<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 2000
REGISTRATION NO. 333-41040
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
GABRIEL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
4813
(Primary Standard Industrial
Classification Code Number)
43-1820855
(I.R.S. Employer
Identification Number)
16090 Swingley Ridge Road, Suite 500
Chesterfield, Missouri 63017
(636) 537-5700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
John P. Denneen, Esq.
Executive Vice President, Corporate Development and Legal Affairs, and Secretary
Gabriel Communications, Inc.
16090 Swingley Ridge Road, Suite 500
Chesterfield, Missouri 63017
(636) 537-5700
(636) 757-0000 (fax)
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
Copies to:
Nick H. Varsam, Esq.
Bryan Cave LLP
One Metropolitan Square
211 North Broadway,
Suite 3600
St. Louis, Missouri 63102
(314) 259-2000
(314) 259-2020 (fax)
Riley M. Murphy, Esq.
Senior Vice President,
General Counsel and Secretary
State Communications, Inc.
301 North Main Street
Suite 2000
Greenville, South Carolina 29601
(864) 331-7318
(864) 331-7146 (fax)
Thomas R. Brome, Esq.
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
(212) 474-1000
(212) 474-3700 (fax)
------------------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement is declared
effective and all other conditions to the proposed merger of State
Communications, Inc. with and into a subsidiary of the Registrant pursuant to
the Agreement and Plan of Merger described in the enclosed information
statement/prospectus have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statements number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED(1) BE REGISTERED(1) PER UNIT OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common stock, par value $0.01................ 13,353,461(2) N/A (9) (9)
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Series C-1 convertible preferred stock, par
value $0.01................................. 5,379,831(3) N/A (9) (9)
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Series C-2 convertible preferred stock, par
value $0.01................................. 15,802,428(4) N/A (9) (9)
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Series C-3 convertible preferred stock, par
value $0.01................................. 17,753,359(5) N/A (9) (9)
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Warrants to purchase common stock............ 14,200,815(6) N/A (9) (9)
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Options to purchase common stock............. 11,027,407(7) N/A (9) (9)
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SUBTOTAL.................................. $1,575(9) $5(9)
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Common stock, par value $0.01................ 13,000,000(8) N/A $99,250,000(8) $26,202(8)
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TOTAL..................................... $99,251,575 $26,203(10)
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</TABLE>
(footnotes appear on following page)
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
(footnotes from previous page)
(1) This Registration Statement relates to the issuance of the following
securities of Gabriel Communications, Inc. in the merger of State
Communications, Inc. with and into a wholly owned subsidiary of Gabriel:
(i) common stock, par value $0.01 per share; (ii) Series C-1, C-2 and C-3
convertible preferred stock, par value $0.01 per share; (iii) warrants to
purchase Gabriel common stock; and (iv) options to purchase Gabriel common
stock. Gabriel hereby also registers (x) such additional securities as may
be issuable in the Merger as a result of an adjustment of the exchange
ratio pursuant to Section 1.3(e) of the merger agreement, and (y) such
additional shares of Gabriel common stock as may be issuable upon
conversion of the Series C-1, C-2 and C-3 convertible preferred stock.
(2) Based upon the product of 12,061,658 shares of State Communications common
stock, par value $0.0001 per share, issued and outstanding as of September
27, 2000, the date of the merger agreement and the merger exchange ratio of
1.1071. Of such shares, 13,247,948 were included in the calculation of the
registration fee in the previous filings of this Registration Statement.
(3) Based upon the product of (i) the sum of (x) 4,711,672 shares of State
Communications Series A Convertible Preferred Stock, par value $0.0001 per
share, issued and outstanding as of September 27, 2000 plus (y) 147,718
shares of State Communications Series A Convertible Preferred stock to be
issued to holders of shares of State Communications preferred stock in lieu
of cash dividends, and (ii) the merger exchange ratio of 1.1071.
(4) Based upon the product of (i) the sum of (x) 13,866,663 shares of State
Communications Series B Convertible Preferred Stock, par value $0.0001 per
share, issued and outstanding as of September 27, 2000 plus (y) 407,050
shares of State Communications Series B Convertible Preferred stock to be
issued to holders of shares of State Communications preferred stock in lieu
of cash dividends, and (ii) the merger exchange ratio of 1.1071.
(5) Based upon the product of (i) the sum of (x) 15,776,471 shares of State
Communications Series C Convertible Preferred Stock, par value $0.0001 per
share, issued and outstanding as of September 27, 2000 plus (y) 259,442
shares of State Communications Series C Convertible Preferred stock to be
issued to holders of shares of State Communications preferred stock in lieu
of cash dividends, and (ii) the merger exchange ratio of 1.1071.
(6) Based upon the sum of (i) the product of (x) 1,084,649 shares of State
Communications common stock issuable upon exercise of outstanding warrants
and (y) the merger exchange ratio of 1.1071, plus (ii) an additional
13,000,000 shares of Gabriel common stock issuable to holders of shares of
State Communications preferred stock and to holders of shares of Gabriel
preferred stock in connection with the merger.
(7) In connection with the merger, holders of options to purchase 9,960,624
shares of State Communications common stock will receive in exchange
therefor options to purchase 11,027,407 shares of Gabriel common stock.
(8) Shares of Gabriel common stock issuable upon exercise of the warrants to be
issued to holders of Gabriel preferred stock and State Communications
preferred stock in connection with the merger. The proposed maximum
offering price and registration fee have been computed in accordance with
Rule 457(g)(1).
(9) The proposed maximum offering price and amount of registration fee have
been calculated in accordance with Rule 457(f)(2). As there is no market
for the State Communications securities to be received by Gabriel, and as
State Communications has an accumulated capital deficit, the proposed
maximum aggregate offering price is calculated as the sum of: (i) $402,
one-third of the par value of 12,061,658 shares of State Communications
common stock outstanding as of September 27, 2000, (ii) $162, one-third of
the par value of 4,859,390 shares of State Communications Series A
convertible preferred stock, (iii) $476, one-third of the par value of
14,273,713 shares of State Communications Series B convertible preferred
stock, and (iv) $535, one-third of the par value of 16,035,913 shares of
State Communications Series C convertible preferred stock.
(10) A total of $26,235 in registration fees was previously paid.
<PAGE> 3
PRELIMINARY INFORMATION STATEMENT/PROSPECTUS, SUBJECT TO COMPLETION, DATED
OCTOBER 2, 2000.
INFORMATION STATEMENT/PROSPECTUS
[TRIVERGENT LOGO] [GABRIEL LOGO]
13,353,461 SHARES OF COMMON STOCK
5,379,831 SHARES OF SERIES C-1 CONVERTIBLE PREFERRED STOCK
15,802,428 SHARES OF SERIES C-2 CONVERTIBLE PREFERRED STOCK
17,753,359 SHARES OF SERIES C-3 CONVERTIBLE PREFERRED STOCK
OPTIONS AND WARRANTS TO PURCHASE 25,228,222 SHARES OF COMMON STOCK
<TABLE>
<S> <C>
301 North Main Street, Suite 2000 16090 Swingley Ridge Road, Suite 500
Greenville, South Carolina 29601 Chesterfield, Missouri 63017
</TABLE>
Dear State Communications, Inc. and Gabriel Communications, Inc. Security
Holders:
We are pleased to inform you that the boards of directors of each of State
Communications, Inc., which we refer to in this information statement/prospectus
as "TriVergent," and Gabriel Communications, Inc. have unanimously approved the
merger of our two companies. In the merger, TriVergent stockholders will receive
1.1071 shares of Gabriel common stock or preferred stock for each share of
TriVergent common stock or preferred stock that they own. Holders of outstanding
options and warrants to purchase TriVergent common stock will receive options or
warrants to acquire Gabriel common stock based on the same exchange ratio.
Holders of TriVergent preferred stock and holders of Gabriel preferred stock
will receive additional consideration consisting of one-year and two-year
warrants to purchase a total of 7,999,950 shares and 4,999,971 shares,
respectively, of Gabriel common stock at an exercise price of $6.00 per share
and $10.25 per share, respectively. These warrants will be distributed to
holders based upon the amount of their respective invested capital in TriVergent
and Gabriel. Based on the above exchange ratio, following the merger, former
holders of TriVergent stock, options and warrants would own approximately 46.1%
of the voting power of the combined company. This assumes the exercise of all
options and warrants that will be outstanding at the effective time of the
merger.
Holders of outstanding shares of TriVergent preferred stock and common stock
sufficient to approve the merger under Delaware law and TriVergent's charter
have agreed to vote their shares to approve or consent to the merger. Similarly,
holders of a sufficient number of the outstanding shares of Gabriel common and
preferred stock also have agreed to vote their shares to approve or consent to
the merger and the amended and restated certificate of incorporation of Gabriel
provided for in the merger agreement. Therefore, we are not asking you for a
proxy or consent and you are requested not to send us one.
The boards of directors of TriVergent and Gabriel are furnishing this
document to you to provide you with important information about the merger, the
merger consideration and the appraisal rights of TriVergent stockholders under
Delaware law. This document is also a prospectus relating to the shares of
Gabriel common stock, preferred stock, warrants and options to be issued in the
merger.
<TABLE>
<S> <C>
/s/ CHARLES S. HOUSER /s/ DAVID L. SOLOMON
--------------------------------------------- ---------------------------------------------
Charles S. Houser David L. Solomon
Chairman and Chief Executive Officer Chairman and Chief Executive Officer
State Communications, Inc. Gabriel Communications, Inc.
</TABLE>
THE PROPOSED MERGER IS A COMPLEX TRANSACTION. GABRIEL AND TRIVERGENT STRONGLY
URGE YOU TO READ AND CONSIDER THIS INFORMATION STATEMENT/PROSPECTUS IN ITS
ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER "RISK FACTORS" BEGINNING ON
PAGE 7. THERE IS NO ESTABLISHED PUBLIC TRADING MARKET FOR ANY OF THE GABRIEL
SECURITIES OFFERED IN THE MERGER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE GABRIEL SECURITIES TO BE ISSUED AS
DESCRIBED IN THIS INFORMATION STATEMENT/PROSPECTUS OR HAS DETERMINED IF THIS
INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This information statement/prospectus is dated , 2000.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
SUMMARY..................................................... 1
The Companies............................................. 1
Gabriel................................................... 1
TriVergent................................................ 1
What TriVergent Stockholders Will Receive in the Merger... 2
Issuance of TriVergent Preferred Stock in Lieu of Accrued
Dividends.............................................. 2
Additional Gabriel Warrants............................... 2
Options and Warrants...................................... 3
Voting and Other Agreements............................... 3
Ownership of Gabriel Following the Merger................. 3
Appraisal Rights.......................................... 3
Material U.S. Federal Income Tax Consequences of the
Merger................................................. 4
Board Approvals........................................... 4
Fairness Opinions of Financial Advisors................... 4
Interests of TriVergent Directors and Executive Officers
in the Merger.......................................... 4
Consents; No Further Stockholder Approval Required........ 4
The Merger Agreement...................................... 5
Conditions to Completion of the Merger.................... 5
Termination of the Merger Agreement....................... 5
Regulatory Matters........................................ 5
Accounting Treatment...................................... 5
No Trading Market or Dividends............................ 5
Comparison of Stockholder Rights.......................... 6
RISK FACTORS................................................ 7
Risks Relating to the Merger.............................. 7
Risks Relating to the Business and Operations of the
Combined Company....................................... 7
Risks Relating to the Communications Industry............. 13
FORWARD-LOOKING STATEMENTS.................................. 14
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA............. 16
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF GABRIEL AND TRIVERGENT................................. 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF GABRIEL, TRIVERGENT AND THE
COMBINED COMPANY.......................................... 27
THE MERGER.................................................. 45
Background of the Merger.................................. 45
The Boards' Reasons for the Merger........................ 47
Approval of Board and Stockholders........................ 48
Opinion of TriVergent's Financial Advisor................. 49
Opinion of Gabriel's Financial Advisor.................... 53
Interests of TriVergent Directors and Executive Officers
in the Merger.......................................... 59
Accounting Treatment...................................... 61
U.S. Federal Income Tax Consequences...................... 61
Regulatory Matters........................................ 65
Appraisal Rights.......................................... 65
Resale of Gabriel Common Stock and Gabriel Preferred
Stock.................................................. 66
Ownership of Gabriel Following the Merger................. 66
Material Relationships Between Gabriel and TriVergent..... 67
</TABLE>
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PAGE
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THE MERGER AGREEMENT........................................ 68
Structure of the Merger................................... 68
Effective Time of the Merger.............................. 68
Issuance of TriVergent Stock in Lieu of Payment of Accrued
and Unpaid Dividends Immediately Prior To The Merger... 68
What Securityholders Will Receive in the Merger........... 69
Amendment of Gabriel Charter.............................. 71
Exchange of TriVergent Stock Certificates; Other
Agreements............................................. 71
Voting and Consent Agreements............................. 72
Employees and Employee Benefit Plans...................... 73
Representations and Warranties............................ 73
Covenants................................................. 74
Conditions to Completion of the Merger.................... 74
Termination............................................... 75
Waiver and Amendment...................................... 75
Expenses; Governing Law................................... 75
THE GABRIEL BUSINESS........................................ 76
Business Strategy......................................... 77
Gabriel's Network Architecture and Technology............. 80
How Gabriel Deploys Its Networks.......................... 82
Gabriel's Products and Services........................... 83
Gabriel's Current Markets................................. 85
Gabriel's Operations Support Systems...................... 86
Sales and Marketing....................................... 87
Employees................................................. 88
Legal Proceedings......................................... 88
Facilities................................................ 88
THE TRIVERGENT BUSINESS..................................... 90
Business Strategy......................................... 91
Recent Acquisitions....................................... 93
Products and Services..................................... 93
Sales and Marketing....................................... 94
TriVergent's Current Markets.............................. 95
Network Infrastructure.................................... 96
Information Systems....................................... 96
Intellectual Property..................................... 97
Employees................................................. 98
Legal Proceedings......................................... 98
Facilities................................................ 98
COMPETITION................................................. 100
REGULATION.................................................. 103
MANAGEMENT OF GABRIEL FOLLOWING THE MERGER.................. 110
Executive Officers........................................ 110
Non-Management Directors.................................. 112
Executive Compensation.................................... 113
Gabriel Stock Plan........................................ 115
TriVergent Stock Plan..................................... 116
Employment Agreements..................................... 117
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 120
ACTION BY STOCKHOLDERS TO APPROVE THE MERGER................ 123
VOTING SECURITIES OF GABRIEL................................ 125
</TABLE>
ii
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VOTING SECURITIES OF TRIVERGENT............................. 128
VOTING SECURITIES OF THE COMBINED COMPANY................... 131
DESCRIPTION OF GABRIEL CAPITAL STOCK........................ 134
General................................................... 134
Amendments to Existing Provisions of Certificate of
Incorporation.......................................... 134
Common Stock.............................................. 134
Preferred Stock........................................... 135
Outstanding Options and Warrants.......................... 137
Stockholders' Agreement................................... 138
Registration Rights Agreement............................. 139
Employee Shareholders Agreement........................... 140
Classified Board of Directors and Other Anti-Takeover
Considerations......................................... 141
COMPARISON OF RIGHTS OF STOCKHOLDERS OF GABRIEL AND
TRIVERGENT................................................ 142
Capitalization............................................ 142
Voting Rights............................................. 142
Number and Election of Directors.......................... 142
Vacancies on the Board of Directors....................... 143
Removal of Directors...................................... 143
Amendments to Charter..................................... 144
Amendments to By-laws..................................... 144
Shareholder Action........................................ 144
Special Stockholder Meetings.............................. 145
Limitation of Personal Liability of Directors............. 145
Indemnification of Directors.............................. 145
Dividends................................................. 146
Appraisal Rights.......................................... 146
Preemptive Rights......................................... 147
Conversion................................................ 147
Preferred Stock........................................... 147
Shareholder Suits......................................... 147
Vote on Extraordinary Corporate Transactions.............. 148
Business Combination Restrictions......................... 148
EXPERTS..................................................... 150
LEGAL MATTERS............................................... 150
AVAILABLE INFORMATION....................................... 151
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
<TABLE>
<S> <C>
ANNEXES
Annex A Agreement and Plan of Merger
Annex B Form of Amended and Restated Certificate of Incorporation of
Gabriel
Annex C Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation
Annex D Opinion of Salomon Smith Barney Inc.
