<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2000
Commission file number 0-24059
MGC Communications, Inc.
(Exact name of registrant as specified in its charter)
Nevada 88-0360042
(State of incorporation) (IRS Employer Identification Number)
171 Sully's Trail, Suite 202,
Pittsford, NY 14534
(Address of principal executive offices)
(716) 218-6550
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
YES X NO
----- -----
The number of shares outstanding of the issuer's common stock,
as of May 12, 2000:
Common stock ($.001 par value) .... 35,588,125 shares outstanding
<PAGE> 2
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MGC COMMUNICATIONS, INC.
INDEX
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Page No.
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations -- Three months ended
March 31, 2000 and 1999 (Unaudited) 3
Consolidated Balance Sheets -- March 31, 2000 (Unaudited) and
December 31, 1999 4
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity for the period from December 31, 1998
to March 31, 2000 (Unaudited) 5
Consolidated Statements of Cash Flows -- Three months ended
March 31, 2000 and 1999 (Unaudited) 6
Condensed Notes to Unaudited Interim Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holder *
Item 5. Other information *
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
- -------------------
* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------
2000 1999
-------- --------
<S> <C> <C>
Operating revenues:
Telecommunications services $ 25,458 $ 8,401
Operating expenses:
Cost of operating revenues (excluding depreciation) 23,231 8,483
Selling, general and administrative 23,140 7,727
Stock-based compensation expense 1,576 --
Depreciation and amortization 6,761 3,484
-------- --------
54,708 19,694
-------- --------
Loss from operations (29,250) (11,293)
Other income (expense):
Gain on sale of investments -- 205
Interest income 8,871 1,500
Interest expense(net of amounts capitalized) (4,965) (4,624)
-------- --------
Net loss (25,344) (14,212)
Accretion of preferred stock to redemption value (3,489) --
Accrued preferred stock dividend (3,007) --
-------- --------
Net loss applicable to common stockholders $(31,840) $(14,212)
======== ========
Basic and diluted loss per share of
common stock $ (1.18) $ (.83)
======== ========
Basic and diluted weighted average
shares outstanding 26,938,911 17,204,944
=========== ==========
</TABLE>
See accompanying condensed notes to unaudited interim
consolidated financial statements.
<PAGE> 4
MGC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- --------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 307,769 $ 42,979
Investments available-for-sale ..................................... 465,628 61,627
Restricted investments ............................................. 20,534 20,256
Accounts receivable, less allowance for doubtful
accounts of $936 and $647 ....................................... 14,281 15,299
Prepaid expenses ................................................... 2,553 1,527
----------- ---------
Total current assets ....................................... 810,765 141,688
Property and equipment, net .......................................... 230,163 191,612
Investments available-for-sale ....................................... 122,448 64,464
Deferred financing costs, net of accumulated amortization
of $2,080 and $1,859 ................................................ 11,279 3,920
Other assets ......................................................... 1,611 745
----------- ---------
Total assets ............................................... $ 1,176,266 $ 402,429
=========== =========
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............................... $ 670 $ 623
Accounts payable:
Trade ........................................................... 22,808 11,788
Property and equipment .......................................... 36,519 24,955
Accrued interest ................................................... 10,405 5,200
Accrued sales tax payable .......................................... 5,447 4,345
Accrued other expenses ............................................. 7,819 5,452
----------- ---------
Total current liabilities .................................. 83,668 52,363
Senior Secured Notes, net of unamortized discount of $2,588
and $2,732 ......................................................... 157,412 157,268
Senior Notes, net of unamortized discount of $6,767 .................. 243,233 --
Other long-term debt ................................................. 3,859 4,044
----------- ---------
Total liabilities .......................................... 488,172 213,675
----------- ---------
Commitments and contingencies Redeemable preferred stock:
10% Series B Convertible Preferred Stock, 5,278,000 shares
authorized, 5,277,779 issued and outstanding at
December 31, 1999 ................................................ -- 55,363
10% Series C Convertible Preferred Stock, 1,250,000 shares
authorized, 1,250,000 issued and outstanding ..................... 36,857 34,510
Note receivable from stockholder for issuance of Series C
convertible preferred stock ...................................... -- (4,900)
7.25% Series D Convertible Preferred Stock, 4,140,000 shares
authorized, 4,140,000 issued and outstanding ..................... 202,359 --
Stockholders' equity:
Preferred stock, 44,610,000 and 43,472,221 shares authorized
but unissued ..................................................... -- --
Common stock, $0.001 par value, 60,000,000 shares
authorized, 35,507,596 and 23,244,328 shares issued and
outstanding ..................................................... 35 23
Additional paid-in capital ......................................... 596,240 225,300
Accumulated deficit ................................................ (139,505) (114,161)
Less: treasury stock ............................................... (76) (76)
Accumulated other comprehensive income ............................. (1,972) (1,086)
Notes receivable from stockholders for issuance of common
stock ........................................................... (5,844) (6,219)
----------- ---------
Total stockholders' equity ................................. 448,878 103,781
----------- ---------
Total liabilities, redeemable preferred stock and
stockholders' equity ..................................... $ 1,176,266 $ 402,429
=========== =========
</TABLE>
See accompanying condensed notes to unaudited interim
consolidated financial statements.
