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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24059
MGC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
NEVADA 88-0360042
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
171 SULLY'S TRAIL, SUITE 202, PITTSFORD, NY 14534
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(716) 218-6550
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
NONE NONE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
7.25% SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during 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 [ ]
As of March 22, 2000, the aggregate market value of Common Stock held by
non-affiliates of the Registrant, based on the closing sale price of such stock
in the NASDAQ Stock Market on March 22, 2000, was approximately $1,540,000,000.
As of March 22, 2000, the Registrant had 29,834,753 shares of Common Stock
outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
None
Exhibit Index is located on page 41.
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PART I
ITEM 1. BUSINESS
THE COMPANY
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 322 incumbent
carrier central office collocation sites providing us access to approximately
17.4 million addressable lines at the end of 1999. Over 240 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 established working relationships with five incumbent carriers: Ameritech,
BellSouth, GTE, PacBell and Sprint. At the end of 1999, we had 158,731 customer
lines sold, of which 142,664 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. 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 Report 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 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
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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 MPOWER 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 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
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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 sales force from 187 at December 31, 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 240 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 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
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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. To speed our implementation of electronic bonding with other
incumbent carriers, including BellSouth, Ameritech, PacBell and US West, we have
recently purchased and begun implementing electronic order interface software
from DSET Corporation.
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 have 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 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 voice and
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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:
"TOTAL SOLUTION" PACKAGE
8 voice lines
Internet access at speeds up to 1.5 Mbps
Unlimited custom calling features
MGCi.com
Web Hosting
10 e-mail boxes
Long Distance
500 minute increments
Free local calling
Customer premise equipment
Single bill and single point of contact
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 December 31, 1999, we had 322 incumbent carrier central office collocation
sites providing access to approximately 17.4 million addressable lines in these
markets. The table below shows the distribution of our central office
collocation sites within these markets.
<TABLE>
<CAPTION>
COLLOCATION ADDRESSABLE
MARKET AREA SITES LINES
- ----------- ----------- ------------
<S> <C> <C>
Southern California................................ 142 8.1 Million
Northern California................................ 33 1.3 Million
Atlanta............................................ 37 2.0 Million
Chicago............................................ 57 2.8 Million
Southern Florida................................... 35 2.2 Million
Las Vegas.......................................... 18 1.0 Million
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TOTALS................................... 322 17.4 MILLION
</TABLE>
The number of central office collocation sites includes only those sites
where we have accepted a cage and installed our equipment. At December 31, 1999,
we had a backlog of 60 central office collocation sites where we had accepted
space from the incumbent carrier but not yet completed the installation of our
equipment.
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 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
- -------------------- ------------ -------------------
<S> <C> <C>
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
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450 18.0 million
</TABLE>
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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 December 31, 1999, we employed 142 field sales personnel and 45
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 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
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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.
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
our equipment from nine as of December 31, 1996 to 322 as of December 31, 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.
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,
Tennessee, North Carolina, Louisiana 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 October 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 all of our existing markets and have applied for or
obtained competitive carrier certification in 26 additional markets.
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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. To speed our
implementation of electronic bonding with other incumbent carriers, including
Bellsouth, Ameritech, PacBell and US West, we have recently purchased and begun
implementing electronic order interface software from DSET Corporation.
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 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.
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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 generally 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 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
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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. Competitive and incumbent local exchange carriers recently have
requested the FCC to reconsider and modify these rules and many of the rules
also require implementing action by state regulatory agencies. We cannot predict
the outcome of any further proceedings.
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. On March
17, 2000, a panel of the U.S. Court of Appeals upheld parts and vacated parts of
the FCC's collocation order and remanded it to the FCC for further
consideration. The Court found that the FCC's order appeared to impermissibly
require the collocation of equipment beyond what was "necessary" for
interconnection or access to unbundled network elements. The Court specifically
questioned any obligation to collocate "multifunction equipment" combining
features that are "necessary" for interconnection or access to unbundled network
elements with features that are not. The Court also found that certain of the
rules relating to the manner of collocation, such as permitting competitors to
select whatever space they desire on the incumbent carrier's premises, were too
expansive. The Court has remanded the order to the FCC for further consideration
of these points. The Company is unable to predict the outcome of any future
proceedings or their impact, if any, on the Company.
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.
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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 most 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 local 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 and similar conditions
have been proposed by Bell Atlantic and GTE in connection with their proposed
merger.
In August 1998, in response to requests by various traditional telephone
companies that the FCC grant them regulatory relief in the provision of advanced
telecommunications services, including DSL services, that are suitable for
high-speed transmission of data and other types of information like our
high-speed dedicated access to the Internet, the FCC issued an order that
established both (a) a rulemaking to address standards by which traditional
telephone companies can provide data transmission services in competition with
companies like us and (b) requirements for those traditional telephone companies
to offer to competitive data transmission companies like us the necessary
unbundled network elements to provide advanced data transmission services. With
respect to the latter, the FCC concluded that DSL services are
telecommunications services and, therefore, the traditional local telephone
companies are required (a) to allow interconnection of their facilities and
equipment used to provide data transport functionality, such as unbundled local
telecommunications lines, and (b) to offer for resale DSL services. After the
traditional local telephone companies appealed this decision, the United States
Court of Appeals for the District of Columbia remanded the proceeding to the FCC
for further consideration. On remand, the FCC reaffirmed its conclusion that DSL
services are telecommunications services, but this remand order has been
appealed. Any change in the August 1998 order that would affect our ability to
interconnect with and obtain facilities from the traditional local telephone
companies could have an unfavorable effect on our business.
In a separate context, 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.
It is important to note that the outcome of these advanced data services
proceedings may be affected by legislation. For example, the U.S. House of
Representatives is currently considering a bill, known as H.R.
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2420, which would, among other things, eliminate the traditional telephone
companies' general obligations to provide unbundled access for or resale of high
speed data services. While H.R. 2420 has substantial support in Congress, it is
uncertain whether it will be enacted into law in its current form.
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.
At present we are in litigation with Sprint over the access charges we have
billed to it. In December 1999, we 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. We recently settled a litigation with AT&T over substantially
similar issues after receiving a favorable decision from the FCC.
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. The outcome of the
proceeding is not possible to predict and may have an unfavorable effect on our
business.
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. On March 24, 2000, the FCC's
February 26, 1999 ruling was vacated by the United States Court of Appeals
because "the Commission has not provided a satisfactory explanation why LECs
that terminate calls to ISPs are not properly seen as "terminat[ing] . . . local
telecommunications traffic," and why such traffic is 'exchange access' rather
than 'telephone exchange service.' " The Court of Appeals remanded
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the matter to the FCC for further proceedings. We are unable to predict the
outcome of such further proceedings or their impact, if any, on our business.
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.
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 11 states and the District of
Columbia and have applied for competitive carrier certification in 19 other
states.
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
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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.
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 merged with SBC Communications, Bell Atlantic has agreed to merge
with GTE Corporation
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and Qwest is seeking to 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.
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
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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.
On June 2, 1999, the FCC allowed most of a Bell Atlantic tariff to become
effective under which Bell Atlantic will sell its DSL services at a
discounted price to Internet Service Providers who commit to buying Bell
Atlantic's DSL service in bulk over a multi-year period for resale to
consumers. The FCC's decision to let this tariff go into effect could
adversely impact us if it gives ISPs, particularly large ISPs such as
America Online, an economic incentive to use Bell Atlantic to meet all of
their DSL needs to qualify for the bulk discount pricing that Bell
Atlantic offers.
- 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
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-
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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.
PERSONNEL
As of February 29, 2000, we had approximately 1,107 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.
RISK FACTORS
WE EXPECT OUR LOSSES TO CONTINUE AND WE MAY NOT BE ABLE TO GENERATE SUFFICIENT
CASH FLOW TO MEET OUR DEBT SERVICE REQUIREMENTS
We recorded net losses of $69.8 million in 1999, $32.1 million in 1998, and
$10.8 million in 1997. In addition, we had negative cash flow from operations of
$45.9 million in 1999, $24.2 million in 1998 and $4.5 million in 1997. We do not
generate enough cash flow to cover our operating and investing expenses. Our
historical earnings were insufficient to cover combined fixed charges and
dividends on preferred stock by $76.4 million for the year ended December 31,
1999. Combined fixed charges and dividends include interest and dividends,
whether paid or accrued. 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.
OUR SUBSTANTIAL DEBT CREATES FINANCIAL AND OPERATING RISK
We have a substantial amount of debt. As of December 31, 1999, we had
approximately $161.9 million of total debt outstanding and in March 2000 we
incurred an additional $250.0 million of debt. The terms of our outstanding debt
limit, but do not prohibit, us from incurring additional debt. For example, the
indentures for our outstanding debt allow us to incur an unlimited amount of
debt to finance the cost of acquiring equipment used in our business. We expect
to incur significant amounts of additional debt in the future to fund our
expansion into new markets, develop our network and expand our customer base.
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;
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- 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.
IF OUR EXPANSION PLANS CHANGE WE MAY NEED SIGNIFICANT ADDITIONAL FUNDS THAT WE
MAY NOT BE ABLE TO OBTAIN
If our expansion plans change we may 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 obtain
sufficient funds, we may be required to delay or abandon these expansion plans.
This may 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, internally generated funds and debt or equity financing,
including the proceeds of this offering. We cannot assure you we will be
successful in raising sufficient debt or equity financing on acceptable terms.
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 WILL FACE ADDITIONAL RISKS IF WE ACQUIRE OTHER BUSINESSES
As part of our growth strategy, we may acquire other businesses as a means
of expanding into new markets or developing new services. We are currently
evaluating various acquisition opportunities and have engaged in discussions
regarding some of them. One or more of these acquisitions, if consummated, would
be material. However, we have not reached any agreement to effect any material
acquisition. 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 back-office operations and personnel;
- difficulties integrating different network equipment and systems into our
operations;
- 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. Furthermore,
we have never acquired another business. Accordingly, we have no experience
dealing with any of the risks associated with making acquisitions. Our failure
to successfully address these risks could have a material adverse effect on our
business.
18
<PAGE> 20
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE AND WILL BE DIFFICULT TO PREDICT
Our annual and quarterly operating results are likely to fluctuate
significantly as a result of numerous factors, many of which are outside of our
control. These factors include:
- the timing and willingness of traditional telephone companies to provide
us with central office space and the prices, terms and conditions on
which they make the space available to us;
- the amount and timing of capital expenditures and other costs relating to
the expansion of our networks and the marketing of our services;
- delays in the commencement of operations in new regions and the
generation of revenue because certain network elements have lead times
that are controlled by incumbent carriers and other third parties;
- the ability to develop and commercialize new services by us or our
competitors;
- the ability to deploy on a timely basis our services to adequately
satisfy customer demand;
- our ability to successfully operate our networks;
- the rate at which customers subscribe to our services;
- decreases in the prices for our services due to competition, volume-based
pricing and other factors;
- the mix of line orders between business customers (which typically have
higher margins) and residential customers:
- the development and operation of our billing and collection systems and
other operational systems and processes;
- the rendering of accurate and verifiable bills from the incumbent
carriers from whom we lease transport and resolution of billing disputes;
- the incorporation of enhancements, upgrades and new software and hardware
products into our network and operational processes that may cause
unanticipated disruptions; and
- the interpretation and enforcement of regulatory developments and court
rulings concerning the 1996 Telecommunications Act, interconnection
agreements and the antitrust laws.
THE TERMS OF OUR DEBT COVENANTS AND PREFERRED STOCK COULD LIMIT HOW WE CONDUCT
OUR BUSINESS AND OUR ABILITY TO RAISE ADDITIONAL FUNDS
The agreements which govern the terms of our debt contain 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.
19
<PAGE> 21
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 in accordance with our
plans.
OUR SUCCESS DEPENDS ON THE EFFECTIVENESS OF OUR MANAGEMENT. WE HAVE A NEW CHIEF
EXECUTIVE OFFICER AND ARE CONSIDERING OTHER ADDITIONS 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, our new chief executive officer,
and Michael R. Daley, our new chief financial officer, 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 are considering
making further additions to our 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.
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;
20
<PAGE> 22
- 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.
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 an 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.
21
<PAGE> 23
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 are our competitors and 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 could 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.
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 "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.
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<PAGE> 24
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
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 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.
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<PAGE> 25
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.
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 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 "-- 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. While we
recently settled our disputes with AT&T and MCI WorldCom, certain other long
distance carriers responsible for generating a portion of our access charge
revenues continue to refuse 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
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<PAGE> 26
are collected on a timely basis, we cannot rely on these revenues as a source of
cash flow. As a result, we may be required to raise additional capital sooner
than we currently anticipate. See "Item 3 -- 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 and 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.
OUR FORWARD-LOOKING STATEMENTS MAY MATERIALLY DIFFER FROM ACTUAL EVENTS OR
RESULTS
This Report 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 Report 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.
ITEM 2. 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 leased office space in the Rochester, New York area and we have
moved our corporate headquarters to the Rochester area.
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<PAGE> 27
We also own property housing our switches 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.
ITEM 3. 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 1999. Access charge revenues from AT&T, Sprint and MCI WorldCom
represented 81% of our total access charge revenues in 1998. As of December 31,
1999, we had outstanding receivables of approximately $10.9 million attributable
to access charges from AT&T, Sprint and other long distance carriers, of which
approximately 66% was in dispute. As of September 30, 1999, receivables
attributable to access charges were $12.3 million. We settled our dispute with
MCI WorldCom in late 1999 and settled our dispute with AT&T in February 2000;
however, our dispute continues with Sprint.
In December 1999, we 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 dispute with Sprint is uncertain. If we are unable
to collect access charges from long distance carriers it 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 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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock, $.001 par value, traded on the NASDAQ Stock
Market under the symbol "MGCX" from May 11, 1998 (the date of the Company's
initial public offering) until February 18, 2000. On February 18, 2000 the
Company's Common Stock began trading under the symbol "MPWR." As of March 15,
2000, there were approximately 290 holders of record of the Company's Common
Stock. The following sets forth the reported high and low sale prices for the
Common Stock for each fiscal quarter since the Company's Common Stock first
commenced trading on May 11, 1998.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31, 1998 HIGH LOW
----------------- ------ ------
<S> <C> <C>
May 11, 1998 through June 30, 1998......................... $19.56 $14.00
Quarter Ending September 30, 1998.......................... $17.93 $ 8.00
Quarter Ending December 31, 1998........................... $10.50 $ 5.25
Quarter Ending March 31, 1999.............................. $10.00 $ 6.00
Quarter Ending June 30, 1999............................... $47.00 $ 9.00
Quarter Ending March 30, 1999.............................. $31.56 $15.56
Quarter Ending December 31, 1999........................... $50.75 $19.69
</TABLE>
As of March 22, 2000 the closing price of the common stock was $64.50.
DIVIDENDS
No cash dividends have ever been declared by the Company on its Common
Stock. The Company intends to retain earnings to finance the development and
growth of its business. Accordingly, the Company does not anticipate that any
dividends will be declared on its Common Stock for the foreseeable future.
Future payments of cash dividends, if any, will depend on the Company's
financial condition, results of operations, business conditions, capital
requirements, restrictions contained in agreements, future prospects and other
factors deemed relevant by the Company's Board of Directors. The Company's
ability to declare and pay dividends on its Common Stock is restricted by
certain covenants in the Indenture governing the Senior Secured Notes.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996
-------- -------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues............................ $ 55,066 $ 18,249 $ 3,791 $ 1
Net loss...................................... (69,769) (32,065) (10,836) (1,491)
Basic and diluted loss per share of common
stock*...................................... (7.63) (2.26) (1.30) (2.11)
Total assets.................................. 402,429 252,119 191,977 12,339
Long-term debt and capital lease obligations
including current maturities................ 161,935 157,295 156,637 --
Redeemable Series A Convertible Preferred
Stock....................................... -- -- 16,665 --
Redeemable Series B Convertible Preferred
Stock....................................... 55,363 -- -- --
Redeemable Series C Convertible Preferred
Stock....................................... 29,610 -- -- --
</TABLE>
- ---------------
* See Note 1 of Notes to Financial Statements
27
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We began providing competitive local dialtone services to small business
and residential customers in December 1996 and began offering long distance
services by February 1998. In the third quarter of 1999, we began to offer
high-speed data and Internet services in our Las Vegas market. During the fourth
quarter of 1999, we began offering high-speed data and Internet service in all
of our other 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 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 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 1999, we continued this expansion with the addition of 115 collocation
sites for a total of 322 built at year end. 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. We cannot assure
you that our revenue or customer base will grow or that we will be able to
achieve or sustain positive cash flow from operations.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 vs. 1998
Total operating revenues increased to $55.1 million for the year ended
December 31, 1999 as compared to $18.2 million for the year ended December 31,
1998. The 202% increase was primarily the result of the increase in the number
of lines in service. Total lines in service increased 199% from 47,744 at
December 31,
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<PAGE> 30
1998 to 142,664 at December 31, 1999. In addition, long distance service, which
was added to our product offerings in February 1998, contributed to the revenue
base for the full twelve month period in 1999, but only for ten full months in
1998. Our switched access revenues, which represented 35% of our total operating
revenues for the year ended December 31, 1999, increased $12.1 million or 164%
from the year ended December 31, 1998 to the year ended December 31, 1999. As of
December 31, 1999, 66% of our switched access receivable balances were 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 year ended December 31, 1999 was $50.0
million as compared to $17.1 million for the year ended December 31, 1998. The
192% 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 year ended December 31, 1999, selling, general and administrative
expenses totaled $44.8 million, a 151% increase over the $17.9 million for the
year ended December 31, 1998. The increase is a result of increased costs
attributable to marketing and delivering our service and supporting our
continued network expansion.
For the year ended December 31, 1999, depreciation and amortization was
$18.9 million as compared to $5.2 million for the year ended December 31, 1998.
This increase is a result of placing additional assets in service in accordance
with the planned build-out of our network.
Gross interest expense for fiscal 1999 totaled $22.3 million, as compared
to $22.2 million for fiscal 1998. Interest capitalized for the year ended
December 31, 1999 increased to $4.1 million as compared to $3.2 million for the
year ended December 31, 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 $7.7 million during the year ended December 31, 1999
compared to $8.8 million for the year ended December 31, 1998. The 12% decrease
is a result of decreases in cash and investments during certain periods of 1999.
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 $69.8 million and $32.1 million for the years
ended December 31, 1999 and 1998, respectively.
For the year ended December 31, 1999, we recognized an accrued preferred
stock dividend of $2.6 million, a beneficial conversion feature of $72.5
million, and an accretion of preferred stock to redemption value of $6.1
million, all as a result of the Series B and C preferred stock issued in May and
December 1999, respectively.
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 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
29
<PAGE> 31
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.
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 $94.1 million for the year ended December 31, 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.
The substantial capital investment required to initiate services and fund
our 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 because of our network expansion activities.
We cannot assure you we will attain break-even cash flow from operations in
subsequent periods.
We expect that our available cash, including the proceeds of a senior note
offering in March 2000, will be adequate to fund our operating losses and
planned capital expenditures, as currently projected, over the next several
years. If these resources are not sufficient, management intends to consider
alternate forms of financing or to delay or modify some of our expansion plans.
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. We might also expand through
acquisitions. To fund an accelerated or expanded capital expenditure plan or
acquisitions, we would likely issue additional debt or equity securities. We
cannot assure you we would be successful in raising additional capital on terms
acceptable to us or at all.
Depending on market conditions, we may raise additional capital at any
time, including obtaining a bank facility. However, we cannot assure you that we
will be successful in obtaining additional debt or equity financing or in
obtaining a bank facility on terms acceptable to us, if at all. The indentures
governing the 13% Senior Secured Notes due 2004 and the 13% Senior Notes due
2010 and the terms of our preferred stock impose restrictions upon our ability
to incur additional debt or issue preferred stock.
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 our 13% Senior
Secured Notes due 2004 and warrants to purchase 862,923 shares of common stock
after giving effect to anti-dilution adjustments. At
30
<PAGE> 32
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 Series
A convertible 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 December 1999, we sold 1,250,000 shares of 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. We received full payment on the note in
February 2000.
In February 2000, we issued 6,163,709 shares of common stock at $54.00 per
share for net proceeds of approximately $316.6 million. We also issued 4,140,000
shares of Series D convertible preferred stock at $50.00 per share for net
proceeds of approximately $200.0 million. The Series D convertible preferred
stock is convertible at the option of the holder into .7652 shares of our common
stock at a conversion price of $65.34 per share.
In March 2000, we completed a $250.0 million offering of our 13% Senior
Notes due 2010.
As of December 31, 1999, we had outstanding receivables of approximately
$10.9 million attributable to access charges billed to AT&T, Sprint and other
long distance carriers. AT&T and Sprint refused to pay the full amount of the
access charges billed to them. We have since settled our dispute with AT&T;
however, our dispute with Sprint has yet to be resolved. Of our outstanding
access charge receivables as of December 31, 1999, 66% remains in dispute. Our
failure to collect from these long distance carriers could have a material
impact on our financial condition. See "Item 3--Legal Proceedings."
IMPACT OF YEAR 2000
As of December 31, 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.
ITEM 7A. 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 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
Report.
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<PAGE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and directors, and their respective ages as of March
1, 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
Richard W. Miller......................... 59 Director
Thomas Neustaetter(1)(2).................. 48 Director
Mark Pelson............................... 38 Director
James Ball................................ 37 President -- Midwest Region
John Boersma.............................. 39 Senior Vice President -- Technology
Development
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.............................. 42 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............................ 39 President -- Eastern Region
Roger J. Pachuta.......................... 47 Senior Vice President -- Engineering and
Operations
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.
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<PAGE> 34
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.
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.
Richard W. Miller was elected to serve as a member of our board of
directors in March 2000. Mr. Miller has served as a director of Avalon Bay
Communities, a real estate investment trust, and its predecessor, Avalon
Properties, since May 1997. From 1993 until 1997, Mr. Miller served as senior
executive vice president and chief financial officer of AT&T and as a member of
AT&T's chairman's office. Mr. Miller also serves as a director of Closure
Medical Corporation and SBA Communications, 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.
Mark Pelson was elected to serve as a member of our board of directors in
March 2000. Mr. Pelson has been a managing director of Providence Equity
Partners Inc. since August 1996. Before joining Providence, Mr. Pelson was a
co-founder and director of TeleCorp, Inc., a wireless telecommunications
company. From 1989 to 1995, Mr. Pelson served in various management positions
with AT&T, most recently as a general manager of strategic planning and mergers
and acquisitions. Mr. Pelson also serves as a director of Carrier1 International
S.A., Madison River Telephone Company and Language Line Holdings, LLC.
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 -- technology development
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
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<PAGE> 35
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.
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.
Roger J. Pachuta joined our company as senior vice president -- engineering
and operations in March of this year. From 1993 through February 2000, Mr.
Pachuta served in various roles for AT&T Wireless, his last position being vice
president of field operations.
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.
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<PAGE> 36
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 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. Masiello and Pelson 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.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal years ended December 31, 1997,
December 31, 1998, and December 31, 1999, the cash compensation paid by the
Company, as well as certain other compensation paid or accrued for such year,
for the two individuals who served as the Company's Chief Executive Officer
during 1999, the four most highly compensated Executive Officers other than the
Chief Executive Officer employed by the Company as of December 31, 1999, and one
other former officer who was one of the four most highly compensated officers
for 1999. This table also indicates all capacities in which they served.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS ALL OTHER
------------------------------ ------------ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)
--------------------------- ---- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Rolla P. Huff, President and Chief
Executive Officer(1)................. 1999 77,923 1,000,000(1) 400,000 0
Nield J. Montgomery, President and
Chief Executive Officer(2)........... 1999 137,456 0 0 0
1998 158,707 20,000(3) 45,000 0
1997 139,424 0 0 0
James Mitchell President -- Eastern
Region(4)............................ 1999 114,615 36,125 10,000 0
1998 88,275 45,000 48,000 0
James J. Hurley, III
President -- Midwest Region(5)....... 1999 120,000 6,676 10,000 0
1998 93,991 30,000 48,000 0
John Boersma, Senior Vice President.... 1999 112,308 0 95,000 0
1998 109,442 6,000 15,000 0
1997 53,308 0 60,000 0
</TABLE>
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<PAGE> 37
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS ALL OTHER
------------------------------ ------------ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)
--------------------------- ---- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
David S. Clark, Senior Vice
President(6)......................... 1999 107,115 10,000 95,000 0
1998 96,058 6,000 18,000 0
1997 46,750 0 36,000 0
Linda M. Sunbury, Senior Vice
President............................ 1999 107,115 10,000 95,000 0
1998 90,876 10,000 22,000 0
1997 81,231 0 12,000 0
</TABLE>
- ---------------
(1) Mr. Huff commenced employment with the Company in November 1999 and
therefore, the salary shown for him for 1999 is for the period from November
1999 through December 1999. Mr. Huff received a signing bonus in the amount
indicated in the above table upon his employment as an officer of the
Company.
(2) Mr. Montgomery served as the Company's President and Chief Executive Officer
until November 1999.
(3) A portion of this bonus was paid in the form of Common Stock in the Company.
(4) Mr. Mitchell commenced employment with the Company in February 1998 and
therefore, the compensation shown for him for 1998 is for the period from
February 1998 through December 1998.
(5) Mr. Hurley commenced employment with the Company in March 1998 and
therefore, the compensation shown for him for 1998 is for the period from
March 1998 through December 1998. Mr. Hurley's employment as an officer of
the Company terminated in November 1999.
(6) Mr. Clark commenced employment in May 1997 and therefore, the salary shown
for him for 1997 is for the period from May 1997 through December 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Jack L. Hancock and Thomas
Neustaetter, none of whom are officers or employees of the Company.
EMPLOYMENT AGREEMENTS
Rolla P. Huff. The Company's employment agreement with Mr. Huff provides
for a base salary of $500,000 per year and an annual bonus of up to 100% of his
base salary based on the Company's achievement of certain annual targets to be
established by the Board of Directors in conjunction with the Company's annual
operating budget or in the discretion of the Board of Directors. Mr. Huff
received a $1,000,000 signing bonus upon his employment with the Company. The
signing bonus is subject to repayment if Mr. Huff's employment with the Company
is terminated before three years of employment under certain circumstances. Mr.
Huff is required to devote his full time and efforts to the business of the
Company during the term of his employment agreement which expires in October
2002. Mr. Huff's employment may be terminated by either the Company or Mr. Huff
at any time. Mr. Huff has agreed not to participate in a competitive business
during the term of his employment and for a period of twelve months following
termination. If Mr. Huff's employment is terminated by the Company without cause
or after a change of control, Mr. Huff will be entitled to severance pay (not
less than $1,000,000) equal to two times the salary and bonus paid to him during
the previous 12 months with payments to be made over the 24 month period
following his termination of employment. Mr. Huff's initial stock options will
also become immediately vested in the event of a change of control of the
Company.
In connection with Mr. Huff's employment with the Company, the Company sold
to Mr. Huff 150,000 shares of Common Stock at its value at that time ($28.81 per
share). The purchase price was payable by a non-recourse promissory note secured
by the shares purchased. The promissory note bears interest at 7.5% per annum
and is due in November 2002. The Company has agreed to forgive all payments due
under the promissory note if there is a change of control, if Mr. Huff is
continuously employed by the Company until November 2002 or if Mr. Huff's
employment is terminated prior to that time by the Company without cause or as a
result of Mr. Huff's disability. The shares of stock are subject to repurchase
by the Company if
36
<PAGE> 38
Mr. Huff's employment is terminated other than by the Company without cause or
as a result of a change of control or Mr. Huff's death or disability.
Michael R. Daley. The Company's employment agreement with Mr. Daley
provides for a base salary of $225,000 per year and an annual bonus of up to 75%
of his base salary based on the Company's achievement of certain annual targets
to be established by the Board of Directors in conjunction with the Company's
annual operating budget. Mr. Daley's employment may be terminated by either the
Company or Mr. Daley at any time. Mr. Daley has agreed not to participate in a
competitive business during the term of his employment and for a period of
twelve months following termination. If Mr. Daley's employment is terminated by
the Company without cause or after a change of control, Mr. Daley will be
entitled to severance pay equal to two times the salary and bonus paid to him
during the previous 12 months with payments to be made over the 24 month period
following his termination of employment. Mr. Daley's initial stock options will
also become immediately vested in the event of a change of control of the
Company.
Nield J. Montgomery. In November 1999, the Company and Mr. Montgomery
entered into an agreement superseding Mr. Montgomery's previous employment
agreement. Under the new agreement, Mr. Montgomery is to remain employed by the
Company until April 2001 and Mr. Montgomery will receive a base salary of $5,000
per month during the period of his employment. In addition, the agreement
provided for Mr. Montgomery to receive a lump sum payment of $360,000 in January
2000 in connection with his resignation as an executive officer and Director of
the Company. Under the agreement, the Company agreed to accelerate the vesting
of a portion of Mr. Montgomery's stock options.
Other Executive Officers. The Company has entered into Employment/Stock
Repurchase Agreements with John Boersma, David S. Clark and Linda M. Sunbury.
These agreements establish base salaries and provide that each employee may earn
a bonus of up to 50% of his or her base salary based on the employee's and the
Company's performance. Each employee's employment may be terminated at any time
by either the Company or the employee. Each of these Executive Officers has
agreed not to participate in a business offering local, long distance and
related telephone services in the area of his or her employment during the term
of employment and for a period of six months following termination. Each of
these Executive Officers has exercised rights to acquire Common Stock at $5.83
per share. All or a portion of such shares are subject to repurchase at their
cost if the Executive Officer's employment with the Company is terminated within
a three year period. The Company has financed the purchase price of certain of
these shares over a period of three years. See "Item 13 -- Certain Relationships
and Related Transactions."
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth information regarding all stock options granted
in the 1999 fiscal year under the Company's Stock Option Plan to those Executive
Officers of the Company named in the Compensation Table above.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZED VALUE AT
SECURITIES GRANTED TO FAIR ASSUMED ANNUAL RATES OF
UNDERLYING EMPLOYEES IN VALUE STOCK PRICE APPRECIATION(1)
OPTIONS FISCAL EXERCISE ON DATE EXPIRATION ---------------------------
GRANTED YEAR PRICE OF GRANT DATE 5% 10%
---------- ------------ -------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rolla P. Huff(2)................ 400,000 16.4% $20.00 $28.81 10/13/09 $10,773,011 $21,892,882
Nield J. Montgomery............. 0 n/a n/a n/a n/a n/a n/a
James Mitchell.................. 10,000 .4% 6.09 6.03 3/1/09 37,343 95,535
James J. Hurley, III............ 10,000 .4% 6.03 6.03 3/1/09 37,942 96,122
John Boersma.................... 20,000 .8% 6.03 6.03 3/1/09 75,885 192,245
John Boersma.................... 75,000 3.1% 27.50 27.50 11/1/09 1,297,095 3,287,094
David S. Clark.................. 20,000 .8% 6.03 6.03 3/1/09 75,885 192,245
David S. Clark.................. 75,000 3.1% 27.50 27.50 11/1/09 1,297,095 3,287,094
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZED VALUE AT
SECURITIES GRANTED TO FAIR ASSUMED ANNUAL RATES OF
UNDERLYING EMPLOYEES IN VALUE STOCK PRICE APPRECIATION(1)
OPTIONS FISCAL EXERCISE ON DATE EXPIRATION ---------------------------
GRANTED YEAR PRICE OF GRANT DATE 5% 10%
---------- ------------ -------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Linda M. Sunbury................ 20,000 .8% 6.03 6.03 3/1/09 75,885 192,245
Linda M. Sunbury................ 75,000 3.1% 27.50 27.50 11/1/09 1,297,095 3,287,094
</TABLE>
- ---------------
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the Securities and Exchange Commission and therefore
are not intended to forecast possible future appreciation, if any, of the
price of the Company's stock.