Annex E Section 262 of the General Corporation Law of the State of
Delaware -- Appraisal Rights
</TABLE>
iii
<PAGE> 7
GABRIEL AND TRIVERGENT NETWORKS IN OPERATION AND UNDER CONSTRUCTION
(AS OF AUGUST 31, 2000)
[MAP]
iv
<PAGE> 8
SUMMARY
This summary highlights selected information contained in this information
statement/prospectus. Gabriel and TriVergent encourage you to carefully read
this entire document and the documents referred to in this information
statement/prospectus for a complete understanding of the merger. Page references
are included in parentheses to direct you to a more complete description of the
items presented in this summary.
THE COMPANIES
GABRIEL (page 76)
Gabriel Communications, Inc. is a rapidly growing, integrated
communications and applications services provider. Gabriel provides services
over its own network facilities and equipment. Gabriel commenced commercial
operations in its first market, St. Louis, Missouri, in June 1999. As of June
30, 2000, Gabriel had
- 15 markets in operation or under construction in nine midwestern states,
- 127 sites secured at which it installs and connects its own data and
voice telecommunications equipment with that of the incumbent telephone
company, like Southwestern Bell or Ameritech,
- 152 sales employees,
- 9,185 access lines installed on its networks, and
- 805 customers served by its networks.
Gabriel offers its customers integrated communications products and
services, including
- local voice and data services,
- domestic and international long distance services,
- dedicated high speed Internet access, web page hosting and domain name
services,
- a comprehensive suite of web-enabled business applications that allows
businesses to outsource their administrative and information technology
functions over the Internet without the need for a dedicated, in-house
information technology staff and infrastructure, and
- unified voice, e-mail and fax messaging and other advanced data services.
Gabriel targets its services primarily to small to mid-sized businesses in
second and third tier cities, i.e., cities with populations ranging from 250,000
to two million. Gabriel offers its customers the convenience of meeting all of
their communications needs through one provider, with a single consolidated
monthly bill.
Gabriel began operations in June 1999. As of June 30, 2000, Gabriel had an
accumulated deficit of $38.4 million. Operations during the six months ended
June 30, 2000 resulted in an operating loss of $21.2 million. Gabriel expects to
incur increasing operating losses as it expands its operations, constructs and
deploys its networks, and grows its customer base.
Gabriel is a privately held company incorporated in Delaware, and its
principal executive offices are located at 16090 Swingley Ridge Road, Suite 500,
Chesterfield, Missouri 63017. Its telephone number is (636) 537-5700.
TRIVERGENT (page 90)
TriVergent is a broadband telecommunications company offering automated web
site design and web hosting, high-speed data and voice services. TriVergent
commenced providing services over its own network facilities during the first
quarter of 2000. As of June 30, 2000, TriVergent had
- 14 markets in operation or under construction in five southeastern
states,
- 269 sites secured at which it installs and connects its own data and
voice telecommunications equipment with that of the incumbent telephone
company, like BellSouth,
- 135 sales employees,
- 936 access lines installed on its networks, and
- 250 customers served by its networks.
1
<PAGE> 9
TriVergent's principal product is its Broadband Bundle, which provides
automated web site design and web hosting, high-speed data and Internet access
and local and long distance voice services, at a single price based on the
customer's selected bandwidth capacity and number of access lines. An important
component of TriVergent's Broadband Bundle is its web site design software,
which allows a customer to design and maintain a fully functional web site
integrated with its broadband Internet access and telephone services. TriVergent
believes it is the only company providing this all-inclusive bundle in its
markets.
TriVergent has a limited operating history and, from its inception in 1997
through June 30, 2000, incurred an accumulated deficit of $65.5 million.
Operations during the six months ended June 30, 2000 resulted in an operating
loss of $25.4 million. TriVergent expects to incur increasing operating losses
as it expands its operations, constructs and deploys its networks, and grows its
customer base.
TriVergent is a privately held company initially incorporated in South
Carolina and recently re-incorporated in Delaware, and its principal executive
offices are located at 301 North Main Street, Suite 2000, Greenville, South
Carolina 29601. Its telephone number is (864) 271-6335.
WHAT TRIVERGENT STOCKHOLDERS WILL RECEIVE IN THE MERGER (page 69)
COMMON STOCKHOLDERS. Based on the number of shares of common and preferred
stock, options and warrants of Gabriel and TriVergent outstanding as of
September 27, 2000, TriVergent common stockholders will be entitled to receive
1.1071 shares of Gabriel common stock for each share of TriVergent common stock.
TriVergent common stockholders will receive an amount of cash for any fractional
shares of Gabriel stock which they would otherwise receive in the merger equal
to the product of that fraction multiplied by $7.00.
PREFERRED STOCKHOLDERS. Based on the number of shares of common and
preferred stock, options and warrants of Gabriel and TriVergent outstanding as
of September 27, 2000, TriVergent convertible preferred stockholders will be
entitled to receive
- 1.1071 shares of Series C-1 convertible preferred stock of Gabriel for
each share of Series A convertible preferred stock of TriVergent,
- 1.1071 shares of Series C-2 convertible preferred stock of Gabriel for
each share of Series B convertible preferred stock of TriVergent, and
- 1.1071 shares of Series C-3 convertible preferred stock of Gabriel for
each share of Series C convertible preferred stock of TriVergent,
The Series C-1, C-2 and C-3 preferred stock will each be a new series of
Gabriel preferred stock and will have terms which are substantially identical to
the existing convertible preferred stock of Gabriel, except as to the respective
conversion prices and liquidation preferences for each series. The liquidation
preferences for all series of Gabriel preferred stock will include a preferred
return of 8.0% per annum from their original issuance dates, in the case of
existing Gabriel preferred stock, or the date on which preferred dividends no
longer accrue on TriVergent preferred stock, in the case of Gabriel Series C-1,
C-2 and C-3 preferred stock. TriVergent preferred stockholders will be entitled
to receive cash in lieu of any fractional shares of Gabriel preferred stock at
the $7.00 per share price.
STOCK CERTIFICATES. After the merger is completed, you will receive written
instructions for surrendering your TriVergent stock certificates and TriVergent
options and warrants in exchange for Gabriel stock certificates and Gabriel
options and warrants, respectively. You should not send in your stock
certificates, options or warrants now.
ISSUANCE OF TRIVERGENT PREFERRED STOCK IN LIEU OF ACCRUED DIVIDENDS (page 68)
Immediately prior to the effective time of the merger, TriVergent will
issue 814,210 additional shares of TriVergent preferred stock, representing
payment in full, at a value of $7.6776 per share, of all accrued and unpaid
dividends on each series of TriVergent preferred stock as of August 31, 2000.
These shares have been deemed outstanding for purposes of determining the
exchange ratio in accordance with the merger agreement.
ADDITIONAL GABRIEL WARRANTS (page 69)
The holders of TriVergent and Gabriel preferred stock will receive one-year
warrants to
2
<PAGE> 10
purchase a total of 7,999,950 shares of Gabriel common stock at an exercise
price of $6.00 per share and two-year warrants to purchase a total of 4,999,971
shares of Gabriel common stock at an exercise price of $10.25 per share. A total
of 3,882,827 and 9,117,094 of these warrants will be distributed to holders of
TriVergent and Gabriel preferred stock, respectively, based upon each holder's
total invested capital.
OPTIONS AND WARRANTS (page 70)
Holders of outstanding warrants and options exercisable for shares of
TriVergent common stock will be entitled to receive warrants or options, as the
case may be, to acquire on the same terms and conditions, except as each holder
of options may otherwise agree with respect to vesting provisions, to purchase
shares of Gabriel common stock. The number of shares will be determined by
multiplying the number of shares of TriVergent common stock subject to
TriVergent warrants or options by the exchange ratio, at an exercise price per
share of Gabriel common stock equal to the exercise price per share of
TriVergent warrants or options, as the case may be, divided by the exchange
ratio. For example, a holder of an option to purchase 10,000 shares of
TriVergent common stock at $2.40 per share would receive in exchange for this
option, at the 1.1071 exchange ratio, an option to purchase 11,071 shares of
Gabriel common stock at $2.17 per share.
The Gabriel options issued to any TriVergent employee who agrees that the
merger will not be treated as an event resulting in acceleration of the exercise
rights of the employee's options will vest over a period of three years from the
date of original grant, versus the five years to which TriVergent options
currently are subject. These options may fully vest and become fully exercisable
in accordance with their terms if any of the events specified in the employee's
agreement occur within one year following the effective time.
VOTING AND OTHER AGREEMENTS (page 71)
Concurrently with the execution and delivery of the merger agreement,
holders of a number of shares of TriVergent preferred stock and common stock and
Gabriel preferred stock and common stock legally sufficient to approve the
merger and the related transactions entered into voting agreements. These
stockholders agreed to consent to or vote their shares of common stock and
preferred stock of either TriVergent or Gabriel, as the case may be, in favor of
the merger agreement and the transactions contemplated by the merger agreement.
The merger agreement provides that, by execution and delivery of a letter
of transmittal, each TriVergent stockholder will agree to become a party to
Gabriel's stockholders' and registration rights agreements. In addition, most of
the senior management of TriVergent have agreed and acknowledged concurrently
with the execution of the merger agreement that the merger will not be treated
as an event constituting a "change in control" resulting in the acceleration of
vesting of their options or within the meaning of their respective employment
agreements.
OWNERSHIP OF GABRIEL FOLLOWING THE MERGER (page 66)
Based on the capitalization of TriVergent and Gabriel on September 27, 2000
and the 1.1071 exchange ratio, holders of TriVergent common and preferred stock
would receive an aggregate of 13,353,461 shares of Gabriel common stock and
38,935,618 shares of Gabriel preferred stock and holders of TriVergent options
and warrants would receive Gabriel options and warrants exercisable for
12,228,221 shares of Gabriel common stock in the merger. Based on those numbers,
at the effective time of the merger former holders of TriVergent common and
preferred stock, options and warrants would own approximately 47.7% of the
shares of Gabriel stock, on a fully diluted basis, without regard to the
additional Gabriel warrants described above. Assuming those additional warrants
are exercised in full, TriVergent stock and option and warrant holders would own
approximately 46.1% of the shares of Gabriel stock, on a fully diluted basis.
APPRAISAL RIGHTS (page 66)
Under Delaware law, holders of shares of TriVergent common stock and
preferred stock are entitled to exercise appraisal rights if they
- are holders of issued and outstanding shares of common stock or preferred
stock immediately prior to the effective time of the merger,
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- have not voted in favor of the merger nor consented thereto in writing
and
- have properly demanded their appraisal rights.