<PAGE> 5
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
-------------------- ------------------ PAID-IN ACCUMULATED ---------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
-------- -------- ---------- ----- ---------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 5 118,305 -- -- --
Warrants and options exercised
for common stock............ -- -- 886,039 1 1,678 -- -- --
Common stock issued for note .. -- -- 150,000 -- 4,322 -- -- --
Payment 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 -- -- -- -- -- --
10% Series C Convertible Preferred
Stock issued for cash........ 1,250,000 34,500 -- -- -- -- -- --
Preferred stock issued for note -- (4,900) -- -- -- -- -- --
Stock-based compensation....... -- -- -- -- 714 -- -- --
Accrued preferred stock dividend -- 2,577 -- -- (2,577) -- -- --
Value of preferred stock beneficial
conversion features.......... -- -- -- -- (72,500) -- -- --
Value of preferred stock beneficial
conversion features.......... -- -- -- -- 72,500 -- -- --
Accretion of preferred stock to
redemption value........... -- 6,133 -- -- (6,133) -- -- --
Net loss....................... -- -- -- -- -- (69,769) -- --
---------- ------ ---------- --- -------- -------- ----- -----
BALANCE AT DECEMBER 31, 1999 6,527,779 $ 84,973 23,244,328 $23 $225,300 $(114,161) 9,140 $(76)
Unrealized loss on investments
available-for-sale.......... -- -- -- -- -- -- -- --
Warrants and options exercised
for common stock............ -- -- 529,695 1 1,358 -- -- --
Common stock issued for cash .. -- -- 6,163,709 6 316,728 -- -- --
Payment on stockholder's notes. -- 4,900 -- -- -- -- -- --
7.25% Series D Convertible Preferred
Stock issued for cash........ 4,140,000 200,274 -- -- -- -- -- --
Stock-based compensation....... -- -- -- -- 1,576 -- -- --
Accrued preferred stock dividend -- 3,007 -- -- (3,007) -- -- --
Accretion of preferred stock to
redemption value........... -- 3,489 -- -- (3,489) -- -- --
Series B Preferred converted to
Common stock ................ (5,277,779) (55,154) 5,277,779 5 55,148 -- -- --
Preferred dividends paid in
Common stock ................ -- (2,626) 292,085 -- 2,626 -- -- --
Adjustment to estimated issuance
costs of series C preferred stock -- 353 -- -- -- -- -- --
Net loss....................... -- -- -- -- -- (25,344) -- --
---------- ------ ---------- --- -------- -------- ----- -----
BALANCE AT MARCH 31, 2000 5,390,000 239,216 35,507,596 $35 $596,240 $(139,505) 9,140 $(76)
========== ======= ========== === ======== ======== ===== ======
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE FROM ACCUMULATED
STOCKHOLDERS FOR OTHER TOTAL
ISSUANCE OF COMPREHENSIVE STOCKHOLDERS
COMMON STOCK INCOME (LOSS) EQUITY
--------------- ------------- ------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ (2,173) $ 817 $ 63,260
Unrealized loss on investments
available-for-sale.......... -- (1,903) (1,903)
Common stock issued............ -- -- 118,310
Warrants and options exercised
for common stock............ -- -- 1,679
Common stock issued for note .. (4,322) -- --
Payment on stockholder's note.. 200 -- 200
Repurchase of common stock..... 76 -- --
10% Series B Convertible Preferred
Stock issued for cash........ -- -- --
10% Series C Convertible Preferred
Stock issued for cash........ -- -- --
Preferred stock issued for note -- -- --
Stock-based compensation....... -- -- 714
Accrued preferred stock dividend -- -- (2,577)
Value of preferred stock beneficial
conversion features.......... -- -- (72,500)
Value of preferred stock beneficial
conversion features.......... -- -- 72,500
Accretion of preferred stock to
redemption value........... -- -- (6,133)
Net loss....................... -- -- (69,769)
