rights to purchase stock or securities or distribution
of securities convertible into or exchangeable for stock hereafter made by the
Company to its stockholders shall not be taxable to the recipients. In the event
the Company elects to make such a reduction in the Conversion Price, the Company
will comply with the
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requirements of Rule 14e-1 under the Exchange Act, and any other securities laws
and regulations thereunder if and to the extent that such laws and regulations
are applicable in connection with the reduction of the Conversion Price.
Whenever the Conversion Price is so decreased, the Company shall mail to Holders
of record of shares of Series D Preferred Stock a notice of the decrease at
least 15 days before the date the decreased Conversion Price takes effect, and
such notice shall state the decreased Conversion Price.
(10) Decreases in Conversion Price. The Company from
time to time may decrease the Conversion Price by an amount determined by the
Board of Directors and described in a notice as hereinafter provided for any
period of time if the period is at least 20 days and if the decrease is
irrevocable during such period. Whenever the Conversion Price is so decreased,
the Company shall mail to Holders of record of shares of Series D Preferred
Stock a notice of the decrease at least 15 days before the date the decreased
Conversion Price takes effect, and such notice shall state the decreased
Conversion Price and the period it will be in effect.
(11) Distribution of Rights, Options or Warrants. In
the event that, after the issuance of the Series D Preferred Stock, the Company
distributes rights, options or warrants (other than those referred to in
paragraph (g)(D)(2) above and other than a distribution of rights, options or
warrants being made pro rata to the Holders of the Series D Preferred Stock
based upon the number of shares of Common Stock into which the Series D
Preferred Stock is then convertible) pro rata to all holders of shares of Common
Stock, so long as any such rights, options or warrants have not expired or been
redeemed by the Company, the Holder of any shares of Series D Preferred Stock
surrendered for conversion will be entitled to receive upon such conversion, in
addition to the shares of Common Stock then issuable upon such conversion (the
"Conversion Shares"), a number of rights, options or warrants to be determined
as follows:
(a) if such conversion occurs on or prior to the
date (a "Distribution Date") for the distribution to the holders of rights,
options or warrants of separate certificates evidencing such rights, options or
warrants, the same number of rights, options or warrants to which a holder of a
number of shares of Common Stock equal to the number of Conversion Shares is
entitled at the time of such conversion in accordance with the terms and
provisions applicable to the rights, options or warrants; and
(b) if such conversion occurs after such
Distribution Date, the same number of rights, options or warrants to which a
holder of the number of shares of Common Stock into which such Series D
Preferred Stock was convertible immediately prior to such Distribution Date
would have been entitled on such Distribution Date in accordance with the terms
and provisions of and applicable to the rights, options or warrants.
(12) Merger or Consolidation. (a) In case of:
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<PAGE> 21
(i) any merger or consolidation of the Company
with or into another Person; or
(ii) any sale, transfer or other disposition to
another Person of all or substantially all of the assets of the Company computed
on a consolidated basis; or
(iii) any statutory exchange of securities with
another Person, other than in connection with a merger or acquisition, (any of
the events described in this paragraph (g)(D)(12)(a) being referred to as a
"Transaction"), there will be no adjustment to the Conversion Price except as
required by paragraph (g)(H).
Upon the occurrence of a Transaction (other than (x) a
consolidation or merger in which the Company is the resulting or continuing
Person and which does not result in any reclassification or exchange of Common
Stock outstanding immediately prior to the merger or consolidation for cash,
securities or other property of another Person or (y) the sale, transfer,
assignment or distribution of shares of Capital Stock or assets to a subsidiary
of the Company) and subject to any adjustment to the Conversion Price required
by paragraph (g)(H)(1), each share of Series D Preferred Stock then outstanding
shall, without the consent of any Holder of Series D Preferred Stock (except as
expressly required by applicable law), become convertible only into the kind and
amount of shares of stock or other securities (of the Company or another
issuer), cash or other property receivable upon such Transaction by a holder of
the number of shares of Common Stock into which such share of Series D Preferred
Stock could have been converted immediately prior to the effective date of such
Transaction, assuming such holder of Common Stock failed to exercise his rights
of election, if any, as to the kind of amount of securities, cash or other
property receivable upon such Transaction.
(b) The provisions of this paragraph (g)(D)(12)
similarly shall apply to successive Transactions. The provisions of this
paragraph (g)(D)(12), and the provisions of paragraph (g)(H) to the extent
applicable, shall be the sole right of Holders of Series D Preferred Stock in
connection with any Transaction and, except as expressly provided by applicable
law and paragraph (f), such Holders shall have no separate vote thereon.
(13) Notice of Adjustment. Whenever the Conversion
Price is adjusted as provided in this paragraph (g)(D) or paragraph (g)(H), the
Company shall promptly file with the Transfer Agent an Officers' Certificate
setting forth the Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment. Promptly after delivery
of such certificate, the Company shall prepare a notice of such adjustment of
the Conversion Price setting forth the adjusted Conversion Price and the date on
which such adjustment becomes effective and shall mail such notice of such
adjustment of the Conversion Price to each Holder of Series D Preferred Stock at
such Holder's last address appearing on the register of holders maintained for
that purpose within 20 days of the effective date of such
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<PAGE> 22
adjustment. Failure to deliver such notice shall not affect the legality or
validity of any such adjustment.
(14) Deferred Issuance. In any case in which this
paragraph (g)(D) provides that an adjustment shall become effective immediately
after a record date for an event, the Company may defer until the occurrence of
such event issuing to the Holder of any share of Series D Preferred Stock
converted after such record date and before the occurrence of such event the
additional Common Stock issuable upon such conversion by reason of the
adjustment required by such event over and above the Common Stock issuable upon
such conversion before giving effect to such adjustment.
(15) Treasury Stock. For purposes of this paragraph
(g)(D), the number of shares of Common Stock at any time outstanding shall not
include shares held in the treasury of the Company but shall include shares
issuable in respect of scrip certificates issued in lieu of fractions of Common
Stock. The Company shall not pay any dividend or make any distribution on Common
Stock held in the treasury of the Company.