Shares to which appraisal rights are applicable will not be converted into the
right to receive the merger consideration unless and until such time as those
shares become ineligible for appraisal.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (page 61)
Gabriel and TriVergent have each received an opinion of tax counsel that
the merger will qualify as a tax-free reorganization for U.S. federal income tax
purposes. Accordingly, holders of TriVergent common and preferred stock will not
recognize gain or loss for U.S. federal income tax purposes as a result of the
exchange of their TriVergent common and preferred stock for Gabriel common and
preferred stock and warrants in the merger, except to the extent of any cash
received in lieu of fractional shares of Gabriel common and preferred stock.
Gabriel preferred stockholders also will not recognize any gain or loss on the
receipt of Gabriel common stock warrants issuable in connection with the merger.
TAX MATTERS ARE VERY COMPLICATED. THE TAX CONSEQUENCES OF THE MERGER TO YOU WILL
DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR OWN TAX
ADVISORS FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO YOU.
BOARD APPROVALS (page 48)
The TriVergent board of directors believes that the merger is fair to and
in the best interests of TriVergent and its stockholders and has unanimously
approved the merger. The Gabriel board of directors believes that the merger is
fair to and in the best interests of Gabriel and also has unanimously approved
the merger.
In reaching their decisions to approve the merger, the boards of directors
of TriVergent and Gabriel consulted with their management teams and outside
financial and legal advisors and carefully considered a variety of factors in
relation to the proposed merger.
To review the background and reasons for the merger in greater detail, as
well as risks related to the merger, see pages 45-48 and 7, respectively.
FAIRNESS OPINIONS OF FINANCIAL ADVISORS (page 49)
In deciding to approve the merger, the TriVergent board of directors
considered the opinion, as of the date of the merger agreement, of TriVergent's
financial advisor, Donaldson, Lufkin & Jenrette Securities Corporation, as to
the fairness of the consideration to be received by TriVergent stockholders as a
whole in the merger from a financial point of view. This opinion is attached as
Annex C to this document. TRIVERGENT ENCOURAGES TRIVERGENT STOCKHOLDERS TO READ
THIS OPINION CAREFULLY.
In deciding to approve the merger, the Gabriel board of directors
considered the opinion of Gabriel's financial advisor, Salomon Smith Barney
Inc., as to the fairness to Gabriel, as of the date of the merger agreement, of
the consideration to be paid in the merger from a financial point of view to
Gabriel. This opinion is attached as Annex D to this document. GABRIEL
ENCOURAGES GABRIEL STOCKHOLDERS TO READ THIS OPINION CAREFULLY.
INTERESTS OF TRIVERGENT DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER (page 59)
Some of the directors and executive officers of TriVergent have employment
or severance agreements and stock options that provide them with interests in
the merger that may be different from, or in addition to, the interests of
TriVergent stockholders generally. You should consider these interests in
assessing the merger and the approval of the TriVergent board.
CONSENTS; NO FURTHER STOCKHOLDER APPROVAL REQUIRED (page 72)
We are not asking you to vote on or consent to the merger. On June 9, 2000,
holders of more than ninety percent of the outstanding shares of TriVergent
Series A and Series B preferred stock and more than two-thirds of the
outstanding shares of TriVergent Series C preferred stock and common stock and
Gabriel preferred stock and common stock agreed to vote in favor of or consent
to the merger and the transactions contemplated by the merger agreement. Under
Delaware law and the terms of TriVergent's and Gabriel's respective certificates
of incorporation, these approvals are sufficient to approve the merger and the
related transactions.
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THE MERGER AGREEMENT (page 68)
THE MERGER AGREEMENT IN ITS ENTIRETY IS ATTACHED AS ANNEX A TO THIS
DOCUMENT. WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT IN ITS ENTIRETY, AS IT
IS THE PRINCIPAL DOCUMENT GOVERNING THE MERGER.
CONDITIONS TO COMPLETION OF THE MERGER
(page 74)
Each party's obligation to complete the merger is subject to the
satisfaction or waiver of several closing conditions, including the following:
- Stockholder approvals for the merger and the amended and restated
certificate of incorporation of Gabriel attached as Annex B hereto.
- No action by either the United States Department of Justice or the FTC to
prohibit or materially modify the merger or the related transactions.
- The continued effectiveness of Gabriel's registration statement on Form
S-4, of which this information statement/prospectus is a part, and
Gabriel's receipt of all state securities law authorizations necessary
for the merger.
- Gabriel's receipt of agreements of holders of TriVergent options, in
addition to those held by the officers who executed these agreements on
or before the date of the merger agreement, representing not less than
85% of the options held by holders of TriVergent options who hold options
to purchase 7,500 or more shares of TriVergent common stock, that the
merger will not be treated as a change in control resulting in
acceleration of the vesting of these holders' options.
- The accuracy of each company's representations and warranties at the
effective time, including the absence of any events or changes that would
have a material adverse effect on either company.
TERMINATION OF THE MERGER AGREEMENT (page 75)
The merger agreement may be terminated, whether before or after approval by
the stockholders of TriVergent or of Gabriel:
- by mutual written consent or
- by either TriVergent or Gabriel if
- the merger is not completed on or before October 31, 2000 (or such
other date as may be agreed), or
- if the other party's closing conditions become incapable of
satisfaction prior to October 31, 2000, or
- the other party has breached or failed to perform, in any material
respect, any of its covenants or agreements contained in the merger
agreement, subject to applicable cure periods.
REGULATORY MATTERS (page 65)
United States antitrust laws prohibit Gabriel and TriVergent from
completing the merger until after they have furnished information to the
Antitrust Division of the Department of Justice and the FTC and a required
waiting period has ended. Gabriel, TriVergent and stockholders of TriVergent who
will own in excess of $15 million in voting securities of Gabriel as a result of
the merger each filed the required notification and report forms with the
Antitrust Division and the FTC, and all waiting periods have expired.
TriVergent has also received the required approvals of the FCC and state
public utility commissions.
ACCOUNTING TREATMENT (page 61)
Gabriel and TriVergent intend to account for the merger using the purchase
method of accounting.
NO TRADING MARKET FOR GABRIEL SECURITIES (page 66)
There is no established public trading market for either the Gabriel or the
TriVergent common or preferred stock. Gabriel has not applied and does not
intend to apply for listing or authorization for quotation of its common or
preferred stock on any securities exchange or on The Nasdaq Stock Market or any
other quotation
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system in connection with the merger. As of
September 27, 2000, there were 6,048,200 shares of Gabriel common stock and
39,905,294 shares of Gabriel preferred stock outstanding held of record by
approximately 51 holders and 35 holders, respectively. Holders of Series B
preferred stock have subscription obligations to purchase an additional
19,289,160 shares of Series B preferred stock. As of September 27, 2000, there
were 12,061,658 shares of TriVergent common stock and 34,354,806 shares of
TriVergent preferred stock outstanding and held of record by approximately 151
holders and 54 holders, respectively. TriVergent Series A, B and C preferred
stock accrue dividends at the rate of 5.5% per annum. Accrued and unpaid
dividends on TriVergent preferred stock will be converted into an aggregate of
814,210 shares of TriVergent preferred stock immediately prior to the merger.
NO DIVIDENDS ON GABRIEL SECURITIES (page 146)
Gabriel has never paid any dividends on its common or preferred stock and
does not anticipate paying dividends in the foreseeable future.
COMPARISON OF STOCKHOLDER RIGHTS (page 142)
The rights of TriVergent stockholders are currently governed by Delaware
law, the TriVergent certificate of incorporation and the certificates of
designation thereunder of its Series A, B and C preferred stock, the TriVergent
by-laws and the TriVergent stockholders' and registration rights agreements.
Upon consummation of the merger, the security holders of TriVergent will become
security holders of Gabriel, which is also a Delaware corporation, and their
rights as stockholders of Gabriel will be governed by Delaware law, the amended
and restated certificate of incorporation of Gabriel attached as Annex B hereto,
the Gabriel by-laws, Gabriel's stockholders' agreement, Gabriel's registration
rights agreement and, in the case of TriVergent's shareholders who will be
employees of the combined company, Gabriel's shareholders' agreement.
PERSONS WHOM YOU MAY CONTACT WITH ANY QUESTIONS
If you have any questions about the merger or if you need additional copies of
this information statement/prospectus, you should contact:
TriVergent stockholders:
Riley M. Murphy
Secretary
State Communications, Inc.
301 North Main Street
Suite 2000
Greenville, South Carolina 29601
Telephone: (864) 331-7318
Gabriel stockholders:
John P. Denneen
Secretary
Gabriel Communications, Inc.
16090 Swingley Ridge Rd.
Suite 500
Chesterfield, Missouri 63107
Telephone: (636) 537-5700
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RISK FACTORS
RISKS RELATING TO THE MERGER
GABRIEL AND TRIVERGENT MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THEIR
BUSINESSES.
This successful integration of Gabriel's and TriVergent's businesses will
require management of the combined company to
- define the responsibilities and align the strategic plans of two
previously independent management teams and coordinate geographically
separate organizations in St. Louis, Missouri, and Greenville, South
Carolina,
- identify and make any changes required to insure that both companies'
existing telecommunications network architectures can function together
to provide their current and planned products and services,
- determine the extent to which their respective operations support systems
are compatible and implement any modifications necessary to avoid delays
or problems in processing customer orders, providing customer care,
billing their customers and interacting with other telephone companies,
- reassess and take actions necessary to realize the benefits expected from
the deployment of more advanced network technologies, and
- effect savings in general, administrative and operating expenses and
network equipment costs.
Management may not be able to successfully accomplish this integration. Neither
company has been involved in a strategic transaction of this size. The effective
integration of corporate cultures and the maintenance of uniform standards,
controls, procedures and compatible technologies will be especially important
over the long term to achieve the expected benefits of the merger. The combined
company's integration efforts will require the dedication of management and
other personnel and may distract management's attention from the day-to-day
operations of the combined company and the pursuit of its business strategies.
If the combined company fails to integrate the businesses quickly and
efficiently, it may incur unanticipated costs or be unable to successfully
advance its business objectives.
THERE WILL BE NO ESTABLISHED TRADING MARKET FOR ANY OF THE GABRIEL SECURITIES TO
BE ISSUED IN THE MERGER AND THESE SECURITIES MAY REMAIN AN ILLIQUID INVESTMENT
FOR AN INDETERMINATE PERIOD OF TIME.
There is no established trading market for any of the Gabriel common stock,
preferred stock, options or warrants, and management of the combined company
does not intend to list any of these securities on any securities exchange or to
apply for authorization for the quotation of any of these securities on The
Nasdaq Stock Market or any other quotation system in connection with the merger.
Moreover, these securities are subject to significant transfer restrictions
under Gabriel's stockholder agreements. See the description of these agreements
on pages 138 and 139. Accordingly, your investment in the combined company will
be illiquid for an indeterminate period of time.
RISKS RELATING TO THE BUSINESS AND OPERATIONS OF THE COMBINED COMPANY
GABRIEL AND TRIVERGENT HAVE RECENTLY COMMENCED THEIR EXISTING OPERATIONS, AND
THE COMBINED COMPANY ANTICIPATES INCREASING OPERATING LOSSES AND NEGATIVE CASH
FLOWS.
Gabriel commenced operations in June 1999 and is providing services over
its own network facilities in nine markets. TriVergent began operating as a
telecommunications services provider in October 1997 by reselling BellSouth's
local telephone service. TriVergent changed its business strategy from reselling
local and long distance services to providing a broadband bundle of services
over its own network facilities in February 1999 and is providing these services
in seven markets. As neither Gabriel nor TriVergent has been offering these
services for a significant period of time, you have very little operating data
about Gabriel and TriVergent upon which to base an evaluation of the future
performance of the combined company and an investment in shares of Gabriel
stock.
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For the six months ended June 30, 2000 Gabriel and TriVergent had operating
losses of $16.7 million and $20.6 million, respectively, and, as of June 30,
2000, had accumulated deficits of $38.4 million and $65.5 million, respectively.
Both Gabriel and TriVergent expect the combined company to continue to
experience increasing consolidated operating losses and negative earnings before
interest, income taxes, depreciation and amortization, or EBITDA, as it expands
its operations, constructs and deploys its networks, and grows its customer
base. The combined company may not generate sufficient revenues, achieve or
sustain positive EBITDA or profitability, or generate sufficient positive
consolidated cash flow to meet its working capital and debt service
requirements.
THE COMBINED COMPANY EXPECTS TO INCUR SIGNIFICANT INDEBTEDNESS, WHICH COULD
IMPAIR ITS ABILITY TO OPERATE AND FINANCE ITS BUSINESS.
The combined company expects to incur significant indebtedness to finance
the construction of its networks. The existing senior secured credit facilities
of Gabriel and TriVergent contain, and future debt financings likely will
contain, covenants that will require the combined company to maintain specified
financial ratios and satisfy financial tests, as well as limitations on its
ability to incur indebtedness, create liens, make investments, make capital
expenditures, pay dividends and effect other specified transactions and
payments.
In addition, a high level of indebtedness could affect the future prospects
of the combined company by
- limiting its ability to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements and
other purposes,
- causing the combined company to delay or modify substantially its market
expansion plans,
- requiring that it dedicate a substantial portion of its cash flow from
operations, if any, to the payment of principal of and interest on its
indebtedness,
- limiting its flexibility in planning for, or reacting to changes in, its
business,
- making it more highly leveraged than some of its competitors, which may
place it at a competitive disadvantage, and
- increasing its vulnerability in the event of a downturn in its business.