------- -------- -------
BALANCE AT DECEMBER 31, 1999 $(6,219) $ (1,086) $ 103,781
Unrealized loss on investments
available-for-sale.......... -- (886) (886)
Warrants and options exercised
for common stock............ -- -- 1,359
Common stock issued for cash .. -- -- 316,734
Payment on stockholder's notes. 375 -- 375
7.25% Series D Convertible Preferred
Stock issued for cash........ -- -- --
Stock-based compensation....... -- -- 1,576
Accrued preferred stock dividend -- -- (3,007)
Accretion of preferred stock to
redemption value........... -- -- (3,489)
Series B Preferred converted to
Common stock ................ -- -- 55,153
Preferred dividends paid in
Common stock ................ -- -- 2,626
Adjustment to estimated issuance
costs of series C preferred stock -- -- --
Net loss....................... -- -- (25,344)
------- -------- -------
BALANCE AT MARCH 31, 2000 $(5,844) $(1,972) $448,878
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(25,344) $(14,212)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 6,761 3,484
Gain on sale of investments...................... -- (205)
Amortization of debt discount.................... 157 144
Amortization of deferred financing costs......... 216 207
Stock based compensation expense................. 1,576 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 1,018 (2,628)
Increase in prepaid expenses.................. (1,026) (42)
Increase in other assets...................... (887) (307)
Increase in accounts payable -- trade......... 11,020 6,819
Increase in sales tax payable................. 1,102 163
Increase in accrued interest and other expenses 7,572 5,966
-------- -------
Net cash provided by (used in) operating activities 2,165 (611)
-------- -------
Cash flows from investing activities:
Purchase of property and equipment, net of
payables......................................... (33,545) (15,240)
Decrease in accounts payable-property and equipment -- (12,894)
Purchase of investments available-for-sale, net.... (785,828) --
Sale of investments available-for-sale ............ 322,957 23,294
Increase in restricted investments................. (278) (550)
-------- -------
Net cash used in investing activities....... (496,694) (5,390)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of Senior Notes............. 243,220 --
Costs associated with issuance of Senior Notes..... (7,575) --
Proceeds from issuance of 7.25% Series D Convertible
Preferred Stock, net of issuance costs........... 200,628 --
Payments on other long term debt................... (321) (153)
Proceeds from issuance of common stock ............ 318,092 240
Collection on notes received for preferred and
common stock .................................... 5,275 --
-------- -------
Net cash provided by financing activities... 759,319 87
-------- -------
Net increase (decrease) in cash............. 264,790 (5,914)
Cash and cash equivalents at beginning of period..... 42,979 11,886
-------- -------
Cash and cash equivalents at the end of period....... $307,769 $5,972
======== =======
Supplemental schedule of non-cash investing and financing
activities:
Increase in property and equipment purchases included
in accounts/notes payable -- property and equipment....... $ 11,746 $ --
Series B preferred stock converted to common stock ......... 55,153 --
Series B preferred stock dividends paid in common stock..... 2,578 --
Preferred stock dividends accrued........................... 2,957 --
Accretion of preferred stock to redemption value............ 3,489 --
======== =======
</TABLE>
See accompanying condensed notes to unaudited
interim consolidated financial statements.
<PAGE> 7
MGC COMMUNICATIONS, INC.