(E) In case:
(1) the Company shall declare a dividend (or any
other distribution) on its Common Stock payable otherwise than in cash out of
its earned surplus; or
(2) the Company shall authorize the granting to all
holders of its Common Stock of rights or warrants to subscribe for or purchase
any shares of Capital Stock of any class or of any other rights; or
(3) of any reclassification of the Common Stock of
the Company (other than a subdivision or combination of its outstanding Common
Stock), or of any consolidation or merger to which the Company is a party and
for which approval of any stockholders of the Company is required, or the sale
or transfer of all or substantially all the assets of the Company; or
(4) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then the Company shall cause to be filed with the Transfer Agent and at each
office or agency maintained for the purpose of conversion of the Series D
Preferred Stock, and shall cause to be mailed to all Holders at their last
addresses as they shall appear in the register of Holders maintained for that
purpose, at least 20 days (or 10 days in any case specified in clause (1) or (2)
above) prior to the applicable date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, rights or warrants, or, if a record is not to be taken, the date
as of which the holders of Common Stock of record to be
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entitled to such dividend, distribution, rights or warrants are to be determined
or (y) the date on which such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their Common Stock for securities, cash
or other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation or winding up. Failure to give the
notice required by this paragraph (g)(E) or any defect therein shall not affect
the legality or validity of any dividend, distribution, right, warrant,
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up, or the vote upon any such action.
(F) The Company shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
shares of Common Stock (or out of its authorized shares of Common Stock held in
the treasury of the Company), for the purpose of effecting the conversion of the
Series D Preferred Stock, the full number of shares of Common Stock then
issuable upon the conversion of all outstanding shares of Series D Preferred
Stock.
(G) The Company will pay any and all document, stamp
or similar issue or transfer taxes that may be payable in respect of the issue
or delivery of Common Stock on conversion of the Series D Preferred Stock
pursuant hereto. The Company shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that of the Holder of
the share of Series D Preferred Stock or the shares of Series D Preferred Stock
to be converted, and no such issue or delivery shall be made unless and until
the Person requesting such issue has paid to the Company the amount of any such
tax, or has established to the satisfaction of the Company that such tax has
been paid.
(H) (1) Notwithstanding any other provision in the
preceding paragraphs to the contrary, if any Common Stock Change of Control
occurs, then the Conversion Price in effect shall be adjusted immediately after
such Common Stock Change of Control as described below and, each share of the
Series D Preferred Stock shall be convertible solely into common stock of the
kind received by holders of Common Stock as the result of such Common Stock
Change of Control. For purposes of calculating any adjustment to be made
pursuant to this paragraph, immediately after a Common Stock Change of Control,
the Conversion Price in effect immediately prior to such Common Stock Change of
Control, but after giving effect to any prior adjustments, shall be adjusted by
multiplying such Conversion Price by a fraction, of which the numerator shall be
the Purchaser Stock Price (as defined in this paragraph (g)(H)(3)) and the
denominator shall be the Applicable Price (as defined in this paragraph
(g)(H)(3)); provided, however, that in the event of a Common Stock Change of
Control in which (x) 100% of the value of the consideration received by a holder
of Common Stock is common stock of the successor, acquirer, or other third party
(and cash, if any, is paid only with respect to any fractional interest in such
common stock resulting from such Common Stock Change of Control) and (y) all of
the Common Stock will have been exchanged for, converted into, or
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<PAGE> 24
acquired for, common stock (and cash only with respect to fractional interests)
of the successor, acquirer or other third party, the Conversion Price in effect
immediately prior to such Common Stock Change of Control shall thereupon be
adjusted by multiplying such Conversion Price by a fraction, of which the
numerator shall be one (1) and the denominator shall be the number of shares of
common stock of the successor, acquirer, or other third party received by a
holder of one share of Common Stock as a result of such Common Stock Change of
Control.
(2) If a Non-Stock Change of Control occurs, each
Holder of Series D Preferred Stock may require the Company to redeem all such
Holder's shares of Series D Preferred Stock at a price (the "Repurchase Price")
equal to 100% of the Liquidation Preference, plus accumulated and unpaid
dividends, if any, whether declared or undeclared, to the date fixed for such
redemption (the "Repurchase Date"); provided, however, that no Holder of Series
D Preferred Stock shall have the right to require the redemption or repurchase
of Series D Preferred Stock prior to the date on which the Company's Senior
Secured Notes mature or such earlier date on which the Senior Secured Notes have
been paid in full (the "Debt Maturity Date").
Following a Non-Stock Change of Control prior to the Debt
Maturity Date, if the Holders of Series D Preferred Stock, but for the proviso
set forth in the immediately preceding paragraph of this paragraph (H)(2), would
have the right to require the Company to redeem all such Holder's shares of
Series D Preferred Stock, then each Holder of Series D Preferred Stock may,
instead of requiring the Company to redeem or repurchase such Holder's shares of
Series D Preferred Stock, require the Company to convert such Holder's shares of
Series D Preferred Stock into Common Stock on the Repurchase Date as provided
below.
Subject to the conditions set forth below, the Repurchase
Price shall be, at the option of the Company, payable (v) in cash, (w) through
the delivery of a number of shares of Common Stock equal to the Repurchase Price
divided by the Discounted Stock Value or (x) any combination of (v) and (w). The
"Discounted Stock Value" means the product of (y) 95% and (z) the average of the
daily closing prices of the Common Stock for the five consecutive Trading Days
ending on (and including) the fourth Trading Day preceding such Repurchase Date.
The closing price for each Trading Day will be the last sales price on such date
on the Nasdaq National Market (or the principal securities exchange or other
securities market on which the Common Stock is then being traded). No fractional
shares of Common Stock shall be issued in connection with the payment of the
Repurchase Price. Instead, the Company shall pay to the Transfer Agent for
distribution to the Holders as provided herein cash in lieu of the fractional
portion of one share which may result from the computation of the number of
shares of Common Stock as set forth in the first two sentences of this paragraph
in an amount equal to the same fraction of the last sales price of a share of
Common Stock on the Nasdaq National Market (or the principal national securities
exchange or other securities market on which the Common Stock is then being
traded) on the fourth Trading Day immediately preceding the Repurchase Date. The
Transfer Agent is hereby authorized to aggregate any fractional shares of Common
Stock that would otherwise be distributable in connection with the payment of
the Repurchase
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Price, and to sell them at the best available price and distribute the proceeds
to the Holders thereof in proportion to their respective interests. The Company
shall reimburse the Transfer Agent for any expenses incurred with respect to
such sale, including brokerage commissions. If the Company is precluded from
paying cash for fractional shares, it shall pay cash to the Holders for the
fractional shares when it becomes legally and contractually able to pay such
cash.