TO EXPAND TO ITS TARGETED 40 MARKETS, THE COMBINED COMPANY WILL REQUIRE
SIGNIFICANT ADDITIONAL CAPITAL, WHICH IT MIGHT NOT BE ABLE TO OBTAIN.
Management estimates that expansion to its targeted 40 markets would
require at least $175 million of additional capital. The combined company will
also require additional financing, or require additional financing sooner than
anticipated, if
- current development plans or projections change or prove to be
inaccurate,
- the combined company has underestimated its cost projections,
- the schedule or target markets of its development plans change,
- necessary to respond to changes in demand for its services, and
regulatory and technological developments,
- the combined company identifies attractive additional market
opportunities, or
- the combined company effects any additional acquisitions or joint
ventures.
Additional capital may not be available to the combined company.
Furthermore, its operations may not produce positive consolidated cash flow in
amounts sufficient to meet its additional capital requirements. If the combined
company is unable to raise and generate sufficient funds, it may be required
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to modify, delay or abandon some of its planned market construction or
expenditures, which could delay or limit its growth.
THE SUCCESS OF THE COMBINED COMPANY WILL DEPEND ON ITS ABILITY TO DEVELOP AND
EXPAND ITS OPERATIONS.
In order for the combined company to be successful, it will need to
continue to develop and expand its operations by
- installing its network platforms and related equipment,
- obtaining needed interconnections, transmission capacity, access
facilities, equipment installation sites and operations support system
connections from the incumbent telephone companies in its markets,
- obtaining required governmental authorizations,
- implementing and integrating advanced, scalable operations support
systems and electronic links to incumbent telephone companies and other
business partners, and
- provisioning, servicing and billing customers.
If the combined company cannot effectively perform any of the above actions, it
may not be able to develop and expand its operations to meet its business
objectives.
THE COMBINED COMPANY INTENDS, AS PART OF ITS BUSINESS STRATEGY, TO CONTINUE TO
EXPAND THROUGH ACQUISITIONS AND OTHER STRATEGIC INVESTMENTS, WHICH INVOLVES
SUBSTANTIAL RISKS.
Growth through acquisitions and other strategic investments involves
substantial risks. The combined company may not be able to identify and
negotiate additional acquisitions on satisfactory terms, finance or obtain
financing needed to complete any acquisitions and, if any acquisition is made,
management may not be able to successfully integrate the acquired business into
the combined company's operations and/or the acquired business may not perform
as expected. Other risks involved in acquisitions are
- possible incurrence of unanticipated costs of the acquired businesses,
- possible loss of key personnel,
- the potential disruption of the combined company's ongoing business and
diversion of resources and management time,
- the possible inability of management to maintain uniform standards,
controls, procedures and policies,
- the risks of entering markets in which management may have little or no
prior direct experience, and
- the potential impairment of relationships with employees, suppliers and
customers as a result of changes in management.
The combined company may also enter into joint ventures and other strategic
investment transactions, which involves the risk that the combined company will
not have control over the joint venture or other strategic partnership and that
a joint venture or strategic partner may have economic, business or legal
interests or objectives that are inconsistent with those of the combined
company. These business partners may also be unable to meet their economic or
other obligations, which could force the combined company to fulfill those
obligations or abandon or curtail the venture.
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THE SUCCESSFUL IMPLEMENTATION OF THE BUSINESS PLAN OF THE COMBINED COMPANY WILL
DEPEND IN PART UPON GROWTH IN THE DEMAND FOR INTERNET ACCESS AND HIGH-SPEED DATA
PRODUCTS AND SERVICES BY SMALL TO MEDIUM-SIZED BUSINESSES.
The combined company will offer high speed Internet access and data
transmission and other enhanced data products and services primarily to small
and medium-sized businesses. The success of its Internet and data services
business will depend upon the demand for these products and services by its
target customers. If demand for Internet access and high speed data products and
services does not grow as anticipated, the combined company may not be able to
achieve its business objectives. The demand for dedicated, high-speed Internet
access and other high-speed data products and services by small to medium-sized
businesses is evolving and depends on a number of factors, including growth in
consumer and business use of new interactive technologies, further development
of technologies that facilitate interactive communications between organizations
and targeted audiences, security concerns and increases in transmission
capacity. Furthermore, the combined company's ability to accommodate growth in
demand, if any, for these products and services will depend on the ability of
the combined company to hire, train and retain qualified personnel and to
further enhance its products and services to adapt to technological and
competitive changes. In addition, the market for high-speed data transmission
via digital subscriber line, or DSL, and other technologies is relatively new
and evolving. DSL is a technology enabling high speed data access across
existing telephone lines. Providers of high-speed data services are testing
products from various suppliers for a multitude of applications, and industry
standards are still being developed.
THE SUCCESS OF THE COMBINED COMPANY'S NETWORK DEPLOYMENT STRATEGY IS HIGHLY
DEPENDENT UPON THE COMBINED COMPANY'S ABILITY TO ESTABLISH AND MANAGE ITS
RELATIONSHIPS WITH THE INCUMBENT TELEPHONE COMPANIES.
The combined company will depend upon the technology, cooperation and
capabilities of the incumbent telephone companies in order to properly provision
and service its customers. The success of the combined company's network
deployment strategy is highly dependent on its ability to interconnect with, and
obtain facilities from, the incumbent telephone companies in its target markets
on a timely basis and on satisfactory terms. Federal law requires most of the
incumbent telephone companies to lease or "unbundle" elements of their networks
and permit competitive providers, like Gabriel and TriVergent, to purchase the
call origination and call termination services they need. However, incumbents
may not provide these unbundled network elements in a timely manner and prices
or other terms and conditions for these elements may not be favorable to the
combined company.
Despite the adoption of the Telecommunications Act of 1996 and related FCC
regulations that are designed to allow new competitive telephone companies like
Gabriel and TriVergent, to compete with the incumbent telephone companies,
Gabriel and TriVergent, like many other competitive providers, have experienced
difficulties in working with the incumbent telephone companies in their initial
markets. This has interfered with the ability of both Gabriel and TriVergent to
provision and service their customers and has increased their costs. Court and
regulatory decisions have created some uncertainty about the FCC's rules
governing the pricing, terms and conditions of agreements needed to obtain
interconnections and network facilities and could make negotiating and enforcing
these agreements more difficult and protracted in the future. If the combined
company is unable to obtain high quality, reliable and reasonably priced
services from the incumbent telephone companies, its cost of providing services
may increase and customers may not subscribe for its services.
THE COMBINED COMPANY'S FAILURE TO EFFECTIVELY PROVIDE ADVANCED INTERNET SERVICES
TO ITS CUSTOMERS COULD HARM ITS BUSINESS.
In addition to providing voice and data services, the combined company will
act as an Internet service provider to its customers. The Internet is comprised
of many Internet service providers that operate their own networks and
interconnect with each other at various points. Both Gabriel and TriVergent are
in the process of developing relationships to permit them to exchange traffic
with these providers. However, the combined company may not be able to develop
or maintain relationships with providers with adequate
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network infrastructure or expand or adapt its network infrastructure to meet the
Internet service requirements of its customers. Because Internet access, web
hosting and applications services are critical to many of the combined company's
customers' businesses, the inability to meet customer requirements and any
significant interruption in the combined company's services could result in lost
profits or other indirect or consequential damages to customers, which could
cause them to switch to another service provider.
THE COMBINED COMPANY MAY NOT BE ABLE TO PROVISION AND SERVICE ITS CUSTOMERS IF
IT CANNOT SECURE SUFFICIENT TRANSMISSION CAPACITY TO MEET ITS FUTURE NEEDS.
The combined company may not be able to lease adequate transmission
capacity in markets it plans to enter or renew its lease arrangements or obtain
comparable arrangements from other carriers in its existing markets. Because it
initially plans to lease rather than build local transmission capacity in each
of its markets, the combined company would be unable to service its customers if
it could not obtain adequate transmission capacity. Insufficient capacity could
result in the loss of customers and the inability to add new customers and could
limit the combined company's ability to enter new markets.
THE OPERATIONS AND GROWTH OF THE COMBINED COMPANY DEPEND UPON THE ABILITY OF
THIRD PARTY SUPPLIERS TO PROVIDE ADVANCED, RELIABLE NETWORK EQUIPMENT ON A
TIMELY BASIS.
The suppliers of the combined company's network equipment may not be able
to meet its equipment requirements on a timely basis, and equipment may not
perform as expected. The following factors could disrupt the combined company's
operations, jeopardize service to its customers, delay its expansion into new
markets and limit its ability to introduce new services and obtain and retain
customers:
- extended interruption in the supply of network equipment;
- material increase in prices;
- significant delay by suppliers in their shipment of products, their
release of new products or the failure of their products to perform as
expected; and
- extended delay in transitioning to the products of an alternative
supplier, if necessary.
As an example, during the fourth quarter of 1999, Gabriel experienced
problems with some advanced customer premise equipment, which did not perform as
expected, causing delays in its sales and installation efforts. To address these
problems, Gabriel installed alternative equipment utilizing traditional
telephone technologies, which did not have some of the capabilities that the
more advanced equipment was designed to provide. Similar problems may arise in
the future.
THE ADVANCED EQUIPMENT THAT THE COMBINED COMPANY PLANS TO USE IN ITS NETWORKS
MAY NOT BECOME COMMERCIALLY AVAILABLE ON A TIMELY BASIS OR PERFORM AS
ANTICIPATED, WHICH WOULD LIMIT THE COMBINED COMPANY'S ABILITY TO REALIZE ANY
COST SAVINGS ASSOCIATED WITH THIS EQUIPMENT.
The combined company plans to incorporate more economical, advanced
equipment in its networks when it becomes commercially available that should
provide more capabilities and efficiencies than its current network platforms.
Management expects this equipment will fully integrate data and voice
transmissions using a single switch instead of using separate switches for voice
and data traffic. A switch is electronic equipment that interconnects
transmission paths, or circuits, to allow telecommunications service providers
to connect calls or data transmissions directly to their destination. The
combined company must rely on third-party equipment vendors to develop this
advanced network equipment. Equipment with all of the required features and
functionality may not perform as expected or become available to the combined
company on a timely basis or on satisfactory terms. In the interim, the combined
company will be required to continue to deploy more costly voice switches to
provide its local and long distance voice services.
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THE FAILURE OF THE COMBINED COMPANY TO SUCCESSFULLY IMPLEMENT, INTEGRATE AND
MAINTAIN SOPHISTICATED OPERATIONS SUPPORT SYSTEMS WOULD ADVERSELY AFFECT ITS
ABILITY TO REALIZE ANTICIPATED OPERATIONAL EFFICIENCIES AND TO PROVISION,
SERVICE AND BILL ITS CUSTOMERS.
Sophisticated back office information and processing systems will be vital
to the combined company's ability to monitor costs, render single monthly
invoices for bundled services, provision customer orders, provide timely
customer service and achieve operating efficiencies. Gabriel and TriVergent have
each developed, with third-party vendors, scalable operations support systems
that are designed to handle all of their customer service, order management,
provisioning, billing, collection and trouble management processing. They also
automate many of the functions for which carriers have historically required
multiple manual entries of customer information. However, management of the
combined company may not be able to integrate Gabriel's and TriVergent's
operations support systems to produce the anticipated operational efficiencies.
The failure of the combined company's operations support systems to perform as
expected or to interface with incumbent telephone companies and other providers,
or the failure to adequately identify all of the information and processing
needs and to upgrade the systems as necessary, will adversely affect the
combined company's ability to provision, service and bill its customers.
THE SUCCESS OF THE COMBINED BUSINESS DEPENDS ON ITS ABILITY TO HIRE AND RETAIN
QUALIFIED MANAGEMENT, TECHNICAL AND SALES PERSONNEL.
The combined company will be managed by its key executive officers, most
notably Mr. David L. Solomon, its chairman and chief executive officer, Mr. G.
Michael Cassity, its president and chief operating officer and Mr. Gerard J.
Howe, its president -- strategic initiatives. The combined company will not
maintain key person life insurance for any of its executive officers. The loss
of the services of one or more of these key executive officers could have a
material adverse effect on the ability of the combined company to achieve its
strategic objectives.
The success of the combined company also will depend in large part on its
ability to attract and retain a large and effective sales force and other highly
skilled and qualified management and technical personnel. The competition for
qualified personnel in the telecommunications industry is intense. The combined
company may not be able to attract and retain the qualified management,
technical and sales personnel necessary to achieve its objectives.
THE COMBINED COMPANY'S RELIANCE ON OTHER CARRIERS TO PROVIDE LONG DISTANCE
TRANSMISSION SERVICES COULD ADVERSELY AFFECT THE PROFITABILITY OF ITS LONG
DISTANCE SERVICES.
The combined company will provide long distance services to its customers
as part of its offering of bundled telecommunications services. The combined
company will rely on other carriers to provide it with long distance
transmission services. Agreements with these carriers typically provide for the
resale of long distance services on a per-minute basis and may contain minimum
volume commitments. If the combined company were to fail to meet any minimum
volume commitments, it would have to pay under-utilization charges, and if it
underestimates its transmission capacity needs, it may be required to obtain
additional capacity through more expensive means, each of which could adversely
affect its ability to offer long distance services profitably. In addition, the
long distance business is extremely competitive and prices have declined
substantially in recent years and are expected to continue to decline. The long
distance business is also characterized by a high average customer churn rate,
meaning that customers frequently change long distance providers in response to
the offering of lower rates or promotional incentives by competitors.