(2) The potential realized value of the option grants to Mr. Huff would be
$3,250,000 even if there was no appreciation in the value of the stock from
the date of the grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table shows aggregate exercises of options during 1999 and
the values of options held as of December 31, 1999 by those Executive Officers
of the Company named in the Compensation Table above.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS OPTIONS(1)
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED ON VALUE EXERCISABLE(E)/ EXERCISABLE(E)/
NAME EXERCISE REALIZED UNEXERCISABLE(U) UNEXERCISABLE(U)
- ---- ----------- -------- ------------------- -----------------
<S> <C> <C> <C> <C>
Rolla P. Huff...................... -- -- 400,000U $12,300,000U
Nield J. Montgomery................ -- -- 261,333E 12,726,359E
Nield J. Montgomery................ -- -- 168,667U 8,283,903U
James Mitchell..................... 19,200 $265,800 48,400U 2,171,528U
James J. Hurley, III............... 9,600 232,032 43,409U 1,852,528U
John Boersma....................... 34,000 729,080 1,000E 42,750E
John Boersma....................... -- -- 135,000U 4,426,270U
David S. Clark..................... -- -- 26,000E 646,848E
David S. Clark..................... -- -- 123,000U 3,882,022U
Linda M. Sunbury................... -- -- 35,200E 1,629,156E
Linda M. Sunbury................... -- -- 123,800U 3,960,934U
</TABLE>
- ---------------
(1) Amounts shown are based upon the closing sale price for the Company's Common
Stock on December 31, 1999, which was $50.75 per share.
DIRECTOR COMPENSATION
The Company's outside directors (Messrs. Flynn, Hancock, Kronfeld,
Masiello, Miller, Neustaetter and Pelson) receive meeting fees of $500 per
meeting of the Board of Directors or Committee attended in person in addition to
reimbursement of their expenses in attending meetings of the Board of Directors.
38
<PAGE> 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information known to us with respect to
beneficial ownership of common stock as of March 27, 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
BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED(1) OWNERSHIP(1)
- ------------------------ ------------ ------------
<S> <C> <C>
Providence Equity Partners III LLC(2)....................... 5,003,969 14.4%
Maurice J. Gallagher, Jr.,
chairman of the board and director(3)..................... 3,312,608 11.3%
David Kronfeld, director(4)................................. 2,061,070 6.7%
Timothy P. Flynn, director(5)............................... 898,500 3.0%
Rolla P. Huff, president,
chief executive officer and director...................... 150,000 *
Jack L. Hancock, director(6)................................ 37,200 *
Thomas Neustaetter, director................................ 8,800 *
Richard W. Miller, director................................. 1,500 *
Mark J. Masiello, director(7)............................... -- --
Mark Pelson, director(7).................................... -- --
All executive officers and directors as a group
(22 persons)(3)(4)(5)(6)(7)(8)............................ 7,096,893 22.9%
</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 indicated above 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.
39
<PAGE> 41
(6) Includes options to purchase 7,200 shares that are presently exercisable or
will become exercisable within 60 days after the date indicated above.
(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. Pelson
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 224,866 shares owned by executive officers not
named above which are presently exercisable or which will become exercisable
within 60 days after the date of indicated above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into an agreement to lease approximately 60,995
square feet of office space from a limited liability company which is
principally owned by two of the Company's Directors and principal stockholders,
Maurice J. Gallagher, Jr. and Timothy P. Flynn. The average rental rate is $1.60
per square foot per month which includes common area maintenance charges.
Management believes that the terms and conditions of this lease arrangement are
at least as favorable to the Company as those which the Company could have
received from an unaffiliated third party. During 1999, the Company paid
$1,335,211 in lease payments and leasehold improvements under this arrangement.
The Company entered into a lease agreement for an Astra aircraft with
Messrs. Flynn and Gallagher in December 1999. The lease agreement provides for a
base rental of $65,000 per month. During 1999, the Company paid $97,500 under
this lease agreement.
Various Executive Officers purchased shares of Common Stock from the
Company in 1997-1999 for cash and/or by promissory note. In each case, the
promissory note is payable within three years, bears interest at 7.5% per annum
and is secured by the pledge of the shares of Common Stock purchased with such
promissory note. In each case, all or a portion of such shares are subject to
repurchase at their cost if the officer's employment with the Company is
terminated within three years. The following chart indicates the outstanding
debt as of February 29, 2000, under the promissory note from each Executive
Officer, which amount represents the highest amount of the debt since January 1,
1999, unless otherwise indicated.
<TABLE>
<CAPTION>
PROMISSORY NOTE BALANCE
EXECUTIVE OFFICER AS OF FEBRUARY 29, 2000
----------------- -----------------------
<S> <C>
Rolla P. Huff................................... $4,446,129
David S. Clark.................................. 114,604
Kent F. Heyman.................................. 114,604
James J. Hurley, III............................ 114,604
James Mitchell*................................. -0-
Mark W. Peterson................................ 114,604
Linda M. Sunbury................................ 114,604
</TABLE>
- ---------------
* The highest amount of debt from Mr. Mitchell since January 1, 1999 was
$197,019.
During April 1999, affiliates of JK&B Management, LLC agreed to purchase
555,556 shares of the Company's Series B Convertible Preferred Stock at $9.00
per share for a total purchase price of $5,000,000. The purchase closed in May
1999. David Kronfeld, a Director of the Company, manages JK&B Management, LLC.
In addition, prior to the transaction, Mr. Kronfeld and affiliated entities
owned more than 5% of the Company's outstanding stock.
During November 1999, affiliates of Providence Equity Partners and JK&B
Management agreed to purchase 1,250,000 shares of the Company's Series C
Convertible Preferred Stock at $28.00 per share for a total purchase price of
$35,000,000, of which 892,857 shares were purchased by affiliates of Providence
Equity Partners for $25,000,000 and 357,143 shares were purchased by affiliates
of JK&B Management for $10,000,000. The purchase closed in December 1999.
Affiliates of JK&B Management paid a portion of their total purchase price by a
promissory note for $4,900,000, which was paid in full, including interest at
7.5% per
40
<PAGE> 42
annum, in February 2000. Prior to the transaction, each of Providence Equity
Partners (by virtue of its ownership of shares of Series B Convertible Preferred
Stock) and JK&B Management was a more than 5% stockholder of the Company. In
addition, Paul J. Salem, a former Director of the Company, and Mark J. Masiello,
a current Director of the Company, are members of Providence Equity Partners
III, LLC, which serves as the general partner of the entities which acquired the
Series C Convertible Preferred Stock.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
1. The response to this portion of Item 14 is submitted as a separate
section of this report.
2. The response to this portion of Item 14 is submitted as a separate
section of this report.
3. Filing of Exhibits:
Exhibit 4.12 -- Certificate of Designation of Series D Convertible
Preferred Stock.
Exhibit 10.17 -- Non-recourse Promissory Note dated October 13, 1999,
from Rolla P. Huff to the Company.
Exhibit 10.18 -- Stock Pledge Agreement dated October 13, 1999, between
the Company and Rolla P. Huff.
Exhibit 10.19 -- Agreement dated as of November 1, 1999, between Nield
J. Montgomery and the Company.
Exhibit 10.20 -- Standard Office Lease Agreement dated March 5, 1999,
between Cheyenne Investments, LLC and the Company.
Exhibit 10.21 -- Aircraft Lease Agreement dated December 1999 between
the Company, Maurice J. Gallagher, Jr. and Timothy P.
Flynn.
Exhibit 10.22 -- Amended and Restated Securities Purchase Agreement
dated as of November 19, 1999, among the Company and
the investors identified therein.
Exhibit 10.23 -- Promissory Note dated December 30, 1999, from JK&B
Capital III, L.P. to the Company.
Exhibit 21 -- Subsidiaries of the Registrant.
Exhibit 23 -- Consent of Arthur Andersen LLP.
Exhibit 27 -- Financial Data Schedule.
(b) The Registrant filed the following current reports on Form 8-K for the
fourth quarter 1999: October 14, 1999 to report third quarter 1999 results, the
hiring of a new chief executive officer and an agreement to issue $35 million of
preferred stock at $28.00 per share.
(c) The following exhibits are filed herewith or incorporated by reference
as indicated. Exhibit numbers refer to Item 60l of Regulation S-K.
EXHIBIT NO. AND DESCRIPTION
<TABLE>
<S> <C>
3.1 Articles of Incorporation and Amendments.(1)
3.2 By-laws.(1)
4.1 See the Articles of Incorporation and amendments filed as
Exhibit 3.1 and the By-laws filed as Exhibit 3.2.
</TABLE>
41
<PAGE> 43
<TABLE>
<S> <C>
4.2 Stockholders Agreement dated as of November 26, 1997, among
the Company, Maurice J. Gallagher, Jr. and certain investors
identified therein.(1)
4.3 Indenture dated as of September 29, 1997, between the
Company and Marine Midland Bank, as Trustee.(1)
4.4 Warrant Registration Rights Agreement dated as of September
29, 1997, among the Company, Bear, Stearns & Co. Inc. and
Furman Selz LLC.(1)
4.5 Security Agreement dated as of September 29, 1997, between
the Company and Marine Midland Bank.(1)
4.6 Collateral Pledge and Security Agreement dated as of
September 29, 1997, between the Company and Marine Midland
Bank.(1)
4.7 Amended and Restated Certificate of Designation of Series B
Convertible Preferred Stock.(2)
4.8 Amended and Restated Registration Rights Agreement dated
December 29, 1999, among the Company and the purchasers of
Series B Convertible Preferred Stock and Series C
Convertible preferred Stock.(2)
4.9 Amended and Restated Securityholders' Agreement dated
December 29, 1999, among the Company and the purchasers of
Series B Convertible Preferred Stock and Series C
Convertible preferred Stock.(2)
4.10 Certificate of Change in Authorized Capital of the
Company.(3)
4.11 Certificate of Designation of Series C Convertible Preferred
Stock.(2)
4.12 Certificate of Designation of Series D Convertible Preferred
Stock.
10.1 Network Products Purchase Agreement dated May 21, 1997,
between the Company and Northern Telecom, Inc.(1) The
Commission has granted confidential treatment with respect
to certain portions of this Agreement.
10.2 Employment and Stock Repurchase Agreement dated May 28,
1997, between the Company and John Boersma.(1)(4)
10.3 Stock Option Plan.(1)(4)
10.4 Warrant Agreement dated September 29, 1997, between the
Company and Marine Midland Bank.(1)
10.5 Standard Office Lease Agreement dated July 1, 1997, between
the Company and Cheyenne Investments L.L.C.(1)
10.6 Employment/Stock Repurchase Agreement dated March 20, 1998
between David Clark and the Company.(1)(4)
10.7 Employment/Stock Repurchase Agreement dated March 20, 1998
between Kent Heyman and the Company.(1)(4)
10.8 Employment/Stock Repurchase Agreement dated March 9, 1998
between James J. Hurley III and the Company.(1)(4)
10.9 Employment/Stock Repurchase Agreement dated February 16,
1998 between James D. Mitchell and the Company.(1)(4)
10.10 Employment/Stock Repurchase Agreement dated March 20, 1998
between Mark Peterson and the Company.(1)(4)
10.11 Employment/Stock Repurchase Agreement dated March 20, 1998
between Linda M. Sunbury and the Company.(1)(4)
10.12 First Amendment to lease dated May 1, 1998 between Cheyenne
Investments, LLC and the Company.(5)
10.13 Second Amendment to Lease dated December 29, 1998 between
Cheyenne Investments, LLC and the Company.(5)
10.14 Merger Agreement between the Company, MGC LJ.Net, Inc. and
LJ.Net, Inc. dated as of March 15, 1999.(6)
10.15 Securities Purchase Agreement dated as of April 5, 1999,
among the Company and the investors identified therein.(6)
10.16 Employment/Stock Repurchase Agreement dated October 13,
1999, between the Company and Rolla P. Huff.(4)
10.17 Non-recourse Promissory Note dated October 13, 1999, from
Rolla P. Huff to the Company.
10.18 Stock Pledge Agreement dated October 13, 1999, between the
Company and Rolla P. Huff.
</TABLE>
42
<PAGE> 44
<TABLE>
<S> <C>
10.19 Agreement dated as of November 1, 1999, between Nield J.
Montgomery and the Company.
10.20 Standard Office Lease Agreement dated March 5, 1999, between
Cheyenne Investments, LLC and the Company.
10.21 Aircraft Lease Agreement dated December 1999 between the
Company, Maurice J. Gallagher, Jr. and Timothy P. Flynn.
10.22 Amended and Restated Securities Purchase Agreement dated as
of November 19, 1999, among the Company and the investors
identified therein.
10.23 Promissory Note dated December 30, 1999, from JK&B Capital
III, L.P. to the Company.
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (File No. 333-38875) previously filed with the Commission.
(2) Incorporated by reference to the company's Registration Statement on Form
S-3, registration statement number 333-91353, filed with the Commission on
November 19, 1999, and amendments thereto.
(3) 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.
(4) Management contract or compensation plan or agreement required to be filed
as an Exhibit to this Report on Form 10-K pursuant to Item 14(C) of Form
10-K.
(5) Incorporated by reference to the Registrant's annual report on Form 10-K
(Commission File No. 0-24059) for the year ended December 31, 1998.
(6) Incorporated by reference to the Registrant's quarterly report on Form 10-Q
(Commission File No. 0-24059) for the quarter ended March 31, 1999.
All schedules have been omitted as they are not required under the related
instructions, are inapplicable, or because the information required is included
in the consolidated financial statements or related notes thereto.
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MGC COMMUNICATIONS, INC.
By: /s/ ROLLA P. HUFF
------------------------------------
Rolla P. Huff, President and
Chief Executive Officer
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C>
/s/ ROLLA P. HUFF March 30, 2000
- --------------------------------------------------------
Rolla P. Huff, President (Chief Executive Officer)
and Director
/s/ MICHAEL DALEY March 30, 2000
- --------------------------------------------------------
Michael Daley, Vice President (Chief Financial Officer
and Principal Accounting Officer)
/s/ MAURICE J. GALLAGHER, JR. March 30, 2000
- --------------------------------------------------------
Maurice J. Gallagher, Jr., Director (Chairman of
the Board)
/s/ TIMOTHY P. FLYNN March 30, 2000
- --------------------------------------------------------
Timothy P. Flynn, Director
/s/ JACK L. HANCOCK March 30, 2000
- --------------------------------------------------------
Jack L. Hancock, Director
/s/ DAVID KRONFELD March 30, 2000
- --------------------------------------------------------
David Kronfeld, Director
March 30, 2000
- --------------------------------------------------------
Mark J. Masiello, Director
March 30, 2000
- --------------------------------------------------------
Richard W. Miller, Director
March 30, 2000
- --------------------------------------------------------
Thomas Neustaetter, Director
March 30, 2000
- --------------------------------------------------------
Mark Pelson, Director
</TABLE>
44
<PAGE> 46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MGC COMMUNICATIONS, INC.
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity for the years ended December 31,
1999, 1998 and 1997....................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 47
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 subsidiaries (the "Company") as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, redeemable preferred stock and stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
February 16, 2000
F-2
<PAGE> 48
MGC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 42,979 $ 11,886
Investments available-for-sale............................ 61,627 9,851
Restricted investments.................................... 20,256 20,797
Accounts receivable, less allowance for doubtful accounts
of $647 and $257 at December 31, 1999 and 1998,
respectively........................................... 15,299 6,360
Prepaid expenses.......................................... 1,527 208
-------- --------
Total current assets.............................. 141,688 49,102
Property and equipment, net................................. 191,612 116,380
Investments available-for-sale.............................. 64,464 63,212
Restricted investments...................................... -- 18,582
Deferred financing costs, net of accumulated amortization of
$1,859 and $1,065 as of December 31, 1999 and 1998,
respectively.............................................. 3,920 4,714
Other assets................................................ 745 129
-------- --------
Total assets...................................... $402,429 $252,119
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease
obligations............................................ $ 623 $ 332
Accounts payable:
Trade..................................................... 11,788 5,314
Property and equipment.................................... 24,955 18,577
Accrued interest.......................................... 5,200 5,200
Accrued sales taxes payable............................... 4,345 1,400
Accrued other expenses.................................... 5,452 1,073
-------- --------
Total current liabilities......................... 52,363 31,896
Senior Secured Notes, net of unamortized discount of $2,732
and $3,307 at December 31, 1999 and 1998, respectively.... 157,268 156,693
Other long-term debt and capital lease obligations.......... 4,044 270
-------- --------
Total liabilities................................. 213,675 188,859
-------- --------
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 at
December 31, 1999...................................... 34,510 --
Note receivable from stockholder for issuance of Series C
Convertible Preferred Stock............................... (4,900) --
Stockholders' equity:
Preferred stock, 43,472,221 shares authorized but
unissued............................................... -- --
</TABLE>
F-3
<PAGE> 49
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
Common stock, $0.001 par value, 60,000,000 shares
authorized, 23,244,328 and 17,190,428 shares issued and
outstanding............................................... 23 17
Additional paid-in capital.................................. 225,300 108,991
Accumulated deficit......................................... (114,161) (44,392)
Less: treasury stock........................................ (76) --
Notes receivable from stockholders for issuance of common
stock..................................................... (6,219) (2,173)
Accumulated other comprehensive income (loss)............... (1,086) 817
-------- --------
Total stockholders' equity........................ 103,781 63,260
-------- --------
Total liabilities, redeemable preferred stock and
stockholders' equity............................ $402,429 $252,119
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 50
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Operating revenues:
Telecommunication services......................... $ 55,066 $ 18,249 $ 3,791
----------- ----------- ----------
Operating expenses:
Cost of operating revenues (excluding
depreciation)................................... 50,012 17,129 3,928
Selling, general and administrative................ 44,836 17,877 6,440
Stock-based compensation expense................... 714 -- --
Depreciation and amortization...................... 18,921 5,238 1,274
----------- ----------- ----------
114,483 40,244 11,642
----------- ----------- ----------
Loss from operations............................ (59,417) (21,995) (7,851)
Other income (expense):
Gain on sale of investments........................ 224 223 --
Interest income.................................... 7,702 8,771 2,507
Interest expense (net of amount capitalized)....... (18,278) (19,064) (5,492)
----------- ----------- ----------
Net loss........................................ (69,769) (32,065) (10,836)
Value of preferred stock beneficial conversion
feature............................................ (72,500) -- --
Accretion of preferred stock to redemption value..... (6,133) -- --
Accrued preferred stock dividend..................... (2,577) -- (136)
----------- ----------- ----------
Net loss applicable to common stockholders........... $ (150,979) $ (32,065) $ (10,972)
=========== =========== ==========
Basic and diluted loss per share of common stock..... $ (7.63) $ (2.26) $ (1.30)
=========== =========== ==========
Basic and diluted weighted average shares
outstanding........................................ 19,775,410 14,178,729 8,458,991
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 51
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
-------------------- ------------------- PAID-IN ACCUMULATED ------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
---------- ------- ---------- ------ ---------- ----------- --------- ------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 -- -- --
8% Series A Convertible Preferred
Stock issued for cash........... 5,148,570 16,665 -- -- -- -- -- --
Accrued preferred stock
dividend........................ -- -- -- -- (136) -- -- --
Net loss.......................... -- -- -- -- -- (10,836) -- --
---------- ------- ---------- --- -------- --------- --------- ----
BALANCE AT DECEMBER 31, 1997...... 5,148,570 16,665 8,799,600 9 21,982 (12,327) -- --
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
(IPO)........................... -- -- 4,025,000 4 62,959 -- -- --
Conversion of preferred stock to
common stock.................... (6,571,427) (21,645) 3,942,839 4 22,431 -- -- --
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 5 118,305 -- -- --
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)
========== ======= ========== === ======== ========= ========= ====
<CAPTION>
NOTES ACCUMULATED
RECEIVABLE FROM OTHER
STOCKHOLDERS FOR COMPREHENSIVE TOTAL
ISSUANCE OF INCOME STOCKHOLDERS'
COMMON STOCK (LOSS) EQUITY
---------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
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
8% Series A Convertible Preferred
Stock issued for cash........... -- -- --
Accrued preferred stock
dividend........................ -- -- (136)
Net loss.......................... -- -- (10,836)
------- ------- --------
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
(IPO)........................... -- -- 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.............. -- (1,903) (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
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 52
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (69,769) $(32,065) $ (10,836)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 18,921 5,238 1,274
Gain on sale of investments............................... (224) (223) --
Amortization of debt discount............................. 575 575 144
Amortization of deferred debt financing costs............. 794 867 198
Stock-based compensation expense.......................... 714 -- --
Changes in assets and liabilities:
Increase in accounts receivable, net...................... (8,939) (5,160) (1,190)
Decrease (increase) in prepaid expenses................... (1,319) 69 (254)
Increase in other assets.................................. (464) (32) (91)
Increase in accounts payable -- trade..................... 6,474 4,852 386
Increase in sales taxes payable........................... 2,945 1,400 --
Increase in accrued interest and other expenses........... 4,379 295 5,879
--------- -------- ---------
Net cash used in operating activities....................... (45,913) (24,184) (4,490)
--------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net of payables....... (83,200) (81,597) (20,207)
Purchase of investments held-to-maturity.................. -- (42,622) (57,710)
Sale (purchase) of investments available-for-sale, net.... (54,707) 28,309 --
Sale (purchase) of restricted investments................. 19,123 18,195 (57,574)
--------- -------- ---------
Net cash used in investing activities....................... (118,784) (77,715) (135,491)
--------- -------- ---------
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) (5,237)
Proceeds from issuance of warrants........................ -- -- 3,885
Proceeds from issuance of 8% Series A Convertible
Preferred Stock, net of issuance costs.................. -- 4,980 16,665
Proceeds from issuance of 10% Series B Convertible
Preferred Stock, net of issuance costs.................. 46,663 -- --
Proceeds from issuance of 10% Series C Convertible
Preferred Stock, net of issuance costs.................. 29,600 -- --
Proceeds (payments) on other long term debt and capital
lease obligations, net.................................. (439) 133 (164)
Proceeds from issuance of common stock.................... 119,966 63,751 6,015
--------- -------- ---------
Net cash provided by financing activities................... 195,790 68,731 177,138
--------- -------- ---------
Net increase (decrease) in cash............................. 31,093 (33,168) 37,157
Cash and cash equivalents at beginning of period............ 11,886 45,054 7,897
--------- -------- ---------
Cash and cash equivalents at the end of period.............. $ 42,979 $ 11,886 $ 45,054
========= ======== =========
Supplemental schedule of non-cash investing and financing
activities:
Treasury stock acquired in partial settlement of a note... $ 76 $ -- $ --
========= ======== =========
Increase in property and equipment purchases included in
accounts/notes payable -- property and equipment........ $ 10,882 $ 15,504 $ 2,434
========= ======== =========
Stock issued in acquisition of subsidiary................. $ 223 $ -- $ --
========= ======== =========
Preferred stock dividends accrued......................... $ 2,577 $ -- $ 136
========= ======== =========
Accretion of preferred stock to redemption value.......... $ 6,133 $ -- $ --
========= ======== =========
Common stock issued for note receivable................... $ 4,322 $ 1,485 $ 688
========= ======== =========
Preferred stock issued for note receivable................ $ 4,900 $ -- $ --
========= ======== =========
Warrants issued as consideration in debt offering
capitalized as deferred financing costs................. $ -- $ -- $ 409
========= ======== =========
Other disclosures:
Cash paid for interest net of amounts capitalized......... $ 16,915 $ 19,192 $ 164
========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 53
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
The accompanying 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 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, 1999, the Company operated in Las Vegas,
Atlanta, Chicago, southern Florida, and selected suburban areas of southern
California including San Diego and Los Angeles with substantially all of its
operating revenues being derived from the Las Vegas, southern California, and
Atlanta operations.
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 includes both billed and unbilled amounts and is reduced by an
estimate for uncollectible amounts. Due to current disputes, the Company has
recognized switched access revenues based on management's best estimate of the
probable collections from such revenue. AT&T, Sprint, MCI WorldCom and other
long distance carriers have refused to pay the full amount of the long distance
access charges billed to them. For the years ended December 31, 1999, 1998 and
1997, the Company has recognized in operating revenues switched access revenues
of approximately $19.5 million, $7.4 million and $0.7 million, respectively.
These revenue amounts exclude $9.5 million, $3.2 million, and $0.2 million of
billed services which have not been recorded as revenue in the accompanying
consolidated statements of operations for the years ended December 31, 1999,
1998 and 1997, respectively. Switched access revenues from AT&T, Sprint, and MCI
WorldCom represented 71% and 81% of our total access charge revenues in 1999 and
1998, respectively. The Company settled its disputes with MCI WorldCom in
October 1999 and with AT&T in February 2000. Amounts collected approximated the
related switched access revenues estimated by the Company's management.
Included in trade accounts receivable in the accompanying consolidated
balance sheets as of December 31, 1999 and 1998 are net receivables related to
switched access of approximately $10.9 million and $3.6 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.
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
F-8
<PAGE> 54
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. As of
December 31, 1999, 1998 and 1997, the Company had expensed advertising costs of
$1,268,000, $810,000 and $125,000, 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 to fund remaining 1998 capital
expenditures. In accordance with SFAS No. 115, the classification of these
investments has been appropriately changed in the accompanying consolidated
financial statements.
During 1999 and 1998, the Company sold $43.6 million and $28.3 million,
respectively, in investments available-for-sale and recorded a $1.9 million
gross unrealized loss and $0.8 million gross unrealized gain, respectively, as
part of other comprehensive income for the years ended December 31, 1999 and
1998.
Available-for-sale securities represent investments principally in
commercial paper and government securities. The commercial paper matures
periodically through March of 2000 and the government securities mature
periodically through June 2002. The unamortized cost basis of these investments
at December 31, 1999 and 1998 is approximately $128.0 million and $72.2 million,
respectively. The cost basis for which the realized gain was calculated on
available-for-sale securities was $128.2 million and $72.0 million, for 1999 and
1998, respectively, 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 $4,057,000, $3,175,000 and $188,000 of interest costs related to
construction during 1999, 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.
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 years ended December 31, 1999, 1998 and 1997 were $1,218,000, $0 and $0,
respectively.
F-9
<PAGE> 55
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999
and 1998, 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 may not be
recoverable. 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 by writing down the asset's carrying value down to
its fair value based on the present value of the discounted cash flows of the
asset or other relevant measures. Management believes no material impairment in
the value of long-lived assets exists at December 31, 1999 or 1998.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes additional
standards for segment reporting in financial statements and is effective for
fiscal years beginning after December 15, 1997. The Company currently operates
in only one segment, communication services, and hence, separate segment
reporting is not applicable.
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 to regulatory agreements that govern the rates to be charged to the
Company.
F-10
<PAGE> 56
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 160,000 units
consisting of $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 aggregate of 4,025,000 shares of common
stock at $17.00 per share. In May 1999, the Company sold 5,277,779 shares of
preferred stock at $9.00 per share as discussed in Note 5. In July 1999, the
Company sold an additional 5,000,000 shares of common stock at $25.00 per share
as also discussed in Note 5. In December 1999, the Company issued 1,250,000
shares of preferred stock at $28.00 per share as also discussed in Note 5. In
February 2000, the Company sold an additional 6,163,709 shares of common stock
at $54.00 per share and 4,140,000 shares of preferred stock at $50.00 per share
as also discussed in Note 5. The Company expects to continue its expansion and
development of services into new markets. The Company expects to fund any
additional capital requirements through existing resources, debt or equity
financing and internally generated funds.
The Company expects that its available cash and the proceeds from the
common stock and series D preferred stock offerings in February 1999 should be
adequate to fund its operating losses and planned capital expenditures, as
currently projected, over the next several years. If these resources are not
sufficient, management intends to consider alternate forms of financing or to
delay or modify some of our expansion plans.
The Company continually evaluates the capital expenditure plan in light of
developments in the telecommunications industry and market acceptance of the
Company's service offerings. As a result of this evaluation, the Company may
decide to accelerate or expand its capital expenditure plan. The Company might
also expand through acquisitions. To fund an accelerated or expanded capital
expenditure plan or acquisitions, the Company would likely issue additional debt
or equity securities. The Company cannot predict that it would be successful in
raising additional capital on terms acceptable to it or at all.
Management also recognizes that 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 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 competitive, regulatory, legislative and judicial developments that
could materially affect the Company's future results.
F-11
<PAGE> 57
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Building and property.................................. $ 5,518 $ 2,653
Switching equipment.................................... 137,492 57,045
Leasehold improvements................................. 870 740
Computer hardware and software......................... 3,780 2,218
Office equipment and vehicles.......................... 5,748 901
-------- --------
153,408 63,557
Less accumulated depreciation and amortization......... (25,237) (6,555)
-------- --------
128,171 57,002
Switching equipment under construction................. 63,441 59,378
-------- --------
Net property and equipment............................. $191,612 $116,380
======== ========
</TABLE>
(4) DEBT
Long-term borrowings at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
13% Senior Secured Notes, due October 1, 2004, net of
unamortized discount of $2,732 and $3,307............ $157,268 $156,693
Other long-term debt and capital lease obligations..... 4,667 602
-------- --------
161,935 157,295
Less current portion................................... (623) (332)
-------- --------
$161,312 $156,963
======== ========
</TABLE>
Maturities of long-term debt and capital lease obligations for each of the
next five years and thereafter ending December 31, consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
2000................................................... $ 623
2001................................................... 696
2002................................................... 508
2003................................................... 274
2004 and thereafter.................................... 159,834
--------
$161,935
========
</TABLE>
In September 1997, the Company completed an offering of units consisting of
in the aggregate of $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
F-12
<PAGE> 58
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $20.3
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, 1999, the Notes were secured by a security
interest in telecommunications equipment with a net book value of $105.4
million.
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 for the
warrant.
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 preferred stock offering for $3.50 per share. Accordingly, the
warrants issued in connection with the 1997 Offering were increased from 774,200
to 862,923 and have been reflected in the accompanying consolidated financial
statements as of December 31, 1999 and 1998. 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 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.
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 for the warrant. All
such warrants were exercised in January and February 1998.
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 will, 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 remain outstanding immediately after
the occurrence of such redemption.
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
F-13
<PAGE> 59
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999, management believes it is in
compliance with all debt covenants.
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.
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.
During 1999, the Company entered into a capital lease agreement for an
aircraft, the owners of which are directors of the Company. All assets under
capital leases are capitalized using interest rates appropriate at the inception
of each lease. Capital leases are recorded at cost and depreciated over the
lesser of the estimated life or lease term. Total related lease payments in 1999
were $97,500.
(5) REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
COMMON STOCK
In 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 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 the registration statement filed 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 Series A
Preferred Stock (as defined 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 Preferred Stock has been reflected in the accompanying
consolidated financial statements.
F-14
<PAGE> 60
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1999, the Company issued 5,000,000 shares of common stock at $25.00
per share and received proceeds, after expenses, of $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.
In September 1999, the Company reacquired 9,140 shares of its common stock
at an aggregate purchase price of $76,136 in partial cancellation of a note
receivable from stockholder for issuance of common stock and is classified as
treasury stock in the accompanying consolidated financial statements.
In October 1999, the Company approved an agreement with a newly hired key
member of management to purchase a total of 150,000 shares of common stock at
$28.81 per share. 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 the purchase price of the shares purchased. The agreement
provides for the forgiveness of the note at the end of a three year term of
employment. The $4,321,875 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.
In February 2000, 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.
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 ("Series A 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.
On April 5, 1999, the Company entered into a Security 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 $46.7
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 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").
F-15
<PAGE> 61
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $9.00 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. The beneficial conversion feature has been
recognized as an increase in additional paid-in capital, with an offsetting
decrease in additional paid-in capital.
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.
At 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 $27.00 per share based on the Market Threshold. For the year ended
December 31, 1999, the Company recorded accretion of $6,123,395 related to the
Series B Preferred Stock which has been recorded as an increase in redeemable
preferred stock with a corresponding decrease in additional paid-in capital.
The holders of the Series B Preferred Stock have the right to require us to
redeem the Series B Preferred Stock after May 4, 2005 or upon 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, then the holders of the
Series B Preferred Stock, along with the holders of the Series C Preferred Stock
(as defined below) 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 L.P. and their affiliates (the "Purchasers") under which the Purchasers
purchased 1,250,000 shares of newly issued Series C Convertible Preferred Stock
("Series C 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 which was paid in February 2000. The
transaction was consummated on December 30, 1999.
Dividends 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. The Company may require
conversion if the Company's stock price exceeds $56.00 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 $28.00 per share and the fair value of the underlying common
stock at the time of issuance. The beneficial conversion feature has been
recognized as an increase in addition paid-in capital, with an offsetting
decrease in additional paid-in capital.