The Company may elect to pay the Repurchase Price by
delivering shares of Common Stock only if:
(i) The shares of Common Stock of the Company to be issued as
payment of the Repurchase Price (x) shall not require registration under any
federal securities law before such shares may be freely transferable without
being subject to any transfer restrictions under the Securities Act or, if such
registration is required, such registration shall be completed and shall become
effective prior to the Repurchase Date, and (y) shall not require registration
with or approval of any governmental authority under any state law or any other
federal law before such shares may be validly issued or delivered or if such
registration is required or such approval must be obtained, such registration
shall be completed or such approval shall be obtained prior to the Repurchase
Date;
(ii) The shares of Common Stock of the Company to be issued
are, or shall have been, approved for listing on the Nasdaq National Market or
the New York Stock Exchange or listed on another national securities exchange,
in any case, prior to the Repurchase Date; and
(iii) All shares of Common Stock of the Company which may be
issued as payment of the Repurchase Price will be issued out of the Company's
authorized but unissued Common Stock and, will upon issue, be duly and validly
issued and fully paid and non-assessable and free of any preemptive or similar
rights.
In the event the Company is restricted from repurchasing
shares of the Series D Preferred Stock on the Repurchase Date pursuant to the
terms of its outstanding indebtedness, Holders of the Series D Preferred Stock
may convert each share of Series D Preferred Stock into a number of shares of
Common Stock equal to the Repurchase Price divided by the Discounted Stock
Value.
In connection with the conversion of shares of Series D Preferred Stock
on the Repurchase Date, the Company shall apply and use its best efforts to have
the shares of Common Stock to be issued upon conversion of the Series D
Preferred Stock approved for listing on the Nasdaq National Market or the New
York Stock Exchange or listing on another national securities exchange prior to
the Repurchase Date. All shares of Common Stock of the Company which may be
issued upon conversion of the Series D Preferred Stock as provided in this
paragraph (H)(2) will be issued out of the Company's authorized but unissued
Common Stock
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and will, upon issue, be duly and validly issued and fully paid and
non-assessable and free of any pre-emptive or similar rights.
In the case of a Repurchase Date falling after a
Record Date and prior to the related Dividend Payment Date, the Holders of the
Series D Preferred Stock at the close of business on such Record Date will be
entitled to receive the dividend payable on such shares on the corresponding
Dividend Payment Date, notwithstanding the redemption or conversion of such
shares following such Record Date. Except as provided for in the preceding
sentence, no payment or allowance will be made for accrued dividends on any
shares of Series D Preferred Stock redeemed or converted pursuant to this
paragraph (H) (2).
On and after the Repurchase Date, unless the Company defaults
in the payment of the Repurchase Price or the conversion of the Series D
Preferred Stock, dividends will cease to accumulate on shares of Series D
Preferred Stock to be redeemed or converted and all rights of Holders of such
shares will terminate except for the right to receive the Repurchase Price,
without interest, or the number of shares of Common Stock into which the shares
of the Series D Preferred Stock have been converted.
Within 30 days after the occurrence of a Non-Stock Change of
Control, the Company will (a) publish a notice of the occurrence of a Non-Stock
Change of Control in the Wall Street Journal or similar daily business
publication of national distribution and (b) send a written notice by first
class mail to each Holder of record of shares of Series D Preferred Stock, at
its registered address, and to the Transfer Agent (the "Company Notice");
provided, however, that neither the failure to give such notice nor any
deficiency therein shall affect the validity of the procedure for the redemption
or conversion of any shares of Series D Preferred Stock to be redeemed or
converted except as to the Holder or Holders to whom the Company has failed to
give said notice or except as to the Holder or Holders whose notice was
defective. The Company Notice shall state:
(i) that a Non-Stock Change of Control has occurred,
(ii) the Repurchase Price, whether shares of the Series D
Preferred Stock will be redeemed or converted, and in the event of a redemption,
whether the Repurchase Price will be paid in cash, through the delivery of
shares of Common Stock, or a combination thereof (and, if a combination thereof,
stating the percentages of the total Repurchase Price that will be paid in cash
and in shares of Common Stock);
(iii) in the event of a redemption, if all or a portion of the
Repurchase Price is to be paid through the delivery of shares of Common Stock,
that the determination of the number of shares of Common Stock to be delivered
shall be calculated as set forth above;
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(iv) in the event of a conversion, that the determination of
the number of shares of Common Stock to be delivered shall be calculated as set
forth above;
(v) the Repurchase Date, which shall be no earlier than the 30
days and no later than 60 days following the date of the Company Notice;
(vi) that to elect to participate in the redemption or
conversion, as the case may be, the Holder must deliver to the Transfer Agent
the certificate or certificates representing the shares of Series D Preferred
Stock to be redeemed or converted along with a written election to participate,
on or before 5:00 p.m., New York City time, on the 30th day after the date of
the Company Notice;
(vii) that unless the Company defaults in the payment of the
Repurchase Price or the conversion of the Series D Preferred Stock, dividends on
the shares of the Series D Preferred Stock tendered to the Company shall cease
to accumulate on such Repurchase Date; and
(viii) that any shares of Series D Preferred Stock not
tendered to the Company will continue to accumulate dividends in accordance with
the terms hereof.
To exercise the repurchase right or conversion right granted
by this paragraph (H)(2), a Holder of Series D Preferred Stock must surrender
the certificate or certificates representing such shares of Series D Preferred
Stock, duly endorsed (or otherwise in proper form for transfer, as determined by
the Company), together with a written notice of election to participate in the
repurchase right or conversion right, as the case may be, to the Transfer Agent
on or before 5:00 p.m., New York City time, on the 30th day after the date of
the Company Notice, and on the Repurchase Date (A) in the event of a redemption,
the Repurchase Price for such shares shall be payable in cash and/or shares of
Common Stock, as the case may be, to the person whose name appears on such
certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled and retired, or (B) such shares shall be converted
into shares of Common Stock and each surrendered certificate shall be canceled
and retired.
On the Repurchase Date, the Company shall, to the extent
lawful, (A) accept for payment or conversion shares of Series D Preferred Stock
validly tendered and (B) promptly deliver the Repurchase Price or the number of
shares of Common Stock into which such shares of Series D Preferred Stock have
been converted to each holder of shares of Series D Preferred Stock validly
tendered to the Company. The Company shall publicly announce the results of the
Non-Stock Change of Control offer on or as soon as practicable after the
Repurchase Date.
The Company shall comply with any securities laws and
regulations, to the extent such laws and regulations are applicable to the
repurchase or conversion of shares of the Series D Preferred Stock, in
connection with a Non-Stock Change of Control.
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<PAGE> 28
Notwithstanding the foregoing, the Company shall not be
required to offer to repurchase or convert, and repurchase or convert,
securities tendered pursuant to this paragraph (H)(2) following a Non-Stock
Change of Control if a third party makes the offer to repurchase securities
tendered pursuant to this paragraph (H)(2) in the manner, at the times and
otherwise in compliance with the requirements set forth in this paragraph (H)(2)
and purchases all of the Series D Preferred Stock validly tendered and not
withdrawn pursuant to such provision.