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RISKS RELATING TO THE COMMUNICATIONS INDUSTRY
INCUMBENT TELEPHONE COMPANIES HAVE A DOMINANT MARKET SHARE IN EACH OF THE
COMBINED COMPANY'S TARGET MARKETS AND MAY TAKE ACTIONS THAT WILL ADVERSELY
AFFECT THE COMBINED COMPANY'S ABILITY TO ATTRACT AND RETAIN CUSTOMERS AND
OPERATE PROFITABLY.
In each of the combined company's markets, it competes principally with the
incumbent telephone companies serving that market, which initially has been
Southwestern Bell and Ameritech, in the case of Gabriel, and BellSouth, in the
case of TriVergent. The incumbent telephone companies have long-standing
relationships and name recognition with their customers, financial, technical
and marketing resources substantially greater than Gabriel and TriVergent, and
the potential to fund competitive services with cash flows from a variety of
businesses. Incumbent telephone companies presently have approximately a 95%
market share in each of the target markets of the combined company. For these
reasons, the combined company faces a significant threat to its ability to
attract and retain customers. In addition, recent regulatory initiatives
designed to promote competition with the incumbent telephone companies have also
been accompanied by increased pricing flexibility for, and relaxation of
regulatory oversight of, the incumbent telephone companies. This may present
incumbent telephone companies with an opportunity to subsidize services that
compete with the combined company's services with revenues generated from non-
competitive services, which would allow incumbent telephone companies to offer
competitive services at lower prices. If the incumbent telephone companies
engage in discount pricing practices, the combined company may not be able to
achieve or maintain adequate market share or margins or compete effectively with
the incumbent telephone companies in its target markets.
INCREASING COMPETITION FROM A NUMBER OF OTHER PROVIDERS IN EACH OF ITS TARGET
MARKETS ALSO COULD ADVERSELY AFFECT THE COMBINED COMPANY'S ABILITY TO ACHIEVE OR
MAINTAIN ADEQUATE MARKET SHARE AND OPERATE PROFITABLY.
Each of Gabriel and TriVergent believes that second and third tier markets
will support only a limited number of competitors and that operations in markets
with multiple competitive providers are likely to be unprofitable for one or
more of these providers. Gabriel and TriVergent consider second tier markets as
metropolitan areas with populations ranging from 950,000 to two million and
third tier markets as metropolitan areas with populations ranging from 250,000
to 950,000. The combined company expects to experience increasing competition in
each of its target markets from other providers of integrated communications
services, which are
- large long distance companies, such as AT&T, WorldCom and Sprint, which
offer integrated local, long distance and data telecommunications
services,
- the regional Bell operating companies, such as Southwestern Bell,
Ameritech and BellSouth, which have gained or are aggressively seeking
regulatory authority under the Telecommunications Act to offer bundled
local and long distance telecommunications services in their own local
regions, and
- other competitive providers.
Many of the combined company's competitors have financial, technical,
marketing, personnel and other resources, including brand name recognition,
substantially greater than the combined company's. These competitors also may
offer lower prices than the combined company's. As a result, the combined
company may not be able to achieve or maintain adequate market share or margins,
or compete effectively, in its target markets.
A GROWING NUMBER OF COMPETITORS ARE DEPLOYING ALTERNATIVE TECHNOLOGIES TO
PROVIDE VOICE AND DATA TRANSMISSION SERVICES WHICH MAY BE MORE ATTRACTIVE TO
POTENTIAL CUSTOMERS OF THE COMBINED COMPANY.
The construction of networks utilizing new technologies such as Internet
telephony, cable modem service and wireless networks might also create
significant new competitors that may have lower costs or alternative products
which may be more attractive to potential customers of the combined company. For
example, Qwest Communications International Inc., Level 3 Communications Inc.
and Williams
13
<PAGE> 21
Communications Group have deployed extensive fiber optic communications networks
utilizing Internet-based technologies. In addition, Sprint and AT&T have
announced that they intend to transition their respective network
infrastructures to Internet protocol platforms in order to offer their customers
integrated voice and data solutions. Teligent, Inc. and Winstar Communications,
Inc. are using wireless technologies to provide high speed integrated local,
long distance and data telecommunications services.
Other potential competitors in the combined company's markets include
electric utilities, cable television companies, resellers, and microwave,
satellite and other wireless telecommunications providers. Some electric
utilities can transmit Internet and data services over their power lines at
speeds comparable to those achievable by telephone companies with traditional
transmission technologies. With the recent acquisitions of TCI and Media One by
AT&T, the announced merger of Time Warner with America Online, and continuing
consolidation in the cable television industry, cable television companies have
emerged as a significant new threat to more traditional providers of
telecommunications services. Other new competitors are utilizing alternative
transmission facilities, including satellite transmission, which can also be
used to provide high capacity voice, data and Internet access and interactive
services. These companies may offer alternative products at competitive prices
which may negatively impact the combined company's ability to obtain and retain
customers.
GOVERNMENT REGULATIONS MIGHT RESTRICT THE COMBINED COMPANY'S OPERATIONS OR
IMPROVE THE COMPETITIVE POSITION OF THE COMBINED COMPANY'S PRINCIPAL
COMPETITORS.
Unlike some competitors of the combined company, particularly the incumbent
telephone companies, TriVergent and Gabriel are not currently subject to some of
the more burdensome requirements of federal regulations. However, the combined
company's ability to compete in the communications industry will depend upon a
continued favorable, pro-competitive regulatory environment. New regulations or
legislation affording greater flexibility and regulatory relief to the combined
company's larger competitors or imposing greater restrictions on the combined
company's operations may significantly harm its ability to compete.
FORWARD-LOOKING STATEMENTS
This document contains a number of forward-looking statements relating to
Gabriel, TriVergent and the combined company with respect to business
strategies, anticipated operating efficiencies, competitive positions, growth
opportunities for existing products and services, and other matters. We consider
any statements that are not historical facts as forward-looking statements.
These forward-looking statements, including those relating to the Gabriel and
TriVergent business plans and future prospects, revenues and income, including
those referenced under the caption "The Merger," are necessarily estimates
reflecting the best judgment of the senior management of Gabriel and TriVergent.
They involve a number of risks and uncertainties that could cause actual results
to differ materially from those suggested by the forward-looking statements.
These differences could be material; therefore, you should evaluate
forward-looking statements in light of various important factors, including
those set forth or incorporated by reference in this document.
Important factors that could cause actual results to differ materially from
estimates or forecasts contained in the forward-looking statements include
- the ability to integrate the operations of the combined company and its
acquired businesses, including their respective product lines and
technologies,
- the combined company's degree of financial leverage and its ability to
expand to its targeted 40 markets,
- the combined company's dependence on growth in demand for its products
and services,
- the ability to establish and maintain relationships with incumbent local
telephone companies and to secure included transmission capacity,
14
<PAGE> 22
- the impact of competitive services and pricing, alternative technologies
and new entrants in the combined company's markets,
- regulatory risks, including the impact of the Telecommunications Act of
1996, and
- other risks referenced from time to time in the combined company's
filings with the SEC.
Words such as "estimate," "project," "plan," "intend," "expect," "believe"
and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are found at various places throughout this
document and the other documents incorporated by reference. You should not place
undue reliance on these forward-looking statements, which speak only as of the
date of this document.
15
<PAGE> 23
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following selected consolidated historical financial data of Gabriel
and TriVergent has been derived from their respective historical financial
statements, which are included in this information statement/prospectus. The
following data should be read in conjunction with the historical consolidated
financial statements of Gabriel and TriVergent, respectively, and the related
notes, the unaudited pro forma condensed consolidated financial statements, and
the related notes, and Gabriel's and TriVergent's respective "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this information statement/prospectus.
Basic and diluted loss per share for each of Gabriel and TriVergent have
been computed using the number of shares of common stock and common stock
options and warrants outstanding. The weighted average number of shares was
based on common stock outstanding for basic loss per share and common stock
outstanding and common stock options and warrants outstanding for diluted loss
per share in periods when such common stock options and warrants are not
antidilutive.
Included in "Other Financial Data" of Gabriel and TriVergent's historical
financial data below are adjusted EBITDA amounts. EBITDA consists of earnings
(loss) before net interest, income taxes, depreciation and amortization, and
amounts reported as adjusted EBITDA have been adjusted to exclude minority
interests and extraordinary items. Management believes EBITDA is a measure
commonly used in the telecommunications industry in assessing companies'
operating performance, leverage and ability to incur and service debt. Adjusted
EBITDA is presented to enhance an understanding of each company's operating
results and is not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles. Gabriel's proposed
senior secured credit facility and Gabriel and TriVergent's existing credit
facilities contain covenants based on EBITDA that require the borrower to
maintain interest coverage and leverage ratios. EBITDA is not a measure of
financial performance under generally accepted accounting principles and should
not be considered an alternative to earnings (loss) from operations and net
income (loss) as a measure of performance or an alternative to cash flow as a
measure of liquidity. Nether EBITDA nor adjusted EBITDA is necessarily
comparable to similarly titled measures of other companies. Each is thus
susceptible to varying calculations. The consolidated statements of cash flows
used in and provided by operating, investing and financing activities, as
calculated under generally accepted accounting principles, of each of TriVergent
and Gabriel are included with the respective company's consolidated financial
statements contained elsewhere in this information statement/prospectus.
16
<PAGE> 24
GABRIEL CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------- ----------------------
1998(1) 1999 1999 2000
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue......................................... -- $ 452 $ 4 $ 3,268
Costs and expenses:
Cost of communications services............... -- 496 4 2,634
Selling, general and administrative........... $ 693 16,559 4,674 17,338
Depreciation and amortization................. 6 1,955 113 4,476
--------- --------- --------- ---------
Total costs and expenses................... 699 19,010 4,791 24,448
--------- --------- --------- ---------
Loss from operations....................... (699) (18,558) (4,787) (21,180)
Other income (expense):
Interest income............................... 132 1,477 549 1,860
Interest expense.............................. -- (215) -- (1,440)
--------- --------- --------- ---------
Total other income (expense)............... 132 1,262 549 420
Minority interest............................... -- -- -- 229
--------- --------- --------- ---------
Net loss................................... $ (567) $ (17,296) $ (4,238) $ (20,531)
========= ========= ========= =========
Basic and diluted loss per share................ $ (0.16) $ (3.25) $ (0.81) $ (3.54)
========= ========= ========= =========
Weighted average common shares outstanding...... 3,550,755 5,322,409 5,225,022 5,800,670
OTHER FINANCIAL DATA:
Capital expenditures............................ $ 153 $ 35,564 $ 13,277 $ 42,286
Adjusted EBITDA................................. (693) (16,602) (4,675) (16,704)
Cash flows from operating activities............ (425) (14,858) (3,009) (11,874)
Cash flows from investing activities............ (153) (37,564) (13,277) (42,286)
Cash flows from financing activities............ 29,261 86,819 27,193 69,955
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------- ----------------------
1998 1999 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................... $28,682 $ 63,080 $35,890 $ 78,876
Property and equipment, net..................... 148 33,806 13,312 76,276
Total assets.................................... 28,833 102,712 55,052 163,408
Long-term debt, less current maturities......... -- 20,000 -- 20,000
Stockholders equity............................. 28,694 78,217 51,649 127,961
</TABLE>
-------------------------
(1) Gabriel was organized on June 15, 1998.
17
<PAGE> 25
TRIVERGENT CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------ ------------------------
1997(1) 1998 1999 1999 2000
--------- --------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues........................... $ -- $ 5,261 $ 25,037 $ 13,818 $ 8,627
Cost of services................... -- 3,802 17,704 9,648 8,731
Operating expenses:
Selling, general and
administrative................ 40 12,166 23,523 13,440 20,210
Provision for uncollectible
accounts...................... -- 1,976 7,285 5,816 382
Depreciation and amortization... -- 150 1,318 518 4,725
--------- --------- ---------- ---------- ----------
Total operating expenses........ 40 14,292 32,126 19,774 25,317
--------- --------- ---------- ---------- ----------
Operating loss..................... (40) (12,833) (24,793) (15,604) (25,421)
Interest income................. -- 123 816 70 986
Interest expense................ -- (13) (1,469) (571) (1,873)
--------- --------- ---------- ---------- ----------
Loss before extraordinary
item.......................... (40) (12,723) (25,446) (16,105) (26,308)
Extraordinary item -- early
extinguishment of debt........ -- -- (218) -- (725)
Net loss........................ (40) (12,723) (25,664) (16,105) (27,033)
Preferred stock accretion....... -- (58) (2,603) (300) (9,737)
--------- --------- ---------- ---------- ----------
Net loss to common
stockholders.................. $ (40) $ (12,781) $ (28,267) $ (16,405) $ (36,770)
========= ========= ========== ========== ==========
Basic and diluted loss per
share......................... $ (.01) $ (1.37) $ (2.60) $ (1.54) $ (3.12)
Weighted average shares
outstanding................... 6,390,476 9,308,771 10,868,729 10,645,897 11,773,102
OTHER FINANCIAL DATA:
Net cash used in operating
activities...................... $ (56) $ (11,072) $ (19,956) $ (15,757) $ (29,973)
Net cash used in investing
activities...................... -- (1,465) (38,764) (2,182) (49,822)
Net cash provided by financing
activities...................... 110 13,883 72,558 16,791 76,853
Capital expenditures............... -- 1,465 34,966 1,688 49,487
Adjusted EBITDA.................... (40) (12,683) (23,475) (15,086) (20,697)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------- ------------------------
1998 1999 1999 2000
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments....... $ 1,399 $ 15,237 $ 251 $ 12,295
Net property and equipment................... 1,314 44,057 2,658 89,507
Total assets................................. 9,942 67,277 8,524 119,980
Long-term debt............................... 83 18,200 2,000 33,776
Redeemable preferred stock................... 11,295 65,780 11,595 141,460
Stockholders' deficit........................ (5,941) (31,158) (21,021) (63,317)
</TABLE>
-------------------------
(1) TriVergent was organized on October 29, 1997.