At each balance sheet date, the Company records a pro rata accretion of the
Series C Preferred Stock to its anticipated redemption value. Such accretion is
based on the market value of the common stock at the
F-16
<PAGE> 62
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
balance sheet date, not to exceed $56.00 per share based on the Market
Threshold. For the year ended December 31, 1999, the Company recorded accretion
of $9,623 related to the Series C Preferred Stock which has been recorded as an
increase in redeemable preferred stock with a corresponding decrease in
additional paid-in capital.
The holders of the Series C Preferred Stock have the right to require the
Company to redeem the Series C Preferred Stock after six years from 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 Preferred B Stock 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 of the 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 Series B Preferred Stock and
the 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.
On February 11, 2000, the Company completed an additional 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 .7652 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.
(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. 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 these reserved shares of
the Company's common stock under the MGC Communications, Inc. Stock Option Plan
(the "Plan").
In May 1999, the Company's stockholders approved an amendment to the
Company's stock option plan under which an additional 2,240,000 shares of common
stock were approved to be issued under the plan. In September 1999, the Company
filed a registration statement on Form S-8 to register these reserved shares of
the Company's common stock under the 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 with an acceleration provision for certain
events or qualified changes in control. All options expire within ten years of
the date of grant.
F-17
<PAGE> 63
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions during 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
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
Granted................................................ 2,436,240 $15.58
Exercised.............................................. (345,700) $ 4.88
Canceled............................................... (364,800) $13.92
---------
Outstanding at December 31, 1999....................... 3,551,940 $16.87
=========
Exercisable at December 31, 1997....................... 165,720 $ 1.47
=========
Exercisable at December 31, 1998....................... 378,660 $ 2.07
=========
Exercisable at December 31, 1999....................... 815,073 $ 4.09
=========
</TABLE>
For options granted during the years ended December 31, 1999 and 1998, the
weighted average fair value of options, on the date of grant, estimated using
the Black-Scholes option pricing model, was $23.80 and $6.70, respectively,
using the following assumptions: dividend yield of 0%; expected option life of
6.5 years; and risk free interest rate at December 31, 1999 and 1998 of 6.54%
and 5.06% and an expected volatility of 153.7% and 80.5%, respectively.
The weighted average fair value of each of the options issued during the
year ended December 31, 1997, substantially all of which have been granted at a
price equal to the then current market price as estimated by management, was
estimated to be $4.03, 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 of 5.06%.
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AT DEC. 31, CONTRACTUAL EXERCISE AT DEC. 31, EXERCISE
RANGE OF EXERCISE PRICE 1999 LIFE PRICE 1999 PRICE
----------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.83 to $5.83...................... 747,930 8.77 years $ 2.24 559,260 $ 2.23
$6.03 to $10.00..................... 947,680 9.00 years $ 7.42 241,273 $ 7.82
$12.50 to $26.00.................... 853,180 9.63 years $21.23 14,540 $25.17
$27.44 to $40.06.................... 1,003,150 9.83 years $33.00 -- $ --
--------- -------
$0.83 to $40.06..................... 3,551,940 9.44 years $16.87 815,073 $ 4.09
========= =======
</TABLE>
The Company applied Accounting Principles Board (APB) Opinion No. 25 in
accounting for its plan. No compensation expense was recognized for the years
ended December 31, 1999, 1998 and 1997. Had the Company determined compensation
cost using the fair value based method defined in SFAS No. 123, the
F-18
<PAGE> 64
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's loss for the years then ended would have increased by $3,778,000,
$565,000 and $7,000, 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, 1999, 1998 and
1997 were computed by dividing net loss applicable to common stockholders by the
weighted average number of shares of common stock.
The Company's warrants, preferred stock and stock options granted and
issued during 1999, 1998 and 1997, and outstanding as of December 31, 1999, 1998
and 1997, are antidilutive and have been excluded from the diluted loss per
share calculation for the years ended December 31, 1999, 1998 and 1997. Had the
Company shown the effects of dilution, the warrants, preferred stock and options
would have added an additional 5.4 million, 1.8 million and 1.6 million shares
to the weighted average shares outstanding for the years ended December 31,
1999, 1998 and 1997, respectively.
(8) INCOME TAXES
The net deferred tax asset as of December 31, 1999 and 1998 is as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred Tax Asset
Net operating loss carry-forward..................... $ 48,152 $ 17,804
Start-up expenditures................................ 173 164
Other................................................ 928 534
-------- --------
49,253 18,502
Less: valuation allowance............................ (39,906) (15,517)
-------- --------
Net deferred tax asset............................... 9,347 2,985
-------- --------
Deferred Tax Liability
Property and equipment............................... 6,405 2,769
Other................................................ 2,942 216
-------- --------
Net deferred tax liability........................... 9,347 2,985
-------- --------
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, 1999 and 1998, the Company
determined that $39,906,000 and $15,517,000, 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, 1999 and 1998, the Company had net operating loss
carry-forwards available for income tax purposes of approximately $133,701,000
and $50,869,000, respectively, which expire principally from 2011 to 2019.
F-19
<PAGE> 65
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company has entered into various leasing agreements for its switching
facilities, offices, and office equipment. The facilities which house the
Company's headquarters in Las Vegas are 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.
Future minimum lease obligations in effect as of December 31, 1999 are as
follows (in thousands):
<TABLE>
<S> <C>
Payments during the year ending December 31:
2000.................................................... $2,353
2001.................................................... 2,291
2002.................................................... 2,150
2003.................................................... 1,588
2004 1,101
Thereafter.............................................. 248
------
$9,731
======
</TABLE>
Rent expense was $1,609,000, $850,000 and $207,000 for the years ended
December 31, 1999, 1998 and 1997, respectively, of which $806,000 was paid to a
related party during 1999.
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 December 31, 1999, the Company had a total for telecommunication
vendors of approximately $43.3 million of remaining purchase commitments for
purchases of switching equipment and to collocation site providers of
approximately $11.9 million of remaining commitments for the build-out of
collocation sites.
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, charges for these services have
made 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. For the years ended December 31,
F-20
<PAGE> 66
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 and 1998, the Company has recorded costs of sales related to the Sprint
(Nevada) interconnection agreement at amounts which are management's best
estimates of the probable outcome of the final negotiated charges to our
accounts. The difference, which totaled approximately $1.1 million and $1.7
million at December 31, 1999 and 1998, respectively has not been recorded in the
accompanying consolidated financial statements. Management believes that the
resolution of this matter will not have a material adverse effect on the
Company's 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 $541,000 and $656,000 during 1999 and
1998, respectively, under such agreement to support and maintain the Company's
proprietary management information computer system. Management believes the
terms and conditions of this agreement are equal to the terms which would be
available from an unaffiliated party.
F-21
<PAGE> 1
Exhibit 4.12
MGC COMMUNICATIONS, INC.
7.25% 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 7.25% Series D Cumulative Convertible Preferred
Stock, par value $0.001 per share, with a liquidation preference of $50.00 per
share, consisting of 4,250,000 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 7.25% Series D Cumulative Convertible Preferred Stock (the
"Series D Preferred Stock"). The number of shares constituting the Series D
Preferred Stock shall be 4,250,000. 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 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
<PAGE> 2
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 7.25% 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 May 15, August 15, November 15 and February 15
of each year (each a "Dividend Payment Date"), commencing on May 15, 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 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
<PAGE> 3
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 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
<PAGE> 4
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,
<PAGE> 5
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 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 February 15, 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 105.8% 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 February 15, 2002, but prior to February 15,
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 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 February 15, 2003 (such period being referred to as the
"Additional Period").
<PAGE> 6
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 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
<PAGE> 7
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 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;
<PAGE> 8
(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 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.
<PAGE> 9
(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) 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
<PAGE> 10
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 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.
<PAGE> 11
(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 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
<PAGE> 12
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 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 February 15, 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
<PAGE> 13
"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 $65.34 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).
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
<PAGE> 14
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 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
<PAGE> 15
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.
(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.
<PAGE> 16
(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 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);
<PAGE> 17
"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";
"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;
<PAGE> 18
"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;
"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
<PAGE> 19
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 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
<PAGE> 20
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:
(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
<PAGE> 21
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 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
<PAGE> 22
(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 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
<PAGE> 23
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 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
<PAGE> 24
(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
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
<PAGE> 25
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 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,
<PAGE> 26
(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;
(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
<PAGE> 27
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.
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
<PAGE> 28
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.
"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)
<PAGE> 29
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 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;
<PAGE> 30
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 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.
<PAGE> 31
(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 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 4,250,000 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
<PAGE> 32
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 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
<PAGE> 33
certificate is replaced. The Company and the Transfer Agent may charge the
Holder for their expenses in replacing a Series D Preferred Stock certificate.
(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.
<PAGE> 34
"Dividend Period" means such period between two consecutive Dividend
Payment Dates and the period from the Issue Date to the first Dividend Payment
Date.
"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.
<PAGE> 35
"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.
<PAGE> 36
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______________________________________
Name: Rolla P. Huff
Title: President
Attest:
_____________________________________
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> 37
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
7.25% 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
7.25% 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 February 2, 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.
This certificate is not valid unless countersigned and registered by the
Transfer Agent.
<PAGE> 38
IN WITNESS WHEREOF, the Company has executed this certificate this
[ ] day of [ ], [ ].
MGC COMMUNICATIONS, INC.
By______________________________________
Name:
Title:
[Seal]
By______________________________________
Name:
Title:
<PAGE> 39
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.
<PAGE> 40
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.)
<PAGE> 41
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 7.25% 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 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.
<PAGE> 42
**Address where shares of Common Stock and any other payments or certificates
shall be sent by the Company.
<PAGE> 1
Exhibit 10.17
NON-RECOURSE
PROMISSORY NOTE
$4,321,875.000 Las Vegas, Nevada
October 13, 1999
FOR VALUE RECEIVED, the undersigned ("Maker") does hereby promise to pay
to the order of MGC Communications, Inc., a Nevada corporation, or its
successors or assigns (hereinafter, together with any subsequent holder hereof,
referred to as "Holder") at 3301 North Buffalo Drive, Las Vegas, Nevada 89129,
or at such other place as the Holder may from time to time designate in writing,
the principal sum of Four Million Three Hundred Twenty-one Thousand Eight
Hundred Seventy-five and 00/100 Dollars ($4,321,875.00), together with interest
thereon, or on so much thereof as is from time to time outstanding and unpaid,
from date, at the rate of seven and one-half percent (7.5%) per annum until paid
in full. Interest and outstanding principal shall be paid as follows:
The principal amount of this Note and all accrued interest thereon shall
be due and payable on October 13, 2002, subject to acceleration at the option of
the Holder, in full in the event that Maker's employment with MGC
Communications, Inc. ("MGC") is terminated by MGC for Cause or by Maker without
Good Reason, in which event, the entire principal amount of this Note shall
become due and payable within thirty (30) days after his termination of
employment with MGC. For all purposes of this Agreement, "Cause" and "Good
Reason" shall have the meanings set forth in that certain Employment/Stock
Repurchase Agreement (the "Employment Agreement") dated as of October 13, 1999,
between Maker and MGC. Amounts due under this Note are subject to being forgiven
by MGC in accordance with the terms of the Employment Agreement.
Maker shall have the right to prepay this Note in full or in part at any
time without the imposition of any prepayment fee or penalty. Any partial
prepayments shall be applied first to any accrued and unpaid interest due under
this Note and the balance, if any, to the outstanding principal balance of this
Note.
This Note is secured by the pledge of 150,000 of Maker's shares (the
"Collateral") in MGC pursuant to a Stock Pledge Agreement of even date herewith
(the "Stock Pledge Agreement"). Notwithstanding anything to the contrary in this
Note, the Holder agrees to satisfy any judgment obtained by the Holder against
Maker for the indebtedness evidenced by this Note by the exercise of the rights
of the Holder under the Stock Pledge Agreement. In the event, as a result of the
foreclosure and sale of the Collateral under the Stock Pledge Agreement, a
lesser sum is realized from the sale of the Collateral than the amount due and
owing on this Note, Holder shall not seek any deficiency judgment against Maker,
it being understood and agreed that Maker shall not have any personal liability
for the payment of this Note and this Note shall be considered non-recourse to
the Maker. No other property or assets of Maker shall be subject to levy,
execution, or other enforcement procedures for the satisfaction of the payments
required under this Note or the Stock Pledge Agreement or for the performance of
any other obligations, covenants or warranties contained herein or under the
Stock Pledge Agreement. The Holder shall not bring any action to obtain a
judgment against Maker for the indebtedness evidenced by this Note except as
part of a judicial proceeding to foreclose upon the Collateral under the Stock
Pledge Agreement. Nothing
<PAGE> 2
contained herein shall: (a) constitute a waiver of any obligation evidenced by
this Note or secured by the Stock Pledge Agreement, or in any way be construed
to release or impair the lien on the Collateral or the indebtedness evidenced by
this Note; or (b) limit the right of Holder to foreclose either judicially or
nonjudicially the lien on the Collateral, or to confirm any foreclosure or sale
pursuant to the power of sale contained in the Stock Pledge Agreement.
Should Maker default in his obligations to Holder under the Stock Pledge
Agreement, the entire principal sum evidenced by this Note with all accrued and
unpaid interest, shall, at the option of the Holder, and without further notice
to Maker, become due and payable and may be collected forthwith. It is further
agreed that the failure of holder to exercise this right of accelerating the
maturity of this debt, or indulgence granted from time to time, shall in no
event be considered a waiver of such right of acceleration or estop Holder from
exercising such right.
All amounts not paid when due hereunder shall bear interest at the rate of
twelve percent (12%) per annum from and after the due date thereof.
Time is of the essence of this Note, and, in the event this Note is
collected by law or through an attorney at law or under advice therefrom, Maker
agrees to pay all costs of collection, including reasonable attorney's fees
actually incurred.
Maker hereby waives presentment, demand for payment and notice of
nonpayment.
This Note shall be construed in all respects and enforced according to the
laws of the State of Nevada.
Any and all notices required or permitted to be given under this Note will
be sufficient if furnished in writing, sent by registered mail in the case of
Maker to 14 Moraine Point Victor, New York 14564, or in the case of Holder to
3301 North Buffalo Drive, Las Vegas, Nevada 89129, Attention: Chief Financial
Officer.
IN WITNESS WHEREOF, Maker has signed this Note as of the day and year
first above written.
/s/ Rolla P. Huff (SEAL)
----------------------------------------
ROLLA P. HUFF
<PAGE> 1
Exhibit 10.18
STOCK PLEDGE AGREEMENT
This Stock Pledge Agreement ("Agreement") is entered into as of October
13, 1999, by and between ROLLA P. HUFF ("Huff") and MGC COMMUNICATIONS, INC., a
Nevada corporation ("MGC").
RECITALS
A. Simultaneously herewith, Huff has purchased 150,000 shares of common
stock in MGC at $28.8125 per share (the "Subject Shares").
B. The purchase price for the Subject Shares is payable under that certain
non-recourse promissory note from Huff to MGC in the initial principal amount of
$4,321,875.00 (the "Obligations").
C. The Subject Shares are to be subject to the terms of this Agreement
until such time (the "Termination Date") as the Obligations have been paid in
full.
D. Upon the terms and subject to the conditions set forth in this
Agreement, Huff hereby pledges the Subject Shares to MGC by depositing them with
MGC.
AGREEMENT
1. Pledge. Huff hereby assigns and delivers to MGC certificate number
_____ which represents 150,000 shares of the common stock of MGC. Such stock
constitutes the Subject Shares. Together with such stock, Huff hereby delivers
to MGC a stock power separate from the stock certificate duly endorsed by Huff
as transferor and authorizing MGC to transfer such stock on the records of MGC.
2. Stock. The Subject Shares shall be and are hereby held by MGC as
security for Huff's payment of the Obligations. The Subject Shares shall not be
disposed of by Huff, nor shall they be encumbered except as herein provided. At
such time as Huff shall have provided to MGC's satisfaction evidence that the
Termination Date has occurred as a result of the Obligations having been paid in
full, including, without limitation, by forgiveness thereof as provided in that
certain Employment/Stock Repurchase Agreement dated as of October 13, 1999, MGC
shall deliver the stock certificate and stock power described above to Huff.
<PAGE> 2
3. Voting Rights. Huff shall have the right to vote the Subject Shares so
long as there is no event of default in existence hereunder. During the
continuance of an event of default, the Subject Shares shall not have any voting
rights (as if the Subject Shares were treasury stock).
4. Default.
4.1 Events of Default. The failure of Huff to perform the
Obligations when due shall constitute an event of default hereunder if such
default continues for more than the cure period set forth in Section 5.1 below.
4.2 Notice of Default. Upon the occurrence of any default, MGC shall
give Huff written notice thereof.
5. Remedies Upon Default.
5.1 Right to Cure. Huff shall have the right to cure any default for
a period of ten (10) days from the date Huff receives written notice of default
pursuant to the provisions of Section 4.2. During this cure period, MGC shall
not have the right to exercise any of its remedies hereunder.
5.2 Additional Remedies. In addition to all other rights and
remedies which MGC may have under law, MGC shall have all rights and remedies of
a secured party under the Uniform Commercial Code in any jurisdiction where
enforcement of this Agreement is sought. In addition thereto, MGC shall have the
right, upon an event of default, to either:
A. If the aggregate fair market value of the Subject Shares
shall be less than the amount of the Obligations, to have transferred into MGC's
name the Subject Shares, in full satisfaction of the Obligations, or
B. Sell or otherwise dispose of the Subject Shares or any part
thereof, in one or more sales, at a public or private sale, for cash, on credit
or otherwise with or without representations or warranties, and upon such terms
as shall be acceptable to MGC, subject to any restrictions imposed by applicable
state or federal securities laws.
-2-
<PAGE> 3
5.3. Sale.
5.3.1 MGC shall give Huff at least ten (10) days prior written
notice of the sale of all or any part of the Subject Shares or of any proposal
by MGC to retain the Subject Shares or any part thereof in satisfaction of
Huff's Obligations. Within such ten (10) day period, Huff may cure the default
prior to the date on which the sale is scheduled. If Huff does not do so, he may
bid at any such sale.
5.3.2 Any sale of the Subject Shares shall be held at such
time or times and at such place or places as MGC may determine in the exercise
of MGC's reasonable discretion; provided, however, that any public sale shall be
held in Las Vegas, Nevada. A private sale shall be held on or after the date
designated in the notice of sale at the place so designated.
5.3.3 MGC may bid at any sale hereunder and shall also have
the rights provided in the Uniform Commercial Code of the State of Nevada. The
Subject Shares pledged hereunder may, upon the completion of any sale or
transfer, be endorsed by MGC as required to transfer the Subject Shares on the
books of MGC and Huff hereby constitutes and appoints MGC as his attorney in
fact to do so.
5.3.4 The proceeds of any sale shall be applied by MGC, after
payment of expenses of sale (including, without limitation, attorneys' fees and
court costs), first to the Obligations, and any surplus shall be paid to the
order of Huff. In the event the proceeds of any such sale are insufficient to
fully discharge Huff's Obligations, Huff shall not be liable to MGC for any
deficiency.
5.3.5 Attorney in Fact. Huff hereby irrevocably appoints MGC
as his attorney in fact for purposes of taking any actions and executing any
documents and instruments MGC reasonably deems necessary to exercise its
remedies and otherwise accomplish the purposes of this Agreement.
6. Reclassification and Dividends. If, during the life of this Agreement,
any stock dividend, reclassification, readjustment or other change is declared
or made in the capital structure of MGC, all new, substituted and additional
shares, or other securities issued in connection with any such change, may and
shall be held by MGC under the terms of this Agreement. All dividends, current
or liquidating, on any Subject Shares held in pledge hereunder, whether in money
or in Subject Shares or in kind, shall be paid to MGC during the pendency
-3-
<PAGE> 4
of an Event of Default, and such dividends shall be applied by MGC to the
Obligations hereunder, but otherwise shall be paid to Huff.
7. Pledgeholder. To facilitate the pledge created herein, the parties
agree that MGC shall act as Pledgeholder.
8. Further Assurances. Huff shall execute, acknowledge and deliver all
such instruments and take all such action as MGC may reasonably request in order
to effectuate the purposes of this Agreement and to carry out the terms hereof.
9. Transfer. MGC may at any time or from time to time sell, assign or
transfer to any person who shall be the transferee of the Obligations all or any
part of its rights hereunder. Upon any such sale, MGC shall be fully discharged
thereafter from all liability and responsibility with respect to the rights
transferred, and the transferee or transferees shall be vested with all the
rights, powers and remedies of the pledge hereunder with respect to the rights
transferred.
10. Miscellaneous Provisions.
10.1 Entire Agreement: Amendment: Waiver. This Agreement supersedes
all prior agreements or understandings, written or oral, between the parties
hereto, related to the subject matter hereof, and incorporates the entire
understanding of the parties with respect thereto. Any modifications concerning
this Agreement shall be of no force or effect unless contained in a subsequent
written modification signed by the party to be charged. This Agreement may only
be amended by a written instrument signed by the party or parties against whom
it is sought to be enforced. The party benefitted by any condition or obligation
contained herein may waive the same, but such waiver shall not be enforceable by
another party or parties unless made by written instrument, signed by the
waiving party. No waiver of any default shall constitute a waiver of any other
default or of any subsequent similar default.
10.2 Notices. Any notice to be given under this Agreement shall be
delivered in person or may be deposited in the United States mail, duly
registered or certified, postage prepaid, return receipt requested, and
addressed as follows:
-4-
<PAGE> 5
Pledgor: Rolla P. Huff
14 Moraine Point
Victor, New York 14564
Pledgee: MGC Communications, Inc.
3301 North Buffalo Drive
Las Vegas, Nevada 89129
or to such other address as may be designated in writing.
10.3 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Nevada.
10.4 Successors and Assigns. This Agreement shall be binding on and
inure to the benefit of the respective successors, assigns and personal
representatives of the parties, except to the extent of any contrary provisions
in this Agreement.
10.5 Headings. The Article and Paragraph headings throughout this
Agreement are provided for convenience only and the words contained therein
shall in no way be held to expand, amplify, modify or aid in the interpretation
or construction thereof.
10.6 Incorporation of Recitals. The recitals hereto are incorporated
into and made a part of this Agreement for all purposes.
10.7 Resolution of Conflicts. Any controversy between the parties
hereto regarding the construction or application of any of the terms, provisions
or conditions of this Agreement or any obligation created pursuant hereto shall,
on the written request of any party served on the other, be submitted to
arbitration, and such arbitration shall comply with and be governed by the
provisions of the American Arbitration Association. The parties in conflict
shall jointly select one (1) neutral arbitrator to hear and determine the
dispute. If the parties are unable to agree upon a neutral arbitrator, then the
State Court sitting in Clark County, Nevada, shall select such arbitrator. The
cost of arbitration, including attorneys' fees, shall be borne by the losing
party or shall be borne by the parties in such proportions as the arbitrator
shall decide.
-5-
<PAGE> 6
10.8 Gender and Number. Any reference which is singular shall
include the plural, the neuter shall include the feminine and masculine, the
masculine shall include the feminine and neuter, the feminine shall include
neuter, and each shall include a corporation wherever necessary to construe this
Agreement.
10.9 Severability. If a court of competent jurisdiction should find
any term or provision of this Agreement to be unenforceable or invalid, then
such term or provision shall be severed from this Agreement and the remainder of
this Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have affixed their signatures as of
the date herein first written above.
MGC COMMUNICATIONS, INC.,
Pledgee
By:_____________________________________
Title:__________________________________
(CORPORATE SEAL)
__________________________________(SEAL)
ROLLA P. HUFF, Pledgor
-6-
<PAGE> 1
Exhibit 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
the 1st day of November, 1999, by and between MGC COMMUNICATIONS, INC., a Nevada
corporation (the "Company") and NIELD J. MONTGOMERY ("Employee").
W I T N E S S E T H T H A T:
The parties, for and in consideration of the mutual and reciprocal
covenants and agreements hereinafter contained, do contract and agree as
follows:
1. Employment: Company hereby employs Employee and Employee hereby accepts
employment by Company upon all of the terms and conditions as are hereinafter
set forth.
2. Duties:
A. Employee shall devote such time as the parties may determine to
be reasonable in connection with the following: (i) Employee shall use good
faith efforts to advise Company on regulatory developments of importance to
Company's business and to provide a monthly report to Company for such purposes,
(ii) Employee shall make himself available to Company at any time, to testify,
at the request of Company in any legal, regulatory or administrative proceedings
involving any matters with which Employee was involved during his employment
with Company prior to November 1, 1999, and (iii) such other duties as are
mutually agreeable to the parties.
B. In the event Employee is contacted by parties or their legal
counsel involved in litigation adverse to the Company or its affiliates,
Employee (i) agrees to provide notice of such contact as soon practicable; and
(ii) acknowledges that any communication with or in the presence of legal
counsel for the Company (including without limitation the Company's outside
legal counsel, the Company's inside legal counsel and legal counsel of each
related or affiliated entity of the Company) shall be privileged to the extent
recognized by law and, further, will not do anything to waive such privilege
unless and until a court of competent jurisdiction decides that the
communication is not privileged. In the event the existence or scope of the
privileged communication is subject to legal challenge, then the Company must
either waive the privilege or pursue litigation to protect the privilege at the
Company's sole expense.
3. Term of Agreement: This Agreement shall be effective as of November 1,
1999 (the "Effective Date") and Employee's employment hereunder shall continue
until April 1, 2001.
4. Limitations of Executive Duties: Employee shall not, without consent
first being given by the Chairman or Board of Directors of the Company:
A. Enter into any contract, oral or written, in the name of, for or
on behalf of Company.
-2-
<PAGE> 2
B. Use any money belonging to Company or pledge its credit.
C. Commit or suffer to be committed any act whereby Company's
property may be subject to attachment or seizure.
D. Cause Company to become a guarantor, surety or endorser or give
any note for the benefit of any other person whomsoever.
Employee shall indemnify and hold Company harmless from and against
any and all damages, actions, causes of action, claims and other liabilities,
contingent or otherwise, directed toward Company by others as a result of
Employee's violation of any of the provisions hereof.
5. Compensation: During the term of this Agreement, Company agrees to pay
to Employee, and Employee agrees to accept from Company, in full payment for
services rendered by Employee and work to be performed by him under the terms of
this Agreement, a monthly base salary of Five Thousand Dollars ($5,000.00),
payable in installments in accordance with the Company's payroll practices.
6. Fringe Benefits: Employee shall not be entitled to participate in any
benefit plans of Company or any other fringe benefits, whether or not offered to
any other employees of Company.
7. Deductions: Deductions shall be made from Employee's salary for social
security, Medicare, federal and state withholding taxes, and any other such
taxes as may from time to time be required by governmental authority.
8. Expenses. During the term of this Agreement, Company agrees to
reimburse Employee, after presentation of receipts and other appropriate
documentation, for all reasonable, ordinary and necessary travel costs and other
necessary expenses incurred by Employee in performing his duties pursuant to
this Agreement to the extent such expenses have been approved by the Chairman of
Company.
9. Termination:
A. Employee may, with or without cause, terminate this Agreement by
giving to Company thirty (30) days written notice.
B. Company may terminate this Agreement immediately for "cause".
Cause shall be defined as any of the following: (i) Employee shall commit a
felony or other act involving moral turpitude, or (ii) Employee shall commit any
act of prohibitive conduct as set forth in Item 4 of this Agreement. Any
termination under this Paragraph B shall take effect immediately upon Employee's
receipt of written notice from Company to Employee. The failure of Company to
terminate Employee's employment hereunder for cause as a result of any of the
foregoing at any one or more times shall not affect Company's ability to
terminate Employee's employment hereunder for cause as a result of the
subsequent occurrence of any act giving rise to "cause" hereunder.
10. Assignment: This Agreement, as it relates to the employment of
Employee, is a personal contract and the rights and interests of Employee
hereunder may not be sold, transferred, assigned,
-2-
<PAGE> 3
pledged or hypothecated. However, this Agreement shall inure to the benefit of
and be binding upon the Company and its successors and assigns including,
without limitation, any corporation or other entity into which the Company is
merged or which acquires all or substantially all of the outstanding common
stock or assets of the Company.
11. Breach by Company. If there is a dispute regarding the payment of any
sum by Company hereunder, Company shall not be deemed to have failed to have
made a payment hereunder if pending the resolution of such dispute, Company pays
the amount in dispute into court or into an escrow account at Company's bank or
with Company's corporate counsel.
12. Remedies Not Exclusive. The rights, remedies and benefits herein
expressly specified are cumulative and not exclusive of any rights, remedies or
benefits which any party may otherwise have.
13. Invalid Provisions: The invalidity of any one or more of the clauses
or words contained in this Agreement shall not affect the reasonable
enforceability of the remaining provisions of this Agreement, all of which are
inserted herein conditionally upon being valid in law; and in the event that one
or more of the words or clauses contained herein shall be invalid, this
instrument shall be construed as if such invalid words or clauses had not been
inserted or, alternatively, said words or clauses shall be reasonably limited to
the extent that the applicable court interpreting the provisions of this
Agreement considers to be reasonable.
14. Binding Effect: All the terms of this Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective legal
representatives, successors and assigns.
15. Jurisdiction: Each of the undersigned further agrees that any action
or proceeding brought or initiated in respect of this Agreement may be brought
or initiated in the State Court of Clark County, Nevada, and each of the
undersigned consents to the exercise of personal jurisdiction and the placement
of venue in any of such courts, or in any jurisdiction allowed by law, in any
such action or proceeding and further consents that service of process may be
effected in any such action or proceeding in such manner as may be permitted by
law. Each of the undersigned further agrees that no such action shall be brought
against any party hereunder except in one of the courts above named.
16. Attorney's Fees: In the event an action is taken by either party to
enforce this Agreement or resolve a dispute in connection herewith, the
prevailing party shall be entitled to recover the costs incurred with the
prosecution and defense of such action, including reasonable attorney's fees.
17. Waiver of Breach or Violation Not Deemed Continuing: The waiver by
either party of any provision of this Agreement shall not operate as, or be
construed to be, a waiver of any subsequent breach hereof.
18. Entire Agreement; Law Governing: This Agreement supersedes any and all
other agreements, either oral or in writing, between the parties hereto with
respect to the subject matter hereof, by and between Company and Employee, and
contains all the covenants and agreements among the parties with respect to such
subject matter. This Agreement shall be construed in accordance with the laws of
the State of Nevada.
-3-
<PAGE> 4
19. Item Headings: The item headings contained in this Agreement are for
convenience only and shall in no manner be construed as a part of this
Agreement.
IN WITNESS WHEREOF, Company has hereunto caused this Agreement to be
executed by a duly authorized officer and its seal to be affixed and Employee
has hereunto set his hand and seal as of the day and year first above written.
EMPLOYEE:
_________________________________ (SEAL)
NIELD J. MONTGOMERY
EMPLOYER:
MGC COMMUNICATIONS, INC.
By:_____________________________________
President
(CORPORATE SEAL)
-4-
<PAGE> 1
Exhibit 10.20
STANDARD OFFICE LEASE AGREEMENT
This Lease between CHEYENNE INVESTMENTS L.L.C., a Nevada Limited Liability
Company, ("Landlord"), and MGC COMMUNICATIONS, INC., a Nevada Corporation,
("Tenant"), is dated March 25, 1999.
1. LEASE OF PREMISES.
In consideration of the Rent (as defined at Section 5.4) and the provisions of
this Lease, Landlord leases to Tenant and Tenant leases from Landlord the
Premises shown by diagonal lines on the floor plan attached hereto as Exhibit
"A", and further described at Section 2i. The Premises are located within the
Building and Project described in Section 2m. Tenant shall have the
nonconclusive right (unless otherwise provided herein) in common with Landlord,
other tenants, subtenants and invitees, to use of the Common Areas (as defined
at Section 2c).