(3) For purposes of this paragraph (H), the following
terms shall have the meanings indicated:
"Applicable Price" means the average of the closing bid prices
for the Common Stock during the ten Trading Days prior to and including the
record date for the determination of the holders of Common Stock entitled to
receive cash, securities, property or other assets in connection with such
Common Stock Change of Control or, if there is no such record date, the date
upon which the holders of the Common Stock shall have the right to receive such
cash, securities, property or other assets, in each case, as adjusted in good
faith by the Board of Directors to appropriately reflect any of the events
referred to in paragraph (g)(D)(1) through (6).
"Beneficial Owner" means a beneficial owner as defined in
Rules 13d-3 and 13d-5 under the Exchange Act (or any successor rules), including
the provision of such Rules that a Person shall be deemed to have beneficial
ownership of all securities that such Person has a right to acquire within 60
days; provided that a Person will not be deemed a beneficial owner of, or to own
beneficially, any securities if such beneficial ownership (1) arises solely as a
result of a revocable proxy delivered in response to a proxy or consent
solicitation made pursuant to, and in accordance with, the Exchange Act and (2)
is not also then reportable on Schedule 13D or Schedule 13G (or any successor
schedule) under the Exchange Act.
"Change of Control" means: (i) the sale, lease, transfer,
conveyance, other disposition (other than by way of merger or consolidation), in
one or a series of related transactions, of all or substantially all the assets
of the Company and its subsidiaries taken as a whole to any "person" (as such
term is used in Section 13(d)(3) of the Exchange Act), (ii) the adoption of a
plan relating to the liquidation, dissolution or winding-up of the Company,
(iii) the consummation of any transaction (including any merger or
consolidation) the result of which is that any "person" (as defined above) other
than any Permitted Holder becomes the Beneficial Owner, directly or indirectly,
of more than 50% of the Voting Stock of the Company plus any voting stock not
yet outstanding but deemed to be Beneficially Owned by such "person" (as defined
above); (iv) the first day on which the Permitted Holders collectively become
the Beneficial Owners, directly or indirectly, of more than 70% of the Voting
Stock of the Company plus any voting stock not yet outstanding but deemed to be
Beneficially Owned by the Permitted Holders; or (v) the first day on which a
majority of the members of the Board of Directors are not Continuing Directors.
28
<PAGE> 29
"Common Stock Change of Control" means any Change of Control
in which more than 50% of the value (as determined in good faith by the Board of
Directors of the Company) of the consideration received by holders of Common
Stock consists of common stock that for each of the ten consecutive Trading Days
referred to in the definition of "Applicable Price" has been admitted for
listing or admitted for listing subject to notice of issuance on a national
securities exchange or quoted on the Nasdaq National Market; provided, however,
that a Change of Control shall not be a Common Stock Change of Control unless
either (i) the Company continues to exist after the occurrence of such Change of
Control and the outstanding shares of Series D Preferred Stock continue to exist
as outstanding shares of Series D Preferred Stock, or (ii) not later than the
occurrence of such Change of Control, the outstanding shares of Series D
Preferred Stock are converted into or exchanged for shares of convertible
preferred stock of a corporation succeeding to the business of the Company,
which convertible preferred stock has powers, preferences and relative,
participating, optional or other rights, and qualifications, limitations and
restrictions, substantially similar to those of the Series D Preferred Stock.
"Continuing Directors" means, as of any date of determination,
individuals who on the Issue Date constituted the Board of Directors (together
with any new directors whose election by the Board of Directors or whose
nomination for election by the Company's stockholders was approved by a vote of
a majority of the members of the Board of Directors then in office who either
were members of the Board of Directors on the Issue Date or whose election or
nomination for election was previously so approved).
"Non-Stock Change of Control" means any Change of Control
other than a Common Stock Change of Control.
"Permitted Holders" means: (i) Providence Equity Partners
Inc., JK&B Capital, L.P., or any of their affiliates, (ii) any of Maurice J.
Gallagher, Jr., Timothy P. Flynn, Rolla P. Huff or their respective spouses or
lineal descendants and their respective spouses (collectively, the "Individual
Family Holders") whether acting in their own name or as a majority of persons
having the power to exercise the voting rights attached to, or having investment
power over, shares held by others, (iii) any affiliate of any member of the
Individual Family Holders, (iv) any trust principally for the benefit of one or
more members of the Individual Family Holders (whether or not any member of the
Individual Family Holders is a trustee of such trust) and (v) any charitable
foundation whose majority of members, trustees or directors, as the case may be,
are persons referred to in (ii) above.
"Purchaser Stock Price" means, the product of (i) the number
of shares of common stock received as consideration in such Common Stock Change
of Control for each share of Common Stock, and (ii) the average of the per share
closing bid prices for the common stock received as consideration in such Common
Stock Change of Control for the ten consecutive Trading Days prior to and
including the record date for the determination of the
29
<PAGE> 30
holders of Common Stock entitled to receive such common stock, or if there is no
such record date, the date upon which the holders of the Common Stock shall have
the right to receive such common stock, in each case, as adjusted in good faith
by the Board of Directors to appropriately reflect any of the events referred to
in paragraph (g)(D)(1) through (6); provided, however, that if no such closing
bid prices exist, then the Purchaser Stock Price shall be set at a price
determined in good faith by the Board of Directors of the Company.
"Senior Secured Notes" means the Company's 13% Senior Secured
Notes due 2004.
(h) Reissuance of Series D Preferred Stock. Shares of Series D
Preferred Stock that have been issued and reacquired in any manner, including
shares purchased, redeemed, converted or exchanged, shall not be reissued as
shares of Series D Preferred Stock and shall (upon compliance with any
applicable provisions of the laws of Nevada) have the status of authorized and
unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock; provided,
however, that so long as any shares of Series D Preferred Stock are outstanding,
any issuance of such shares must be in compliance with the terms hereof. Upon
any such reacquisitions, the number of shares of Series D Preferred Stock
authorized pursuant to this Certificate of Designation shall be reduced by the
number of shares so acquired.
(i) Business Day. If any payment, redemption or exchange shall be
required by the terms hereof to be made on a day that is not a Business Day,
such payment, redemption or exchange shall be made on the immediately succeeding
Business Day.