18
<PAGE> 26
COMPARATIVE PER SHARE DATA
The following table sets forth for Gabriel common stock and TriVergent
common stock, for the periods indicated, selected historical per share data and
the corresponding unaudited pro forma combined and pro forma equivalent per
share amounts, calculated assuming an exchange ratio, as of September 27, 2000,
of 1.1071 shares of Gabriel common stock and giving effect to the proposed
merger. The data presented are based upon the historical consolidated financial
statements and related notes of each of Gabriel and TriVergent. This information
should be read in conjunction with, and is qualified in its entirety by
reference to, the historical financial statements of Gabriel and TriVergent and
related notes and the pro forma condensed combined financial statements and
related notes included elsewhere in this information statement/prospectus. The
data presented is not necessarily indicative of the future results of operations
of the consolidated companies or the actual results that would have occurred if
the merger had been consummated prior to the periods indicated. Neither Gabriel
nor TriVergent has ever paid dividends on its common stock.
<TABLE>
<CAPTION>
GABRIEL/
TRIVERGENT
GABRIEL TRIVERGENT PRO FORMA
HISTORICAL HISTORICAL COMBINED
---------- ---------- -----------
<S> <C> <C> <C>
Book value per common share equivalent(1):
December 31, 1999......................................... $ 2.21 $(1.05) $ 3.70
June 30, 2000............................................. 2.79 (1.36) 3.54
Income (loss) per weighted average common share outstanding
from continuing operations (after preferred dividend
requirement):
Basic and diluted:
Year ended December 31, 1997(2)...................... -- $(0.01) --
Year ended December 31, 1998(3)...................... $(0.16) (1.37) $(1.94)
Year ended December 31, 1999(4)...................... (3.25) (2.58) (3.38)
Six months ended June 30, 1999....................... (0.81) (1.54) (1.63)
Six months ended June 30, 2000(4).................... (3.54) (3.06) (3.27)
</TABLE>
-------------------------
(1) The book value per common share equivalent data is calculated by dividing
stockholders' equity by the aggregate of the common stock outstanding at the
end of the period plus the assumed shares upon conversion of the preferred
stock outstanding at the end of the period.
(2) TriVergent was organized on October 29, 1997.
(3) Gabriel was organized on June 15, 1998.
(4) Before extraordinary item.
19
<PAGE> 27
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF GABRIEL AND TRIVERGENT
The following unaudited pro forma condensed combined financial statements
have been derived from the application of pro forma adjustments to the
historical financial statements of Gabriel and TriVergent. The unaudited pro
forma condensed combined balance sheet as of June 30, 2000, gives effect to the
merger as if it occurred on June 30, 2000. The unaudited pro forma condensed
combined statements of operations for the year ended December 31, 1999 and the
six months ended June 30, 2000, give effect to the merger as if it had occurred
on January 1, 1999. The unaudited pro forma condensed combined financial
statements should be read in conjunction with the financial statements of
Gabriel and TriVergent which are included in this information
statement/prospectus.
The pro forma adjustments are described in the notes to the unaudited pro
forma condensed combined financial statements and are based on available
information and assumptions that management believes are reasonable. The
unaudited pro forma condensed combined financial statements do not purport to
present the financial position or results of operations of Gabriel had the
merger occurred on the date specified, nor are they necessarily indicative of
the results of operations that may be achieved in the future. The unaudited pro
forma condensed combined financial statements do not reflect any adjustments for
the benefits that management expects to realize in connection with the merger.
No assurances can be made as to the amount or timing of the benefits, if any,
that may be realized.
The merger will be accounted for using the purchase method of accounting.
Under this method, tangible and identifiable intangible assets acquired and
liabilities assumed are recorded at their estimated fair values. The excess of
the purchase price, including estimated fees and expenses related to the merger,
over the fair value of the assets acquired is classified as goodwill on the
accompanying unaudited pro forma condensed combined balance sheet. The
allocation of the purchase price, estimated fair values and useful lives of
assets acquired and liabilities assumed are subject to final valuation
adjustments. The final allocation of the purchase price will give consideration
to identifiable intangible assets, if any are determined in the valuation
process, as well as the fair value per share of Gabriel stock. Gabriel
management does not believe the purchase price allocation and the related
amortization will be materially different than the allocation presented herein.
20
<PAGE> 28
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
GABRIEL TRIVERGENT ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 78,876 $ 12,295 $ (8,000)(2) $ 83,171
Accounts receivable, net.................... 1,748 840 -- 2,588
Other current assets........................ 1,949 1,383 -- 3,332
--------- -------- --------- ---------
Total current assets..................... 82,573 14,518 (8,000) 89,091
Property, plant and equipment, net............ 76,276 89,507 5,574(2) 171,357
Other noncurrent assets:
Goodwill, net............................... -- 8,575 (8,575)(5e) 148,226
148,226(2)
Other long-term assets, net................. 4,559 7,380 -- 11,939
--------- -------- --------- ---------
Total assets............................. 163,408 119,980 137,225 420,613
========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 2,987 $ 2,200 $ -- $ 5,187
Accrued and other current liabilities....... 8,509 5,860 -- 14,369
--------- -------- --------- ---------
Total current liabilities................ 11,496 8,060 -- 19,556
Term loan..................................... 20,000 32,832 -- 52,832
Long-term portion of capital lease
obligation.................................. -- 945 -- 945
--------- -------- --------- ---------
Total liabilities........................ 31,496 41,837 -- 73,333
--------- -------- --------- ---------
Minority Interest............................. 3,951 -- -- 3,951
Redeemable preferred stock.................... -- 141,460 (142,359)(5a) (899)
Stockholders' equity:
Preferred stock............................. 592 -- 389(3) 981
Common stock................................ 60 12 134(3) 194
(12)(5a)
Additional paid-in capital.................. 301,128 2,340 219,382(5b) 522,850
Accumulated deficit......................... (38,395) (65,460) 65,460(5a) (38,395)
Unearned compensation....................... -- -- (5,978)(2) (5,978)
Treasury stock.............................. (400) (209) 209(5a) (400)
Preferred stock subscriptions receivable.... (135,024) -- -- (135,024)
--------- -------- --------- ---------
Total stockholders' equity............... 127,961 (63,317) 279,584 344,228
--------- -------- --------- ---------
Total liabilities and stockholders' equity.... $ 163,408 $119,980 $ 137,225 $ 420,613
========= ======== ========= =========
</TABLE>
21
<PAGE> 29
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
GABRIEL TRIVERGENT ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenue.................................. $ 452 $ 25,037 $ -- $ 25,489
Operating expenses:
Cost of communication services......... 496 17,704 -- 18,200
Selling, general and administrative.... 16,559 23,523 3,605(5c) 43,687
Provision for uncollectible accounts... -- 7,285 -- 7,285
Depreciation and amortization.......... 1,955 1,318 9,882(5d) 12,992
(163)(5e)
--------- ---------- -------- ----------
Total operating expenses............ 19,010 49,830 13,324 82,164
--------- ---------- -------- ----------
Loss from operations................ (18,558) (24,793) (13,324) (56,675)
Other income (expense):
Interest income........................ 1,477 816 -- 2,293
Interest expense....................... (215) (1,469) -- (1,684)
--------- ---------- -------- ----------
Loss before extraordinary item...... $ (17,296) $ (25,446) $(13,324) $ (56,066)
--------- ---------- -------- ----------
Adjustments for the determination of loss
applicable to common stockholders:
Preferred stock accretion................ -- (2,603) -- (2,603)
--------- ---------- -------- ----------
Loss applicable to common stockholders... $ (17,296) $ (28,049) $(13,324) $ (58,669)
========= ========== ======== ==========
Loss per common share (basic and
diluted)(4)............................ $ (3.25) $ (2.58) $ (3.38)
========= ========== ==========
Shares used in computation of loss per
common share........................... 5,322,409 10,868,729 17,355,179
========= ========== ==========
</TABLE>
22
<PAGE> 30
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PRO
HISTORICAL HISTORICAL PRO FORMA FORMA
GABRIEL TRIVERGENT ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenue..................................... $ 3,268 $ 8,627 $ -- $ 11,895
Operating expenses:
Cost of communication services............ 2,634 8,731 -- 11,365
Selling, general and administrative....... 17,338 20,592 570(5c) 38,500
Depreciation and amortization............. 4,476 4,725 4,941(5d) 13,687
(455)(5e)
--------- ---------- -------- ----------
Total operating expenses............. 24,448 34,048 5,056 63,552
--------- ---------- -------- ----------
Loss from operations................. (21,180) (25,421) (5,056) (51,657)
Other income (expense):
Interest income........................... 1,860 986 -- 2,846
Interest expense.......................... (1,440) (1,873) -- (3,313)
--------- ---------- -------- ----------
Loss before minority interest and
extraordinary item................ (20,760) (26,308) (5,056) (52,124)
Minority Interest........................... 229 -- -- 229
--------- ---------- -------- ----------
Loss before extraordinary item....... $ (20,531) $ (26,308) $ (5,056) $ (51,895)
--------- ---------- -------- ----------
Adjustments for the determination of loss
applicable to common stockholders:
Preferred stock accretion................... $ -- $ (9,737) $ -- $ (9,737)
--------- ---------- -------- ----------
Loss applicable to common stockholders...... $ (20,531) $ (36,045) $ (5,056) $ (61,632)
========= ========== ======== ==========
Loss per common share (basic and
diluted)(5)............................... $ (3.54) $ (3.06) $ (3.27)
========= ========== ==========
Shares used in computation of loss per
common share.............................. 5,800,670 11,773,102 18,834,671
========= ========== ==========
</TABLE>
23
<PAGE> 31
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined balance sheet as of June 30,
2000, gives effect to the merger as if it had occurred on June 30, 2000. The
unaudited pro forma condensed combined statements of operations for the year
ended December 31, 1999 and for the six months ended June 30, 2000 give effect
to the merger as if it had occurred on January 1, 1999. These statements are
prepared on the basis of accounting for the merger as a purchase business
combination.
NOTE 2. PURCHASE PRICE AND PURCHASE PRICE ALLOCATION
The merger will be accounted for as a purchase of TriVergent by Gabriel.
The merger will therefore result in an allocation of purchase price to the
tangible and intangible assets of TriVergent. This allocation reflects an
estimate of the fair value of assets to be acquired by Gabriel based upon
available information. This allocation will be adjusted based on the final
purchase price and the final determination of asset values.
Holders of outstanding warrants and options exercisable for shares of
TriVergent common stock will be entitled to receive warrants or options, as the
case may be, to acquire on the same terms and conditions, except as each holder
of options may otherwise agree with respect to vesting provisions, to purchase
the number of shares of Gabriel common stock determined by multiplying the
number of shares of TriVergent common stock subject to TriVergent warrants or
options by the exchange ratio, 1.1071, at an exercise price per share of Gabriel
common stock equal to the exercise price per share of TriVergent warrants or
options, as the case may be, divided by the exchange ratio. The Gabriel options
issued to any TriVergent employee who acknowledges that the merger will not be
treated as an event resulting in acceleration of the exercise rights of such
employee's options will vest over a period of three years from the date of
original grant, versus the five years currently provided for in the TriVergent
options. These options may fully vest and become fully exercisable in accordance
with their terms if certain events occur within one year following the effective
time.
TriVergent's common and preferred stock outstanding was based on shares
outstanding on September 27, 2000. Gabriel's fair value per share used to
calculate the purchase price and to reflect current market conditions was $4.00
per share. The final purchase price will be determined as of the date of closing
of the merger based on the fair value of the shares to be issued in the merger
as of that date.
For pro forma purposes, the estimated fair value of these options and
warrants has been included in the purchase price. The intrinsic value of the
unvested options has been allocated to unearned compensation based on unvested
options as of September 27, 2000 and will be finalized as of the closing and
determination of such value. The fair value of the options and warrants to
purchase shares of Gabriel has been calculated based on the number of options
and warrants outstanding as of September 27, 2000.
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<PAGE> 32
The aggregate purchase price was determined as follows (in thousands,
except exchange ratio and per share information):
<TABLE>
<S> <C>
TriVergent common and preferred stock outstanding at
September 27, 2000........................................ 46,417
TriVergent preferred stock issued in lieu of accrued
dividends................................................. 814
--------
47,231
Exchange ratio.............................................. 1.1071
Equivalent Gabriel stock exchanged.......................... 52,289
Gabriel market value per share.............................. $ 4.00
--------
Fair value of common and preferred stock issued............. $209,156
Fair value of TriVergent options assumed.................... $ 16,003
Intrinsic value of unvested options......................... $ (5,978)
Fair value of TriVergent warrants assumed................... $ 3,064
Estimated transaction costs................................. $ 8,000
--------
Total consideration.................................... $230,245
========
</TABLE>
The purchase price was allocated to the fair value of the net assets
acquired and to goodwill as follows (in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 12,295
Property and equipment...................................... 95,081
Other assets................................................ 9,603
Long term debt.............................................. (32,832)
Other liabilities........................................... (9,005)
Note receivable from officers............................... 899
Unearned compensation....................................... 5,978
Goodwill.................................................... 148,226
--------
Aggregate purchase price.................................. 230,245
========
</TABLE>
NOTE 3. GABRIEL STOCK ISSUED
The pro forma adjustments reflect TriVergent stock exchanged for Gabriel
stock, with a par value of $.01, as follows:
<TABLE>
<S> <C>
Common stock................................................ 13,353,462
Preferred stock............................................. 38,935,618
----------
Total shares issued....................................... 52,289,080
==========
</TABLE>
NOTE 4. LOSS PER COMMON SHARE (BASIC AND DILUTED)
Pro forma loss per common share has been computed using the shares of stock
outstanding as if the merger had occurred on January 1, 1999. The common shares
used in the computation of loss per common share was based on common stock
outstanding for basic loss per share and, for diluted loss per share, common
stock outstanding and assuming conversion of preferred stock and the exercise of
common stock options and warrants in periods when such conversion of preferred
stock, and the exercise of common stock options and warrants are not
antidilutive. The shares used in the computation of loss per common share for
the combined company is calculated as the shares used in the computation of
historical loss per common share for Gabriel plus the Gabriel common stock
exchanged for TriVergent common stock as calculated and set forth in Note 3
above.