Condensed Notes to Unaudited Interim Consolidated Financial Statements
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
MGC Communications, Inc. doing business as Mpower Communications Corp. (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 and transactions have been eliminated.
These consolidated financial statements reflect all normal recurring
adjustments, which management believes are necessary to present fairly the
financial position, results of operations, and cash flows for the Company for
the respective periods presented. Certain information and footnote disclosures
normally included in the annual consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission for Form 10-Q. These unaudited interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K filed with the Securities and Exchange Commission.
The consolidated balance sheet at December 31, 1999 was derived from
the audited consolidated financial statements, but does not include all
disclosures required under generally accepted accounting principles.
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Building and property........................... $ 5,579 $ 5,518
Switching equipment............................. 168,608 137,492
Leasehold improvements.......................... 1,978 870
Computer hardware and software.................. 5,408 3,780
Office equipment and vehicles................... 6,889 5,748
------- -------
188,462 153,408
Less accumulated depreciation and
amortization.................................. (31,907) (25,237)
------- -------
156,555 128,171
Switching equipment under construction.......... 73,608 63,441
------- -------
Net property and equipment............ $230,163 $191,612
======== ========
</TABLE>
(3) COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
In the ordinary course of business, the Company enters into purchase
agreements with its vendors of telecommunications equipment and collocation
sites. As of March 31, 2000 and December 31, 1999, the Company had a total of
approximately $127.9 million and $43.3 million, respectively, of remaining
purchase commitments to telecommunication vendors for purchases of switching
equipment and approximately $58.4 million and $11.9 million of commitments to
collocation site providers for the build-out of collocation sites. In April
2000, the company committed to purchase an aircraft for $10.8 million.
(4) DEBT
On March 24, 2000 the Company received approximately $235.6 million in
net proceeds from the issuance of $250 million of 13% Senior Notes due April 1,
2010. The Notes bear a fixed annual interest rate of 13% which will be paid in
cash every six months on April 1 and October 1, commencing October 1, 2000. The
Notes are senior unsecured obligations and rank equally with all of the
Company's existing and future senior debt and are senior to all of the Company's
existing and future subordinate debt. The Notes contain certain
<PAGE> 8
repurchase requirements if certain assets are sold and the proceeds are not used
as specified in the indenture.
At any time after April 1, 2005, the Company may, at its option, redeem
the Notes, in whole or in part, 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> <C>
2005.............. 106.500
2006.............. 104.330
2007.............. 102.166
2008 and 100.000
thereafter........
</TABLE>
At any time prior to April 1, 2003, the Company may redeem up to 35% of
the principal amount of the Notes from the net cash proceeds of an underwritten
public offering of the Company's capital stock at a redemption price equal to
113.0% of the principal amount of the notes plus any unpaid or accrued interest.
(5) REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
In February 2000, the Company completed an offering in which 4,140,000
shares of 7.25% Series D Convertible Redeemable Preferred Stock at $50.00 per
share were issued for $207.0 million in gross proceeds. Each share of preferred
stock is convertible at the option of the holder into .7562 shares of common
stock at a conversion price of $65.34 per share, subject to adjustments and
expiration of conversion rights in certain circumstances. Quarterly dividends
are payable at the Company's option in cash or shares of common stock,
beginning May 15, 2000. On April 18, 2000 the Company's board of directors
declared a quarterly dividend of $0.95 per share, payable in shares of the
Company's common stock on May 15, 2000. The record date for the dividend
payment was April 28, 2000.
In conjunction with the above offering, the Company issued 6,163,709
shares of common stock at $54.00 per share for gross proceeds of $332.8 million.
In this offering, existing shareholders sold an additional 29,041 shares of
common stock for which the Company did not receive any proceeds.