(j) Limitation on Mergers and Asset Sales. Without the vote or consent
of the holders of a majority of the then outstanding shares of Series D
Preferred Stock, the Company may not consolidate or merge with or into, or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its assets to, any Person unless: (A) (1) the successor, transferee or lessee
(if not the Company) is organized and existing under the laws of the United
States of America or any State thereof or the District of Columbia; (2) the
Series D Preferred Stock shall be converted into or exchanged for and shall
become shares of such successor, transferee or lessee, having in respect of such
successor, transferee, or lessee substantially the same powers, preference and
relative participating, optional or other special rights and the qualifications,
limitations or restrictions thereon, that the Series D Preferred Stock had
immediately prior to such transaction ; and (3) the Company delivers to the
Transfer Agent an Officers' Certificate and an Opinion of Counsel stating that
such consolidation, merger or transfer complies with this Certificate of
Designation, or (B) (1) the consideration received by the holders of Common
Stock consists entirely of cash, (2) upon consummation of such transaction, each
share of Series D Preferred Stock shall be converted into or exchanged for cash
in an amount at least equal to the greater of (a) the amount which would be paid
to a holder of the number of shares of Common Stock into which such share of
Series D Preferred Stock could convert immediately prior to the consummation of
such transaction and (b) the liquidation preference of such share of Series D
30
<PAGE> 31
Preferred Stock plus all accumulated and unpaid dividends, if any, whether or
not declared, to the date of the consummation of such transaction and (3) the
Company delivers to the Transfer Agent an Officers' Certificate and an Opinion
of Counsel stating that such consolidation, merger or transfer complies with
this Certificate of Designation, or (C) (1) the consideration to be received by
the holders of Common Stock in respect of each share of Common Stock has a value
which, for any five Business Days during the period commencing on the date that
the Company publicly announces such consolidation, merger or transfer and ending
ten Business Days thereafter, is equal to or greater than 140% of the Conversion
Price in effect on the date of such public announcement by the Company, (2) the
Consolidated Net Worth of the successor, transferee or lessee is equal to or
exceeds an amount equal to the product of two, multiplied by the Consolidated
Net Worth of the Company immediately prior to such consolidation, merger, or
transfer, and (3) the Company delivers to the Transfer Agent an Officers'
Certificate and an Opinion of Counsel stating that such consolidation, merger or
transfer complies with this Certificate of Designation.
For purposes of this paragraph (j), "Consolidated Net Worth"
shall mean, in respect of any Person, the total amount shown on the balance
sheet of such Person and its consolidated subsidiaries, determined on a
consolidated basis in accordance with generally accepted accounting principles,
as of the end of the most recent fiscal quarter of such Person for which
internal financial statements are then available, prior to the taking of any
action for which the determination is made, as (i) the par or stated value of
all of the outstanding capital stock of such Person, plus (ii) paid-in capital
or capital surplus relating to such capital stock, plus (iii) any retained
earnings or earned surplus, less any accumulated deficit.
In the event of any consolidation or merger or conveyance,
transfer or lease of all or substantially all of the assets of the Company that
is permitted pursuant to this paragraph (j), the successor resulting from such
consolidation or into which the Company is merged or the transferee or lessee to
which such conveyance, transfer or lease is made, will succeed to, and be
substituted for, and may exercise every right and power of, the Company with
respect to the Series D Preferred Stock, and thereafter, except in the case of a
lease, the predecessor (if still in existence) shall be released from its
obligations and covenants with respect to the Series D Preferred Stock.
(k) Certificates.
(i) Form and Dating. The Series D Preferred Stock and the
Transfer Agent's certificate of authentication shall be substantially in the
form of Exhibit A, which is hereby incorporated in and expressly made a part of
this Certificate of Designation. The Series D Preferred Stock certificate may
have notations, legends or endorsements required by law, stock exchange rules,
agreements to which the Company is subject, if any, or usage (provided that any
such notation, legend or endorsement is in a form acceptable to the Company).
Each Series D Preferred Stock certificate shall be dated the date of its
authentication. The terms of the Series D
31
<PAGE> 32
Preferred Stock certificate set forth in Exhibit A are part of the terms of this
Certificate of Designation.
(ii) Execution and Authentication. Two Officers shall sign the
Series D Preferred Stock certificates for the Company by manual or facsimile
signature. The Company's seal shall be impressed, affixed, imprinted or
reproduced on the Series D Preferred Stock certificates and may be in facsimile
form.
If an Officer whose signature is on a Series D Preferred Stock
certificate no longer holds that office at the time the Transfer Agent
authenticates the Series D Preferred Stock certificate, the Series D Preferred
Stock certificates shall be valid nevertheless. A Series D Preferred Stock
certificate shall not be valid until an authorized signatory of the Transfer
Agent manually signs the certificate of authentication on the Series D Preferred
Stock certificate. The signature shall be conclusive evidence that the Series D
Preferred Stock certificate has been authenticated under this Certificate of
Designation. The Transfer Agent shall authenticate and deliver certificates for
up to [3,450,000] shares of Series D Preferred Stock for original issue upon a
written order of the Company signed by two Officers of the Company. Such order
shall specify the number of shares of Series D Preferred Stock to be
authenticated and the date on which the original issue of Series D Preferred
Stock is to be authenticated.
The Transfer Agent may appoint an authenticating agent
reasonably acceptable to the Company to authenticate the certificates for Series
D Preferred Stock. Unless limited by the terms of such appointment, an
authenticating agent may authenticate certificates for Series D Preferred Stock
whenever the Transfer Agent may do so. Each reference in this Certificate of
Designation to authentication by the Transfer Agent includes authentication by
such agent. An authenticating agent has the same rights as the Transfer Agent or
agent for service of notices and demands.
(iii) Transfer and Exchange of Shares of Series D Preferred
Stock. (A) When shares of Series D Preferred Stock are presented to the Transfer
Agent with a request to register the transfer of such shares of Series D
Preferred Stock or to exchange such shares of Series D Preferred Stock for an
equal number of shares of Series D Preferred Stock of other authorized
denominations, the Transfer Agent shall register the transfer or make the
exchange as requested if its reasonable requirements for such transaction are
met; provided, however, that the certificate representing such shares of Series
D Preferred Stock surrendered for transfer or exchange shall be duly endorsed or
accompanied by a written instrument of transfer in form reasonably satisfactory
to the Company and the Transfer Agent, duly executed by the Holder thereof or
its attorney duly authorized in writing.
(B) Obligations with Respect to Transfers and
Exchanges of Series D Preferred Stock. (1) To permit registrations of transfers
and exchanges, the Company shall
32
<PAGE> 33
execute and the Transfer Agent shall authenticate certificates representing
shares of Series D Preferred Stock as required pursuant to the provisions of
this paragraph (k)(iii).