2. DEFINITIONS.
As used in this Lease, the following terms shall have the following meanings:
a. Base Rent (initial): $478,175.00
_________________________________________ per year.
A(1) Common Area Expenses (initial): 68,508.00
______________________________ per year.
D. Base Year; The calendar year of 2000
______________________________________
c. Broker(s) ____________________________________________________________
Landlord's ___________________________________________________________
Tenant's _____________________________________________________________
d. Commencement Date: November 6, 1999
e. Common Areas: the building lobbies, common corridors and hallways,
restrooms, garage and parking areas, stairways, elevators and other
generally understood public or common areas. Landlord shall have the
right to regulate or restrict the use of the Common Areas.
f. Expense Stop: see 7h
_______________________________________________________
g. Expiration Date: ?????? 31, 2004
____________________________________ unless otherwise
sooner terminated in accordance with the provisions of this Lease.
h. Index (Section 5.3); United States Department of Labor, Bureau of Labor
Statistics Consumer Price Index for All Urban Consumers, U.S. City
Average, "All Items" (1967-100).
i. Landlord's Mailing Address:
3291 N. Buffalo Dr., Stc. 5
Las Vegas, NV 89125
Tenant's Mailing Address:
3301 Buffalo Drive
Las Vegas, NV 89129
j. Monthly Installments of Base Rent (initial): $35,681.25
___________ per month.
j(i). Monthly installments of Common Area Maintenance Charge (initial)
$5,709.00
__________
k. Parking: Tenant shall be permitted to park N/A employees and visitors
cars on a non exclusive basis in the area(s) designated by Landlord for
parking. Tenant shall abide by any and all parking regulations and rules
established from time to time by Landlord's parking operator.
l. Premises: approximately 28,545 square feet of Rentable Area, shown by
diagonal lines on Exhibit "A," located in Building 9 and known as Suite
N/A.
m. Project: the building of which the Premises are a part (the "Building")
and any other buildings or improvements on the real property (the
"Property") located at FLYNN GALLAGHER CORPORATE CENTRE and further
described at Exhibit "B."
--------------
Initial
<PAGE> 2
n. Both parties expressly and explicitly agree that they have reviewed all of
the lease agreement including but not limited to attached addenda and
exhibits to their satisfaction prior to the execution of this lease
agreement. Both parties have had the opportunity have legal counsel review
this lease agreement and if either party chooses not to seek advice of
counsel then said decision will be made with knowing and willing consent.
1. Waiver. No delay or omission in the exercise of any right or remedy of
Landlord upon any default by Tenant shall impair such right or remedy or be
construed as a waiver of such default. The receipt and acceptance by Landlord of
delinquent Rent shall not constitute a waiver of any other default; it shall
constitute only a waiver of timely payment for the particular Rent payment
involved.
No act or conduct of Landlord, including, without limitation, the
acceptance of keys to the Premises, shall constitute an acceptance of the
surrender of the Premises by Tenant before the expiration of the Term. Only a
written notice from Landlord to Tenant shall constitute acceptance of the
surrender of the Premises and accomplish a termination of the lease.
Landlord's consent to or approval of any act by Tenant requiring
Landlord's consent for approval shall not be deemed to waive or render
unnecessary Landlord's consent to or approval of any subsequent act by Tenant.
Any waiver by Landlord of any default must be in writing and shall not be a
waiver of any other default concerning the same or any other provision of the
Lease.
The parties hereto have executed this Lease as of the dates set forth below.
Landlord:
CHEYENNE INVESTMENTS L.L.C.
By: /s/ George K. Connor Mgr.
--------------------------------
George K. Connor
Title: Manager
Date: 4/29/99
-------------------------------
By:
--------------------------------
Title:
------------------------------
Date:
-------------------------------
Tenant: MGC COMMUNICATIONS, INC., A Nevada Corporation
By: /s/ ???? J. Montgomery
---------------------------------
???? J. Montgomery
Title: President & CEO
Date: 4/29/99
-------------------------------
By:
---------------------------------
Title:
------------------------------
Date: -------------------------------
16
<PAGE> 3
FIRST AMENDMENT TO LEASE
This First Amendment to Lease is attached to and made a part of that certain
Lease dated July 01, 1997 by and between Cheyenne Investments, LLC, a Nevada
Limited Liability Company, ("Landlord") and MGC Communications, Inc., a Nevada
Corporation ("Tenant").
The above mentioned Lease is amended as follows:
PREMISES
(1) The number Thirty Two Thousand, Four Hundred Fifty square feet (32,450) of
Rentable area is hereby submitted for the number Twenty Four Thousand, One
Hundred Twenty Five square feet (24,125) of Rentable area as found in
Paragraph 2,(l).
BASE MONTHLY RENT
(2) The sum Fifty Three Thousand Five Hundred Forty Two and 50/100 Dollars
($53,542.50) is hereby substituted for the sum Thirty Nine Thousand Eight
Hundred Six and 25/100 Dollars ($39,806.25) as found in Paragraph 2,(j).
Save and except as amended hereby, said lease shall remain unmodified and in
full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have signed this First Amendment to
Lease this day of May, 1998.
LANDLORD: TENANT:
____________________________ _______________________________
Cheyenne Investments, LLC MGC Communications, Inc.
A Limited Liability Company A Nevada Corporation
By: ??????? K. Connor By: N.J. Montgomery
____________________________ ___________________________
Title: Manager Title: President
_____________________ ________________________
<PAGE> 4
SECOND AMENDMENT TO LEASE
This Second Amendment to Lease is attached to and made part of that certain
Lease dated July 1, 1997 by and between Cheyenne Investments, LLC, a Nevada
Limited Liability Company, ("Landlord") and MGC Communications, Inc., a Nevada
Corporation ("Tenant").
The above mentioned Lease is amended as follows:
ADDITIONAL RENTABLE AREA
1) Approximately Three Thousand Three Hundred Thirteen (3,313) square
feet of Rentable Area, located in building B, Suite 7, at 3291 N.
Buffalo Drive, Las Vegas, Nevada 89129.
2) The Base Monthly Rent for the additional square footage is Five
Thousand Six Hundred Three and 11/100 Dollars ($5,603.11).
IN WITNESS WHEREOF, Landlord and Tenant have signed this Second Amendment to
Lease this 29th day of December, 1998.
LANDLORD: TENANT:
Cheyenne Investments, LLC MGC Communications, Inc.
A Limited Liability Company A Nevada Corporation
By: /s/ By: /s/
------------------------ ----------------------
Title: Title: President & CEO
--------------------- -------------------
<PAGE> 1
EXHIBIT 10.21
================================================================================
AIRCRAFT LEASE
BETWEEN
MAURICE J. GALLAGHER, JR. AND TIMOTHY P. FLYNN
JOINTLY, AS LESSOR
AND
MGC COMMUNICATIONS, INC.
LESSEE
AS OF DECEMBER_____, 1999
COVERING
ISRAELI AIRCRAFT INDUSTRIES
MODEL - ASTRA
SERIAL NO. 011
UNITED STATES REGISTRATION NUMBER N705MA
================================================================================
<PAGE> 2
AIRCRAFT LEASE AGREEMENT
This Lease Agreement, dated as of the ____th day of December, 1999 (the
"Lease"), is by and between Maurice J. Gallagher, Jr. and Timothy P. Flynn,
each, an individual person (each of whom are married persons) having residence
in the State of Nevada (jointly, the "Lessor"), and MGC Communications, Inc. a
corporation organized and existing under the laws of the State of Nevada
("Lessee").
In consideration of and subject to the mutual covenants, terms and conditions
contained in this Lease, Lessee and Lessor agree as follows:
The Lease set forth as follows constitutes a sublease of the Aircraft. Lessor
currently leases the Aircraft from Pacific Coast Group, Inc., a Nevada
corporation, the Owner pursuant to an Aircraft Lease Agreement dated ________,
1999 (hereinafter, the "Headlease").
Capitalized terms shall be as defined in this Lease and in Exhibit A hereto.
SECTION 1. LEASE OF AIRCRAFT; DELIVERY; CONDITIONS PRECEDENT.
1.1 Lease of Aircraft. Subject to satisfaction of the conditions set forth
in Section 1.3 hereof, Lessor agrees to and does hereby rent, lease and hire,
and Lessee agrees to and does hereby rent, lease and hire the Aircraft described
in the Aircraft Lease Supplement (the "Supplement"), to be executed by Lessor
and Lessee upon delivery of the Aircraft to Lessee hereunder. Such Supplement
shall be substantially in the form annexed hereto as Exhibit B. By execution and
delivery of the Supplement by Lessee, Lessee shall confirm to Lessor that Lessee
has accepted the Aircraft for lease hereunder and is satisfied that the Aircraft
has been delivered by Lessor in the condition required by the Lease. Whenever
reference is made herein or in the Supplement to the Lease, it shall include the
Lease and the Supplement, all of which shall be deemed the Lease of the Aircraft
described in the Supplement and to which all of the terms and provisions hereof
shall apply.
1.2 Delivery. The Aircraft shall be tendered for delivery to Lessee at Las
Vegas, NV. Upon such tender, Lessee shall be entitled to inspect the Aircraft
and determine, in its sole discretion whether or not to accept delivery of and
lease the Aircraft. If Lessee refuses to accept delivery or fails to accept
delivery within a reasonable time after such inspection, Lessor may, by written
notice, terminate this Lease, whereupon neither Lessee nor Lessor shall have any
further rights or obligations hereunder. Acceptance of delivery of the Aircraft
by Lessee shall be on an "AS IS, WHERE IS" basis and in accordance with the
further terms hereof.
1.3 Conditions Precedent and Condition Subsequent. Lessor's obligation to
lease or deliver the Aircraft hereunder shall be subject to and conditioned upon
satisfaction of the following conditions precedent on or before the Delivery
Date and in the case of (e), after the Delivery Date:
(a) Lessor shall have received the payment of Basic Rent for the first
month of the Term as set forth in Section 3.1;
(b) the representations and warranties of Lessee contained in Section 5
hereof shall each be true and accurate on and as of the Delivery Date
(except to the extent that such representations and warranties relate
solely to an earlier or later date);
(c) no event shall have occurred and be continuing, or shall reasonably be
expected to occur, which would constitute an Event of Loss or an Event of
Default or which would constitute an Event of Loss or an Event of Default
but for the lapse of time or the giving of notice or both; and
(d) Lessor shall have received the following, in each case in form and
substance satisfactory to Lessor, on or before the Delivery Date:
(i) a Lease Supplement (including Delivery Receipt) duly authorized
and executed by Lessee, covering the Aircraft and effective as of
the Delivery Date for the Aircraft;
(ii) an insurance certificate and report with respect to the
Aircraft as required by Section 12 hereof; and,
(iii) such other documents as the Lessor may reasonably request.
<PAGE> 3
(e) Lessor shall have received, no later than 60 days after the date of
this Lease, evidence of the ratification of this Lease and Lessee's
performance hereunder by the Board of Directors of Lessee; provided,
however, if , on or before 60 days after the date of this Lease, the Board
of Directors of Lessee shall have disapproved this Lease and Lessee's
performance hereunder, Lessor shall be so notified by Lessee and Lessee
shall immediately, and not later than five days thereafter, return the
Aircraft to Lessor in accordance with the terms of this Lease, whereupon
such return of the Aircraft, this Lease shall terminate. In any case,
Lessee's representations and warranties with respect to authorization of
this Lease are true and correct and are in no way modified by the terms
hereof. Failure of Lessee to deliver the Board ratification as stated
above as and when required, shall constitute an immediate Event of Default
under this Lease.
SECTION 2. TERM
2.1 Term. The Term of this Lease shall begin on the Delivery Date
specified in the Lease Supplement and shall expire on the Expiration Date set
forth in the Supplement.
SECTION 3. RENT; MSP PAYMENTS; NO SET-OFF
3.1 Rent.
(a) Basic Rent. Commencing on the Delivery Date, Lessee shall pay to
Lessor as Basic Rent the amount of "Basic Rent" set forth in Annex Two to
Exhibit B hereto on each Basic Rent Date during the Term.
(b) MSP Payments. In addition to the payment of Basic Rent, Lessee shall
pay "MSP Payments", if any are required pursuant to an existing
maintenance support program for the engines, as follows: upon the Delivery
Date, Lessor shall, in addition to lease of the Aircraft to Lessee,
transfer to Lessee, but only for the duration of the Lease, Lessor's
agreement with the manufacturer of the Engines for maintenance of the
Engines pursuant to which Lessee shall pay such manufacturer a usage fee
on a per-cycle or per-hour basis in exchange for maintenance by the
manufacturer (such agreement shall herein be referred to as the "MSP
Agreement"). Payments required to be made to the manufacturer under the
MSP Agreement shall be sometimes referred to herein as "MSP Payments".
Lessee shall supply to Lessor, on a monthly basis, a copy of each of the
reports on Engine usage for the prior month that Lessee shall supply (and
is required to supply) to the manufacturer under the MSP Agreement,
including, without limitation, evidence of the payment of all MSP
Payments. Failure of Lessee to comply in any way with the terms and
conditions of the MSP Agreement shall constitute an Event of Default under
the Lease. The MSP Payments shall constitute supplemental Rent under the
terms of the Lease.
Lessee shall bear and pay all costs, expenses, charges, fees, assessments,
and payments that accrue under the MSP Agreement during the term of the
Lease and Lessee shall bear any repair or maintenance costs with respect
to the Engines not covered by the MSP Agreement. Lessee shall comply with
all terms and conditions of the MSP Agreement such that there shall not
occur during the term of the Lease any default or event that would allow
the manufacturer to terminate the MSP Agreement for any reason
(c) In addition, Lessee shall pay or cause to be paid on the date provided
herein all other amounts payable hereunder (including the MSP Payments and
Stipulated Loss Value) which the Lessee assumes the obligation to pay, or
agrees to pay, under the Lease to Lessor or others (such sums, including
Basic Rent being hereinafter collectively referred to as "Rent").
(d) In reliance on the prompt payment by Lessee of Rent and other payments
due hereunder, Lessor has made or will make certain financial commitments.
If Lessee fails to pay Rent or any other amount, when due, Lessor will
suffer loss and damage, the exact nature and amount of which may be
difficult or impossible to ascertain. Lessee shall pay Lessor, on demand,
to the extent permitted by applicable law (by way of agreed compensation
for loss and damage and not as a penalty), interest (computed on the basis
of a 360-day year of actual days elapsed) in the amount of 16% per annum
or the highest rate permitted by Nevada law, whichever is less (such
lesser amount being herein defined as the "Late Payment Rate") on any
payment not paid within five (5) days after the date due for any period
during which the same shall be overdue. Interest payable hereunder will
accrue on a day-to-day basis and be compounded monthly.
(e) All payments of Rent due hereunder shall be made in United States
Dollars by wire transfer in immediately
<PAGE> 4
available funds so as to be received by 2:00 p.m. local time at the place
of payment on the day in question by deposit to:
Imperial Bank
Walnut Creek, CA
ABA:
For the acct. of: Pacific Coast Group, Inc.
Acct. # 0018-501- 031
or to such other account as Lessor may from time to time, upon reasonable
notice, direct to Lessee in writing. If any payment shall be due on a day
which is not a Business Day, it shall be due on the next succeeding
Business Day.
(f) All payments by Lessee under this Lease, including Rent, interest,
fees, indemnities or any other item, shall be made in full without any
deduction or withholding whether in respect of set-off, defense,
counterclaim, duties, taxes or Impositions (as defined in Section 8,
imposed in any jurisdiction from which such payments are made) unless
Lessee is prohibited by law from doing so, in which event Lessee will
gross up the payment amount such that the net payment received by Lessor
after any deduction or withholding equals the amounts called for under
this Lease. Lessee shall also: (i) ensure that the deduction or
withholding does not exceed the minimum amount legally required; (ii) pay
to the relevant government entities within the period for payment
permitted by applicable law the full amount of the deduction or
withholding (including the full amount of any deduction or withholding
from any additional amount paid pursuant hereto); and (iii) furnish to
Lessor within thirty (30) days after each payment an official receipt of
the relevant government entities involved for all amounts so deducted or
withheld.
(g) The Rent and other amounts payable by Lessee under this Lease are
exclusive of any value added tax, turnover tax or similar tax or duty. If
a value added tax or any similar tax or duty is payable in any
jurisdiction in respect of any Rent or other amount as aforesaid, Lessee
shall pay all such tax or duty and indemnify and defend each Indemnified
Person against any claims for the same and any related claims, losses or
liabilities.
(h) The expiration or other termination of this Lease or Lessee's
obligation to pay Basic Rent hereunder shall not limit or modify the
obligations of Lessee to pay any sum which otherwise becomes due or
accrues during the Lease Term.
3.2 No Set-Off. This Lease is a net lease and, except in instances in
which Lessee has actually paid Lessor the Stipulated Loss Value, Lessee's
obligation to pay all Rent payable hereunder shall be absolute and unconditional
and shall not be affected by any circumstance whatsoever.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF LESSOR; DISCLAIMERS.
4.1 Lessor Warranty. Lessor warrants that during the Term of this Lease,
if no Event of Default has occurred and is continuing, Lessee's quiet enjoyment
of the Aircraft shall not be interrupted by Lessor or anyone claiming through or
under Lessor.
4.2 Disclaimer. The warranty set forth in Section 4.1 of this Lease is in
lieu of all other warranties of Lessor, whether written, oral, express or
implied with respect to the Lease of the Aircraft.
(a) UPON LESSEE'S ACCEPTANCE OF THE AIRCRAFT AND EXECUTION OF THE
SUPPLEMENT AND DELIVERY RECEIPT, THEN AS BETWEEN LESSOR AND LESSEE, LESSEE
UNCONDITIONALLY ACKNOWLEDGES AND AGREES THAT NEITHER LESSOR NOR ANY OF ITS
OFFICERS, SHAREHOLDERS, DIRECTORS, EMPLOYEES OR REPRESENTATIVES HAVE MADE
OR WILL BE DEEMED TO HAVE MADE ANY TERM, CONDITION, REPRESENTATION,
WARRANTY OR COVENANT, EXPRESSED OR IMPLIED (WHETHER STATUTORY OR
OTHERWISE), AS TO (I) THE CAPACITY, AGE, AIRWORTHINESS, VALUE, QUALITY,
DESCRIPTION, CONDITION (WHETHER OF THE AIRCRAFT, ANY ENGINE, ANY PART
THEREOF OR THE TECHNICAL RECORDS), DESIGN, WORKMANSHIP, MATERIALS,
MANUFACTURE, CONSTRUCTION, OPERATION, DESCRIPTION, STATE, MERCHANTABILITY,
PERFORMANCE, FITNESS FOR ANY PARTICULAR USE OR PURPOSE OR SUITABILITY OF
THE AIRCRAFT OR ANY PART THEREOF, AS TO THE ABSENCE OF LATENT OR OTHER
DEFECTS, WHETHER OR NOT DISCOVERABLE, KNOWN OR UNKNOWN, APPARENT OR
CONCEALED, EXTERIOR OR INTERIOR, (II) THE ABSENCE OF ANY INFRINGEMENT OF
ANY PATENT, TRADEMARK,
<PAGE> 5
COPYRIGHT OR OTHER INTELLECTUAL PROPERTY RIGHTS, (III) ANY IMPLIED
WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF
TRADE OR (IV) ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR
IMPLIED WITH RESPECT TO THE AIRCRAFT, ENGINES, OR ANY PART THEREOF, ALL OF
WHICH ARE HEREBY EXPRESSLY EXCLUDED AND EXTINGUISHED. LESSEE AGREES NOT TO
LOOK TO LESSOR OR ANY INDEMNIFIED PERSON FOR DAMAGES OR RELIEF ARISING OUT
OF THE FAILURE OF SUCH AIRCRAFT TO CONFORM TO ANY DESCRIPTION OF THE
AIRCRAFT.
(c) Lessee agrees to lease the Aircraft "AS IS, WHERE IS AND WITH ALL
FAULTS".
(d) Lessee hereby waives, as between Lessee and Lessor, and agrees not to
seek to establish or enforce any rights or remedies, express or implied
(whether statutory or otherwise), against Lessor or the Aircraft relating
to any of the matters mentioned in this Section 4 and the leasing thereof
by Lessor to Lessee.
(e) DELIVERY BY LESSEE TO LESSOR OF THE SUPPLEMENT AND DELIVERY RECEIPT
WILL BE CONCLUSIVE PROOF AS BETWEEN LESSOR AND LESSEE THAT LESSEE'S
TECHNICAL EXPERTS HAVE EXAMINED, INSPECTED AND INVESTIGATED THE AIRCRAFT,
ENGINES AND EACH PART THEREOF AND (I) EACH IS AIRWORTHY AND IN GOOD
WORKING ORDER AND REPAIR AND (II) THE AIRCRAFT, ENGINES, EACH PART THEREOF
AND THE TECHNICAL RECORDS ARE WITHOUT DEFECT (WHETHER OR NOT DISCOVERABLE
AT DELIVERY) AND IN EVERY WAY SATISFACTORY TO LESSEE.
(f) Lessee agrees that no Indemnified Person will be liable to Lessee, any
sublessee or any Person, whether in contract or tort and however arising,
for any unavailability, loss of use or service, cost, loss (consequential,
incidental or otherwise), liability, damage or delay of, from, to or in
connection with the Aircraft, any Person or property whatsoever, whether
on board the Aircraft or elsewhere and irrespective of whether such
occurrences arise from any act or omission or the active or passive
negligence or other fault of any Indemnified Person.
(g) Lessor shall not be liable for any expense in repairing or replacing
any item of the Aircraft or be liable to supply the Aircraft or any item
in lieu of the Aircraft or any part thereof if same is lost, confiscated,
damaged, destroyed or otherwise rendered unfit for use.
(h) LESSEE HEREBY WAIVES ANY AND ALL RIGHTS TO THE REMEDIES SET FORTH IN
THE UNIFORM COMMERCIAL CODE, AS ADOPTED BY THE STATE OF NEVADA .
(i) The amount of the Basic Rent contained herein is based, in part, on
the exculpatory clauses stated above.
SECTION 5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF LESSEE
Lessee covenants, represents and warrants to Lessor (which warranties and
covenants shall survive the execution hereof and will continue through the
Expiration Date) that: (i) Lessee is a corporation duly organized and existing
in good standing under the laws of the State of Nevada; is duly qualified to do
business wherever necessary to carry on its present business and operations and
to perform its obligations under this Lease; (ii) this Lease and the necessary
documentation relating thereto, when executed by Lessee, will have been duly
authorized by all necessary corporate action on the part of Lessee, and does not
require any stockholder approval, and does not contravene any law binding on
Lessee or contravene Lessee's Certificate of Incorporation or By-Laws, or any
indenture, loan agreement, credit agreement, or other contractual agreement to
which Lessee is a party or by which it is bound; (iii) neither the execution and
delivery by Lessee of this Lease, nor the leasing of the Aircraft, nor the
performance by Lessee of any of its obligations nor compliance with any of its
covenants hereunder, require the consent or approval of, or the giving of notice
to, the FAA, or any other federal, state or foreign governmental authority; (iv)
this Lease, when entered into and delivered by Lessee, will constitute the
legal, valid and binding obligations of Lessee, enforceable against the Lessee
in accordance with the terms hereof; (v) there are no pending or threatened
actions or proceedings before any court or administrative agency which may
materially adversely affect Lessee's financial condition or operation, or the
payment and performance of its obligations hereunder; (vi) the Aircraft shall be
based and primarily used in the United States and the Aircraft will not be "used
predominantly outside the United States" within the meaning of Section
168(g)(1)(A) of the Internal Revenue Code of the United States, as amended.;
(vii) the chief place of business of Lessee is as set forth in the notice
section hereto, and Lessee agrees to give the Lessor prior written notice of any
relocation of said chief place of business from its present location; and (viii)
the Principal Location of the Aircraft is as defined in Exhibit A attached
hereto, and the Lessee agrees not to change such Principal Location without the
consent of Lessor, which consent
<PAGE> 6
shall not be unreasonably withheld.
SECTION 6. RETURN OF AIRCRAFT
6.1 General Return Conditions. Upon the expiration of or the earlier
termination of the Lease, Lessee, at Lessee's own expense, shall return the
Aircraft to Lessor at Las Vegas, Nevada or such other location as is mutually
agreed to by Lessor and Lessee. Additionally, the Aircraft, upon such return:
(a) Shall be free and clear of all liens or encumbrances of any kind or nature
whatsoever, other than Lessor Liens; and, (b) shall be in full compliance with
all provisions set forth in Exhibit C hereto, which provisions are incorporated
into this Section 6.1 by reference. Any reference to Section 6 hereof shall
include Exhibit C.
6.2 Ground Inspection. During the maintenance checks performed immediately
prior to the proposed redelivery and at the actual return of the Aircraft,
Lessor or its representatives will have an opportunity to fully inspect the
Aircraft and the Technical Records to Lessor's satisfaction. Unless otherwise
agreed in writing by the parties, any deficiencies from the Aircraft return
condition requirements set forth in this Section 6 will be corrected by Lessee,
at Lessee's cost, prior to the demonstration flight described in this Section 6.
6.3 Demonstration Flight. Immediately prior to the proposed redelivery of
the Aircraft, Lessee will carry out for Lessor or Lessor's representatives a
demonstration flight in the Aircraft in accordance with Manufacturer's standard
flight operation check flight procedures, for one hour in duration as necessary
to perform such check flight procedures. Flight costs and fuel will be furnished
by and at the expense of Lessee. Unless otherwise agreed in writing by the
parties, any deficiencies from the Aircraft return condition requirements set
forth in this Section 6 shall be corrected by Lessee, at Lessee's cost, prior to
return of the Aircraft.
6.4 Lessee's Continuing Obligations. In the event Lessee does not return
the Aircraft to Lessor on the Expiration Date and in the condition required by
this Section 6 for any reason, the obligations of Lessee under this Lease will
continue. Such event shall not be considered a renewal of the terms of the Lease
or of Lessee's rights to use the Aircraft, an extension of the Lease Term or a
waiver of Lessee's Event of Default or any right of Lessor hereunder. Lessee
shall fully indemnify Lessor, on demand, for all loss and damage (including
incidental loss and damage and consequential loss and damage and fees and
disbursements of legal counsel), liabilities, actions, proceedings, costs and
expenses thereby suffered or incurred by Lessor. Until the Aircraft is
redelivered to Lessor and put in the condition required by this Section 6,
Lessee shall pay the amount of Basic Rent for each day from the scheduled
Expiration Date until the date the Aircraft is returned to Lessor in the proper
condition specified hereunder. Payment shall be made upon presentation of
Lessor's invoice to Lessee.
6.5 Return Acceptance Receipt. Upon return of the Aircraft in accordance
with the terms of the Lease, Lessee shall prepare and execute two (2) Return
Acceptance Receipts in such form as Lessor shall prescribe and Lessor will
countersign and return one such Return Acceptance Receipt to Lessee.
6.6 Indemnities and Insurance. The insurance requirements and the
indemnities set forth in Sections 12 and 13, respectively, shall apply to each
Indemnified Person during return of the Aircraft, including the ground
inspection. With respect to the demonstration flight, the Indemnified Persons
will receive the same protections as Lessor on Lessee's Aviation and Airline
General Third Party Liability Insurance.
6.7 Airport and Navigation Charges. Lessee shall ensure that upon return
of the Aircraft any and all airport, navigation and other charges (including,
without limitation, any Eurocontrol or other like air traffic control charges)
which shall give rise, or may if unpaid, give rise to any lien, right of
detention, right of sale or other Lien in relation to the Aircraft, any Engine
or any Part, whether incurred in respect of the Aircraft or any other aircraft
operated by Lessee, have been paid and discharged in full (whether or not due)
and Lessee shall, at Lessor's request, produce evidence thereof satisfactory to
Lessor.
6.8 Fuel. Upon return of the Aircraft, each fuel tank shall contain the
same quantity of fuel as was contained in such tanks when the Aircraft was
delivered to the Lessee on the Delivery Date or, in the case of differences in
such quantity, an appropriate adjustment will be made by payment at the then
current market price of fuel.
SECTION 7. LIENS
Lessee shall not directly or indirectly create, incur, assume, consent to,
suffer or permit to exist any Liens on or with respect to the Aircraft, the
Engines or any part thereof, the Lessor's title thereto or any interest of the
Lessor therein (and the Lessee will
<PAGE> 7
promptly, at its own expense, take such action as may be necessary duly to
discharge any such Lien). For purposes of this Lease, Lien shall mean any lien,
mortgage, encumbrance, pledge, charge, lease, right or other security interest
of any kind, including any thereof arising under any conditional sales or other
title retention agreement.
SECTION 8. TAXES
8.1 Indemnity. Lessee agrees to pay and indemnify Lessor and any
Indemnified Person for, and to hold and save Lessor and any Indemnified Person
harmless from and against, all license and registration fees, import and export
duties, gross receipts, income, sales, use, excise, personal property, ad
valorem, value added, leasing, leasing use, stamp, landing, airport use or other
taxes, levies, imposts, duties, charges or withholdings of any nature, together
with any penalties, fines or interest thereon (except to the extent resulting
from the gross negligence or willful misconduct of the Lessor or its employees
or agents) ("Impositions"), arising out of the transactions contemplated by the
Lease and imposed against Lessor, an Indemnified Person, Lessee or the Aircraft
or any part thereof by any government or other taxing authority upon or with
respect to the Aircraft or any part thereof or upon purchase of the Aircraft by
Lessor, or the delivery, ownership, delivery financing, leasing, possession,
use, maintenance, operation, import, export, sale, or return thereof, or upon
the rentals, receipts or earnings arising therefrom, or upon or with respect to
the Lease and its terms and conditions.
8.2 Exclusions. The provisions of Section 8.1 shall not apply to: (a) Any
Imposition upon, based on, or measured by the net income of Lessor and imposed
by the United States federal government; or, (b) any Imposition in respect to
the Aircraft to the extent it is unrelated to this Lease (or operation of the
Aircraft hereunder) and attributable to the period of time prior to delivery of
the Aircraft to Lessee or after return of the Aircraft to Lessor under this
Lease; or, (c) any Imposition to the extent attributable to Lessor's voluntary
sale or transfer (or any involuntary sale or transfer resulting from a Lessor
Lien) of the Aircraft or assignment of this Lease (except a sale made pursuant
to Section 17 hereof or a transfer made pursuant to Section 11 hereof).
8.3 After Tax Basis. The amount which Lessee is required to pay with
respect to any Impositions indemnified against under Section 8.1 is an amount
sufficient to restore the Indemnified Person on an after-tax basis to the same
position the Indemnified Person would have been in had such Impositions not been
incurred.
8.4 Payment Date. Any amount payable to Lessor or an Indemnified Person
pursuant to this Section 8 shall be paid by Lessee within ten (10) days after
receipt of written demand therefor from an Indemnified Person accompanied by a
written statement describing in reasonable detail the basis for such indemnity
claim and the computation of the amount so payable; provided, however, that such
amount need not be paid by Lessee prior to the earlier of, (i) the date any
Imposition is payable to the appropriate government entity or taxing authority
or, (ii) in the case of amounts which are being contested by Lessee in good
faith or by the Indemnified Person pursuant to Section 8.5, the date such
contest is finally resolved.
8.5 Contest. If a claim is made against the Lessee or an Indemnified
Person for any Imposition, the party receiving notice of such claim shall
promptly notify the other. Provided no Default or Event of Default shall have
occurred and be continuing, Lessee shall be entitled, at Lessee's cost and
expense, to contest any Imposition, provided: (a) Lessee is obligated to pay
such Imposition under the provisions of this Section 8; (b) the Indemnified
Person is reasonably satisfied there are reasonable grounds for contest and
Lessee has either paid such Imposition or deposited an amount equal thereto with
the Indemnified Person as security for such payment;(c) the contest by Lessee is
made in good faith, with due diligence and by appropriate proceedings; and, (d)
counsel for the Indemnified Person shall have reasonably determined that
nonpayment of any such Imposition or the contest of any such payment in such
proceedings does not adversely affect the title, property or rights of the
Indemnified Person.
8.6 Refunds. Upon receipt by an Indemnified Person of a refund of all or
any part of any Imposition (including any deductions or withholdings referred to
in Section 3) which Lessee has paid, the Indemnified Person will reimburse
Lessee the net amount of any such Imposition refunded (plus any related
gross-ups paid pursuant to Section 8.3, if appropriate to achieve the intent of
these provisions).
8.7 Cooperation. Lessee and Lessor will cooperate with one another in
providing information which may be reasonably required to fulfill each party's
tax filing requirements and any audit information request arising from such
filing.
8.8 Survival. The representations, warranties, indemnities and agreements
of Lessee provided for in this Section 8 shall survive the expiration or other
termination of this Lease.
<PAGE> 8
SECTION 9. REGISTRATION AND MAINTENANCE; OPERATION, COMPLIANCE AND USE;
REPLACEMENT PARTS; IMPROVEMENTS; ETC.