(6) SUBSEQUENT EVENT
In April 2000, the Company entered into a merger agreement to purchase
Primary Networks for $145 million. Primary Networks is a provider of
data-centric communications services to business and residential customers in
the Midwest. The Company will issue 1.4 million shares to Primary Network
shareholders, will assume approximately $76 million of liabilities, a portion of
which will be swapped for additional high-yield bonds to be issued under the
Company's recent high-yield financing indenture discussed above, and will
account for this transaction as a purchase. The Company's board of directors
approved the agreement between both companies and expects to close the merger in
the third quarter.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We began providing competitive local dialtone services to small
business and residential users in December 1996, and in February 1998, began
offering long distance services in our existing markets. 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 principal operating expenses consist of cost of operating revenues,
selling, general and administrative costs and depreciation and amortization
expense. Cost of operating revenues consists primarily of access charges, line
installation expenses, transport expenses, compensation expenses of technical
personnel, long distance expenses and collocation lease expenses. Selling,
general and administrative expenses consist primarily of compensation expenses,
advertising, provision for bad debts, professional fees and office rentals.
Depreciation and amortization expense includes depreciation of switching and
collocation equipment as well as general property and equipment.
Building and expanding our business has required and will continue to
require us to make significant capital expenditures primarily consisting of the
costs of purchasing switches and associated equipment, land for switching sites
and constructing buildings or improving leased buildings to house our switching
and collocation facilities. As part of our "smart build" network strategy, we
purchased and installed host switches in each of the its markets while leasing
the means of transporting voice and data traffic from these switches to our
customers' telephones or other equipment. We believe this facilities-based
strategy, while initially increasing the Company's level of capital expenditures
and operating losses, will enhance long-term financial performance in comparison
to a resale strategy.
We have experienced operating losses and generated negative EBITDA
since inception and expect to continue to generate negative EBITDA for a period
of time while we continue to expand our network and develop product offerings
and a customer base. We can not assure you that our revenue or customer base
will increase or that we will be able to achieve or sustain positive EBITDA.
RESULTS OF OPERATIONS
QUARTERLY COMPARISON - MARCH 31, 2000 VS. MARCH 31, 1999
Total operating revenues increased to $25.5 million for the quarter
ended March 31,2000 as compared to $8.4 million for the quarter ended March 31,
1999. The 204% increase is a result of the increase in the number of lines in
service and increased long distance service revenue. We had 168,786 lines in
service at the end of the first quarter as compared to 65,147 lines in service
at March 31, 1999, a 159% increase.
Cost of operating revenues for the quarter ended March 31, 2000 was
$23.2 million as compared to $8.5 million for the quarter ended March 31, 1999.
The 173% increase is due to the increased number of lines in service and
installation and operational expenses associated with the expansion of our
network.
For the quarter ended March 31, 2000, selling, general and
administrative expenses totaled $23.1 million, a 200% increase over the $7.7
million for the quarter ended March 31, 1999. The increase is a result of
increased costs attributable to the significant expansion of our sales and
marketing efforts; delivery of customer service and our continued network
and market expansion.
For the quarter ended March 31, 2000 depreciation and amortization was
$6.8 million as compared to $3.5 million for the quarter ended March 31, 1999.
This increase is a result of placing additional assets in service in accordance
with the planned build-out of our network.
Gross interest expense for the quarters ended March 31, 2000 and March
31, 1999 totaled $5.9 million and $5.6 million, respectively. The 5% increase
was a result of the increased interest expense related to the $250 million debt
offering in late March 2000. Interest capitalized for the quarter ended March
31, 2000 decreased to $.9 million as compared to $1.0 million for the quarter
ended March 31, 1999. Gross interest expense is primarily attributable to the
13% Senior Secured Notes due 2004 we issued in September 1997.
<PAGE> 10
Interest income was $8.9 million during the quarter ended March 31,
2000 compared to $1.5 million for the quarter ended March 31, 1999. The 493%
increase is a result of the increase in cash and investments since March 31,
1999 provided by the debt and equity offerings.
We incurred net losses of $25.3 million during first quarter 2000
compared to $14.2 million during the first quarter 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our operations require substantial capital investment for the purchase
of communications equipment and the development and installation of our network.
Capital expenditures for the quarter ended March 31, 2000 were $45.3 million. We
expect to continue using substantial amounts of our existing capital to fund the
purchase of the equipment necessary to continue expanding the network footprint
in our existing markets and to develop new products and services.