(2) All shares of Series D Preferred Stock issued
upon any registration of transfer or exchange of shares of Series D Preferred
Stock shall be the valid obligations of the Company, entitled to the same
benefits under this Certificate of Designation as the shares of Series D
Preferred Stock surrendered upon such registration of transfer or exchange.
(3) Prior to due presentment for registration of
transfer of any shares of Series D Preferred Stock, the Transfer Agent and the
Company may deem and treat the person in whose name such shares of Series D
Preferred Stock are registered as the absolute owner of such Series D Preferred
Stock and neither the Transfer Agent nor the Company shall be affected by notice
to the contrary.
(4) No service charge shall be made to a Holder for
any registration of transfer or exchange upon surrender of any certificate
representing shares of Series D Preferred Stock or shares of Common Stock at the
office of the Transfer Agent maintained for that purpose. However, the Company
may require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any registration of transfer or
exchange of Series D Preferred Stock certificates or Common Stock certificates.
(C) No Obligation of the Transfer Agent. The Transfer
Agent shall have no obligation or duty to monitor, determine or inquire as to
compliance with any restrictions on transfer imposed under this Certificate of
Designation or under applicable law with respect to any transfer of any interest
in any Series D Preferred Stock other than to require delivery of such
certificates and other documentation or evidence as are expressly required by,
and to do so if and when expressly required by, the terms of this Certificate of
Designation, and to examine the same to determine substantial compliance as to
form with the express requirements hereof.
(iv) Replacement Certificates. If a modified Series D Preferred Stock
certificate is surrendered to the Transfer Agent or if the Holder of a Series D
Preferred Stock certificate claims that the Series D Preferred Stock certificate
has been lost, destroyed or wrongfully taken, the Company shall issue and the
Transfer Agent shall countersign a replacement Series D Preferred Stock
certificate if the reasonable requirements of the Transfer Agent and of Section
8- 405 of the Uniform Commercial Code as in effect in the State of New York are
met. If required by the Transfer Agent or the Company, such Holder shall furnish
an indemnity bond sufficient in the judgment of the Company and the Transfer
Agent to protect the Company and the Transfer Agent from any loss which either
of them may suffer if a Series D Preferred Stock certificate is replaced. The
Company and the Transfer Agent may charge the Holder for their expenses in
replacing a Series D Preferred Stock certificate.
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<PAGE> 34
(v) Temporary Certificates. Until definitive Series D Preferred Stock
certificates are ready for delivery, the Company may prepare and the Transfer
Agent shall countersign temporary Series D Preferred Stock certificates.
Temporary Series D Preferred Stock certificates shall be substantially in the
form of definitive Series D Preferred Stock certificates but may have variations
that the Company considers appropriate for temporary Series D Preferred Stock
certificates. Without unreasonable delay, the Company shall prepare and the
Transfer Agent shall countersign definitive Series D Preferred Stock
certificates and deliver them in exchange for temporary Series D Preferred Stock
certificates.
(vi) Cancellation. In the event the Company shall purchase or otherwise
acquire shares of Series D Preferred Stock, the certificate(s) representing the
same shall thereupon be delivered to the Transfer Agent for cancellation.
The Transfer Agent and no one else shall cancel and destroy
all Series D Preferred Stock certificates surrendered for transfer, exchange,
replacement or cancellation and deliver a certificate of such destruction to the
Company unless the Company directs the Transfer Agent to deliver canceled Series
D Preferred Stock certificates to the Company. The Company may not issue new
Series D Preferred Stock certificates to replace Series D Preferred Stock
certificates to the extent they evidence Series D Preferred Stock which the
Company has purchased or otherwise acquired.
(7) Certain Definitions. As used in this Certificate of
Designation, the following terms shall have the following meanings (and (1)
terms defined in the singular have comparable meanings when used in the plural
and vice versa, (2) "including" means including without limitation, (3) "or" is
not exclusive, (4) "to" any date means to and including such date and (5) an
accounting term not otherwise defined has the meaning assigned to it in
accordance with United States generally accepted accounting principles as in
effect on the Issue Date and all accounting calculations will be determined in
accordance with such principles), unless the content otherwise requires:
"Business Day" means each day which is not a Legal Holiday.
"Capital Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) in equity of such Person, whether now outstanding
or issued after the Issue Date, including all Common Stock and Preferred Stock.
"Common Stock" means the Company's common stock, par value
$0.001 per share.
"Dividend Period" means such period between two consecutive
Dividend Payment Dates and the period from the Issue Date to the first Dividend
Payment Date.
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<PAGE> 35
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Holders" means the registered holders from time to time of
the Series D Preferred Stock.
"Issue Date" means the date on which the Series D Preferred
Stock is initially issued.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions are not required to be open in the State of New York.
"Officer" means the Chairman of the Board of Directors, the
President, any Vice President, the Treasurer, the Secretary, any Assistant
Secretary or Assistant Treasurer of the Company.
"Officers' Certificate" means a certificate signed by two
Officers.
"Opinion of Counsel" means a written opinion from legal
counsel who is acceptable to the Transfer Agent. The counsel may be an employee
of or counsel to the Company or the Transfer Agent.
"person" or "Person" means any individual, corporation,
partnership, joint venture, limited liability company, association, joint-stock
company, trust, unincorporated organization, governmental or any agency or
political subdivision thereof or any other entity.
"Preferred Stock" means, with respect to any Person, any and
all shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference stock,
whether now outstanding or issued after the Issue Date, including all series and
classes of such preferred or preference stock.
"SEC" or "Commission" means the Securities and Exchange
Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Series B Preferred Stock" means the 5,278,000 shares of the
Company's Preferred Stock which, as of the Issue Date, have been designated as
Series B Convertible Preferred Stock.
"Series C Preferred Stock" means the 1,250,000 shares of the
Company's Preferred Stock which, as of the Issue Date, have been designated as
the Series C Convertible Preferred Stock.
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<PAGE> 36
"Subsidiary" means with respect to any Person, any
corporation, association or other business entity of which Voting Stock
representing more than 50% of the voting power of shares of outstanding Voting
Stock is owned, directly or indirectly, by such Person, or one or more other
Subsidiaries of such Person.
"Transfer Agent" means the transfer agent for the Series D
Preferred Stock appointed by the Company, which initially shall be Continental
Stock Transfer and Trust Company.
"Voting Stock" of a corporation means all classes of Capital
Stock of such corporation then outstanding and normally entitled to vote in the
election of directors.
