<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: March 13, 2000 Date of earliest event reported: March 13, 2000
MGC COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Commission file number 0-24059
NEVADA 88-0360042
(State of incorporation) (I.R.S. employer identification number)
171 Sully's Trail, Suite 202
Pittsford, NY 14534
(716) 218-6550
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
<PAGE> 2
Item 5. On March 13, 2000, the Company announced its intention to initiate
an offering of its % Senior Notes due 2010 pursuant to a private
placement. A copy of the press release is filed as an Exhibit to
this report on Form 8-K.
Item 7. Financial Statements and Exhibits.
(c) Exhibits. The following exhibits are furnished as part of this report.
Exhibit numbers refer to Item 601 of Regulation S-K.
23 - Consent of Independent Public Accountants
27 - Financial Data Schedule
99.1 - March 10, 2000 Press Release
99.2 - Business
99.3 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
99.4 - Audited Financial Statements for years ended December
31, 1999, 1998 and 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MGC COMMUNICATIONS, INC.
March 13, 2000 By: /s/ Kent F. Heyman
----------------------
Kent F. Heyman
Senior Vice President and
General Counsel
<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 8-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 8, 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>
<PAGE> 1
EXhibit 99.1
MPOWER COMMUNICATIONS INITIATES $250 MILLION BOND OFFERING
Rochester, NY - March 13, 2000 - Mpower Communications Corp. (NASDAQ:MPWR), a
provider of integrated communications services to business customers, today
announced that it intends to issue $250 million of senior notes through a
private placement.
Mpower plans to use the proceeds of the offering to fund capital expenditures,
including augmenting its national Digital Subscriber Line (DSL) build-out to
include metropolitan fiber rings connecting the company's collocation facilities
within major markets. The funding will also be used for market expansion,
working capital, general corporate purposes, and, potentially, acquisitions.
The notes will not be registered under the Securities Act and may not be offered
or sold in the United States absent registration or an applicable exemption from
registration requirements. This press release shall not constitute an offer to
sell or the solicitation of an offer to buy, nor shall there be any sale of
these securities in any state in which such offer, solicitation, or sale would
be unlawful prior to registration or qualification under the securities laws of
any state.
ABOUT MPOWER COMMUNICATIONS
Mpower Communications (a.k.a. MGC Communications, Inc.) is a leading provider of
facilities-based integrated communication services including Internet, Voice
over DSL (VoDSL), local phone service, custom calling features and long distance
services to business customers. The company currently operates in Southern
California (including Los Angeles, San Diego and Orange County), Chicago,
Atlanta, Southern Florida and Las Vegas. Further information about the company
can be found at http://www.mpowercom.com.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this press release that state Mpower
Communications and/or management's intentions, hopes, beliefs, expectations or
predictions of the future are forward-looking statements. Management wishes to
caution the reader these forward-looking statements are not historical facts
and are only estimates or predictions. Actual results may differ materially as a
result of risks and uncertainties including, but not limited to, projections of
future sales, returns on invested assets, regulatory approval processes, market
conditions and other risks detailed from time to time in Mpower's Securities and
Exchange Commission filings.
FOR MORE INFORMATION CONTACT:
Dave Clark Michele Sadwick
SVP Investor Relations VP Corporate Communications
Mpower Communications Mpower Communications
716/218-6559 716/218-6542
<PAGE> 1
Exhibit 99.2
BUSINESS
In the following description, the terms "we," "us" and "our" refer to MGC
Communications, Inc. and its consolidated subsidiaries, doing business as
Mpower Communications Corp.
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.
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.
<PAGE> 1
Exhibit 99.3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our financial
statements and the notes related to our financial statements, each of which can
be found elsewhere in this filing.
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 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.
<PAGE> 2
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, 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.
<PAGE> 3
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 our available cash and the proceeds of a senior note offering in
March 2000 should 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.
<PAGE> 4
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 Notes and the 13% Senior Secured Notes due 2004 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 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 gross proceeds of approximately $332.8 million. We also issued
4,140,000 shares of Series D convertible preferred stock at $50.00 per share for
gross proceeds of approximately $207.0 million. The Series D convertible
preferred stock may be converted into common stock on a one-to-one basis.
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.
<PAGE> 1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MGC COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
PAGE
----
<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-4
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity for the years ended December 31,
1999, 1998 and 1997....................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 2
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> 3
MGC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
ASSETS ---- ----
<S> <C> <C>
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................................................ -- --
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-3
<PAGE> 4
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
<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-4
<PAGE> 5
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
-------------------- ------------------- PAID-IN ACCUMULATED ---------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
---------- ------- ---------- ------ ---------- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 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
RECEIVABLE FROM ACCUMULATED
STOCKHOLDERS FOR OTHER TOTAL
ISSUANCE OF COMPREHENSIVE STOCKHOLDERS'
COMMON STOCK INCOME (LOSS) EQUITY
---------------- ------------- -------------
<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-5
<PAGE> 6
MGC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<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-6
<PAGE> 7
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.
F-7
<PAGE> 8
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED INVESTMENTS
Restricted investments consist of U.S. Treasury Notes which are restricted
in that they must be used for the repayment of interest on certain debt and are
stated at amortized cost plus accrued interest. Management designated these
investments as held-to-maturity securities in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The carrying value of the
restricted investments approximates the fair value.
ADVERTISING COSTS
The Company expenses advertising costs in the period incurred. 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.
F-8
<PAGE> 9
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Buildings................................ 40 years
Telecommunications and other switching
equipment.............................. 5-10 years
Computer hardware and software........... 3-5 years
Office furniture & equipment............. 3-5 years
Leasehold improvements................... the lesser of the estimated useful lives
or term of lease
</TABLE>
The Company capitalizes costs associated with the design, deployment and
expansion of the Company's network including internally and externally developed
software. Capitalized external software costs include the actual costs to
purchase software from vendors. Capitalized internal software costs generally
include personnel and related costs incurred in the enhancement and
implementation of purchased software packages. Capitalized internal labor costs
for the years ended December 31, 1999, 1998 and 1997 were $1,218,000, $0 and $0,
respectively.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized to interest expense over the life of
the related financing using the effective interest method.
INCOME TAXES
The Company has applied the provisions of SFAS No. 109, "Accounting for
Income Taxes," which requires the recognition of deferred tax assets and
liabilities for the consequences of temporary differences between amounts
reported for financial reporting and income tax purposes. SFAS No. 109 requires
recognition of a future tax benefit of net operating loss carryforwards and
certain other temporary differences to the extent that realization of such
benefit is more likely than not; otherwise, a valuation allowance is applied.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. SFAS No. 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. At December 31, 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
F-9
<PAGE> 10
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-10
<PAGE> 11
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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>
F-11
<PAGE> 12
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 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
F-12
<PAGE> 13
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-13
<PAGE> 14
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-14
<PAGE> 15
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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").
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.
F-15
<PAGE> 16
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-16
<PAGE> 17
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-17
<PAGE> 18
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an acceleration provision for certain events or qualified changes in control.
All options expire within ten years of the date of grant.
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%.
F-18
<PAGE> 19
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-19
<PAGE> 20
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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.
F-20
<PAGE> 21
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 colocation
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 colocation site providers of
approximately $11.9 million of remaining commitments for the build-out of
colocation 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, 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
F-21
<PAGE> 22
MGC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-22