On February 7, 2000, we issued 6,163,709 shares of Common Stock at
$54.00 per share for a total consideration of $332.8 million. We received net
proceeds of approximately $316.6 million from this offering. On February 7,
2000, we also issued 4,140,000 shares of Series D Convertible Preferred Stock at
$50.00 per share for a total consideration of $207.0 million. The net proceeds
from this offering were approximately $200 million. On March 24, 2000 we
received approximately $235.6 million in net proceeds from the issuance of $250
million of 13% Senior Notes due April 1, 2010.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2000, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 101, "Revenue Recognition," that will be effective for
our year ending December 31, 2000. The bulletin provides guidance for applying
Generally Accepted Accounting Principles to revenue recognition, presentation,
and disclosure in financial statements filed with the SEC. We believe that the
bulletin will not materially impact our revenue recognition practices.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Report that state our intentions,
hopes, beliefs, expectations or predictions of the future are forward-looking
statements. We would like to caution the reader these forward-looking statements
such as our plans to expand our existing network through collocation, statements
regarding development, introduction and acceptance of our products or business,
statements regarding our ability to achieve or exceed our goals or reach
profitability in the future, statements regarding the adequacy or availability
of financing, statements regarding the outcome of regulatory proceeding or
litigation or the effect of government regulations or similar statements
contained in this Report regarding matters that are not historical facts, are
only estimates or predictions. Actual results may differ materially as a result
of risks facing us or actual results differing from assumptions underlying such
statements. Such risks and assumptions include but are not limited to: our
ability to successfully market our existing and proposed services to current and
new customers in existing and planned markets; successfully develop commercially
viable data and Internet offerings; access markets; install switches and obtain
suitable locations for its switches; negotiate and renew suitable interconnect
agreements with the ILECs; obtain an acceptable level of cooperation from the
ILECs, all in a timely manner, at reasonable cost and on satisfactory terms and
conditions, as well as regulatory, competitive, legislative and judicial
developments that could materially affect our future results. All
forward-looking statements made in this Report are expressly qualified in their
entirety by these cautionary statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of our long term debt bears fixed interest rates. The fair market
value of this debt however, is sensitive to changes in prevailing interest
rates. We run the risk that market rates will decline and the required payments
will exceed those based on the current market rate. We do not use interest rate
derivative instruments to manage our exposure to interest rate changes.
PART II. OTHER INFORMATION
<PAGE> 11
ITEM 1. LEGAL PROCEEDINGS
We are party to numerous state and federal administrative proceedings.
In these proceedings, we are seeking to define and/or enforce ILEC performance
requirements related to:
- the cost and provisioning of Unbundled Network Elements
("UNEs");
- the establishment of Operations Support Systems;
- the allocation of subsidies; and
- collocation costs and procedures.
The outcome of these proceedings will establish the rates and
procedures by which we obtain and provide UNEs and could have a material effect
on the our operating costs.
We are also involved in legal proceedings in which we are seeking to
enforce our tariffed rates for originating and terminating switched access. The
outcome of these proceedings is uncertain, and adverse results could have a
material impact on our financial condition.
From time to time, we engage in other litigation and governmental
proceedings in the ordinary course of business. We do not believe that any
pending litigation or governmental proceedings will have a material adverse
effect on our results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During first quarter 2000, we issued in a registered public offering
65,507 shares of common stock pursuant to the exercise of warrants acquired in
a private placement. As the warrants were exercised on a cashless basis, we did
not receive any proceeds from the issuance. All of the securities were acquired
by the recipients thereof for investment and with no view toward the sale or
redistribution thereof. In each instance, the offers and sales were made
without any public solicitation; the stock certificates bear restrictive
legends; and appropriate stop transfer instruction have been or will be given
to the transfer agent. No underwriter was involved in this transaction and no
commissions were paid with respect to the sale of such securities. These
issuances of securities were made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 as
transactions by an issuer not involving a public offering.
On February 7, 2000, we issued 6,163,709 shares of Common Stock at
$54.00 per share for total consideration of $332.8 million. We received net
proceeds of approximately $316.6 million. We intend to use the proceeds to fund
further network development.
On February 7, 2000, we also issued in a registered public offering
4,140,000 shares of Series D Convertible Preferred Stock at $50.00 per share
for total consideration of $207.0 million. We received net proceeds of
approximately $200 million. We intend to use the proceeds to fund further
network development.