(8) SEC Reports and Reports to Holders. So long as any shares of Series
D Preferred Stock remain outstanding, the Company will file with the SEC
(whether or not the Company is required to do so) all such reports and other
information as the Company would be required to file with the SEC pursuant to
Section 13(a) or 15(d) of the Exchange Act. Upon the written request of a Holder
of Series D Preferred Stock, the Company will supply to such Holder, at no cost
to such Holder, copies of such reports or other information.
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<PAGE> 37
IN WITNESS WHEREOF, said MGC Communications, Inc. has caused
this Certificate of Designation to be signed by its President, and attested to
by its Secretary, on February 2, 2000.
MGC COMMUNICATIONS, INC.
By /s/ Rolla P. Huff
---------------------------------
Name: Rolla P. Huff
Title: President
Attest:
/s/ Kent F. Heyman
- ------------------------------
Name: Kent F. Heyman
Title: Secretary
STATE OF )
------------------
ss.: )
COUNTY OF )
-----------------
On the 2nd day of February, 2000, before me personally came Rolla Huff
to me known, who, being by me duly sworn, did depose and say he resides at 14
Moraine Point, Victor, New York 14564, 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 instruments to be the free act and
deed of said corporation.
- ------------------------------------
Notary Public
My Commission Expires:
---------------
<PAGE> 38
EXHIBIT A
FORM OF SERIES D PREFERRED STOCK
FACE OF SECURITY
Certificate Number: [ ]
Number of Shares of Series D Preferred Stock: [ ]
CUSIP NO.: 552763 500
[__]% Series D Cumulative Convertible Preferred Stock
(par value $0.001 per share)
(liquidation preference $50.00 per share)
of
MGC Communications, Inc.
MGC Communications, Inc., a Nevada corporation (the "Company"), hereby
certifies that [________________] (the "Holder") is the registered owner of
fully paid and non-assessable preferred securities of the Company designated the
[__]% Series D Cumulative Convertible Preferred Stock (par value $0.001 per
share) (liquidation preference $50.00 per share) (the "Series D Preferred
Stock"). The shares of Series D Preferred Stock are transferable on the books
and records of the Transfer Agent, in person or by a duly authorized attorney,
upon surrender of this certificate duly endorsed and in proper form for
transfer. The Series D Preferred Stock represented hereby are issued and shall
in all respects be subject to the provisions of the Certificate of Designation
of Series D Cumulative Convertible Preferred Stock dated [__________ __,] 2000,
as the same may be amended from time to time (the "Certificate of Designation").
Capitalized terms used herein but not defined shall have the meaning given them
in the Certificate of Designation. The Company will provide a copy of the
Certificate of Designation to a Holder without charge upon written request to
the Company at its principal place of business.
Reference is hereby made to select provisions of the Series D Preferred
Stock set forth on the reverse hereof, and to the Certificate of Designation,
which select provisions and the Certificate of Designation shall for all
purposes have the same effect as if set forth at this place. Upon receipt of
this certificate, the Holder is bound by the Certificate of Designation and is
entitled to the benefits thereunder.
A-1
<PAGE> 39
This certificate is not valid unless countersigned and registered by
the Transfer Agent.
IN WITNESS WHEREOF, the Company has executed this certificate
this [ ] day of [ ], [ ].
MGC COMMUNICATIONS, INC.
By
--------------------------------
Name:
Title:
[Seal]
By
--------------------------------
Name:
Title:
A-2
<PAGE> 40
REVERSE OF SECURITY
Dividends on each share of Series D Preferred Stock shall be payable at
a rate per annum set forth in the face hereof or as provided in the Certificate
of Designation. Dividends may be paid in cash or in shares of Common Stock of
the Company, at the option of the Company.
The shares of Series D Preferred Stock shall be redeemable as provided
in the Certificate of Designation and in the Articles. The shares of Series D
Preferred Stock shall be convertible into the Company's Common Stock in the
manner and according to the terms set forth in the Certificate of Designation.
As required under Nevada law, the Company shall furnish to any Holder
upon request and without charge, a statement setting forth in full or
summarizing the voting powers, designations, preferences, limitations,
restrictions and relative rights of the various classes of stock of the Company
or series thereof. All such requests should be directed to MGC Communications,
Inc., 171 Sully's Trail, Suite 202, Pittsford, New York 14534, Attention:
General Counsel.
A-3
<PAGE> 41
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers the
shares of Series D Preferred Stock evidenced hereby to:
-------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax identification number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert address and zip code of assignee)
and irrevocably appoints:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
agent to transfer the shares of Series D Preferred Stock evidenced hereby on the
books of the Transfer Agent. The agent may substitute another to act for him or
her.
Date:
---------------------------
Signature:
----------------------
(Sign exactly as your name appears on the other side of this Series D Preferred
Stock Certificate)
Signature
Guarantee:(1)
----------------------------------------------------------------------
- --------
(1) (Signature must be guaranteed by an "eligible guarantor institution"
that is, a bank, stockbroker, savings and loan association or credit
union meeting the requirements of the Transfer Agent, which
requirements include membership or participation in the Securities
Transfer Agents Medallion Program ("STAMP") or such other "signature
guarantee program" as may be determined by the Transfer Agent in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.)
A-4
<PAGE> 42
EXHIBIT B
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series D Preferred Stock)
The undersigned hereby irrevocably elects to convert (the "Conversion") shares
of [__]% Series D Cumulative Convertible Preferred Stock (the "Series D
Preferred Stock"), represented by stock certificate No(s). _____ (the "Series D
Preferred Stock Certificates") into shares of Common Stock ("Common Stock") of
MGC Communications, Inc. (the "Company") according to the conditions of the
Certificate of Designation of the Series D Preferred Stock (the "Certificate of
Designation"), as of the date written below. If shares are to be issued in the
name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith payment
of all applicable taxes or evidence that such taxes have been paid. No fee will
be charged to the holder for any conversion, except for transfer taxes, if any.
A copy of each Series D Preferred Stock Certificate is attached hereto (or
evidence of loss, theft or destruction thereof).*
Capitalized terms used but not defined herein shall have the meanings ascribed
thereto in or pursuant to the Certificate of Designation.