9.1 Title and Registration. Lessee, at Lessee's own expense, shall cause
the Aircraft to remain on the FAA Aircraft Registry in the name of Lessor at all
times during the Term of the Lease. Lessee further covenants and agrees not to
register, matriculate or record an interest in the Aircraft, whether
provisionally or finally, with any other agency or instrumentality of the United
States, or any other nation or any political subdivision of any of them. The
Lessee undertakes, to the extent permitted by applicable law, to do all such
further acts, deeds, assurances or things as may, in the reasonable opinion of
the Lessor, be necessary or desirable in order to protect or preserve Lessor's
title to the Aircraft.
9.2 Maintenance.
(a) During the Lease Term and until the Aircraft is returned to Lessor in
the condition required by the Lease, Lessee alone has the obligation, at
Lessee's expense, to maintain and repair the Aircraft, Engines, and all of
the Parts in accordance with Lessee's FAA-approved maintenance program
(which shall be substantially the same as the maintenance program
recommended by the Manufacturer pursuant to which the Aircraft was
maintained prior to delivery to Lessee and which shall have been approved
by Lessor) or any other maintenance program approved by Owner and Lessor
(herein referred to as the "Maintenance Program") and Lessee shall, in
compliance with the rules and regulations of the FAA and the Maintenance
Program, (i) keep the Airframe, including all installed components, and
each Engine in as good condition as when delivered to the Lessee
hereunder, ordinary wear and tear excepted and consistent with the
accumulation of hours and cycles on the Airframe; (ii) keep the Aircraft
in such operating condition as may be necessary to enable the
airworthiness certification of such Aircraft (and the Airworthiness
Certificate) to be maintained in good standing at all times under the
Federal Aviation Act; (iii) maintain the Aircraft in the same manner and
with the same care as used by Lessee with respect to similar aircraft and
engines operated by Lessee and without in any way discriminating against
the Aircraft; (iv) promptly furnish the Lessor such information as may be
required to enable the Lessor to file any reports required by any
governmental authority as a result of the ownership of the Aircraft; and,
(v) comply with all requirements of the MSP Agreement.
(b) Without limiting the provisions of (a) above, Lessee agrees that such
maintenance and repairs shall include, but shall not be limited to, each
of the following specific items: (i) Incorporation in the Aircraft of all
airworthiness directives and AD Notes of the FAA and all other mandatory
inspection, maintenance requirements and mandatory instructions from the
FAA and those issued by the Manufacturer; (ii) incorporation in the
Aircraft of all service bulletins of Manufacturer, the Engine
Manufacturer, and other applicable vendors; (iii) maintenance of all
Aircraft records required by the FAA or the Maintenance Program, in
English, including recording the number of hours and cycles the Aircraft
operates and all maintenance and repairs performed on the Aircraft; and
(iv) compliance with the MSP Agreement.
(c) All maintenance and repair of the Aircraft (other than routine flight
line maintenance) shall be performed only by an FAA approved repair
station reasonably satisfactory to Lessor.
(d) For purposes of this subsection (d), the term "Mandatory Improvement"
shall mean all airworthiness directives applicable to the Aircraft, and
modifications to the Aircraft, which are mandated by rule or regulation of
the FAA which are issued during the Term and compliance with which is
required during the Term. The Lessee shall bear the cost of all Mandatory
Improvements; provided, however, if an individual Mandatory Improvement is
estimated to cost in excess of US$50,000 to perform (materials and labor
included), Lessee shall have the right, upon notice to Lessor, to
terminate this Lease in full compliance with the Lease (except for
compliance with the relevant Mandatory Improvement) upon the date falling
thirty (30) days prior to the date on which compliance therewith is due;
provided further, however, if the Lessor agrees to bear the costs of such
Mandatory Improvement which are in excess of US$50,000, Lessee shall not
have the right to terminate this Lease and the Mandatory Improvement shall
be made with Lessor reimbursing Lessee for such excess cost. Lessee shall
provide Lessor with prompt notice of the issuance of any Mandatory
Improvement which may cost in excess of US$50,000 to perform.
9.3 Operation, Compliance and Use.
(a) Lessee agrees the Aircraft shall be possessed, used and operated in
compliance with any and all statutes, laws, ordinances, regulations and
mandatory standards or directives of any governmental agency applicable to
the maintenance, use or operation thereof, and in compliance with any
airworthiness certificate, license or registration
<PAGE> 9
relating to the Aircraft issued by any agency and in compliance with the
bulletins issued by the Manufacturer and required to be complied with as a
condition to the continued effectiveness of the Aircraft's FAA Certificate
of Airworthiness. Lessee will not permit the Aircraft to fly into any
airport or country if so doing would cause either Lessor or Lessee to be
in violation of any United States laws applicable to either of Lessor or
Lessee. Lessee will not operate or permit the Aircraft to be operated in a
manner, for any time period, such that Lessor or a third party shall be
deemed to have operational control of the Aircraft. Lessee shall not
operate or permit the Aircraft to be operated under either Part 121 or 135
of the United States Federal Aviation Regulations, or otherwise be
operated for passenger, cargo or mail carriage for remuneration or hire
pursuant to FAR Part 135 or 121. Lessee shall supply its own pilots and
flight crews duly licensed by the FAA and who have at least a minimum of
total pilot hours required by the FAA and any other appropriate agency of
the Government of the United States having jurisdiction thereof and/or as
may be required by the companies issuing the insurance policies required
herein, whichever is greater. The Aircraft shall be used solely in a
passenger configuration for which Lessee is duly authorized by the FAA. At
all times during the term, Lessee shall keep and maintain a copy of the
lease by Owner to Lessor and this Lease on board the Aircraft.
(b) Lessee shall pay all costs incurred in the operation of the Aircraft
during the Lease Term, for profit or otherwise, including the costs of
flight crews, cabin personnel, fuel, oil, lubricants, maintenance,
insurance, landing and navigation fees, airport charges, passenger service
and any and all other expenses of any kind or nature directly or
indirectly, in connection with or related to the use, lease, possession,
movement and operation of the Aircraft. The obligations, covenants and
liabilities of Lessee under this paragraph arising prior to return of the
Aircraft to Lessor will continue in full force and effect, notwithstanding
the termination of this Lease or expiration of the Lease Term.
(c) Lessee agrees throughout the Lease Term to maintain operational
control of the Aircraft and to use the Aircraft in accordance with
applicable U.S. Department of Transportation and FAA regulations and laws
and regulations of any country, state, territory or municipality into or
over which Lessee may operate. Lessee shall comply with all health and
police regulations and all rules and orders relating to the Aircraft which
such Aircraft may be subject to in its use and operation during the Lease
Term. Lessee will not employ, suffer or cause the Aircraft to be used in
any business or activity forbidden by law.
(d) Lessee will not use or permit the Aircraft to be used in any manner or
for any purpose or activity not covered by the insurance policies Lessee
is required to carry and maintain as set forth in the Lease. Lessee will
not carry any objects, materials or goods of any description excepted or
exempted from such insurance policies or do any other act or permit to be
done anything which could reasonably be expected to invalidate or limit
any of such insurance policies.
(e) Lessee shall promptly pay when due all enroute navigation charges,
navigation service charges and all other charges payable by Lessee for the
use of or for services provided at any airport, whether in respect of the
Aircraft or any other aircraft of Lessee, and will indemnify and hold and
save Lessor and each other Indemnified Person harmless in respect of same.
(f) Throughout the Term of this Lease, the possession, operation, use and
maintenance of the Aircraft shall be at the sole risk and expense of the
Lessee.
9.4 Replacement Parts. Lessee, at Lessee's cost and expense, shall
promptly replace with new, newly overhauled, or serviceable Parts all Parts
which may from time to time become worn out, lost, stolen, destroyed, seized,
confiscated, damaged beyond repair or permanently rendered or declared unfit for
use on the Aircraft for any reason whatsoever. Additionally, in the ordinary
course of maintenance, service, repair, overhaul or testing, Lessee may, at its
own cost and expense, remove any Parts, whether or not worn out, lost, stolen,
destroyed, seized, confiscated, damaged beyond repair or permanently rendered or
declared unfit for use on the Aircraft, provided that Lessee shall, at its own
cost and expense, replace such Parts as promptly as practicable. All replacement
Parts described in the preceding two sentences of this Section 9.4 shall be free
and clear of all Liens, except Lessor Liens; shall have been certified for use
on the Aircraft under the Manufacturer's type certificate for the Aircraft and
shall be in as good operating condition as, and shall have a value and utility
at least equal to, the Parts replaced, assuming such replaced Parts were in the
condition and repair required to be maintained by the terms hereof (replacement
Parts meeting this criteria are hereinafter called "Replacement Parts"). All
Parts, at any time removed from the Airframe or any Engine, shall remain the
property of Lessor, no matter where located, until such time as such Parts shall
be replaced by Parts which have been incorporated or installed in or attached to
the Airframe or such Engine and which meet the requirements for Replacement
Parts specified above. Immediately upon any Replacement Part being incorporated
<PAGE> 10
into, installed in or attached to the Airframe or any Engine as above provided,
without further act, (i) title to the removed Part shall thereupon vest in
Lessee, or such other person then entitled thereto, free and clear of all rights
of Lessor and shall no longer be deemed a Part hereunder; (ii) title to such
Replacement Part shall thereupon vest in Lessor; and, (iii) such Replacement
Part shall become subject to the Lease and be deemed part of the Airframe or
Engine, as the case may be, for all purposes hereof, to the same extent as the
Parts originally incorporated or installed in or attached to the Airframe or
such Engine and title thereto shall immediately vest in Lessor upon
incorporation into the Airframe or Engine, as the case may be. Lessee, upon
Lessor's request, shall deliver, or cause to be delivered, to Lessor a bill of
sale, paid invoice or other evidence of title covering any such Replacement
Part.
9.5 Improvements and Modifications. Lessee, without expense to Lessor,
shall make, or cause to be made, such alterations and modifications of and
additions to the Aircraft and each Engine as may be required from time to time
to comply with all airworthiness directives and regulations, standards and
requirements of the FAA and any other governmental authority having jurisdiction
during the Term of the Lease. Only with Lessor's consent (which shall not be
unreasonably withheld), may Lessee make or cause to be made, alterations and
modifications of and additions to the Aircraft and each Engine which are not
required by law, but which are voluntary.
9.6 Technical Records. Lessee, at Lessee's expense, shall at all times
maintain and preserve, in the English language, all manuals, logbooks, flight
records, maintenance records, modification and overhaul records and pertinent
historical records relating to the Aircraft, as shall be delivered to Lessee and
as shall from time to time be required by applicable law or in order to comply
with all applicable regulations and requirements of the FAA ("Technical
Records").
9.7 Aircraft Marking. Lessee agrees, at Lessee's expense, to, (i) cause
the Airframe and Engines to be kept numbered with the registration number and/or
serial number therefor as specified in the Supplement; (ii) maintain the
equivalent passenger configuration, appearance and coloring of the Aircraft as
when accepted by Lessee hereunder or as otherwise approved by Lessor which
approval shall not be unreasonably withheld; (iii) affix and maintain on the
Airframe adjacent to the airworthiness certificate and on each Engine a metal
nameplate bearing such information as Lessor requests and bearing such other
information as from time to time is required by law or applicable regulations or
as is otherwise necessary in order to protect the title of Lessor to the
Aircraft and each Engine and the rights of Lessor under the Lease.
SECTION 10. INSPECTION AND MONTHLY REPORTS
Lessor shall have the right, but not the duty, to inspect the Aircraft, the
Engines and their respective records, logs, manuals and other materials relating
thereto and to observe Lessee's maintenance procedures at all times and wherever
located or performed. Such inspection shall be on reasonable notice to Lessee
and shall not unreasonably interfere with operation and use of the Aircraft by
Lessee. Upon request of Lessor, Lessee shall confirm to Lessor the location of
the Aircraft and shall, at any reasonable time, make the Aircraft, and Lessee's
records pertaining to the Aircraft, available to Lessor for inspection at a
mutually agreed upon location. Additionally, during the Term of the Lease,
Lessee shall furnish to Lessor, monthly, by the fifth (5th) day of each month, a
written summary of the hours and cycles of usage of the Airframe and the
Engines, together with such other data required on the form prescribed by
Lessor, as well as such other information as the Lessor may reasonably request.
SECTION 11. LOSS OR DESTRUCTION
11.1 Event of Loss. Upon the occurrence of an Event of Loss with respect
to the Airframe or the Airframe and the Engines and/or engines then installed
thereon, Lessee shall notify Lessor thereof within two (2) days of the date
thereof. Sixty (60) days after such Event of Loss (the date of which shall be
determined in accordance with the definition of Event of Loss) or the date
insurance proceeds are received in respect thereto, whichever shall be the
earlier date, Lessee shall pay to Owner the Stipulated Loss Value of the
Aircraft, together with any other sums then due under the Lease and Lessor's and
Owner's costs and expenses related to such Event of Loss. Upon making such
Stipulated Loss Value payment in respect hereof and all sums due and owing with
respect thereto, Lessee's obligation to pay further Basic Rent for the Aircraft
shall cease and the Lease shall terminate. Upon Owner's receipt of the
Stipulated Loss Value of the Aircraft, together with any other sums then due
under the Lease, together with Lessor's and Owner's costs and expenses related
to such Event of Loss, Lessor shall procure the delivery to Lessee or insurers
to Lessee, depending upon the direction of the insurers which have paid Owner
the Stipulated Loss Value, Owner's title to the Aircraft such title to be
strictly "AS IS" and "WHERE IS" without any warranties whatsoever, except that
there are no liens arising through Owner, whereupon Lessee shall be entitled to
recover possession of the Aircraft, unless possession thereof is required to be
delivered to an insurance carrier in order to settle an insurance claim arising
out of such Event of Loss. Neither Owner nor Lessor shall be under any duty to
Lessee to pursue any claim to recover
<PAGE> 11
the Aircraft or Engines, but Lessee may, at Lessee's expense, pursue same in
such manner as may be satisfactory to Lessor and the Owner.
Proceeds of the insurance required in Section 12 (headed "Insurance")
herein below, if paid to Owner, Lessor, or the Lender prior to the time Lessee
is required to pay the Stipulated Loss Value, shall be applied to the amount of
Stipulated Loss Value otherwise payable by Lessee.
11.2 Event of Loss with Respect to an Engine. Upon the occurrence of an
Event of Loss with respect to an Engine under circumstances in which there has
not occurred an Event of Loss with respect to the Airframe, Lessee shall give
Lessor prompt written notice thereof and shall, on the date insurance proceeds
are received in respect to such Event of Loss or within sixty (60) days after
the occurrence of such Event of Loss (the date of which shall be determined in
accordance with the definition of Event of Loss) whichever shall be the earlier
date, duly convey to the Owner, as replacement for the Engine with respect to
which such Event of Loss occurred, title to another engine (such engine to be of
the same or another comparable manufacturer, of the same or improved
modification status, value, utility, performance and efficiency and suitable for
installation and use on the Airframe) free and clear of all Liens (except
Lessor's Liens) and having a value and utility at least equal to, and being in
as good operating condition as, the Engine with respect to which such Event of
Loss occurred, assuming such Engine was of the value and utility and in the
condition and repair required by the terms hereof. Prior to or at the time of
any such conveyance, the Lessee, at Lessee's expense, shall furnish Lessor and
Owner with such documents to evidence such conveyance as Lessor and Owner shall
reasonably request, including, without limitation, a Bill of Sale. Upon full
compliance by Lessee with the terms of this paragraph, Lessor will cause Owner
to transfer to Lessee, without recourse or warranty (except as to Lessor Liens),
all of Owner's right, title and interest in and to the Engine with respect to
which such Event of Loss occurred. For all purposes hereof, each such
replacement engine shall, after such conveyance, be deemed an "Engine" as
defined herein, and shall be deemed part of the property leased hereunder. No
Event of Loss with respect to an Engine under the circumstances contemplated by
the terms of this paragraph shall result in any reduction or abatement in any
sum due hereunder, including Lessee's obligation to pay Basic Rent.
11.3 Loss Not Constituting an Event of Loss. If the Aircraft or any part
thereof suffers loss or damage not constituting an Event of Loss of such
Aircraft or the Airframe, all the obligations of Lessee under this Lease will
continue in full force, and Lessee shall promptly repair or replace all damaged
or lost Parts, at Lessee's own expense, in accordance with the Lease. In the
event of any loss or damage to the Aircraft, other than an Event of Loss of such
Aircraft or Airframe, Lessee shall, at Lessee's sole expense, fully repair such
Aircraft in order that such Aircraft is placed in airworthy condition and in
substantially the same condition as existed prior to such loss or damage and, in
addition thereto, Lessee shall pay to Owner an amount equal to the diminution in
market value of the Aircraft as a result of such damage determined by an
industry expert selected by Owner, who shall inspect the Aircraft and the damage
and provide to Owner, Lessor and Lessee a report providing the good faith
estimate of the diminution in market value. Lessee shall pay Owner such amount
within thirty (30) days after demand thereof by Owner. Lessee will notify Lessor
and Owner forthwith of any loss, theft or damage to the Aircraft together with
Lessee's proposals for carrying out repair. In the event either Owner or Lessor
does not agree with Lessee's proposals for repair, Lessor will so notify Lessee
within two (2) Business Days after its receipt of such proposals. Lessee, Lessor
and Owner shall then consult with the Aircraft Manufacturer and the
Manufacturer's directions or recommendations as to the manner in which to carry
out repairs shall be conclusive and binding on Lessee, Lessor and Owner. If the
Manufacturer declines to give directions or recommendations, Lessee shall carry
out repairs in accordance with the reasonable joint directions of Lessor and
Owner.
11.4 Risk of Loss, No Release of Obligations. Except as provided in this
Section 11, Lessee shall bear the entire risk of loss and shall not be released
from its obligations hereunder in the event of any damage to the Aircraft or any
Engine or any Part of either or any Event of Loss relating thereto.
SECTION 12. INSURANCE
Lessee represents, warrants and agrees to allow the Aircraft to be operated only
in areas and only in a manner for which each policy of insurance required by the
provisions of this Section 12 shall be in full force and effect.
12.1 Public Liability and Property Damage Insurance. Lessee shall at all
times carry throughout the Term, at Lessee's sole expense, with insurers of
recognized responsibility, aircraft liability insurance including, without
limitation, passenger legal liability, property damage liability and contractual
liability insurance (exclusive of manufacturer's product liability insurance)
with respect to the Aircraft, in an amount not less than US$100,000,000 combined
single limit and cargo
<PAGE> 12
liability insurance. Such insurance shall evidence coverage for "Y2K" risks, in
accordance with industry standards.
12.2 Insurance Against Loss or Damage to the Aircraft. Lessee shall at all
times maintain in effect, at Lessee's sole expense, with insurers of recognized
responsibility, "all-risk" aircraft hull and war risk insurance covering the
Aircraft and "all-risk" coverage of Engines and Parts while temporarily removed
from the Aircraft and not replaced by similar components, including, without
limitation, war risk, governmental confiscation and expropriation and hijacking
insurance, and fire, transit and extended coverage with respect to any Engines
or Parts while removed from the Aircraft; provided, that such insurance shall at
all times be for an amount not less than the Stipulated Loss Value.
With respect to insurance proceeds under the foregoing policies, (a) if such
payments are received with respect to the Airframe (or the Airframe and the
Engines installed thereon), payments as shall not exceed the Stipulated Loss
Value required to be paid by Lessee shall be applied in reduction of Lessee's
obligation to pay such amount, if not already paid by Lessee, or, if already
paid by Lessee, shall be applied to reimburse Lessee for its payment of such
amount, and the balance, if any, of such payments remaining thereafter shall be
paid to Lessee; and, (b) if such payments are received with respect to an Event
of Loss with respect to an Engine such payments shall be paid to Lessee,
provided that Lessee shall have fully performed or, concurrently therewith, will
fully perform the terms of Section 11.2 with respect to the Event of Loss for
which such payments are made.
The insurance payments for any property damage loss to any Airframe or any
Engine not constituting an Event of Loss with respect thereto or with respect to
an Event of Loss of an Engine shall be paid as follows: (a) to Lessee if the
amount of insurance payment(s) is less than US$25,000, to be applied by Lessee
for accomplishing repairs and/or replacements as required; and (b) solely to
Lessor if the amount of insurance payment(s) is greater than US$25,000, to be
held and reimbursed to Lessee for accomplishing repairs and/or replacements as
required, or for Lessor to pay suppliers directly for such repairs and/or
replacements.
12.3 Reports, Etc. Lessee will furnish, or cause to be furnished, to
Lessor and Lender on or before the Delivery Date and on the renewal dates of
Lessee's relevant insurance policies, a report, signed by a recognized
independent firm of insurance brokers (the "Insurance Brokers"), describing in
reasonable detail the hull and liability insurance (and property insurance for
detached engines and parts) then carried and maintained with respect to the
Aircraft and stating the opinion of such firm that such insurance complies with
the terms hereof. Lessee will cause such Insurance Brokers to agree to advise
Owner, Lessor and Lender in writing, (i) of any default in the payment of any
premium which default might invalidate or render unenforceable, in whole or in
part, any insurance on the Aircraft or Engines, and (ii) at least 30 days (seven
days in the case of war risk and allied perils coverage) prior to the
cancellation (but not scheduled expiration) or material adverse change of any
insurance maintained pursuant to this Section 12. In the event that Lessee shall
fail to maintain or cause to be maintained insurance as herein provided, Lessor
or Lender may at its option provide such insurance and, in such event, Lessee
shall, upon demand, reimburse Lessor , Owner or Lender for the cost thereof. No
such payment, performance or compliance shall be deemed to cure any Event of
Default or otherwise relieve the Lessee of its obligations under this Lease.
12.4 Application of Payments During Existence of a Default or an Event of
Default. Any amount referred to in this Section 12 which is payable to or
retainable by Lessee shall not be paid to or retained by Lessee if at the time
of such payment or retention a Default or an Event of Default shall have
occurred and be continuing, but shall be held by or paid over to Lessor as
security for the obligations of Lessee under this Lease and, if Lessor declares
the Lease to be terminated, applied against the obligations under the Lease as
and when due. At such time as there shall not be continuing any such Default or
Event of Default, such amount shall be paid to Lessee to the extent not
previously applied in accordance with the preceding sentence.
12.5 Terms of Insurance Policies. Any policies carried in accordance with
Sections 12.1 and 12.2 hereof covering the Aircraft, and any policies taken out
in substitution or replacement for any such policies: (a) Shall name Lessor,
Owner and the Lender and each of their respective officers, directors, employees
and agents as additional insureds (the "Additional Insureds"), as their
interests may appear (but without imposing on such party liability to pay
premiums with respect to such insurance) to the full extent and amount of
aircraft liability insurance coverage held by Lessee, and shall name Owner and
the Lender as sole, joint, loss payees ("Sole Loss Payee") with respect to
proceeds payable for an Event of Loss and in accordance with Section 12.2 above
with respect to damage not constituting an Event of Loss; (b) shall have
deductibles in amounts not exceeding $50,000; (c) shall provide that if the
insurers cancel such insurance for any reason whatsoever, or if any material
change is made in the insurance which adversely affects the interest of the
Additional Insureds or Sole Loss Payee, or such insurance shall lapse for
non-payment of premium, such cancellation, lapse, or change shall not be
effective as to the Additional Insureds or Sole Loss Payee for 30 days after
receipt (seven days after sending such notice in the case of war risk and allied
perils coverage) by the Additional Insureds or Sole Loss Payee of written notice
by such insurers of such
<PAGE> 13
cancellation or change, provided, however, that if any notice period specified
above is not reasonably obtainable, such policies shall provide for as long a
period of prior notice as shall then be reasonably obtainable; (d) shall provide
that in respect of the Additional Insureds' or Sole Loss Payee's interests in
such policies the insurance shall not be invalidated by any action, inaction or
omission of Lessor or Lessee and shall insure the interests of the Additional
Insureds or Sole Loss Payee regardless of any breach or violation of any
warranty, declaration or condition contained in such policies by the Lessee; (e)
shall be primary without any right of contribution from any other insurance
which is carried by Lessee, or the Additional Insureds or Sole Loss Payee; (f)
shall expressly provide that all of the provisions thereof, except the limits of
liability, shall operate in the same manner as if there were a separate policy
covering each insured; (g) shall provide that the insurers waive any right, (i)
to set-off or counterclaim or any other deduction, whether by attachment or
otherwise, in respect of any liability of Lessee or any Additional Insured to
the extent of any money owed to Lessee or the Additional Insureds and, (ii) any
right to subrogation; (h) shall provide that losses shall be adjusted with
Lessee and Lessor jointly, unless and until the insurers have received written
notice of an Event of Default which is continuing (in which case adjustments
shall be with Lessor solely) or until insurers have paid to Lessor and the
Lender the Stipulated Loss Value (in which case adjustments shall be made with
Lessee solely), ; (i) shall contain a 50/50 clause per AVS 103 or its
equivalent; and, (j) shall include and insure (to the extent of the risks
covered by the policies) the indemnity provisions of Section 13 and Lessee will
maintain such insurance of the indemnities for a minimum of three (3) years
following the Expiration Date of the Lease.
SECTION 13. INDEMNIFICATION
13.1 Indemnity. Lessee assumes liability for, and hereby agrees to
indemnify, protect, save and keep harmless Lessor, and each of the Indemnified
Persons and its respective assignees, partners, employees, officers, directors
and affiliates from and against any and all liabilities, obligations, losses,
damages, penalties, claims (including, without limitation, claims involving
strict or absolute liability in tort), actions, suits, costs, expenses and
disbursements (including, without limitation, legal fees and expenses) in
connection with the Lease or the Aircraft of any kind and nature whatsoever
("Claims") which may be imposed on, incurred by or asserted against them,
arising out of:
(a) The Lease or any transactions contemplated hereby;
(b) The operation, possession, use, non-use, maintenance, storage,
overhaul or testing of the Aircraft, any Engine or any Part during the
Lease Term by Lessee, any sublessee or any other Person whatsoever,
whether or not the same is in compliance with the terms of the Lease,
including, without limitation, claims for death, personal injury, property
damage, consequential and punitive damages, other loss or harm to any
Person whatsoever and claims relating to any laws, including, without
limitation, environmental control, noise and pollution laws, rules or
regulations;
(c) The manufacture, design, sale, purchase, acceptance, rejection,
delivery, condition, repair, modification, servicing, rebuilding,
airworthiness, registration, re-registration, performance, nondelivery,
sublease, merchantability, fitness for use, substitution or replacement of
the Aircraft, any Engine or any Part under the Lease or other transfer of
use or possession of the Aircraft, any Engine or any Part, including under
a pooling or interchange arrangement, including, without limitation,
latent and other defects, whether or not discoverable, and patent,
trademark or copyright infringement; or
(d) Any non-compliance by Lessee with any term of this Lease or the
falsity or inaccuracy of any representation or warranty of Lessee set
forth herein or in any other document delivered by Lessee in connection
with this Lease.
LESSEE AGREES THAT NEITHER LESSOR NOR OWNER SHALL BE LIABLE TO LESSEE FOR
ANY CLAIM CAUSED DIRECTLY OR INDIRECTLY BY THE INADEQUACY OF THE AIRCRAFT
OR ANY PART THEREOF FOR ANY PURPOSE OR ANY DEFICIENCY OR DEFECT THEREIN OR
THE USE OF MAINTENANCE THEREOF OR ANY REPAIRS, SERVICING OR ADJUSTMENTS
THERETO OR ANY DELAY IN PROVIDING OR FAILURE TO PROVIDE ANY THEREOF OR ANY
INTERRUPTION OR LOSS OF SERVICE OR USE THEREOF OR ANY LOSS OF BUSINESS,
ALL OF WHICH SHALL BE THE RISK AND RESPONSIBILITY OF THE LESSEE. The
foregoing indemnity is intended to include and cover any Claim to which
Lessor, Owner or the Lender may be subject (in contract, tort, strict
liability, or under other theory) regardless of the negligence or fault,
active or passive or any other type, of Lessor, Owner or the Lender but
shall not include claims against Lessor or Owner which have accrued prior
to the delivery of the Aircraft to Lessee.
13.2 After-Tax Basis. The amount which Lessee will be required to pay with
respect to any Claim indemnified against under Section 13.1 will be an amount
sufficient to restore the Indemnified Person, on an after-tax basis, to the same
<PAGE> 14
position the Indemnified Person would have been in had such Claim not been
incurred.
13.3 Timing of Payment. It is the intent of the parties that each
Indemnified Person will have the right to indemnification for Claims hereunder
as soon as a claim is made, whether or not meritorious and whether or not
liability is established. Lessee will pay an Indemnified Person for Claims
pursuant to this Section 13 within ten (10) days after receipt of a written
demand therefor from such Indemnified Person accompanied by a written statement
describing in reasonable detail the basis for such indemnity.
13.4 Subrogation. Upon the full and final payment of any indemnity
pursuant to this Section 13 by Lessee, Lessee will be subrogated to any right of
the Indemnified Person in respect of the matter against which such indemnity has
been made.
13.5 Notice. Each Indemnified Person and Lessee will give prompt written
notice one to the other of any liability of which such party has knowledge for
which Lessee is, or may be, liable under Section 13; provided, however, that
failure to give such notice will not terminate any of the rights of Lessor under
this Section 13 except to the extent that Lessee has been materially prejudiced
by the failure to provide such notice.
13.6 Refunds. If any Indemnified Person obtains a recovery of all or any
part of any amount which Lessee has paid to such Indemnified Person, such
Indemnified Person will pay to Lessee the net amount recovered by such
Indemnified Person (including any related gross-ups paid pursuant to Section
13.2, if appropriate to reflect the intent of these provisions).
13.7 Defense of Claims. Unless a Default has occurred and is continuing,
Lessee and its insurers will have the right (in each such case at Lessee's sole
expense) to investigate or, provided that Lessee or its insurers has not
reserved the right to dispute liability with respect to any insurance policies
pursuant to which coverage is sought, defend or compromise any claim covered by
insurance for which indemnification is sought pursuant to Section 13 and each
Indemnified Person will cooperate with Lessee or its insurers with respect
thereto. If Lessee or its insurers are retaining attorneys to handle such claim,
such counsel must be reasonably satisfactory to the Indemnified Person. If not,
the Indemnified Person will have the right to retain counsel of their choice at
Lessee's expense.
13.8 Survival of Obligation. The representations, warranties, indemnities
and agreements of Lessee provided for in this Section 13 survive the expiration
or other termination of this Lease.
SECTION 14. RESERVED
SECTION 15. SUBLEASE; POSSESSION; ASSIGNMENT; MERGER
15.1 No Assignment or Sublease by Lessee. No assignment, novation,
transfer, mortgage or other charge may be made by Lessee of any of its rights or
obligations with respect to the Aircraft or the Lease. Lessee shall not
sublease, or otherwise transfer or relinquish possession of the Airframe or any
Engine or install any Engine or permit any Engine to be installed on any
airframe other than the Airframe.
15.2 Lessor's and Owner's Assignment. Lessor and Owner may assign or
create a security interest in all its rights hereunder in and to the Aircraft
and the Engines, including, without limitation, the right to receive payments of
Rent, including, without limitation, receipt of insurance proceeds, to and for
the benefit of any Person. Lessee agrees to execute and deliver any
acknowledgment and consent thereto as may be requested by Lessor, Owner or the
Lender. Lessor may assign all or a portion of its rights and obligations
hereunder upon any sale of the Aircraft or assignment of its lease with Owner.
Lessee agrees to execute and deliver any acknowledgement and consent thereto as
may be requested by Lessor.
15. 3 Merger. Lessee agrees that prior to any consolidation with or merger
into any other corporation and prior to the conveyance, transfer or lease of all
or substantially all of its assets as an entirety to any person or entity,
Lessee shall notify Lessor and at Lessor's request, Lessee shall obtain and
deliver the due acknowledgment (by the successor entity or person) of the
obligations of the Lessee under this Lease and confirmation of continued
compliance herewith after such consolidation, merger or conveyance of assets.