On March 31, 2000, the holders of Series B Convertible Preferred Stock
elected to convert their 5,277,779 shares at $9.00 per share, along with $2.6
million in dividends, into 5,569,864 shares of common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of April 17, 2000, among Primary Network Holdings, Inc., Mpower Communications
Corp. and Mpower Merger Sub, Inc. (1)
3.1 Articles of Incorporation and Amendments. (Incorporated by reference to the Company's Registration Statement on
Form S-4 (file No. 333-38875) previously filed with the Commission).
3.2 By-laws. (Incorporated by reference to the Company's Registration Statement on Form S-4 (file No. 333-38875) previously
filed with the Commission).
4.1 Shareholders Agreement among Mpower Communications Corp. and Brian Matthews, Carol Matthews, Charles Wiegert, Welton
Brison, Tom Hesterman, Richard Phillips, John Alden, EC Primary LLC, Quantum Emerging Growth Partners, C.V. and TGV
Partners, dated as of April 17, 2000. (1)
4.2 Letter Agreement among Mpower Communications Corp. and EC Primary L.P., Quantum Emerging Growth Partners C.V., Ravich
Revocable Trust of 1989, The Ravich Children Permanent Trust, U.S. Bancorp Libra, and TGV/Primary Investors LLC, dated
as of April 17, 2000. (1)
4.3 Indenture, dated as of March 24, 2000, between MGC Communications, Inc., Mpower Holding Corporation and HSBC Bank
USA, as trustee. (1)
10.1 Shareholders Agreement among Mpower Communications Corp. and Brian Matthews, Carol Matthews, Charles Wiegert, Welton
Brison, Tom Hesterman, Richard Phillips, John Alden, EC Primary LLC, Quantum Emerging Growth Partners, C.V. and TGV
Partners, dated as of April 17, 2000. (1)
23.1 Consent of Arthur Andersen LLP. (1)
23.2 Consent of Ernst & Young LLP. (1)
23.3 Consent of Lionel, Sawyer & Collins. (1)
23.4 Consent of Shearman & Sterling. (1)
23.5 Consent of Milbank, Tweed, Hadley & McCloy, LLP. (1)
23.6 Consent of Houlihan Lokey Howard & Zukin Financial Advisors, Inc. (1)
23.7 Consent of Arthur Andersen LLP. (2)
23.8 Consent of KPMG LLP. (2)
23.9 Consent of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C. (2)
24.1 Power of Attorney. (1)
24.2 Power of Attorney. (3)
27.1 Financial Data Schedule.*
99.1 Form of proxy card for the Special Meeting of stockholders of Primary Network. (1)
99.2 Form of Letter of Transmittal. (1)
99.3 Primary Network's Chairman's letter to stockholders. (1)
99.4 Notice to stockholders of Primary Network. (1)
</TABLE>
- --------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4 filed with the Commission on May 10, 2000.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-3 filed with the Commission on February 8, 2000.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-3 (File No. 333-91353).
* Filed herewith.
(b) On May 4, 2000 the company filed Form 8-K to report financial results for
the quarter ended March 31, 2000.
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
MGC COMMUNICATIONS, INC.
Date: May 15, 2000 /s/ Maurice J. Gallagher, Jr.
-----------------------------
Maurice J. Gallagher, Jr.
Chairman of the Board
Date: May 15, 2000 /s/ Michael R. Daley
-----------------------------
Michael R. Daley
Sr. Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 307,769
<SECURITIES> 608,610
<RECEIVABLES> 15,217
<ALLOWANCES> 936
<INVENTORY> 0
<CURRENT-ASSETS> 810,765
<PP&E> 230,163
<DEPRECIATION> 31,907
<TOTAL-ASSETS> 1,176,266
<CURRENT-LIABILITIES> 83,668
<BONDS> 400,645
239,216
0
<COMMON> 36
<OTHER-SE> 448,842
<TOTAL-LIABILITY-AND-EQUITY> 1,176,266
<SALES> 25,458
<TOTAL-REVENUES> 25,458
<CGS> 23,231
<TOTAL-COSTS> 54,708
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<INTEREST-EXPENSE> 4,965
<INCOME-PRETAX> (25,344)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,344)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (25,344)
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