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<PAGE> 33
NOTE 5. OTHER PRO FORMA ADJUSTMENTS
(a) The pro forma adjustments reflect the elimination of TriVergent's
historical common stock, preferred stock, accumulated deficit, and treasury
stock as of June 30, 2000.
(b) The pro forma adjustments record the net effect of the following
adjustments on capital in excess of par value (in thousands):
<TABLE>
<S> <C>
Issuance of shares for acquisition.......................... $208,633
Issuance of options and warrants for acquisition............ 13,089
Elimination of TriVergent additional paid in capital........ (2,340)
--------
$219,382
========
</TABLE>
(c) The intrinsic value of unvested options results in the amortization of
unearned compensation of $3.6 million and $.6 million for the years ended
December 31, 1999 and the six months ended June 30, 2000, respectively. The
unearned compensation is amortized over the remaining vesting period.
(d) The effect of allocating the aggregate purchase price to goodwill
results in additional amortization expense of $9.9 million and $4.9 million for
the year ended December 31, 1999 and the six months ended June 30, 2000,
respectively. For amortization purposes, goodwill has been assigned a 15 year
life.
(e) As a result of the merger, historical goodwill carried on the balance
sheet and associated amortization recorded on the statement of operations of
TriVergent are eliminated.
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<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
GABRIEL, TRIVERGENT AND THE COMBINED COMPANY
GABRIEL
OVERVIEW
Gabriel was organized in June 1998 and commenced commercial operations in
June 1999. Prior to commencing commercial operations, Gabriel devoted
substantial efforts to
- developing business plans,
- pursuing applications for governmental authorizations,
- hiring management and other key personnel,
- designing and developing its networks,
- developing, acquiring and integrating its operations support systems,
- acquiring equipment and facilities, and
- negotiating interconnection agreements with incumbent telephone
companies.
Gabriel has experienced significant operating losses and negative cash flow
since its inception and expects to continue to experience significant operating
losses and negative cash flow as it expands its operations, constructs and
develops its networks and grows its customer base.
In contrast to carriers that install their own telecommunications switch in
each market and construct their own fiber optic transmission facilities to reach
customers, Gabriel does not build its own network connections to each individual
customer. Instead, it installs its own voice and data switches but then leases
transmission facilities from incumbent telephone companies and other providers.
It also installs and connects its own access equipment in incumbent telephone
companies' central offices, a process which is commonly referred to in the
telecommunications industry as "collocation." This network deployment strategy
enables Gabriel to reach its entire targeted customer base in its markets
without having to build its own fiber optic transmission facilities from the
incumbent telephone companies' central offices to its switches in order to
establish network connections to each customer.
The level of up-front capital that Gabriel requires to construct a network
varies depending on a number of factors. These factors are
- the size and geography of the market,
- the cost of construction of its network in each market, and
- the degree of penetration of the market, and its ability to negotiate
favorable prices for purchases of equipment.
The cost to build a network is also affected by the number of central office
collocations and potentially may be reduced if and when more economical,
advanced switching equipment becomes available.
Gabriel was operating in nine markets in six states as of June 30, 2000,
with six additional markets in three states under construction. As of June 30,
2000, Gabriel had approximately 12,280 access lines sold to approximately 1,108
customers and had approximately 9,185 access lines installed on its networks and
serving 805 customers. All of Gabriel's customers have signed contracts, 79% of
which have three-year terms.
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<PAGE> 35
FACTORS AFFECTING RESULTS OF OPERATIONS
REVENUES
Gabriel generates revenues from
- local calling services, including basic voice calling services and
advanced local features such as call waiting and call forwarding,
- long distance services, which include a full range of domestic,
international and toll-free long distance services,
- dedicated, high speed Internet access services, including DSL Internet
access,
- advanced data services, such as high speed data transmission and unified
voice mail, e-mail and fax messaging services, and
- access charges, which Gabriel earns by connecting its customers to their
selected long distance carrier for outbound calls or by delivering
inbound long distance traffic to Gabriel's local service customers.
Gabriel prices its services competitively with those of the incumbent
telephone companies and offers its customers combined service discounts designed
to give them incentives to purchase a bundled suite of services.
COST OF COMMUNICATION SERVICES
Gabriel's cost of communication services includes recurring costs
associated with
- leasing the high capacity transmission facilities that connect its
switching equipment to incumbent telephone companies' central offices,
- leasing the local loop lines that connect its customers to its networks,
- leasing space used to collocate its customer access equipment in
incumbent telephone companies' central offices,
- providing Internet access, and
- purchasing long distance services for resale to its customers.
Gabriel has interconnection agreements with Southwestern Bell, Ameritech,
BellSouth, GTE and Cincinnati Bell for its network and collocation facilities.
Except for some initial nonrecurring charges, Gabriel pays for these facilities
on a monthly basis. Gabriel also has agreements with WorldCom, Inc. and Qwest
Communications to provide it with long distance transmission services. These
agreements provide for the resale of long distance services on a per-minute
basis.
The primary expense associated with providing Internet access to Gabriel's
customers is the cost of interconnecting its network with national Internet
service providers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Gabriel's selling, general and administrative expenses include costs
incurred for technical, selling and marketing, corporate administration, human
resources, network maintenance, operations support and professional and
consulting fees. Gabriel expects that its selling, general and administrative
expenses will increase significantly as it expands its operations and hires
additional employees. Gabriel employs a direct local sales force in each of its
markets. Gabriel uses quota-based commission plans and incentive programs to
compensate its sales personnel. Gabriel supplements its direct sales force
through the use of agents such as value-added resellers and equipment
integrators. Gabriel also uses print and other media advertising campaigns to
create brand awareness.
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<PAGE> 36
DEPRECIATION AND AMORTIZATION
Gabriel's depreciation and amortization expenses include depreciation of
switching and other network equipment, operations support systems, furniture and
fixtures, and amortization of initial nonrecurring charges from the incumbent
telephone companies for their collocation facilities. Gabriel expects its
depreciation and amortization expense to increase as it continues to make
capital expenditures as it expands its networks.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Gabriel's operations for the six months ended June 30, 2000 have generated
$3.3 million of revenue compared to $4,000 for the same period in 1999. Gabriel
became operational in June 1999. As of June 30, 2000, approximately 68% of
Gabriel's customers had contracted to take the full package of local, long
distance and Internet access. Approximately 82% and 92% of Gabriel's customers
have contracted for long distance and Internet services, respectively. During
the first six months of 2000, an additional 6,665 lines were installed for 686
new customers.
Cost of communication services amounted to $2.6 million for the six months
ended June 30, 2000 compared to $5,000 for the same period in 1999. Cost of
communication services in 1999 includes costs incurred only from the time the
company became operational.
Selling, general and administrative expenses increased by $12.7 million for
the six months ended June 30, 2000 compared to the same period in 1999.
Technical expenses for the six months ended June 30, 2000 were $3.9 million
compared with $900,000 for the six months ended June 30, 1999. Sales and
marketing expenses for the six months ended June 30, 2000 were $5.1 million
compared with $900,000 for the six months ended June 30, 1999. General
administrative expenses for the six months ended June 30, 2000 were $8.4 million
compared to $2.8 million for the six months ended June 30, 1999. The increase in
selling, general and administrative expenses are primarily due to the increase
of 165 employees, including an additional 54 sales employees, between June 30,
1999 and June 30, 2000 as Gabriel's first nine markets became operational during
the same period. During the remainder of 2000, Gabriel expects the number of its
sales personnel to continue to grow significantly.
Depreciation and amortization expense increased to $4.5 million for the
first six months of 2000 from $100,000 for the same period in 1999, consistent
with the completion of Gabriel's networks and initiation of services in
Gabriel's first nine markets by June 30, 2000.
Interest expense for the six months ended June 30, 2000 was $1.4 million.
The expense relates to borrowings and commitment fees under Gabriel's existing
senior secured credit facility. Interest income for the six months ended June
30, 2000 was $1.9 million compared to $500,000 for the six months ended June 30,
1999. Interest income is earned on the short-term investment of available cash.
Gabriel had an operating loss of $21.2 million and negative adjusted EBITDA
of $16.7 million for the six months ended June 30, 2000 compared to $4.8 million
and $4.7 million, respectively, for the six months ended June 30, 1999. Gabriel
expects to continue to experience increasing operating losses and negative
adjusted EBITDA as a result of its development activities as it expands its
operations. Gabriel does not expect to achieve positive adjusted EBITDA in any
market until after approximately two and one half years of operation in that
market.
Gabriel's net loss for the six months ended June 30, 2000 was $20.5 million
compared to $4.2 million for the six months ended June 30, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Gabriel's operations through December 31, 1999 generated $453,000 of
revenue. As of December 31, 1999, approximately 79% of Gabriel's customers had
contracted to take the full package of local, long
29
<PAGE> 37
distance and Internet access. Approximately 90% of Gabriel's customers had
contracted for long distance and Internet services.
Cost of communications services amounted to $496,000 for the year ended
December 31, 1999. The negative gross margin Gabriel experienced during its
initial start-up period was primarily attributable to the fact that Gabriel had
recurring costs associated with underutilized leased transmission facilities
until it had built a sufficient customer base in its initial markets.
Selling, general and administrative expenses were $16.6 million for the
year ended December 31, 1999 compared to $693,000 for the period from inception
to December 31, 1998. The number of employees increased to 247 as of December
31, 1999, from 15 as of December 31, 1998. The sales force, including sales
managers, account executives and sales engineers and administrators, had grown
to 95 as of year end.
Depreciation expense increased from $5,600 in 1998 to $2.0 million for the
year ended December 31, 1999, consistent with the completion of networks and
initiation of services in Gabriel's first five markets by December 31, 1999.
Gabriel had an operating loss of $18.6 million and negative EBITDA of $16.6
million for the year ended December 31, 1999 compared to $699,000 and $693,000,
respectively, for the period ended December 31, 1998.
Gabriel's net loss for the year ended December 31, 1999, was $17.3 million
compared to $567,000 for the period from inception to December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Gabriel's financing plan is predicated on obtaining the funding required
for each market to reach positive free cash flow prior to committing to the
development of that market. By using this approach, Gabriel seeks to avoid being
in the position of seeking additional capital to fund a market after Gabriel has
already made significant capital investment in that market. Gabriel believes
that by raising all required capital prior to making any commitments in a
market, it can raise capital on more favorable terms and conditions.
Gabriel has raised $302.2 million of equity financing primarily from a
group of private equity investment funds with extensive experience in financing
telecommunications companies. Gabriel has also secured commitments from a group
of lenders to provide an expanded $245 million senior secured credit facility.
For a description of the intended use of proceeds and the expected terms of this
facility, see "-- Anticipated Capital Requirements of the Combined Company" on
page 42.
From its inception through June 30, 2000, Gabriel has made capital
expenditures totaling $78.0 million for network equipment, software, hardware
and other assets necessary for deploying the networks in its initial markets,
establishing its network operations control center and providing the operations
and other support systems necessary for its business. Gabriel has also used
capital to fund its operations and has used excess cash to purchase short-term
investments. Gabriel estimates that its capital expenditures during the third
and fourth quarters of 2000 will be $35.8 million, including $16.8 million for
collocation and other incremental expenditures for its first nine networks,
$13.6 million for the six additional networks it currently has under
construction and $5.4 million related to its operations support systems and
certain corporate expenditures.
The actual amount and timing of Gabriel's future capital requirements may
differ materially from its estimates as a result of, among other things
- the cost of the construction of its networks,
- a change in or inaccuracy of its development plans or projections that
leads to an alteration in the schedule or targets of its roll-out plans,
- the demand for its services,
30
<PAGE> 38
- regulatory and technological developments, including new opportunities in
the telecommunications industry,
- an inability to access credit markets, and
- the consummation of acquisitions.
Gabriel's costs of deploying its networks and operating its business, as
well as its revenues, will depend on a variety of factors, including
- its ability to meet its roll-out schedules,
- the extent of price and service competition for telecommunications
services in its markets,
- its ability to develop, acquire and integrate the necessary operations
support systems,
- the number of customers and the services for which they subscribe and the
time required to provision those customers,
- the nature and penetration of new services that it may offer, and
- the impact of changes in technology and telecommunication regulations.
As such, actual costs and revenues may vary from expected amounts, possibly to a
material degree, and such variations may affect Gabriel's future capital
requirements.