Date of Conversion:
---------------------------------
Conversion Price:
-----------------------------------
Number of shares of Series D Preferred Stock to be Converted:
-------------------
Number of shares of Common Stock to be Issued:
----------------------------------
Signature:
------------------------------------------
Name:
-----------------------------------------------
Address:**
------------------------------------------
Fax No.:
--------------------------------------------
*The Company is not required to issue shares of Common Stock until the original
Series D Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof and indemnity reasonably satisfactory to the Company and the
Transfer Agent) to be converted are received by the Company or its Transfer
Agent. The Company shall issue and deliver shares of Common
B-1
<PAGE> 43
Stock by hand or by delivery to an overnight courier not later than three
business days following receipt of the original Series D Preferred Stock
Certificate(s) to be converted.
**Address where shares of Common Stock and any other payments or certificates
shall be sent by the Company.
B-2
<PAGE> 1
Exhibit 5.1
[ELLIS, FUNK, GOLDBERG, LABOVITZ & DOKSON, P.C. LETTERHEAD]
February , 2000
MGC Communications, Inc.
171 Sully's Trail, Suite 202
Pittsford, NY 14534
Re: MGC Communications, Inc. Registration Statement on Form S-3
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-3
filed by MGC Communications, Inc. (the "Company"), a Nevada corporation, with
the Securities and Exchange Commission with respect to the registration under
the Securities Act of 1933, as amended, of (i) 5,175,000 shares of Common Stock,
$.001 par value per share, of the Company (the "Common Stock"), including
4,470,959 shares to be sold by the Company and 29,041 shares to be sold by
certain selling stockholders named in the Registration Statement (the "Selling
Stockholders") to the underwriters named in the Registration Statement (the
"Underwriters"), for resale by them to the public, and 675,000 shares of Common
Stock subject to an over-allotment option granted to the Underwriters by the
Company, and (ii) 3,450,000 shares of Series D Convertible Preferred Stock,
$.001 par value per share, of the Company (the "Preferred Stock"), including
3,000,000 shares to be sold by the Company to the Underwriters for resale by
them to the public and 450,000 shares of Preferred Stock subject to an
over-allotment option granted to the Underwriters by the Company.
As your counsel, and in connection with the preparation of the Registration
Statement, we have examined the originals or copies of such documents,
corporate records, certificates of public officials, officers of the Company
and other instruments relating to the authorization and issuance of the Common
Stock and Preferred Stock as we deemed relevant or necessary for the opinions
herein expressed. Upon the basis of the foregoing, it is our opinion that:
1. The shares of Common Stock to be sold by the Selling Stockholders as
described in the Registration Statement are legally issued, fully-paid
and nonassessable.
2. The shares of Common Stock and Preferred Stock to be issued and sold
by the Company to the Underwriters will be, upon issuance, sale and
delivery in the manner and under the terms and conditions described in
the Registration Statement, legally issued, fully-paid and
nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name in the "Legal
Matters" section of the Registration Statement, including the Prospectus
constituting a part thereof, and any amendments thereto.
Your truly,
ELLIS, FUNK, GOLDBERG, LABOVITZ & DOKSON, P.C.
By: /s/ Robert B. Goldberg
-------------------------------------------
Robert B. Goldberg
<PAGE> 1
EXHIBIT 8.1
February 4, 2000
MGC Communications, Inc.
171 Sully's Trail, Suite 202
Pittsford, NY 14534
Ladies and Gentlemen:
We have acted as counsel for MGC Communications, Inc., a Nevada corporation (the
"Company"), in connection with the offer by the Company to issue up to 3,450,000
shares of Series D Convertible Preferred Stock to be sold under Registration
Statement No. 333-91353 (the "Registration Statement") and up to an additional
690,000 shares of Series D Convertible Preferred Stock that may be issued in a
Rule 462(b) registration statement (all of which shares are collectively
referred to as the "Preferred Stock"). This letter will confirm that we have
advised the Company with respect to certain United States federal income tax
consequences of the purchase, ownership and disposition of the Preferred Stock,
as described in the discussion set forth under the caption "Federal Tax
Considerations" in the Prospectus included in the Registration Statement
declared effective on this date by the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "Act"). Unless
otherwise defined, capitalized terms used herein shall have the respective
meanings ascribed to them in the Registration Statement.
We have based our opinions set forth in this letter on the provisions of the
Internal Revenue Code of 1986, as presently amended (the "Code"), existing
Treasury regulations thereunder (the "Regulations"), published rulings and
practices of the Internal Revenue Service (the "Service") and court decisions.
It should be noted that the federal income tax consequences discussed in this
letter might be modified by legislative, judicial or administrative action at
any time, and such action might be applied retroactively or otherwise in a
manner that might alter such tax consequences.
Based on the assumptions and subject to the qualifications and limitations set
forth therein, (i) we adopt the discussion set forth under the caption "Federal
Tax Considerations" in the Registration Statement as our opinion with respect to
the material United States federal income tax considerations of the purchase,
ownership and disposition of the Preferred Stock, and (ii) in our opinion, such
discussion accurately describes the material United States federal income tax
considerations of the purchase, ownership and disposition of the Preferred
Stock. Such discussion is limited to the material United States federal income
tax consequences discussed therein, and it does not purport to discuss all
possible federal income tax consequences or any state, local or foreign tax
consequences of the purchase, ownership and disposition of the Preferred Stock.
Except as stated above, we express no opinion with respect to any other matter,
other than those matters discussed in our opinion to the Company filed as
Exhibit 5.1 to the Registration Statement.
<PAGE> 2
MGC Communications, Inc.
February 4, 2000
Page 2
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement, to the use of our name in the Registration Statement,
and to the reference to us and this opinion letter in the Registration Statement
and to the incorporation of this opinion in the Rule 462(b) registration
statement. By giving such consent, we do not thereby admit that we are "experts"
with respect to this letter, as that term is used in the Act, or the rules and
regulations of the SEC thereunder.
Very truly yours,
ELLIS, FUNK, GOLDBERG, LABOVITZ
& DOKSON, P.C.
By: /s/ Robert B. Goldberg
------------------------------
Robert B. Goldberg
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in this Registration Statement and to the incorporation by reference in
this Registration Statement of our report dated March 2, 1999 included in MGC
Communications, Inc.'s Annual Report on Form 10-K for the year ended December
31, 1998 and to all references to our Firm included in this Registration
Statement.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
February 3, 2000
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
MGC Communications, Inc.:
We consent to the use of our report, dated August 18, 1997, relating to the
statements of operations, stockholders' equity and cash flows of MGC
Communications, Inc. for the year ended December 31, 1996, included in the Form
S-3/A Registration Statement of MGC Communications, Inc., to be filed on or
about January 17, 2000, and to the reference to our firm under the heading
"Selected Consolidated Financial and Operating Data" and "Experts" in the
Registration Statement.
KPMG LLP
Las Vegas, Nevada
February 3, 2000