SECTION 16. EVENTS OF DEFAULT
The term "Event of Default," wherever used herein, shall mean any of the
following events under the Lease (whatever the reason for such Events of Default
and whether it shall be voluntary or involuntary, or come about or be affected
by operation
<PAGE> 15
of law, or be pursuant to or in compliance with any judgment, decree or order of
any court or any order, rule, or regulation of any administrative or
governmental body):
(a) Lessee fails to take delivery of the Aircraft when obligated to do so
under the terms of this Lease;
(b) Lessee fails to make a Rent or other payment due hereunder in the
manner and within five (5) consecutive days after date provided herein;
(c) Lessee fails at any time to obtain or maintain the insurance required
by Section 12;
(d) Lessee fails to return the Aircraft to Lessor on the Expiration Date
in accordance with and in the condition required by Section 6;
(e) Lessee shall fail to maintain the Aircraft, any of the Engines or any
Parts or to maintain adequate Aircraft Technical Records in accordance
with the terms of this Lease and such failure is not corrected within ten
(10) days;
(f) Lessee fails to observe or perform any of its other obligations
hereunder and fails to cure the same within fifteen (15) days after the
occurrence thereof. If such failure cannot by its nature be cured within
fifteen (15) days, Lessee will have the reasonable number of days
necessary to cure such failure (not to exceed a period of thirty (30)
days) so long as Lessee uses diligent and best efforts to do so and gives
Lessor written notice thereof and the failure does not result in any
danger of sale, forfeiture or loss of the Aircraft or Engine;
(g) Any representation or warranty of Lessee herein proves to be untrue or
incorrect in any material respect;
(h) The registration of the Aircraft is canceled other than as a result of
an action or omission of Lessor;
(i) Lessee abandons the Aircraft or Engines or they are no longer in the
possession and unencumbered control (other than Lessor Liens) of Lessee
except as permitted under this Lease;
(j) Lessee either temporarily or permanently discontinues business or
sells or otherwise disposes of all or substantially all of its assets
(unless Lessee shall have complied with Section 15.3);
(k) Reserved;
(l) Lessee, (i) suspends payment on its debts or other obligations, (ii)
is unable to or admits inability to pay its debts or other obligations as
they fall due, (iii) is adjudicated or becomes bankrupt or insolvent or,
(iv) proposes or enters into any composition or other arrangement for the
benefit of its creditors generally;
(m) Any proceedings, resolutions, filings or other steps are instituted
with respect to Lessee relating to bankruptcy liquidation, reorganization
or protection from creditors of Lessee or a substantial part of Lessee's
property. If instituted by Lessee, the same shall be an immediate Event of
Default. If instituted by another Person, the same shall be an Event of
Default if not dismissed, remedied or relinquished within thirty (30)
days;
(n) Any order, judgment or decree is entered by any court of competent
jurisdiction appointing a receiver, trustee or liquidator of Lessee or a
substantial part of Lessee's property, or if a substantial part of
Lessee's property is to be sequestered. If instituted or done with the
consent of Lessee, the same shall be an immediate Event of Default. If
instituted by another Person, the same shall be an Event of Default if not
dismissed, remedied or relinquished within thirty (30) days; or,
(o) The Lease is or becomes wholly or partly invalid, ineffective or
unenforceable due to reasons beyond Lessor's control and either, (i)
Lessee fails in its continuing performance notwithstanding such
invalidity, ineffectiveness or unenforceability, or, (ii) after good faith
negotiations, Lessor and Lessee have not arrived at a mutually acceptable
alternative basis for continuation of this Lease within fifteen (15) days
after Lessor's notice requiring negotiation.
SECTION 17. REMEDIES
17.1 Lessor's General Rights. Upon the occurrence of any Event of Default,
all rights of Lessee hereunder will
<PAGE> 16
immediately cease and terminate and Lessor may do all or any of the following at
its option (in addition to such other rights and remedies which Lessor may have,
but subject to any requirements of applicable law):
(a) For Lessee's account, do anything that may reasonably be required to
cure any Event of Default or recover from Lessee all reasonable costs,
including legal fees and expenses incurred in doing so and interest at the
Late Payment Rate;
(b) Proceed by appropriate court action or actions to enforce performance
of the Lease and to recover any damages for the breach hereof, including
the amounts specified in Section 17.2; and,
(c) Terminate the Lease by taking possession of the Aircraft or by serving
notice requiring Lessee to return the Aircraft to Lessor at any location
specified by Lessor. If Lessor takes possession of the Aircraft, it may
enter upon Lessee's premises where the Aircraft is located without
liability. Upon repossession of the Aircraft, Lessor will then be entitled
to sell, lease, keep idle or otherwise deal with the Aircraft as if this
Lease had never been made.
17.2 Lessee Liability for Damages. If an Event of Default occurs, Lessor
has the right to recover from Lessee all of the following:
(a) All amounts which are then due and unpaid hereunder, and which become
due prior to the earlier of Lessor's recovery of possession of the
Aircraft or Lessee making an effective tender thereof;
(b) Any lost profits suffered by Lessor because of Lessor's inability to
place the Aircraft on lease with another lessee on financial terms as
favorable to Lessor as the terms hereof or because whatever use, if any,
to which Lessor is able to put the Aircraft upon its return or the funds
arising from a sale or other disposition of the Aircraft are not as
profitable to Lessor as leasing the Aircraft in accordance with the terms
hereof would have been;
(c) All costs associated with Lessor's exercise of its remedies hereunder,
including, but not limited to, repossession costs, legal fees and
disbursements, Aircraft storage costs and Aircraft re-lease or sale costs;
(d) Any loss, cost, expense or liability sustained by Lessor due to
Lessee's failure to redeliver the Aircraft in the condition required by
the Lease; and,
(e) Any other losses (including lost profits), damage, expense, cost or
liability which Lessor suffers or incurs as a result of the Event of
Default and/or termination of this Lease, including, without limitation,
an amount sufficient to fully compensate Lessor for any loss or damage to
Lessor's residual interest in the Aircraft caused by Lessee's default.
17.3 Remedies Non-Exclusive and Waiver of Default. No remedy referred to
herein is intended to be exclusive, but each shall be cumulative and in addition
to any other remedy referred to above or otherwise available to Lessor at law or
in equity. Only by written notice to Lessee, Lessor may, at its election, waive
any Default or Event of Default and its consequences and annul or rescind any
prior notice of termination of this Lease. No express waiver by Lessor of any
Default or Event of Default hereunder shall in any way be, or be construed to be
a waiver of any future or subsequent Default or Event of Default. The failure or
delay of Lessor in exercising any rights granted it hereunder upon any
occurrence of any of the contingencies set forth herein shall not constitute a
waiver of any such rights upon the continuation or recurrence of any such
contingencies or similar contingencies, and any single or partial exercise of
any particular right by Lessor shall not exhaust the same or constitute a waiver
of any other right provided herein.
17.4 Present Value of Payments. In calculating Lessor's damages hereunder
upon an Event of Default, all Rent and other amounts which would have been due
hereunder during the Lease Term if an Event of Default had not occurred will be
calculated on a present value basis using a discounting rate of five percent
(5%) per annum.
17.5 U.S. Bankruptcy Code. To the extent that the provisions of Section
1110 of Title 11 of the United States Code may at any time be applicable hereto,
any right of Lessor to take possession of the Aircraft or any Engine shall not
be affected by the power of the courts to enjoin such taking of possession.
SECTION 18. NOTICES
<PAGE> 17
All notice provided for or required under the terms and provisions hereof shall
be in writing and any such notice shall be deemed given when properly sent and
received by facsimile (with written confirmation by mail), when personally
delivered or where sent and received by overnight courier service, or three (3)
days after it is deposited in the United States Mail with proper postage prepaid
for first class certified mail, return receipt requested, addressed as follows:
If to Lessor: Maurice J. Gallagher, Jr. and Timothy P. Flynn
3291 North Buffalo Drive
Suite 8
Las Vegas, Nevada 89129
Telephone Number: 702 256 4323
Facsimile Number: 702 256 7209
If to Lessee: MGC Communications, Inc.
171 Sullys Trail
Suite 202
Pittfford, New York 14534
Attn: Linda Sunbury
Tel. 716 218 6540
Fax 716 218 0881
or to such other address as Lessor or Lessee may, from time to time, designate
in writing.
SECTION 19. GOVERNING LAW AND JURISDICTION; FURTHER ASSURANCES
19.1 Nevada Law. This Lease is being delivered in the State of Nevada,
United States of America, and will in all respects be governed by and construed
in accordance with the laws of the State of Nevada (notwithstanding the conflict
laws of the State of Nevada), United States of America.
19.2 Non-Exclusive Jurisdiction in Nevada. The parties hereby consent to
the non-exclusive jurisdiction of the Federal District Court for the District of
Nevada or the State of Nevada Court in Las Vegas, Nevada United States of
America. Nothing herein will prevent either party from bringing suit in any
other appropriate jurisdiction.
19.3 Prevailing Party in Dispute. If any legal action or other proceeding
is brought in connection with any provisions in the Lease, the prevailing party
will be entitled to recover reasonable attorneys' fees and disbursements and
other costs incurred in such action or proceedings. The prevailing party will
also, to the extent permissible by law, be entitled to receive pre-and
post-judgment interest at the Late Payment Rate.
19.4 Further Assurances. Lessee shall promptly and duly execute and
deliver to Lessor such further documents and assurances and take such further
action as Lessor may from time to time reasonably request in order to carry out
more effectively the intent and purpose of the Lease and to establish and
protect the rights and remedies created or intended to be created in favor of
Lessor.
SECTION 20. PURCHASE OPTION.
20. 1 Provided that this Lease has not been earlier terminated and there
exists no continuing Event of Default by Lessee at the time of the exercise of
its purchase option hereunder and at the time of the purchase of the Aircraft
pursuant hereto and all prior defaults have been cured, Lessee, by giving Lessor
not more than one hundred and eighty (180) and not less than ninety (90) days'
written notice prior to any Purchase Option Date as specified in Annex 2 to
Exhibit B, may on any Purchase Option Date elect to purchase the Aircraft from
the Lessor (who shall be required to purchase the Aircraft from Owner) for an
amount equal to the Fair Market Value of the Aircraft on the applicable Purchase
Option Date , plus any amounts owed to Lessor but unpaid under this Lease and
any applicable sales, use, property or excise taxes based on or measured by such
sale and any other expenses of transfer with respect thereto (such amounts, the
"Purchase Option Amount"). If Lessee elects to exercise said purchase option,
the Aircraft shall be purchased on the applicable Purchase Option Date and by
the delivery at such time by Lessee to Lessor of payment, in cash, via direct
wire transfer, of the amount of the Purchase Option Amount. Upon payment of such
amount (plus all other amounts owed hereunder, as aforesaid), Lessor shall upon
request of Lessee, deliver a Bill of Sale for the Aircraft, on an "as-is,
where-is, with all faults" basis, without representations
<PAGE> 18
or warranties of any kind whatsoever, except as to warranty of title and being
free of Lessor Liens. Lessee and Lessor shall enter into an industry standard
purchase agreement which is consistent herewith, within 15 business days after
the exercise by Lessee of its purchase option and Lessee shall, in connection
therewith, deposit with Lessor a 10% non-refundable deposit. If Lessee does not
elect to exercise said purchase option on the Expiration Date, Lessee shall
redeliver the Aircraft to Lessor pursuant to and under the terms and conditions
of this Lease. If, during the term, Lessor shall, pursuant to the terms hereof,
terminate this Lease upon or as a result of default by Lessee hereunder, all
rights of Lessee to purchase the Aircraft shall terminate and be of no further
force or effect (regardless of whether or not Lessee shall have given notice of
the exercise of the purchase option and regardless of whether or not a purchase
agreement shall have been entered into by the parties pursuant thereto). Lessor
and Lessee recognize that Lessor is not the owner of the Aircraft but Lessor
represents that Lessee's rights under this Section are granted pursuant to
Lessor's rights to purchase the Aircraft under its lease of the Aircraft with
the Owner and that such rights to purchase are consistent with Lessee's rights
hereunder.
SECTION 21. MISCELLANEOUS
21.1 Transaction Costs. Lessor and Lessee shall each bear their own
counsel fees in connection with the development and execution of the Lease.
21.2 Binding on Successors. The Lease, including all agreements,
covenants, representations, and warranties, shall be binding upon and inure to
the benefit of, and may be enforced by, (i) the Lessor and its successors,
assigns and agents and, (ii) Lessee and Lessee's successors and, to the extent
permitted hereby, assigns.
21.3 Survival. All agreements, indemnities, representations and warranties
contained in the Lease or any agreement, document or certificate delivered
pursuant hereto or thereto or in connection herewith or therewith shall survive
the execution and delivery of the Lease and the expiration or other termination
of the Lease.
21.4 Additional Documents. Upon Lessor's reasonable request, Lessee shall
furnish to Lessor audited financial statements and other information concerning
the financial condition of Lessee as well as periodic estoppel certificates
certifying that, (i) this Lease is in full force and effect, (ii) to Lessee's
knowledge after due inquiry no Default exists and, (iii) Lessee has no claims
under the Lease against Lessor or Lessor's Assignee.
21.5 Power of Attorney. Lessee hereby irrevocably appoints Lessor as its
attorney, coupled with an interest, for the purpose of putting into effect the
intent of the Lease following an Event of Default, including without limitation,
the return, and repossession of the Aircraft. Lessee will take all steps
required under the laws of the State of Nevada to provide such power of attorney
to Lessor.
21.6 Lessor Performance for Lessee. The exercise by Lessor of its remedy
of performing a Lessee obligation hereunder is not a waiver of and will not
relieve Lessee from the performance of such obligation at any time or from the
performance of any of its other obligations hereunder. If a Default shall occur
hereunder, Lessor may make the payment or perform or comply with the agreement,
the non-payment, nonperformance or noncompliance which caused such Default and
the amount of such payment and the amount of the reasonable expense of Lessor
incurred in connection with such payment or the performance of or compliance
with such agreement, as the case may be, together with interest at the Late
Payment Rate, shall be payable by Lessee to Lessor upon demand, and such action
shall not be deemed a cure or waiver of any Default or Event of Default
hereunder by Lessee unless or until Lessor is reimbursed by Lessee.
21.7 Application of Payments. Any amounts paid or recovered in respect of
Lessee's abilities hereunder may be applied to Rent, interest at the Late
Payment Rate, fees or any other amount due hereunder in such proportions, order
and manner as Lessor determines in its absolute discretion.
21.8 Usury Laws. The parties intend to contract in strict compliance with
applicable usury laws. No provision hereof shall be construed to create a
contract for the use, forbearance or detention of money requiring payment of
interest at a rate in excess of the maximum interest rates permitted by law. All
sums deemed to constitute interest in excess of the maximum lawful rate shall,
at Lessor's option, either be refunded to Lessee or credited to the payment of
Rent.
21.9 Delegation by Lessor. Lessor may delegate to any Person(s) all or any
of the rights, powers or discretion vested in it by the Lease and any such
delegation may be made upon such terms and conditions as Lessor in its absolute
discretion thinks fit.
<PAGE> 19
21.10 Reserved.
21.11 Rights of Parties. The rights of the parties hereunder are
cumulative, not exclusive, may be exercised as often as each party considers
appropriate and are in addition to its rights under general Law. The rights of
one party against the other party are not capable of being waived or amended
except by an express waiver or amendment, made in writing. Any failure to
exercise or any delay in exercising any of such rights will not operate as a
waiver or amendment of that or any other such right; any defective or partial
exercise of any such rights will not preclude any other or further exercise of
that or any other such right; and, no act or course of conduct or negotiation on
a party's part or on its behalf will in any way preclude such party from
exercising any such right or constitute a suspension or any amendment of any
such right.
21.12 Further Assurances. Each party agrees from time to time to do and
perform such other and further acts and to execute and deliver any and all such
other instruments as may be required by law or reasonably requested by the other
party to establish, maintain or protect the rights and remedies of the
requesting party or to carry out and effect the intent and purpose of the Lease.
21.13 Headings. All sections and paragraph headings and captions are
purely for convenience and will not affect the interpretation of this Lease.
21.14 Invalidity of any Provision. If any of the provisions of the Lease
become invalid, illegal or unenforceable in any respect under any Law, the
offending provision or provisions shall be deleted from the Lease and the
validity, legality and enforceability of the remaining provisions will not in
any way be affected or impaired.
21.15 Negotiation. The terms of the Lease are agreed by Lessor from its
office in Las Vegas, Nevada.
21.16 Time of the Essence. Time is of the essence in the performance of
all obligations of the parties under the Lease.
21.17 Amendments in Writing. The provisions of the Lease may only be
amended or modified by a writing executed by Lessor and Lessee.
21.18 Execution in Counterparts. The Lease may be executed in
counterparts, and four (4) counterparts of the Lease have been executed. One
counterpart has been marked "Original" and the other counterparts have been
marked either "LESSEE'S COUNTERPART," "LESSOR'S COUNTERPART," or "FAA FILING
COUNTERPART."
21.19 Entire Agreement. The Lease, together with the Exhibits and
Supplements thereto, constitutes the entire agreement between the parties in
relation to the Leasing of the Aircraft by Lessor to Lessee and supersedes all
previous proposals, agreements and other written or oral communications in
relation hereto. The parties acknowledge there have been no representations,
warranties, promises, guarantees or agreements, express or implied, except as
set forth herein. The Lease shall constitute an agreement by lease and nothing
herein shall be construed as conveying to Lessee any right, title or interest in
or to the Aircraft, except as a lessee only.
22. SECTION 22 TRUTH-IN-LEASING.
LESSEE CERTIFIES THAT FROM THE DATE OF INITIAL UNITED STATES REGISTRATION OF THE
AIRCRAFT LEASED HEREUNDER TO THE LEASE COMMENCEMENT DATE WITH RESPECT THERETO,
THE AIRCRAFT HAS BEEN MAINTAINED AND INSPECTED UNDER PART 91 OF THE FEDERAL
AVIATION REGULATIONS AND THAT DURING THE LEASE TERM WITH THERETO, THE AIRCRAFT
WILL BE MAINTAINED AND INSPECTED UNDER PART 91 OF THE FEDERAL AVIATION
REGULATIONS. DURING THE LEASE TERM WITH RESPECT TO SUCH AIRCRAFT, LESSEE WILL BE
RESPONSIBLE FOR OPERATIONAL CONTROL OF EACH SUCH AIRCRAFT AND LESSEE CERTIFIES
THAT IT UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL
AVIATION REGULATIONS. AN EXPLANATION OF FACTORS BEARING ON OPERATIONAL CONTROL
AND PERTINENT FEDERAL AVIATION REGULATIONS CAN OBTAINED FROM THE NEAREST FAA
FLIGHT STANDARDS DISTRICT OFFICE.
23. SECTION 23 FEDERAL INCOME TAX BENEFITS
<PAGE> 20
Lessee acknowledges that Owner is the owner of the Aircraft for state law and
Federal income tax purposes and that accelerated depreciation or cost recovery
deductions on the full amount of the Aircraft cost will be available to Owner.
Lessee acknowledges that Owner intends to claim and take all applicable
depreciation deductions with respect to the Aircraft in accordance with Section
168 of the Internal Revenue Code of 1986, as amended (the "Code"). Lessee
understands, agrees and acknowledges that Lessee's breach of certain express
covenants of this Lease could lead to loss by Owner of such deductions and
Lessee shall be liable therefor (through claims by Owner against Lessor under
the Headlease) if arising out of breach by Lessee hereunder.
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have caused this Aircraft Lease
Agreement to be duly executed, as of the date first above written.
MAURICE J. GALLAGHER, JR.
Lessor
_________________________________
TIMOTHY P. FLYNN
Lessor
_________________________________
MGC COMMUNICATIONS, INC.
Lessee
By:______________________________
Print Name:______________________
Title:___________________________
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<PAGE> 22
EXHIBIT A
DEFINITIONS
(a) All references in the Lease to designated Sections and other
subdivisions are to designated Sections and other subdivisions of the Lease, and
the words "herein," "hereto" and "hereunder" and other words of similar import
refer to the Lease as a whole and not to any particular Section or other
subdivision.
(b) Except as otherwise indicated, all the agreements or instruments
defined herein or in the Lease shall mean such agreements or instruments as the
same may from time to time be supplemented or amended or the terms thereof
waived or modified to the extent permitted by, and in accordance with, the terms
thereof.
(c) The terms defined herein and in the Lease shall, for purposes of the
Lease and all exhibits thereto, have the meanings assigned to them and shall
include the plural as well as the singular.
(d) Unless the context otherwise requires, the following terms shall have
the following meanings for all purposes of this Lease:
"Aircraft" means the Airframe to be delivered and leased hereunder,
together with the two Engines identified in the Lease Supplement, as the Engines
constituting a part of the Aircraft (or any Replacement Engine substituted for
any such Engine pursuant to Section 11.2 hereof), whether or not any of such
initial or substituted engines may from time to time be installed on such
Airframe or may be installed on any other airframe.
"Airframe" means, (i) the Israeli Aircraft Industries Model Astra
aircraft, serial number 011, US Reg. No. N705MA (excluding Engines or engines
from time to time installed thereon) specified in the Lease Supplement; (ii) any
and all Parts so long as the same shall be incorporated or installed in or
attached to such Airframe and so long as title thereto shall remain vested in
Lessor in accordance with the terms of Section 9.4 after removal from such
Airframe; and, (iii) all logs and Technical Records related to such Airframe.
"Basic Rent" means the monthly rental payable pursuant to Section 3.1 and
as set forth in Annex Two to Exhibit B.
"Basic Rent Date" means, the Delivery Date and the same calendar date of
each month as the Delivery Date, after the Delivery Date, throughout the Term of
this Lease.
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks are required or authorized to be closed in Las Vegas,
Nevada or the place of payment of Rent as Lessor may from time to time designate
pursuant to Section 3.1 hereof.
"Claims" shall have the meaning set forth in Section 13 of the Lease
captioned "Indemnification."
"Default" shall mean an event which, after the giving of notice or lapse
of time, or both, would mature into an Event of Default.
"Delivery Date" in respect to the Aircraft means the date of the Lease
Supplement.
"Delivery Receipt" shall mean that document exchanged by Lessor and Lessee
upon delivery of the Aircraft to Lessee, referred to in the Supplement.
"Engine" means each of the two Garrett Airesearch Model TFE731-3C engines
listed by manufacturer's serial numbers in the Lease Supplement as the engines
constituting a part of the Aircraft, in each case whether or not from time to
time installed on the Airframe covered by such Lease Supplement or any other
airframe and any Replacement Engine that may from time to time be substituted
for an Engine pursuant to Section 11.2, together in each case, with any and all
Parts incorporated or installed thereon or attached thereto and any and all
Parts removed therefrom so long as title thereto shall remain vested in Lessor
in accordance with Section 9.4 and all logs and Technical Records relating to
such Engine; provided, however, that at such time as a Replacement Engine shall
be substituted for an Engine in full compliance with the applicable provisions
hereof, the replaced Engine shall cease to be an Engine hereunder. The term
"Engines" also means, as of any date of determination, all Engines then leased
hereunder.
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<PAGE> 23
"Event of Default" has the meaning specified in Section 16.
"Event of Loss" means, with respect to the Aircraft or any Engine, any of
the following events or conditions with respect to such property: (a)
Destruction, damage beyond economic repair or being rendered permanently unfit
for normal use for any reason whatsoever (the date of which shall be the date
such event occurs or, if not known, the date on which the Aircraft, Airframe or
Engine was last seen by Lessee); (b) Actual, constructive, compromised, arranged
or agreed total loss (the date of which shall be the earlier of the date on
which the loss is agreed or compromised by the insurers or sixty (60) days after
the date of notice to Lessee's broker or insurers claiming such total loss); (c)
Requisition of title, confiscation, forfeiture or any compulsory acquisition or
taking whatsoever (the date of which shall be the date on which the same takes
effect); (d) Sequestration, detention or seizure for more than ninety (90)
consecutive days (the date of which shall be the earlier of the date on which
insurers make payment on the basis of a total loss or the date of expiration of
such period); (e) Requisition for use for more than ninety (90) consecutive days
(the date of which shall be the earlier of the date on which the insurers make
payment on the basis of a total loss or the date of expiration of such period);
(f) The loss of the Aircraft due to theft or disappearance for a period in
excess of fifteen (15) consecutive days (the date of which shall be the earlier
of the final day of such period or the date on which insurers make payment on
the basis of a total loss); (g) Any other occurrence which deprives Lessee of
use or possession for a period of thirty (30) consecutive days or longer (the
date of which shall be the earlier of the final day of such period or the date
on which insurers make payment on the basis of a total loss); (h) With respect
to any Engine, any divestiture of title to such engine shall be treated as an
Event of Loss. An Event of Loss with respect to an Aircraft shall be deemed to
have occurred if an Event of Loss shall occur with respect to its Airframe.
"Expiration Date" shall be the date thereof set forth in the Supplement.
"FAA" means the United States Federal Aviation Administration and any
successor agency or agencies.
"Fair Market Value" means, unless otherwise set forth in Annex Two to
Exhibit B, the value of the Aircraft determined by majority vote of a panel of
three industry recognized appraisers, one selected by each of Lessor and Owner,
jointly, and Lessee and the third appointed by the two so selected, whose
decision shall be based on determining the fair market value of the Aircraft
based on an arms-length sale of the Aircraft by a seller acting under no
compulsion to sell and a buyer acting under no compulsion to buy, which panel
shall be selected and the determination made, no later than sixty days prior to
the Expiration of the Lease.
"Federal Aviation Act" means the United States Federal Aviation Act of
1958, as amended from time to time, or any similar legislation of the United
States enacted in substitution or replacement thereof.
"Impositions" shall have the meaning set forth in Section 8 of the Lease
captioned "Taxes."
"Indemnified Person" means Lessor, the Owner, the Lender and each of their
respective officers, directors, shareholders, agents and representatives.
"Late Payment Rate" means the interest rate specified and defined in
Section 3.1(e) hereof.
"law" means any (i) statute, decree, constitution, regulation, order or
any directive of any governmental entity (ii) treaty or pact, compact or other
agreement to which any governmental entity is a signatory or party, and (iii)
judicial or administrative interpretation or application.
"Lease Supplement" or "Supplement" means a lease supplement substantially
in the form of Exhibit B, to be entered into between Lessor and Lessee on the
Delivery Date for the purpose of leasing the Aircraft under and pursuant to the
terms of the Lease, and any subsequent Lease Supplement entered into in
accordance with the terms hereof.
"Lender" means any lender to Owner, and who holds a first priority
security interest over the Aircraft, and any other lender notified to Lessee by
Lessor and/or Owner in writing.
"Lessor Lien" means any Lien or disposition of title with respect to the
Aircraft, the Airframe, any Engine or any Part that arises as a result of or
results from (i) taxes or expenses imposed on Owner, Lessor or any Assignee (or
the consolidated group of taxpayers of which any of them is a part), other than
taxes or expenses for which Lessee is obligated but fails to
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<PAGE> 24
indemnify pursuant to any provisions of this Lease, (ii) any claim against
Lessor, Owner or any Assignee involving or arising out of events or conditions
not related to the transactions contemplated by this Lease or (iii) any
voluntary transfer by Lessor or Owner of all or any portion of its interest in
the Aircraft or this Lease pursuant to Section 15.
"Lien" means any mortgage, pledge, lien, charge, encumbrance, lease,
sublease, security interest, conditional sale agreement, title retention
agreement or claim as provided in Section 7 hereof.
"Maintenance Program" shall have the meaning set forth in Section 9.2 of
the Lease.
"Manufacturer" shall mean with respect to the Airframe, Israeli Aircraft
Industries, and its successors and assigns and shall mean, with respect to the
Engines, Garrett Airesearch and its successors and assigns.
"month" shall mean a period commencing on one day in a calendar month and
ending on the day in the next succeeding calendar month the date of which
numerically corresponds to the date of such first day, provided that if there is
no numerically corresponding date in the next succeeding calendar month, such
period shall end on the last day of the next succeeding calendar month and
"months" and "monthly" shall be construed accordingly.
"Owner" means Pacific Coast Group, Inc., a Nevada corporation.
"Parts" means all appliances, parts, instruments, appurtenances,
accessories, furnishings and other equipment of whatever nature (but excluding
complete Engines and engines, but including propellers) so long as the same
shall be incorporated or installed in or attached to the Airframe or any Engine
or so long as title thereto shall remain vested in Lessor in accordance with
Section 9.4 after removal therefrom. Reference is made to the Aircraft records
and logs for a partial list of Parts incorporated in or on the Aircraft.
"Person" shall mean any individual, partnership, corporation, trust,
unincorporated association or joint venture, a government or any department or
agency thereof, or any other entity.
"Principal Location" shall mean the airport at Rochester, New York, or
such other location selected by Lessee with Lessor's prior written approval,
which approval shall not be unreasonably withheld or delayed.
"Purchase Option" shall mean the rights of Lessee to purchase the Aircraft
under Section 20.1 of this Lease.
"Rent" means Basic Rent and all other sums payable hereunder which the
Lessee assumes the obligation to pay, or agrees to pay to the Lessor or others,
collectively.
"Replacement Parts" shall have the meaning set forth in Section 9.4 of the
Lease.
"Stipulated Loss Value" for the Aircraft, payable with respect to any
event as provided in the Lease, means the amount, set forth in the Lease
Supplement and Annex Two of Exhibit B hereto, throughout the entire Lease Term
and any extension thereof, and through such later date until the Aircraft is
redelivered to Lessor, and as may be adjusted pursuant to the Lease Supplement.
"Technical Records" shall mean all manuals, logbooks, flight records,
maintenance records, modification and overhaul records, and historical records
relating to the Aircraft and either delivered hereunder or required by the FAA.
"Term" or "Lease Term" shall mean the period between the Delivery Date as
specified in the Supplement and the later of, the Expiration Date (as specified
in the Supplement) and the return of the Aircraft to Lessor as required under
this Lease.
"United States Government" means the United States of America or any
agency or instrumentality thereof.
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<PAGE> 25
Exhibit B
LEASE SUPPLEMENT
LEASE SUPPLEMENT, dated December _____, 1999, between Maurice J.
Gallagher, Jr. and Timothy P. Flynn, individual persons (who are married
persons) each of whom reside in the State of Nevada, jointly, as "Lessor", and
MGC Communications, Inc. and , a corporation organized under the laws of the
State of Nevada, as "Lessee".
Lessor and Lessee have heretofore entered into that certain Aircraft Lease
Agreement dated December ___ 1999 (herein called the "Lease Agreement", the
defined terms therein being hereinafter used with the same meaning). The Lease
Agreement provides for the execution and delivery of a Lease Supplement,
substantially in the form hereof, for the purpose of leasing a specific aircraft
under the Lease Agreement as and when delivered by Lessor to Lessee in
accordance with the terms thereof.
The Lease Agreement relates to the aircraft and engines described below,
and this Lease Supplement is attached to a counterpart of the Lease Agreement
and made a part thereof and such counterpart of the Lease Agreement, together
with this Lease Supplement, shall be considered to be one document.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, Lessor and Lessee hereby agree as follows:
1. Lessor hereby delivers and leases to Lessee under the Lease Agreement,
and Lessee hereby accepts and leases from Lessor under the Lease Agreement the
following described IAI Astra aircraft (the "Aircraft"), which Aircraft, as of
the date hereof, consists of the following components:
(a) one IAI Astra Airframe: U.S. registration number N705MA, serial number
011;
(b) two (2) Garrett Airesearch Model TFE731-3C engines bearing,
respectively, manufacturer's serial numbers P96105C, and P96110C (the
"Engines") (each of said Engines has 750 or more rated takeoff horsepower
or the equivalent of such horsepower);
(c) the other equipment listed in Annex One hereto.
2. Lessee hereby delivers to Lessor a Memorandum of Delivery in the form
prescribed by Lessor (as set forth in Exhibit D to the Lease).
3. The Delivery Date of the Aircraft is the date of this Lease Supplement
set forth in the opening paragraph hereof.
4. The first Basic Rent Date for the Aircraft is the Delivery Date.
5. The Expiration Date of the Lease Term in respect to the Aircraft
covered by this Supplement is _____________.
6. Lessee hereby confirms to Lessor, that (a) Lessee shall perform all of
its obligations as set forth in the Lease Agreement, and in particular confirms
that, in accordance with Section 3 of the Lease Agreement, Lessee shall pay to
Lessor the Basic Rent on each Basic Rent Date during the Term for the delivered
Aircraft; and (b) there exists no Default or Event of Default under the Lease.
This document is intended only as a summary of terms more fully set forth
in the Lease Agreement and in the event of any seeming conflict between this
Supplement and the Lease Agreement, the Lease Agreement shall be controlling.
7. The Stipulated Loss Value of the Aircraft covered by this Supplement is
and shall be $ 6,000,000 from the Delivery Date through the Expiration Date, and
through return of the Aircraft to Lessor under the Lease; provided, however,
annually, on the anniversary of the Delivery Date, at Lessor's option, the
Lessor and Lessee shall agree on an increase to the Stipulated Loss Value based
on an increase in the market value of the Aircraft reasonably determined by
Lessor and utilizing accepted industry information. Any increase in the
Stipulated Loss Value shall be acknowledged in writing by Lessor and Lessee and
shall effect an amendment to this Lease.
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<PAGE> 26
8. Lessee hereby confirms to Lessor, (i) that Lessee has made a thorough
and diligent inspection of the Aircraft, Engines and their respective records,
(ii) that the Aircraft and Engines fully conform to the requirements of the
Lease Agreement, and (iii) that Lessee has accepted the Aircraft for all
purposes under the Lease Agreement.
9. All of the terms and provisions of the Lease Agreement are hereby
incorporated by reference in this Lease Supplement to the same extent as if
fully set forth herein.
IN WITNESS WHEREOF, the parties hereto have caused this Lease Supplement
to be duly executed by their respective officers thereunto duly authorized as of
the date first above written.
MAURICE J. GALLAGHER, JR.
Lessor
_________________________________
TIMOTHY P. FLYNN
Lessor
_________________________________
MGC COMMUNICATIONS, INC.
Lessee
By:______________________________
Print Name:______________________
Title:___________________________
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<PAGE> 27
ANNEX ONE
To Exhibit B
IAI Astra 1125
Serial Number 011
AIRFRAME: 6048 Total Time 4563 Total Landings
ENGINES: Garrett TFE 731-3C-200G on MSP
LT P96105C 5770 TT
RT P96110C 5796 TT
AVIONICS: Collins Five Tube EFIS
Collins APS- 80 Auto Pilot
Collins VNI-80B Vertical Nav System
Dual Collins VHF - 22A Comm Systems
Dual Collins VIR - 32A Nav Receivers
Dual Collins TDR 90 Transponders
Collins WXT - 250 Color Radar
Collins ALT-55 Radio Altimeter
Collins ADF - 60 ADF
Collins FPA-80 Profile Advisory System
Dual UNS1-K Flight Mgt Systems with GPS
Fairchild A100 CVR
Wulfsburg FliteFone VI
Dual HF Transceivers King KHF 950
FEATURES/OPTIONS: Extended Range Fuel Tanks
Thrust Reversers
Current on MSP
" C " Check 2/98, "A" check 11/99 by Garrett, LAX
INTERIOR: 8 Passenger - Five Light Gray Leather
Swiveling/Reclining Chair
Three Place Divan done in Gray Leather
All Cabinets and Trim Completed in Rosewood.
Forward Galley - Aft fully enclosed Lav
Interior Leather Refuburished and Fireblocked 1/96
EXTERIOR: Overall Matterhorn White with Maroon and Gray Accent
Stripes
-27-
<PAGE> 28
ANNEX TWO
To Exhibit B
IAI Astra 1125
Serial Number 011
CONFIDENTIAL TERMS
(TO BE OMITTED FROM FAA FILING COPY)
The following terms and in the Lease shall, for purposes of the Lease and all
exhibits thereto, have the additional meanings assigned to them or shall be the
amounts as follows:
Basic Rent: Throughout the Ten (10) Year term, Lessee shall
pay Lessor as "Basic Rent" an amount of US
$65,000.00 on the Basic Rent Dates 1 through 36
and an amount of US $52,000 on the Basic Rent
Dates 37 through 120.
Engine Reserve payments: Pursuant to the MSP Agreement.
Stipulated Loss Value: $6,000,000.00 throughout the Lease Term and
through return of the Aircraft to Lessor
(subject to adjustment as set forth in the
Lease Supplement).
Purchase Option Dates: Shall be the Basic Rent Date's in the following
months and the parties agree that the Fair
Market Value of the Aircraft on those dates
shall be as indicated.
Month Fair Market Value
13 $5,700,000
25 $5,350,000
37 $4,990,000
120 Established in accordance with the
definition of Fair Market Value.
Delivery Date: December ____, 1999
Expiration Date: December ____, 2009
Delivery Location: Las Vegas, NV
Notices: See Section 18 of the Lease
Principal Location: Rochester, NY
THE NEXT PAGE IS THE SIGNATURE PAGE
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<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have, as of the day and year first above
written, caused this Rental Schedule to be executed in their respective
corporate names.
MAURICE J. GALLAGHER, JR.
Lessor
_________________________________
TIMOTHY P. FLYNN
Lessor
_________________________________
MGC COMMUNICATIONS, INC.
Lessee
By:______________________________
Print Name:______________________
Title:___________________________
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<PAGE> 30
EXHIBIT C
RETURN CONDITIONS
1. Condition of Aircraft - General. At the time of its return to Lessor under
Section 6 of this Lease, the Aircraft shall have been maintained and repaired in
full compliance with the provisions of Section 9 of this Lease, to similar
standards and quality of other aircraft owned or operated by Lessee, so long as
such standards and quality do not conflict with FAA requirements, and shall also
meet the following criteria:
1.1 Operating Condition. The Aircraft (including all installed components,
Parts and the Engines) shall be in as good an operating condition as it
was on delivery, normal wear and tear excepted, consistent with the
accumulation of hours and cycles on the Airframe, and with all the
Aircraft systems, equipment, components and Parts functioning fully, in
accordance with their intended use.
1.2 Certificate of Airworthiness. The Aircraft shall have, and be in
compliance with, a current valid Standard Certificate of Airworthiness
issued by the FAA and shall be current and in full compliance with all
requirements specified in the Lessee's maintenance program applicable to
the Aircraft.
1.3 Compliance with Government Requirements. The Aircraft shall have had
accomplished thereon and be in compliance with all outstanding orders,
notes, directives and instructions affecting the Aircraft, issued and made
mandatory by the FAA or other relevant authority, compliance with which is
required to be completed by such return date.
1.4 Deferred Maintenance. All deferred maintenance items and outstanding
discrepancies in respect to the Aircraft shall be accomplished and/or
corrected prior to the return of such Aircraft, without regard to any
Minimum Equipment List (MEL), waiver, deviation or exception. Any
terminating action required by an Airworthiness Directive, Mandatory
Service Bulletin, or requirement of the Federal Aviation Authority shall
have been complied with at the time of redelivery to Lessor.
1.5 Configuration. Upon its return, the Aircraft shall have two Engines and
all its Parts properly installed thereon, and shall be in the same
configuration (unless otherwise agreed between the Lessee and Lessor) as
when delivered to Lessee hereunder, except for Airworthiness Directives or
other mandatory improvements required under Section 9 of this Lease.
1.6 Appearance. Upon its return, the Aircraft shall be clean by major airline
standards. Additionally, the interior and exterior of the Aircraft shall
be in good repair and condition, consistent with reasonable scheduled
passenger airline appearance standards.
1.7 Manuals and Technical Records. All manuals, logbooks, flight records,
maintenance records, modification and overhaul records, and historical
records relating to the Aircraft and either delivered hereunder or
required by the FAA ("Technical Records"), shall be returned with the
Aircraft, at which time all Technical Records shall be in full compliance
with all FAA rules, regulations and requirements and be current with the
latest entries and revisions posted therein. In the event the Technical
Records or other data are missing or incomplete, Lessor shall have the
right to cause the Technical Records or other data to be reconstructed or
completed at Lessee's expense.
1.8 Scheduled Maintenance. There shall be no scheduled maintenance due with
respect to the Aircraft at the time of return of the Aircraft to Lessor
and within six months thereafter. Aircraft shall be delivered fresh from
an "A" inspection and shall have not accumulated more than 100 hours since
the performance of the last "B" inspection. All installed components shall
have a similar time remaining to their next scheduled inspection/overhaul
(as determined by the Manufacturer's current Chapter 5 Inspection
Requirements) as at the time of delivery.
2. Engines. The Engines shall be current, fully paid and in good standing
under the terms of the MSP Agreement. Lessee shall execute and deliver
such further documents and agreements to effect transfer of the MSP
Agreement, if any, to Lessor at the end of the Term.
3. Termination of Lease. Lessee shall execute and deliver to Lessor a
termination of this Lease, as to the Aircraft being returned, in form
suitable for recording at the FAA Aircraft Registry, as Lessor may
request, to make clear upon public records that the Aircraft is free and
clear of all rights of Lessee hereunder or otherwise.
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<PAGE> 31
EXHIBIT D
IAI Astra
MEMORANDUM OF DELIVERY
The undersigned hereby acknowledges that on this ______ day of December, 1999,
at Las Vegas, Nevada, did receive and accept delivery of that certain IAI Astra
, model 20, serial number 116, registration number N705MA, including its Garrett
model TFE 731-3A engines, serial numbers P-96105C and P-96110C, and other
appliances, parts, additions, accessories, instruments, components and other
items of equipment now installed thereon as per attached specification,
(collectively the "Aircraft"); and together with all available log books and
pilot manuals. The undersigned does hereby further acknowledge and agree that
the aforesaid Aircraft is in full compliance with the provisions of the Aircraft
Lease Agreement dated as of December ___ 1999, by and between the undersigned
and Maurice J. Gallagher, Jr. and Timothy P. Flynn, jointly, as Lessor.
Purchaser hereby accepts delivery of the Aircraft "AS IS" and "WHERE IS", with
all faults, and agrees that the Seller shall have no obligation whatsoever in
respect to correction of any discrepancies or conditions.
Executed as of the time and date first shown above.
MGC Communications, Inc.
By:____________________________________
Title:_________________________________
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<PAGE> 1
Exhibit 10.22
AMENDED AND RESTATED
SECURITIES PURCHASE AGREEMENT
by and between
PROVIDENCE EQUITY PARTNERS III L.P.
PROVIDENCE EQUITY OPERATING PARTNERS III L.P.
J K & B CAPITAL III L.P.
J K & B CAPITAL, L.P.
J K & B CAPITAL II, L.P.
J K & B CAPITAL III QIP, L.P.
and
MGC COMMUNICATIONS, INC.
Dated as of November 19, 1999
<PAGE> 2
LIST OF EXHIBITS AND SCHEDULES
Exhibit A Certificate of Designation
Exhibit B Form of Registration Rights Agreement
Exhibit C Form of Securityholders' Agreement
Exhibit D Form of Opinion of Counsel to the Company
Exhibit E Form of Opinion of Regulatory Counsel to the Company
Exhibit F Amendment to Certificate of Designation for Series B
Preferred
Exhibit G Form of Promissory Note
Schedule 2.1: List of Purchasers
Schedule 3.4(a): Capitalization
Schedule 3.4(b): Options, Etc.
Schedule 3.4(c): Registration Rights
Schedule 3.5: Subsidiaries; Other Interests
Schedule 3.6: September Balance Sheet
Schedule 3.9 Title to Assets
Schedule 3.10 Necessary Property
Schedule 3.11 Compliance with Law
Schedule 3.12 No Material Adverse Change
Schedule 3.13 No Brokers
Schedule 3.14 Network
Schedule 3.15 Customers and Suppliers
Schedule 3.16: Year 2000 Compliance Plan
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<PAGE> 3
AMENDED AND RESTATED
SECURITIES PURCHASE AGREEMENT
MGC COMMUNICATIONS, INC.
3301 North Buffalo Drive
Las Vegas, Nevada 89129
As of November 19, 1999
Providence Equity Partners III L.P.
901 Fleet Center
50 Kennedy Plaza
Providence, Rhode Island 02903
Providence Equity Operating Partners III L.P.
901 Fleet Center
50 Kennedy Plaza
Providence, Rhode Island 02903
JK&B Capital III L.P.
JK&B Capital, L.P.
JK&B Capital II, L.P.
JK&B Capital III QIP, L.P.
205 N. Michigan Avenue, Suite 808
Chicago, Illinois 60601
Ladies and Gentlemen:
The undersigned, MGC Communications, Inc., a Nevada corporation (the
"Company"), hereby agrees with you as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Definitions. Capitalized terms used herein and not otherwise
defined herein shall have the meanings set forth in this Article I:
Business Day. The term "Business Day" shall mean any day other than
Saturday, Sunday, a federal holiday or other day on which commercial banks in
the State of Rhode Island or Las Vegas, Nevada are required or permitted to
close by law.
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Charter. The term "Charter" means the certificate or articles of
incorporation, by-laws, statute, constitution, joint venture, certificate of
limited partnership, partnership agreement, articles of organization, limited
liability company operating agreement or other organizational document of any
Person other than an individual, each as from time to time amended or modified.
Closing Date. The term "Closing Date" shall have the meaning specified in
Section 2.2 or such other date as the Company and the Purchasers may agree upon.
Common Stock. The term "Common Stock" shall mean the Common Stock, $.001
par value, of the Company.
Company. The term "Company" shall mean MGC Communications, Inc., a Nevada
corporation.
Contract. The term "Contract" means any contract, plan, lease, commitment,
indenture or other agreement.
Current Financial Statements. The term "Current Financial Statements"
shall have the meaning specified in Section 3.6.
Equity Securities. The term "Equity Securities" means all shares of
capital stock of the Company, including (i) all classes of shares of capital
stock, voting and non-voting (including, without limitation, the Purchased
Securities), (ii) any warrants, options or other rights to subscribe for or to
acquire, directly or indirectly, whether pursuant to any division or split of
any class of shares of capital stock of the Company or in connection with a
combination, exchange, reorganization, recapitalization, reclassification,
merger, consolidation or similar business combination transaction involving the
Company or otherwise, (iii) any other equity interests in the Company or any
bonds, notes, debentures, or other securities convertible into or exchangeable
for, directly or indirectly, any shares of capital stock or equity interests of
the Company and (iv) any interests in any of the foregoing in each case
outstanding at any time.
FCC. The term "FCC" shall mean the Federal Communications Commission.
GAAP. The term "GAAP" shall mean generally accepted accounting principles
applied on a basis consistent with prior periods and such that a chartered
accountant would, insofar as the use of accounting principles is pertinent, be
in a position to deliver an unqualified opinion as to financial statements in
which such principles have been properly applied.
Governmental Authority. The term "Governmental Authority" shall mean any
government or any agency, bureau, board, commission, court, department,
official, political subdivision, tribunal or other instrumentality of any
government (foreign, federal, local or otherwise) and shall include any
international regulatory or trade body or organization and the FCC and any State
Regulatory Agency.
Income Statement. The term "Income Statement" shall have the meaning
specified in
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Section 3.6.
Indebtedness. The term "Indebtedness" shall mean all obligations,
contingent (to the extent required to be reflected in financial statements
prepared in accordance with GAAP) and otherwise, which in accordance with GAAP
should be classified on the obligor's balance sheet as liabilities, including
without limitation, in any event and whether or not so classified: (i) all debt
and similar monetary obligations, whether direct or indirect; (ii) all
liabilities secured by any mortgage, pledge, security interest, lien, charge or
other encumbrance existing on property owned or acquired subject thereto,
whether or not the liability secured thereby shall have been assumed; (iii) all
guarantees, endorsements and other contingent obligations whether direct or
indirect in respect of Indebtedness or performance of others, including any
obligation to supply funds to or in any manner to invest in, directly or
indirectly, the debtor to purchase Indebtedness or to assure the owner of
Indebtedness against loss, through an agreement to purchase goods, supplies or
services for the purpose of enabling the debtor to make payment of the
Indebtedness held by such owner or otherwise and (iv) obligations to reimburse
issuers of any letters of credit.
Licenses. The term "Licenses" shall mean all licenses, permits, consents,
approvals, concessions and authorizations of all Governmental Authorities,
whether foreign, federal, state or local, including, without limitation, the
Federal Communications Commission and any State Regulatory Agency and their
equivalents in foreign countries.
Lien. The term "Lien" shall mean (a) any encumbrance, mortgage, pledge,
lien, charge or other security interest of any kind upon any property or assets
of any character, or upon the income or profits therefrom; (b) any acquisition
of or agreement to have an option to acquire any property or assets upon
conditional sale or other title retention agreement, device or arrangement
(including a capitalized lease); or (c) any sale, assignment, pledge or other
transfer for security of any accounts, general intangibles or chattel paper,
with or without recourse.
Majority Purchasers. The term "Majority Purchasers" shall mean, at any
time, the record holders of more than fifty percent (50%) of the outstanding
Purchased Securities.
Material Adverse Effect. The term "Material Adverse Effect" shall mean,
with respect to any Person, any effect that is, or series of related effects
that are, in the aggregate, materially adverse to the business, assets,
properties, condition (financial or otherwise) or prospects of such Person.
Person. The term "Person" shall mean an individual, partnership, limited
liability company, corporation, association, trust, joint venture,
unincorporated organization and any Governmental Authority.
Purchased Securities. The term "Purchased Securities" shall mean the
Series C Preferred being purchased by the Purchasers pursuant to Section 2.1 of
this Agreement, the Common Stock issuable upon conversion of the Series C
Preferred or otherwise and any capital stock or other securities of the Company
issued or issuable in exchange therefor upon an exchange, conversion,
reorganization, reclassification, recapitalization, merger, consolidation or
other similar business transaction involving the Company, its Subsidiaries or
otherwise.
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Purchaser. The term "Purchaser" shall mean the several purchasers named in
Schedule 2.1 (individually, a "Purchaser" and collectively, the "Purchasers")
and their respective successors and assigns.
Related Agreements. The term "Related Agreements" shall mean the
Securityholders' Agreement and the Registration Rights Agreement.
Registration Rights Agreement. The term "Registration Rights Agreement"
shall mean that certain Amended and Restated Registration Rights Agreement,
dated the Closing Date, by and among the Company, and the Purchasers, in the
form of Exhibit B attached hereto, as the same may be amended, modified or
supplemented from time to time.
SEC. The term "SEC" shall mean the Securities and Exchange Commission.
SEC Documents. The term "SEC Documents" shall have the meaning specified
in Section 3.17.
Securities Act. The term "Securities Act" shall mean all applicable
securities laws, rules, regulations, notices and policies in force in the United
States, as amended, modified or supplemented from time to time.
Securityholders' Agreement. The term "Securityholders' Agreement" shall
mean that certain Amended and Restated Securityholders' Agreement among the
Company, the Purchasers and certain holders of the Company's outstanding Common
Stock and Series B Preferred, in the form of Exhibit C attached hereto, as the
same may be amended, modified or supplemented from time to time.
September Balance Sheet. The term "September Balance Sheet" shall have the
meaning specified in Section 3.6.
Series C Preferred. The term "Series C Preferred" shall mean the Series C
Preferred Stock, $.001 par value, of the Company.
State Regulatory Agency. The term "State Regulatory Agency" means any of
the various state regulatory agencies with primary regulatory jurisdiction over
telecommunications matters.
Subsidiary. The term "Subsidiary" shall mean any Person of which the
Company or other specified Person now or hereafter shall at the time own,
directly or indirectly through a Subsidiary, at least a majority of the
outstanding Equity Securities (or other shares of beneficial interest) entitled
to vote generally.
Tax or Taxes The term "Tax" or "Taxes" shall mean all taxes, charges,
fees, levies, imposts and other assessments, including all income, sales, use,
goods and services, value added, capital, capital gains, alternative net worth,
transfer, profits, withholding, payroll, employer health, excise, real property
and personal property taxes, and any other taxes, customs duties,
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fees, assessments or similar charges in the nature of a tax, including, without
limitation, pension plan contributions and workers compensation premiums,
together with any interest, fines and penalties imposed by any Governmental
Authority, and whether disputed or not.
Section 1.2. Hereof, Herein, etc. The words "hereof", "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement. Unless otherwise specified herein, the term "or" has the inclusive
meaning represented by the term "and/or" and the term "including" is not
limiting. All references as to "Sections", "Subsections", "Articles",
"Schedules" and "Exhibits" shall be to Section, Subsections, Articles, Schedules
and Exhibits, respectively, of this Agreement unless otherwise specifically
provided.
Section 1.3. Computation of Time Periods. In the computation of periods of
time from a specified date to a later specified date, unless otherwise specified
herein the words "commencing on" mean "commencing on and including", the word
"from" means "from and including" and the words "to" and "until" each means "to
and including".
ARTICLE II
SALE AND PURCHASE OF PURCHASED SECURITIES
Section 2.1. Sale and Purchase of the Purchased Securities. Subject to all
of the terms and conditions hereof and in reliance on the representations and
warranties set forth or referred to herein, the Company agrees to issue and sell
to each Purchaser and each Purchaser agrees to purchase, on the Closing Date,
the number of Purchased Securities set forth opposite the name of such Purchaser
on Schedule 2.1, at a purchase price per share equal to $28.00 (the "Per Share
Price"). Notwithstanding the foregoing, in the event the Company issues shares
of Common Stock, Series D Convertible Preferred Stock ("Series D Preferred") or
other class or series of Preferred Stock prior to the Closing Date and the
effective price per share of Common Stock issued or issuable upon conversion of
the Series D Preferred or effective cost per share of Common Stock of such other
class or series of Preferred Stock upon conversion is less than the Per Share
Price, such Per Share Price shall be reduced to the lowest of the issue price of
such Common Stock, such effective price per share of Common Stock issuable upon
conversion of the Series D Preferred or effective cost per share of Common Stock
issuable pursuant to such other class or series of Preferred Stock and the
number of shares of Purchased Securities to be purchased by each Purchaser shall
be increased proportionally. In addition, in such event appropriate changes
shall be made herein and in the Exhibits hereto to give effect to such lower Per
Share Price.
Section 2.2. Closing. The closing of the purchase and sale of the
Purchased Securities contemplated by Section 2.1 (the "Closing") will take place
at the offices of Edwards & Angell, 2800 BankBoston Plaza, Providence, Rhode
Island 02903 at 10:00 a.m. on a mutually agreeable date within five (5) business
days of satisfaction of the Conditions to Closing contained in Article V (the
"Closing Date"). Subject to the satisfaction of the conditions to Closing set
forth in Article V, as payment in full for the Purchased Securities being
purchased by the Purchasers under this Agreement on the Closing Date, each
Purchaser shall deliver to the Company, in
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immediately available funds, the amount set forth opposite such Purchaser's name
under the heading "Aggregate Purchase Price of the Purchased Securities" on
Schedule 2.1, provided, however, that JK&B Capital III, L.P. shall pay for the
Purchased Securities to be purchased by it by delivery to the Company of $1.4
million in immediately available funds and the balance by delivery of its
promissory note due March 1, 2000 in the form set forth as Exhibit G.
Section 2.3. Use of Proceeds. Proceeds from the sale of the Purchased
Securities hereunder shall be used for the expansion of the Company's
telecommunications network and sales and marketing program and for working
capital and general corporate purposes, as determined from time to time by the
Company's Board of Directors and consistent with the Company's business plan in
effect at such time.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Purchasers to enter into this Agreement and to
purchase the Purchased Securities, the Company hereby represents and warrants
that:
Section 3.1. Organization and Existence. (a) The Company is duly
organized, validly existing and in good standing in its jurisdiction of
organization and is duly qualified as a foreign corporation and authorized to do
business in all other jurisdictions in which the nature of its business or
property makes such qualification necessary except where the failure to so
qualify would not have a Material Adverse Effect. The Company has the power to
own its properties and to carry on its business as now conducted and as proposed
to be conducted.
(b) Each of the Company's Subsidiaries is duly organized, validly existing
and in good standing in its jurisdiction of incorporation and is duly qualified
as a foreign entity and authorized to do business in all other jurisdictions in
which the nature of its business or property makes such qualification necessary
and where the failure to so qualify would not have a Material Adverse Effect.
Each of the Subsidiaries has the power to own its properties and to carry on its
business as now conducted and as proposed to be conducted. The Company holds of
record all outstanding shares of each Subsidiary.
Section 3.2. Authorization; No Conflicts. The execution, delivery and
performance by the Company of this Agreement and of each Related Agreement, and
the issuance and sale by the Company of the Purchased Securities hereunder, (a)
are within its power and authority, and (b) have been duly authorized by all
necessary action of the Company (including the audit committee of the Company's
Board of Directors) and its stockholders and by all other requisite proceedings.
Neither the execution and delivery by the Company of this Agreement or any
Related Agreement nor the consummation by the Company of the transactions
contemplated thereby (including, without limitation, the purchase and sale of
the Purchased Securities hereunder) (a) will violate any provision of the
Charter of the Company or any of its Subsidiaries, (b) will violate or conflict
with any applicable statute, law, ordinance, rule, regulation, order, judgment,
writ, injunction, license, permit or decree applicable to the Company or any of
its Subsidiaries, (c) will conflict with or constitute a violation of or a
default (or an
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event which with notice or lapse of time or both, would constitute a default)
under, or will result in the termination of, or accelerate performance required
by, any Contract to which the Company or any of its Subsidiaries is a party or
to which any of the assets or properties of the Company or any of its
Subsidiaries are subject, (d) will result in the creation of any Lien upon any
of the Equity Securities of the Company or any of its Subsidiaries or upon any
of the property or assets of the Company or any of its Subsidiaries, or (e) will
require the consent, authorization or approval of, or notice to or filing or
registration with, any Person, other than stockholder approval, if required by
Nasdaq.
Section 3.3. Enforceability. The execution and delivery by the Company of
this Agreement and of each of the Related Agreements, and the issuance and sale
by the Company of the Purchased Securities hereunder, will result in legally
binding obligations of the Company enforceable against the Company in accordance
with the respective terms and provisions hereof and thereof, subject, however,
to limitations with respect to enforcement imposed by law in connection with
bankruptcy or similar proceedings, or to the extent that equitable remedies such
as specific performance and injunction are in the discretion of the court from
which they are sought.
Section 3.4. Capitalization.
(a) Schedule 3.4(a) accurately sets forth the number, type and class of
Equity Securities the Company is authorized to issue, the name and address of
those Persons owning 5% or more of the Company's outstanding Equity Securities
immediately prior to giving effect to the transactions contemplated hereby and
the number and class of Equity Securities owned by each such record owner. All
of the Company's issued Equity Securities have been duly authorized, validly
issued and outstanding and are fully paid and non-assessable.
(b) Options, Etc. Except as set forth on Schedule 3.4(b) and except for
the rights of the Purchasers hereunder, no Person has any rights (either
pre-emptive or otherwise) or options to subscribe for or purchase from the
Company, or any warrants or other agreements providing for or requiring the
issuance by the Company of, any Equity Securities or other securities
convertible into or exchangeable for, or exercisable into Equity Securities of
the Company, or any voting trusts, proxies or agreements relating to the voting
of the Company's or any Subsidiary's Equity Securities. The number of shares of
Common Stock available for issuance under the Company's Stock Option Plan is
4,640,000. Schedule 3.4(b) sets forth the (i) name of each Person holding such
convertible or exchangeable securities, (ii) the type of security, (iii) the
amount of shares of Common Stock issuable upon exercise of such securities, and
(iv) the exercise price of such securities.
(c) Registration Rights. Except as set forth on Schedule 3.4(c) and as
provided under the Registration Rights Agreement, no other holder of Equity
Securities has registration rights with respect to such Equity Securities.
Section 3.5. Subsidiaries; Other Ownership Interests. Except as set forth
on Schedule 3.5 hereto, the Company does not have any Subsidiaries (foreign or
domestic) and does not own or hold of record and/or beneficially own or hold,
directly or through a Subsidiary, any Equity
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Securities of any corporation, general or limited partnership, limited liability
company, business trust or joint venture or in any other unincorporated trade or
business enterprise. Except as set forth on Schedule 3.5 hereto, all outstanding
Equity Securities of each such Subsidiary and such other business enterprises is
owned by the Company or another Subsidiary of the Company as set forth on such
Schedule 3.5, free and clear of any Lien, is validly issued and outstanding, and
is fully paid and non-assessable, and there are no commitments for the purchase
or sale of, and no options, warrants or other rights to subscribe for or
purchase, any Equity Securities of any such Subsidiary.
Section 3.6. Reports and Financial Statements. Each Purchaser has
heretofore been furnished with the consolidated balance sheet and statement of
income and cash flow of the Company and its subsidiaries as of September 30,
1999 (the "September Balance Sheet") and statement of income for the nine-month
period ended September 30, 1999 (the "Income Statement", and together with the
September Balance Sheet, the "Current Financial Statements"), such September
Balance Sheet being attached hereto as Schedule 3.6.
Section 3.7. Indebtedness and Liens. Neither the Company nor any of its
Subsidiaries has Indebtedness or Liens upon any of their properties other than
those which are reflected on the September Balance Sheet and Indebtedness
incurred in the ordinary course of business since September 30, 1999.
Section 3.8. Taxes.
(a) Each of the Company and its Subsidiaries has prepared and filed on
time with all appropriate Governmental Authorities all Tax returns and other
material documents that it has been required to file in respect of any Taxes for
all fiscal periods ending on or prior to the Closing Date and all such returns
or other material documents are correct and complete in all material respects.
(b) Each of the Company and its Subsidiaries has paid in full all Taxes
due on or before the date hereof and, in the case of such Taxes accruing on or
before such date that are not due on or before such date, the Company has made
adequate provision in its books and records and financial statements (including
the September Balance Sheet) for such payment.
Section 3.9. Title to Assets. Except as disclosed on Schedule 3.9, the
Company and its Subsidiaries own all of their assets, and have good and
marketable title with respect thereto, reflected in the September Balance Sheet,
subject to no Liens.
Section 3.10. Necessary Property. Except as may be set forth in Schedule
3.10 and the other Schedules hereto, the properties and assets owned, leased by
or licensed to the Company or any of its Subsidiaries and reflected in the
Current Financial Statements and any properties or assets acquired since
September 30, 1999, constitute all of the material real and personal properties,
tangible and intangible, which are necessary, used or useful in the conduct of
its business in the manner and to the extent presently conducted by them.
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Section 3.11. Compliance with Law.
(a) Except as may be set forth in Schedule 3.11, neither the Company nor
any Subsidiary is in default under, or in violation of, any laws, rules or
regulations (including, without limitation, foreign, federal, state or local
laws, rules or regulations relating to the issuance or sale of securities,
telecommunications, anti-trust, occupational safety, the protection of the
environment, transportation, storage or disposal of hazardous waste,
anti-pollution and air and water quality laws), or any Licenses, granted by, or
any judgment, decree, writ, injunction or order of, any Governmental Authority,
applicable to its business or any of its properties or assets, which defaults
and violations would in the aggregate expose the Company and its Subsidiaries to
liabilities in excess of an aggregate of $250,000 or otherwise materially
adversely affect the assets or properties or business or operations of the
Company and its Subsidiaries or requiring or prohibiting future activities.
Neither the Company nor any Subsidiary has received any notification alleging
any violations of any of the foregoing with respect to which adequate corrective
action has not been taken.
(b) Except as set forth on Schedule 3.11, there are no proceedings or
investigations pending or threatened, before the FCC or any State Regulatory
Agency directed specifically at the Company or, in the case of matters of
general applicability to the telecommunications industry, in which the Company
is identified for possible disparate treatment or whose outcome may have a
disparate impact on the Company in which any of the following matters are being
considered which are reasonably likely to have a material adverse effect on the
Company, nor has the Company or any of its Subsidiaries received written notice
or inquiry from the FCC or any State Regulatory Agency, indicating that any of
such matters should be considered or may become the object of consideration or
investigation specifically regarding the Company which are reasonably likely to
have a material adverse effect on the Company or, in the case of matters of
general applicability to the telecommunications industry, in which the Company
is identified for possible disparate treatment or whose outcome may have a
disparate impact on the Company: (a) increases or reductions in access charges,
universal service contributions or the like; (b) traffic routing restrictions or
restrictions on use of facilities; (c) reduction or restriction of rates charged
to customers; (d) reduction of earnings; (e) refunds or other forfeitures of
amounts previously charged to customers; (f) use of NXX codes; or (g) failure to
meet any expense, infrastructure, service quality or other commitments
previously made to or imposed by the FCC or any State Regulatory Agency.
(c) Except as set forth on Schedule 3.11, neither the Company nor any of
its Subsidiaries has any outstanding commitments made in the context of a matter
or proceeding related specifically to the Company or, in the case of matters of
general applicability to the telecommunications industry, in which the Company
is identified for possible disparate treatment or whose outcome may have a
disparate impact on the Company (and no such obligations have been imposed upon
the Company and remain outstanding), regarding: (a) increases or reductions in
access charges, universal service contributions or the like; (b) traffic routing
restrictions or restrictions on use of facilities; (c) reduction or restriction
of rates charged to customers; (d) reduction of earnings; (e) refunds or other
forfeitures of amounts previously charged to customers; (f) use of NXX codes; or
(g) expenses, infrastructure expenditures, service quality or
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other regulatory requirements, to or by the FCC or any State Regulatory Agency,
in each case which are reasonably likely to have a material adverse effect on
the Company.
Section 3.12. No Material Adverse Changes. Except as disclosed in the
Company's SEC Documents or as set forth on Schedule 3.12, since December 31,
1998, there has occurred no material adverse change in the business, assets,
properties, prospects, operations, or condition (financial or otherwise) of the
Company or any of its Subsidiaries, whether or not in the ordinary course of
business, whether separately or in the aggregate with other occurrences or
developments, and whether insured against or not.
Section 3.13. No Brokers. Except as set forth on Schedule 3.13, the
Company has not employed any broker, finder, advisor or intermediary in
connection with the transactions contemplated hereby which would be entitled to
a broker's, finder's or similar fee or commission in connection therewith or
upon the consummation of the transactions contemplated by this Agreement or any
Related Agreement.
Section 3.14. Network.
(a) Schedule 3.14 sets forth, as of September 30, 1999, (i) the location
of each switch owned by the Company and the switch's make and model and (ii) the
location of all of the Company's colocation sites.
(b) The Company's switches are (i) fully installed, (ii) interconnected to
the incumbent telephone company's local network and (iii) capable of carrying
commercial traffic.
(c) The Company's colocation sites possess all of the necessary equipment
to carry commercial traffic and are linked via leased or owned transmission
cable to a switch owned by the Company.
Section 3.15. Customers and Suppliers.
(a) Schedule 3.15 sets forth as of September 30, 1999 (i) the total number
of lines sold and (ii) the total number of lines in service.
(b) Less than three percent (3%) of the Company's consolidated revenues is
derived from local resale of telecommunications services.
Section 3.16. Year 2000 Compliance. The Company has performed an audit to
determine if the material hardware and software systems used by the Company and
the Company's key vendors and suppliers are Year 2000 Compliant or will be Year
2000 Compliant by December 31, 1999, and, based on that, has formulated a plan
to make such systems Year 2000 Compliant, as more particularly described on
Schedule 3.16 (the "Year 2000 Compliance Plan"). The term "Year 2000 Compliant"
as used herein means that the computer systems at issue will accurately process,
provide, and receive date data from, into, and between the twentieth and
twenty-first centuries, including the years 1999 and 2000, and leap year
calculations. The Company represents that it is using its best efforts to
achieve the goals set
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forth in its Year 2000 Compliance Plan, and that if such goals are achieved, the
material hardware and software systems used by the Company will be Year 2000
Compliant by December 31, 1999.
Section 3.17. Financial Reports and SEC Documents. The Company's Annual
Reports on Form 10-K for the fiscal years ended December 31, 1998 and December
31, 1997, and all other reports, registration statements, definitive proxy
statements or information statements filed or to be filed by it under the
Securities Act, or under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act,
in the form filed or to be filed with the SEC (collectively, "SEC Documents"),
as of the date filed, (A) complied or will comply as to form with the applicable
requirements under the Securities Act or the Exchange Act, as the case may be,
and (B) did not and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; and each of the balance sheets contained in or
incorporated by reference into any of the Company's SEC Documents (including the
related notes and schedules thereto) fairly presents, or will fairly present,
the financial position of the Company and its Subsidiaries as of its date, and
each of the statements of income and changes in stockholders' equity and cash
flows or equivalent statements in the Company's SEC Documents (including any
related notes and schedules thereto) fairly presents, or will fairly present,
the results of operations, changes in stockholders' equity and changes in cash
flows, as the case may be, of the Company and its Subsidiaries for the period to
which they relate, in each case, in compliance with applicable accounting
requirements and with the published rules of the SEC with respect thereto and in
accordance with GAAP consistently applied during the periods involved, except,
in each case, as may be noted herein, subject to normal year-end audit
adjustments in the case of unaudited statements.
Section 3.18. Disclosure. No representation, warranty or statement made in
this Agreement, any Purchased Security, any Related Agreement or any agreement,
certificate, statement or document furnished by or on behalf of the Company in
connection herewith or therewith when considered as a whole contains any untrue
statement of material fact or omits to state a material fact necessary in order
to make the statements contained herein or therein, in light of the
circumstances in which they were made, not misleading.
ARTICLE IV
PURCHASERS' REPRESENTATIONS
Each of the Purchasers hereby, severally and not jointly, represents and
warrants to the Company as follows:
Section 4.1. Organization and Good Standing. Such Purchaser is validly
existing and in good standing under the laws of the state of its formation.
Section 4.2. Authorization. This Agreement and the Related Agreements to
which such Purchaser is a party have been executed by a duly authorized Person
on its behalf and the execution, delivery and performance hereof and thereof (a)
have been duly authorized by all appropriate action, and (b) will not violate
the provision of any material law or regulation of any
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Governmental Authority applicable to it or constitute a violation of any
material agreement or instrument by which it is bound.
Section 4.3. Enforceability. The execution and delivery of this Agreement
and the Related Agreements and the transactions contemplated thereunder will
result in legally binding obligations of such Purchaser enforceable against such
Purchaser in accordance with the respective terms and provisions hereof and
thereof, subject, however, to limitations with respect to enforcement imposed by
law in connection with bankruptcy or similar proceedings or to the extent that
equitable remedies such as specific performance and injunction are in the
discretion of the court from which they are sought.
Section 4.4. Investment Intent. Such Purchaser (i) is an "accredited
investor" as defined in Regulation D of the Securities Act, (ii) is acquiring
the Purchased Securities to be purchased by such Purchaser pursuant to Section
2.1 hereof for investment and not with a view to the distribution thereof, and
(iii) has not engaged any broker, agent or finder who may claim a fee in
connection with the acquisition of the Purchased Securities.
ARTICLE V
CONDITIONS TO PURCHASERS' OBLIGATION TO PURCHASE AND THE
COMPANY'S OBLIGATION TO SELL
Section 5.1. Purchasers' Closing Conditions. Each Purchaser's obligation
to purchase the Purchased Securities pursuant to Section 2.1 is subject to
compliance by the Company with its agreements herein contained, and to the
satisfaction, on or prior to the Closing Date of the following conditions:
(a) Related Agreements. Each of the Related Agreements shall have been
executed and delivered in the form attached hereto or in such other form
satisfactory to the Purchasers. All covenants, agreements and conditions
contained in the Related Agreements which are to be performed or complied with
on or prior to the Closing Date shall have been performed or complied with in
all material respects.
(b) Charter Documents. The Purchasers shall have received from the Company
a copy, certified by the appropriate Governmental Authority to be true and
complete as of a date no more than twenty (20) days prior to the Closing Date,
of (a) the certificate of incorporation of the Company and (b) a certificate,
dated not more than twenty (20) days prior to the Closing Date, of the relevant
Governmental Authority or other appropriate official of each State in which the
Company is incorporated or qualified to do business, as to the Company's good
standing in such State or qualification to do business, as the case may be.
(c) Proof of Action. The Purchasers shall have received from the Company
copies, certified by a duly authorized officer thereof to be true and complete
as of the Closing Date, of the records of all action taken to authorize the
execution, delivery and performance of this Agreement and each of the Related
Agreements to which the Company is a party.
14
<PAGE> 15
(d) Incumbency Certificate. The Purchasers shall have received from the
Company an incumbency certificate, dated the Closing Date, signed by a duly
authorized officer thereof and giving the name and bearing a specimen signature
of each individual who shall be authorized to sign, in the name and on behalf of
the Company, this Agreement and each of the Related Agreements to which the
Company is or is to become a party, and to give notices and to take other action
on behalf of the Company under each of such documents.
(e) Legal Opinion. The Purchasers shall have received from Ellis, Funk,
Goldberg, Labovitz & Dokson, P.C., counsel to the Company, an opinion
substantially in the form of Exhibit D attached hereto.
(f) Regulatory Opinion. The Purchasers shall have received from Kelley
Drye & Warren LLP, regulatory counsel to the Company, an opinion reasonably
satisfactory to the Purchasers, or otherwise substantially in the form of
Exhibit E attached hereto.
(g) Representations and Warranties; Covenants; Officers' Certificates. The
representations and warranties contained or incorporated by reference herein
shall be true and correct in all material respects (except those representations
and warranties qualified by materiality, which shall be true and correct in all
respects) on and as of the Closing Date. The Company shall have performed and
complied with all conditions and agreements required to be performed or complied
with by it prior to the Closing. The Purchasers shall have received on the
Closing Date a certificate with respect to the foregoing executed by an
authorized officer of the Company.
(h) Legality; Governmental and Other Authorizations. The purchase of the
Purchased Securities shall not be prohibited by any law or governmental order or
regulation, and shall not subject any Purchaser to any penalty, special Tax, or
other onerous condition. All necessary consents, approvals, Licenses, orders and
authorizations of, and registrations, declarations and filings with, any
Governmental Authority (including the FCC and any State Regulatory Agency) or
any other Person, with respect to any of the transactions contemplated by this
Agreement or any of the Related Agreements, shall have been duly obtained or
made and shall be in full force and effect. The Nasdaq Stock Market ("Nasdaq")
shall have issued written confirmation to the Company satisfactory to the
Purchasers stating that stockholder approval of the transactions contemplated
hereby is not required by Nasdaq's rules and regulations or, if the approval of
the Company's stockholders is so required, then such approval shall have been
validly obtained.
(i) Filing of Certificate of Designation. The Purchasers shall have
received satisfactory evidence of the filing of the Certificate of Designation
with the Secretary of State of Nevada.
(j) Payment of Certain Fees and Disbursements. The Purchasers shall have
been reimbursed for all reasonable costs and expenses (including, but not
limited to, legal, consulting and accounting) incurred by them through the
Closing Date in connection with the transactions contemplated by this Agreement.
(k) Amendment. The Certificate of Designation for the Series B Preferred
shall have
15
<PAGE> 16
been amended to read as set forth in Exhibit F hereto.
(l) General. All instruments and corporate proceedings in connection with
the transactions contemplated by this Agreement and the Related Agreements shall
be satisfactory in form and substance to the Purchasers and their counsel, and
the Purchasers shall have received copies of all documents, including, without
limitation, records of corporate or other proceedings, opinions of counsel and
consents which the Purchaser may have reasonably requested in connection
therewith.
The agreements, certificates, documents, other evidence of compliance and
opinions described in this Section 5.1 shall be in form and substance reasonably
acceptable to each Purchaser, and shall, except as otherwise provided, be
delivered to the Purchasers at the Closing; provided, however, any one or more
of the foregoing conditions may be waived with the prior written consent of each
Purchaser.
Section 5.2. Company's Closing Conditions. The Company's obligation to
sell the Purchased Securities pursuant to Section 2.1 is subject to the
satisfaction, on or prior to the Closing Date, of the following conditions:
a. Representations and Warranties. The representations and warranties of
the Purchasers contained herein shall be true and correct in all material
respects (except those representations and warranties qualified by materiality,
which shall be true and correct in all respects) on and as of the Closing Date.
b. Sufficient Investment. The Purchasers shall be prepared to purchase at
least $35,000,000 of Purchased Securities pursuant to Section 2.1.
c. Certain Agreements. The Securityholders Agreement and Registration
Rights Agreement shall have been executed and delivered by the Purchasers.
d. Charter Amendment. The Company's Board of Directors and the holders of
a majority of the Company's outstanding Series B Preferred Stock shall have
approved the Certificate of Designation for the Series C Preferred and the
Amended and Restated Certificate of Designation for the Company's Series B
Preferred Stock.
ARTICLE VI
COVENANTS APPLICABLE TO THE COMPANY WHILE ANY
PURCHASED SECURITIES ARE OUTSTANDING
The Company covenants that while any of the Purchased Securities are held
by any of the Purchasers or an assignee thereof, other than a transferee
pursuant to a public sale, the Company will cooperate with the Purchasers and
will execute, acknowledge and deliver, or cause to be executed, acknowledged or
delivered, all such further acts, deeds, documents, assignments, transfers,
conveyances, powers of attorney and assurances as the Purchasers shall
reasonably request to carry out to the satisfaction of the Purchasers the
transactions contemplated by this
16
<PAGE> 17
Agreement and the Related Agreements.
ARTICLE VII
DELIVERY OF FINANCIAL AND OTHER REPORTS WHILE ANY
PURCHASED SECURITIES ARE OUTSTANDING
The Company hereby agrees that so long as 250,000 shares of Series C
Preferred are outstanding (subject to adjustment for stock splits, stock
dividends and similar events) it will provide to each Purchaser holding at least
250,000 shares of Series C Preferred and/or Common Stock (subject to adjustment
for stock splits, stock dividends and similar events) (a "Qualified Purchaser")
the information called for by the following provisions, so long as such
Qualified Purchaser has acknowledged in writing that it will be precluded from
trading in the Company's stock while in possession of material information
concerning the Company that has not been disclosed to the public:
Section 7.1. Monthly Statements. Within thirty (30) days after the end of
each month, commencing with the month ending October 31, 1999, the Company will
deliver to each Qualified Purchaser internal, unaudited consolidated balance
sheet and statement of income and retained earnings and of cash flow of the
Company and its Subsidiaries as of the end of each such month, together with
comparative information to the results for the same month of the prior year, and
to the budget for such month and year to date results with a comparison of such
year-to-date information to budget and to the comparable period of the prior
year.
Section 7.2. Other Financial Information. The Company will deliver to each
Qualified Purchaser prior to the commencement of each fiscal year, an annual
budget and projected monthly balance sheets and statements of income and
quarterly statements of cash flow for such fiscal year, prepared on a
comparative basis to the previous year and as soon as practical after
preparation thereof, complete copies of all quarterly (if any) or annual
budgetary analyses or forecasts of the Company and its Subsidiaries in the form
customarily prepared by management for its own internal use or the use of the
Board of Directors of the Company.
Section 7.3. Officers' Certificates. Together with delivery of the
financial statements of the Company and its Subsidiaries pursuant to Sections
7.1 and 7.2, the Company shall deliver to each Qualified Purchaser a certificate
of the President, chief financial officer or Treasurer of the Company to the
effect that (a) such statements have been prepared in accordance with GAAP and
present fairly the financial position of the Company and its Subsidiaries as of
the dates specified and the results of its operations and cash flow with respect
to the periods specified (subject in the case of interim financial statements
and the year-end financials, when delivered prior to their having been audited,
only to normal year-end audit adjustments), and (b) such officers have caused
the provisions of this Agreement and the Purchased Securities to be reviewed and
have no knowledge of any default, or if either such officer has such knowledge,
specifying such default and the nature thereof, and what action the Company has
taken, is taking or proposes to take with respect thereto.
Section 7.4. Notice of Litigation, Defaults, Etc. The Company will
promptly give
17
<PAGE> 18
notice to each Qualified Purchaser of any litigation or any administrative
proceeding to which the Company or any of its Subsidiaries may hereafter become
a party which may result in a Material Adverse Effect on the Company or any of
its Subsidiaries. Forthwith upon any officer of the Company obtaining knowledge
of any material default under a material agreement or any default or event of
default under this Agreement or any Related Agreement, the Company will furnish
a notice specifying the nature and period of existence thereof, what action the
Company has taken, is taking or proposes to take with respect thereto. Promptly
after the receipt thereof, the Company will provide copies of any reports as to
adequacies in accounting controls submitted by independent accountants with
respect to the Company and its Subsidiaries.
Section 7.5. Other Information. The Company will deliver to each Qualified
Purchaser copies of all papers distributed from time to time to the members or
stockholders of the Company at such time as such papers are so distributed to
them. In addition, from time to time upon the request of a Qualified Purchaser,
the Company will furnish such information regarding the business, affairs,
prospects and financial condition of the Company and its Subsidiaries as the
representatives or officers of a Qualified Purchaser may reasonably request.
Each such representative and officer shall have the right during normal business
hours to examine the books and records of the Company or any of its Subsidiaries
to make copies, notes and abstracts therefrom, and to make an independent
examination, at such Qualified Purchaser's cost, of the books and records of the
Company or any of its Subsidiaries, all at such reasonable times and intervals
as the applicable Qualified Purchaser may reasonably request.
ARTICLE VIII
EXPENSES; INDEMNITY
Section 8.1. Expenses. The Company hereby agrees to pay at the Closing all
reasonable fees, costs and expenses incurred by the Purchasers in connection
with the transactions hereunder and in connection with any amendments or waivers
(whether or not the same become effective) hereof and all reasonable expenses
incurred by the Purchasers in connection with the enforcement of any rights
hereunder or with respect to any Purchased Security, including without
limitation (i) the cost and expenses of preparing and duplicating this
Agreement, each Related Agreement and the Purchased Securities; (ii) the cost of
delivering to each Purchaser's principal office, insured to such Purchaser's
satisfaction, the Purchased Securities sold to such Purchaser hereunder and any
securities delivered to such Purchaser in exchange therefor or upon any
exercise, conversion or substitution thereof; (iii) the reasonable fees,
expenses and disbursements of one counsel for the Purchasers, in connection with
the preparation, administration or interpretation of this Agreement and the
Related Agreements and other agreements, documents and instruments mentioned
herein or therein, the Closing, any amendments, modifications, approvals,
consents or waivers hereto, thereto, hereunder or thereunder; (iv) the
out-of-pocket fees, expenses and costs incurred by the Purchasers in connection
with the Purchasers' due diligence investigation of the Company and its
Subsidiaries; and (v) all Taxes (other than Taxes determined with respect to
income and Taxes relating to any transfer of the Purchased Securities to any
Person other than to the Company) including, without limitation, any recording
fees, filing fees and documentary stamp and similar Taxes at any time payable in
respect of this Agreement or any Related Agreement or the issuance of any of the
Purchased Securities and any securities
18
<PAGE> 19
issued in exchange therefor or upon any exercise, conversion or substitution
thereof. Further, the Company agrees to pay all reasonable legal, consulting,
accounting, appraisal and investment banking fees and charges incurred by any
holder of the Purchased Securities or their representatives in connection with
the enforcement of or preservation of rights under this Agreement or any Related
Agreement in the event of a breach or reasonably alleged breach by the Company
of its obligations hereunder or thereunder.
Section 8.2. Indemnification. The Company hereby further agrees to
indemnify, exonerate and hold each Purchaser and its (if applicable) general and
limited partners and their respective shareholders, officers, directors,
employees and agents free and harmless from and against any and all actions,
causes of action, suits, losses, liabilities, damages and expenses, including,
without limitation, reasonable attorneys' fees and disbursements, incurred in
any capacity by any of the indemnities as a result of or relating to (i) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with proceeds from the sale of any of the Purchased Securities, (ii)
the execution, delivery, performance or enforcement of this Agreement, the
Related Agreements or any agreement, document or instrument contemplated hereby
or thereby (including, without limitation, any failure by the Company to comply
with any of the covenants thereunder), or (iii) any breach of any representation
or warranty of the Company in this Agreement or any Related Agreement.
Section 8.3. Brokers' Fees. The Company hereby indemnifies each Purchaser
against and agrees that it will hold it harmless from any claim, demand or
liability for any broker's, finder's or similar fee or commission alleged to
have been incurred by the Company (and not by a Purchaser) in connection with
the transactions contemplated by this Agreement or any Related Agreement.
ARTICLE IX
NOTICES
Any notices or other communications required to be given pursuant to this
Agreement shall be in writing and shall be deemed given: (i) upon delivery, if
by hand; (ii) three (3) Business Days after mailing, if sent by registered or
certified mail, postage prepaid, return receipt requested; (iii) one (1)
Business Day after mailing, if sent via overnight courier; or (iv) upon
transmission, if sent by telex or facsimile except that if such notice or other
communication is received by telex or facsimile after 5:00 p.m. on a Business
Day at the place of receipt, it shall be effective as of the following Business
Day. All notices and other communications hereunder shall be given as follows:
(a) If to the Company, to it at:
MGC Communications, Inc.
3301 North Buffalo Drive
Las Vegas, Nevada 89129
Attention: Maurice J. Gallagher, Jr.
Facsimile: (702) 310-5715
Telephone: (702) 310-1000
19
<PAGE> 20
with a copy to:
Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
3490 Piedmont Rd., Suite 400
Atlanta, GA 30305
Attention: Robert B. Goldberg, Esq.
Facsimile: 404-233-2188
Telephone: 404-233-2800 X222
(b) If to Providence Equity Partners III L.P. or Providence Equity
Operating Partners III L.P., to it at:
c/o Providence Equity Partners L.L.C.
901 Fleet Center
50 Kennedy Plaza
Providence, Rhode Island 02903
Attention: Mark Masiello
Facsimile: (401) 751-1790
Telephone: (401) 751-1700
with a copy to:
Edwards & Angell, LLP
2800 BankBoston Plaza
Providence, Rhode Island 02903
Attention: David K. Duffell, Esq.
Facsimile: 401-276-6602
Telephone: 401-274-9200
(c) If to another Purchaser, to it at the address set forth on Schedule
2.1
Any party may change its address for receiving notice by written notice given to
the other names above in the manner provided above.
ARTICLE X
SURVIVAL OF COVENANTS, AGREEMENTS,
REPRESENTATIONS AND WARRANTIES, TRANSFER
All covenants, agreements, representations and warranties made herein to
the Purchasers or the Company or in any other document referred to herein or
delivered to the Purchasers or the Company pursuant hereto shall be deemed to
have been relied on by each of the Purchasers and the Company, notwithstanding
any investigation made by any of the Purchasers or on their behalf, or by the
Company, and shall survive the execution and delivery of this Agreement and
other such documents and the delivery to the Purchasers of the Purchased
Securities for a period of eighteen (18) months after the Closing Date, except
for the representations and warranties
20
<PAGE> 21
contained in Sections 3.1, 3.2, 3.3, and 3.8 which shall survive the Closing and
continue in full force and effect forever thereafter (subject to any applicable
statute of limitations). Whether or not any express assignment has been made in
this Agreement, the provisions of this Agreement that are for the benefit of any
Purchaser as the holder of any Purchased Securities are also for the benefit of,
and enforceable by, all subsequent holders of the Purchased Securities, and the
provisions of this Agreement that subject any Purchaser to obligations as the
holder of any Purchased Securities also subject all subsequent holders of
Purchased Securities thereto.
ARTICLE XI
AMENDMENTS AND WAIVERS
No modification to or amendment of any provision of this Agreement shall
be effective against the Company or any Purchaser unless such modification or
amendment is approved in writing by the Majority Purchasers and the Company. No
waiver of the rights and obligations hereunder of any party hereto shall be
effective unless such waiver is in writing and duly executed and delivered by
(a) the Majority Purchasers (in the event such waiver is sought by the Company),
or (b) the Company (in the event such waiver is sought by any Purchaser). The
failure of any party hereto to enforce any of provision of this Agreement shall
in no way be construed as a waiver of such provision and shall not affect the
right of such party thereafter to enforce each and every provision of this
Agreement in accordance with its terms. Any amendment or waiver effected in
accordance with this Article XI shall be binding upon the Company and each
holder of any Purchased Security sold pursuant to this Agreement.
ARTICLE XII
WAIVER OF JURY TRIAL
EACH OF THE COMPANY AND THE PURCHASERS HEREBY EXPRESSLY WAIVES ANY RIGHT
IT MAY HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING EXISTING UNDER OR
RELATING TO THIS AGREEMENT, THE PURCHASED SECURITIES OR ANY OF THE RELATED
AGREEMENTS.
ARTICLE XIII
GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF RHODE ISLAND WITHOUT GIVING EFFECT TO ANY CHOICE OR
CONFLICT OF LAW PROVISION OR RULE THAT WOULD CAUSE THE APPLICATION OF THE
SUBSTANTIVE LAWS OF ANY OTHER STATE, AND SHALL BIND AND INURE TO THE BENEFIT OF
THE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS.
ARTICLE XIV
21
<PAGE> 22
PUBLIC ANNOUNCEMENTS
The Company hereby acknowledges that each Purchaser will have the right to
publicize its investment in the Company as contemplated hereby by means of a
press release reasonably acceptable to the Company, a tombstone advertisement or
other customary advertisement in newspapers and other periodicals. The Majority
Purchasers shall have the right to reasonably approve in advance the content of
any public announcement by the Company regarding the transactions contemplated
hereby.
ARTICLE XV
TIME OF THE ESSENCE
Time shall be of the essence of this Agreement.
ARTICLE XVI
ENTIRE AGREEMENT; COUNTERPARTS; SECTION HEADINGS
This Agreement, the Purchased Securities and the Related Agreements set
forth the entire understanding of the parties hereto with respect to the
transactions contemplated hereby and supersede any prior written or oral
understandings with respect thereto. This Agreement may be executed
simultaneously in one or more counterparts thereof, each of which shall be
deemed an original but all of which together shall constitute one and the same
instrument. Signatures sent by telecopy shall be deemed to constitute original
signatures. The headings in this Agreement are for convenience of reference only
and shall not alter or otherwise affect the meaning hereof.
[Remainder of page intentionally left blank.]
22
<PAGE> 23
If the foregoing corresponds with your understanding of our agreement,
kindly sign this letter and the accompanying copies thereof in the appropriate
space below.
Very truly yours,
MGC COMMUNICATIONS, INC.
By:
Name:
Title:
Accepted and agreed to:
PROVIDENCE EQUITY PARTNERS III L.P.
By: Providence Equity Partners III L.L.C., its general partner
By:________________________________
Managing Director
PROVIDENCE EQUITY OPERATING PARTNERS III L.P.
By: Providence Equity Partners III L.L.C., its general partner
By:________________________________
Managing Director
JK&B CAPITAL III L.P.
By: JK&B Capital, LLC, its general partner
By:
[Signature page to Securities Purchase Agreement]
23
<PAGE> 24
JK&B CAPITAL, L.P.
By: , its general partner
By:
JK&B CAPITAL II, L.P.
By: , its general partner
By:
JK&B CAPITAL III QIP, L.P.
By: , its general partner
By:
[Signature page to Securities Purchase Agreement]
24
<PAGE> 25
SCHEDULE 2.1
List of Purchasers
<TABLE>
<CAPTION>
Aggregate
Purchase Price
Number of Purchased of the
Securities to be Purchased
Name and Address Purchased * Securities
---------------- ------------------- --------------
<S> <C> <C>
1. Providence Equity
Partners III L.P. 886,259 shares of
Suite 900, Fleet Center Series C
50 Kennedy Plaza Convertible
Providence, RI 02903 Preferred Stock $24,815,252
2. Providence Equity
Operating
Partners III L.P. 6,598 shares of
Suite 900, Fleet Center Series C
50 Kennedy Plaza Convertible
Providence, RI 02903 Preferred Stock $184,744
3. JK&B Capital III L.P. 225,000 shares of
205 N. Michigan Avenue Series C
Suite 808 Convertible
Chicago, IL 60601 Preferred Stock $6,300,000
4. JK&B Capital, L.P. 59,524 shares of
205 N. Michigan Avenue Series C
Suite 808 Convertible
Chicago, IL 60601 Preferred Stock $1,666,672
5. JK&B Capital II, L.P. 29,762 shares of
205 N. Michigan Avenue Series C
Suite 808 Convertible
Chicago, IL 60601 Preferred Stock $833,336
6. JK&B Capital III QIP, L.P. 42,857 shares of
205 N. Michigan Avenue Series C
Suite 808 Convertible
Chicago, IL 60601 Preferred Stock $1,200,000
Total: 1,250,000 $35,000,004
</TABLE>
* Subject to adjustment as provided in Section 2.1.
<PAGE> 26
Exhibit A
to
Securities Purchase Agreement
Dated as of November 19, 1999
Certificate of Designation
26
<PAGE> 27
Exhibit B
to
Securities Purchase Agreement
Dated as of November 19, 1999
Form of Registration Rights Agreement
27
<PAGE> 28
Exhibit C
to
Securities Purchase Agreement
Dated as of November 19, 1999
Form of Securityholders' Agreement
28
<PAGE> 29
Exhibit D
to
Securities Purchase Agreement
Dated as of November 19, 1999
Form of Company Corporate Opinion
29
<PAGE> 30
Exhibit E
to
Securities Purchase Agreement
Dated as of November 19, 1999
Form of Company Regulatory Opinion
30
<PAGE> 31
Exhibit G
to
Securities Purchase Agreement
Dated as of November 19, 1999
Form of Promissory Note
31
<PAGE> 1
Exhibit 10.23
PROMISSORY NOTE
$4,900,000.00 Pittsford, New York
December 30, 1999
FOR VALUE RECEIVED, the undersigned ("Maker") does hereby promise to pay
to the order of MGC Communications, Inc., a Nevada corporation, or its
successors or assigns (hereinafter, together with any subsequent holder hereof,
referred to as "Holder") at 171 Sullys Trail, Suite 202, Pittsford, New York
14534, or at such other place as the Holder may from time to time designate in
writing, the principal sum of Four Million Nine Hundred Thousand and 00/100
Dollars ($4,900,000.00), together with interest thereon, or on so much thereof
as is from time to time outstanding and unpaid, from date, at the rate of seven
and one-half percent (7.5%) per annum until paid in full. All accrued interest
and the entire outstanding principal shall be due and payable March 1, 2000.
Maker shall have the right to prepay this Note in full or in part at any
time without the imposition of any prepayment fee or penalty. Any partial
prepayments shall be applied first to any accrued and unpaid interest due under
this Note and the balance, if any, to the outstanding principal balance of this
Note.
All amounts not paid when due hereunder shall bear interest at the rate of
twelve percent (12%) per annum from and after the due date thereof.
Time is of the essence of this Note, and, in the event this Note is
collected by law or through an attorney at law or under advice therefrom, Maker
agrees to pay all costs of collection, including reasonable attorneys' fees
actually incurred.
Maker hereby waives presentment, demand for payment and notice of
nonpayment.
This Note shall be construed in all respects and enforced according to the
laws of the State of New York.
Any and all notices required or permitted to be given under this Note will
be sufficient if furnished in writing, sent by registered mail in the case of
Maker to JK&B Capital III, L.P., Attn: Nancy O'Leary, 205 N. Michigan, Suite
808, Chicago, Illinois 60601, or in the case of Holder to 171 Sullys Trail,
Suite 202, Pittsford, New York 14534, Attention: President.
IN WITNESS WHEREOF, Maker has signed this Note as of the day and year
first above written.
JK&B CAPITAL III, L.P.
By JK&B Capital, LLC, Its General Partner
By: /s/ David Kronfeld
------------------------------------
Its: Manager
-----------------------------------
Print Name: David Kronfeld
----------------------------
<PAGE> 1
Exhibit 21 Subsidiaries of the Registrant
Subsidiaries of MGC Communications, Inc. are as follows:
MGC Lease Corporation, a Nevada Corporation formed February 5, 1998
MGC License Corporation, a Georgia Corporation formed November 24, 1998
MGC LJ.Net, Inc. a Nevada Corporation formed January 22, 1999
MGCi Corp., a Nevada corporation formed October 1, 1999
Mpower Communications Corporation, a Delaware corporation formed _______,
2000
<PAGE> 1
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements File No. 333-60141 and File No. 333-86865.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 42,979
<SECURITIES> 146,347
<RECEIVABLES> 15,946
<ALLOWANCES> (647)
<INVENTORY> 0
<CURRENT-ASSETS> 141,688
<PP&E> 216,849
<DEPRECIATION> (25,237)
<TOTAL-ASSETS> 402,429
<CURRENT-LIABILITIES> 52,363
<BONDS> 157,268
84,973
0
<COMMON> 23
<OTHER-SE> 103,758
<TOTAL-LIABILITY-AND-EQUITY> 402,429
<SALES> 55,066
<TOTAL-REVENUES> 55,066
<CGS> 50,012
<TOTAL-COSTS> 114,483
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,278
<INCOME-PRETAX> (69,769)
<INCOME-TAX> 0
<INCOME-CONTINUING> (69,769)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,769)
<EPS-BASIC> (7.63)
<EPS-DILUTED> (7.63)
</TABLE>