As of June 30, 2000, Gabriel had $78.9 million of cash and short-term
investments and $70.0 million of undrawn financing available under its existing
senior secured credit facility. Giving pro forma effect to the $245 million
commitment discussed above, Gabriel would have $225.0 million of undrawn
financing available under the proposed expanded facility. As of June 30, 2000,
the borrower under this facility, a wholly owned finance subsidiary of Gabriel,
had borrowed $20 million at an interest rate of 10.12% per annum.
In April 2000, Gabriel received approximately $69.5 million from the
private placement of its Series B preferred stock from existing investors. In
October 2000, Gabriel expects to receive approximately $67.5 million upon the
issuance of additional Series B preferred stock to these investors pursuant to
their outstanding subscription obligations under Gabriel's Series B preferred
stock purchase agreement. Gabriel expects to receive the remaining commitment of
approximately $67.5 million by the end of 2000.
Gabriel's operations resulted in a net loss for the period from inception
in June 1998 through December 31, 1998 and for the year ended December 31, 1999
and, accordingly, were insufficient to cover expenses by $567,000 million and
$17.3 million, respectively. Gabriel's operations resulted in a net loss for the
six months ended June 30, 1999 and for the six months ended June 30, 2000 and
accordingly, were insufficient to cover expenses by $11.3 million and $20.5
million, respectively.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999 and June 30, 2000, the carrying value of Gabriel's
debt obligations was $20.0 million and the weighted average interest rate on its
debt obligations was 10.12% and 10.96%, respectively. Because the interest rates
on Gabriel's senior credit facility are at floating rates, it is exposed to
interest rate risks. If market interest rates had been 1% higher, Gabriel's
interest expenses for 1999 and the first six months of 2000 would have been
increased by $8,000 and $118,000, respectively. The annualized effect on
interest expense in 2000 would be $236,000.
Gabriel has not, in the past, used financial instruments in any material
respect as hedges against financial and currency risks or for trading. However,
as Gabriel expands its operations, it may begin to use various financial
instruments, including derivative financial instruments, in the ordinary course
of business, for purposes other than trading. These instruments could include
letters of credit, guarantees of debt and interest rate swap agreements. Gabriel
does not intend to use derivative financial instruments for speculative
purposes.
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<PAGE> 39
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, as subsequently amended by
SFAS No. 138, is effective on a prospective basis for interim periods and fiscal
years beginning January 1, 2001. This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging securities. Gabriel does not
anticipate that adoption of this standard will have a material effect on its
financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101. This bulletin provides interpretive guidance on the
recognition, presentation and disclosure of revenue that must be applied to
financial statements no later than the second fiscal quarter of 2000. Gabriel
does not believe that adoption of this bulletin will have a material impact on
its consolidated financial position or results of operations.
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<PAGE> 40
TRIVERGENT
OVERVIEW
From its inception in October 1997 through April 1999, TriVergent's
business strategy was to target residential customers for the resale of local
and long distance voice services. These customers were solicited largely through
direct mail using an incentive check, generally for $20, to switch to
TriVergent's resold services. This check (when cashed) served as authorization
for transferring the service from their existing telecommunications service
providers to TriVergent. In March 1999, TriVergent changed its business strategy
to become a single source, web-based communications company serving small and
medium-sized businesses in the southeastern United States. As a result, in April
1999, with the exception of its prepaid business, TriVergent discontinued
marketing its resale voice services and began to implement its new business
strategy. To implement this new strategy, TriVergent began to
- acquire a significant number of BellSouth central office collocations,
- deploy voice and data switches,
- build data centers,
- develop electronic operations support systems and
- acquire data management expertise through the acquisition of
Internet-related companies.
TriVergent's historical financial statements for the period ended June 30,
2000 reflect its financial and operating performance under its former business
strategy and reflect minimal revenues from its new business strategy.
TriVergent expects its revenues from resale services to decline to
immaterial amounts by 2002. TriVergent anticipates that, in the future, the
majority of its revenues will come from the sale of its Broadband Bundle, which
includes high-speed Internet access, web site design, web hosting, and local and
long distance voice services. The Broadband Bundle is sold for a single price
based on the customer selected bandwidth capacity and number of access lines.
TriVergent will also continue to sell prepaid local telephone services,
primarily through local check cashing businesses. TriVergent expects this
business to continue but not to grow.
To date, TriVergent has experienced significant operating losses and
negative cash flow, substantially from the resale business. Under TriVergent's
new business strategy, it does not anticipate achieving positive cash flow in
any of its target markets during the initial development, construction and
expansion of its telecommunications services until it establishes a sufficient
revenue-generating customer base. TriVergent estimates that it will take
approximately 24 months before a typical target market becomes cash flow
positive. As a result, TriVergent expects to experience significant operating
losses and negative cash flow as it expands operations into its initial markets.
TriVergent's business plan provides for five Nortel DMS 100/500 switch
sites and 18 asynchronous transfer mode switch sites to cover its initial 14
markets. TriVergent estimates that the total cost to build out a typical market
is approximately $10 million. Fixed costs associated with the buildout of a
particular market include:
- securing collocation facilities. TriVergent anticipates fixed costs of a
typical collocation facility will be approximately $440,000. This
includes nonrecurring initial set up fees payable to BellSouth and the
costs associated with the switching and ancillary equipment located
there, including a small asynchronous transfer mode switch, which would
cost approximately $50,000.
- purchasing necessary voice and data switching equipment. Switch costs
associated with each Nortel DMS 100/500 switch site are approximately
$4.5 million and include approximately $3.5 million for the cost of a
Nortel DMS 100/500 switch and the related equipment. An asynchronous
transfer mode switch site costs approximately $1.5 million, which
includes $750,000 for the cost of the switch and related equipment.
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<PAGE> 41
- leasehold improvements to switch sites. These costs are approximately
$1.0 million for each of the Nortel DMS 100/500 switches and $750,000 for
asynchronous transfer mode switches.
TriVergent acquires local telephone services on a wholesale basis from
BellSouth and other incumbent telephone companies, both for the resale and
prepaid businesses. To provide its Broadband Bundle, TriVergent has an
interconnection agreement with BellSouth for its network and collocation
facilities. Except for some initial nonrecurring charges, TriVergent pays for
these facilities on a monthly basis. TriVergent also has agreements with Global
Crossing, a long haul telecommunications provider, to provide it with long
distance services both for the resale business and Broadband Bundle service
offering. TriVergent is charged for long distance services as used but has
annual minimum usage commitments which could result in underutilization charges
if TriVergent fails to meet these commitments. TriVergent also has an agreement
with Global Crossing for the purchase of transmission capacity to connect its
switches, for which TriVergent paid $14 million in March 2000. TriVergent will
amortize this cost over the 20-year life of the contract. It will also pay
monthly maintenance charges related to this capacity agreement.
To accelerate its new business strategy, TriVergent has acquired five data
communications and Internet companies in two of its target markets, with
customer bases that TriVergent hopes to migrate to its Broadband Bundle, which
are
- Carolina Online, Inc., a Greenville, South Carolina provider of Internet
access to 7,000 customers, acquired in March 1999, for a total purchase
price of $1.8 million, consisting of $490,000 in cash and 545,833 shares
of common stock,
- DCS, Inc., a Greenville, South Carolina data integrator and equipment
provider, acquired in July 1999, for a total purchase price of $1.0
million, consisting of $368,898 in cash and assumption of debt, and
262,959 shares of common stock,
- Ester Communications, Inc., a Wilmington, North Carolina provider of
voice and data equipment and services to 3,000 small business customers,
acquired in February 2000, for a total purchase price of $4.5 million,
consisting of $2.3 million in cash and 587,755 shares of common stock,
- Information Services and Advertising Corporation, a Wilmington, North
Carolina provider of Internet services to 1,200 customers, acquired in
February 2000, for a total purchase price of $800,000, consisting of
$300,000 in cash and 117,647 shares of common stock, and
- InterNetMCR, Inc., a Greensboro, North Carolina based Internet service
provider which serves approximately 2,800 businesses and consumers,
acquired in June 2000, for a total purchase price of $1.66 million,
consisting of $460,000 in cash and 196,000 shares of common stock.
While there were no significant revenues from these Internet and equipment
services in 1999 or in the six months ended June 30, 2000, TriVergent expects to
have revenue in future periods from these businesses.
FACTORS AFFECTING RESULTS OF OPERATIONS
REVENUES
TriVergent's revenues through June 30, 2000 consisted primarily of revenues
from the resale of local and long distance voice services to residential
customers and to a lesser extent from prepaid local telephone services. There
were minimal revenues in this period from the sale of TriVergent's Broadband
Bundle or data center services. Through June 30, 2000, TriVergent's revenues
were derived from
- resale of local and long distance telephone services to residential
customers,
- prepaid local telephone services,
- dial-up Internet access services from Carolina Online, and
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<PAGE> 42
- small amounts of cabling equipment revenues from the local area and wide
area network equipment business of DCS.
In the future, TriVergent expects to continue to receive revenue from these
sources, although revenues associated with the residential resale business will
decline substantially.
With the change in business strategy, TriVergent expects to generate most
of its future revenues from sales of its services over its own network
facilities to small and medium-sized businesses. TriVergent expects the
increasing portion of its revenues will come from
- the Broadband Bundle product, which includes high-speed Internet access,
web site design, web hosting and maintenance, and local and long distance
telephone voice services,
- long distance services in excess of the 100 minutes per month included in
the Broadband Bundle,
- renting space for customer servers at the data centers,
- compensation for terminating calls of other providers' customers to
TriVergent's customers over its network, and
- installation, equipment sale and cabling services.
COST OF SERVICES
The cost of services for the residential resale business consists primarily
of the purchase of wholesale local telephone services from BellSouth and the
purchase of wholesale long distance services from Global Crossing.
As TriVergent deploys its network and begins selling its Broadband Bundle,
it will incur additional costs of services, primarily for
- the lease of transmission capacity and customer connections,
- the recurring costs of transmission capacity purchased from Global
Crossing,
- operating costs, such as rent and personnel costs, associated with the
collocation facilities, data centers and TriVergent's own switching
sites, and
- payments to other carriers to terminate TriVergent's customers' calls on
their networks.
TriVergent leases lines from the incumbent telephone company in each market
to connect its customers with its collocation and switching facilities.
TriVergent also leases transmission lines from other communications companies,
including incumbent telephone companies, to connect its switching and
collocation facilities.
TriVergent has an agreement with Global Crossing for the resale and
transmission of long distance services on a per minute basis which contains
minimum volume commitments. In the event it fails to meet these minimum volume
commitments, TriVergent may be obligated to pay under-utilization charges.
Similarly, in the event TriVergent underestimates its need for transmission
capacity, it may be required to obtain capacity through more expensive means.
Transmission capacity costs will increase as customers' long distance calling
volume increases, and TriVergent expects these costs to be a significant portion
of the cost of long distance services.
TriVergent expects switch site lease costs and collocation costs to be a
significant part of the ongoing cost of services. BellSouth and other incumbent
telephone companies typically charge both a start-up fee and a monthly recurring
fee for use of collocation sites in their central offices. The primary expense
associated with providing Internet access to TriVergent's customers is the cost
of interconnecting its network with a national Internet service provider.
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<PAGE> 43
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
TriVergent's selling, general and administrative expenses include selling
and marketing costs, billing, corporate administration, human resources and
network maintenance.
For the residential resale business, TriVergent incurred costs associated
with its direct mailing and direct marketing agency commissions. TriVergent will
no longer incur these costs since it is no longer marketing these services. The
incentive checks used to solicit the residential customer resale business were
recognized as a marketing expense as service was initiated and will no longer be
incurred in the future. For the remaining resale customers and the new
businesses, TriVergent will continue to incur costs associated with
provisioning, customer care, information technology, regulatory and facilities
rental costs.
For TriVergent's Broadband Bundle services it will incur additional
selling, general and administrative costs related to
- its direct sales force, as well as commissions for its independent sales
agents,
- increased provisioning, customer care, information technology and other
personnel costs,
- the new network engineering department,
- outsourcing reciprocal compensation and access billings,
- increased general administrative overhead, and
- advertising and public relations.
TriVergent expects its selling and marketing costs to increase
significantly as it expands its operations. TriVergent will employ a large
direct sales force in most markets it enters with the Broadband Bundle. To
attract and retain a highly qualified sales force, TriVergent is offering its
sales personnel a compensation package emphasizing base salaries, commissions
and stock options. In addition to the direct sales force, TriVergent expects to
make significant use of independent sales agents in each market to sell its
broadband products. Sales agents are compensated with monthly residual payments
based upon the monthly billings of customers they service.
TriVergent is also developing an integrated information system and
procedures for operations support systems and other back office systems to
enter, schedule, provision and track a customer order from point of sale to the
installation and testing of service. This system will also include or interface
with trouble management, inventory, billing, collection and customer care
service systems. TriVergent also expects billing costs to increase as the number
of customers and call volume increase.
TriVergent expects that other costs and expenses, including the costs
associated with the maintenance of its network, administrative overhead and
office leases, will grow significantly as it expands its operations and that
administrative overhead will be a large portion of these expenses during the
development phase of its business. However, TriVergent expects these expenses to
decrease as a percentage of its revenue as it builds its customer base.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
TriVergent's provision for uncollectible accounts, particularly in 1999,
reflected the poor credit quality of its residential resale customers. The
direct mail solicitation, which offered local and long distance services at a
discount from BellSouth's rates, attracted a number of consumers who were poor
credit risks and about whom TriVergent had no credit information. In addition,
due to the lag time between the transfer of billing information from BellSouth
to TriVergent, many of its customers received their initial bill after several
months of service. As a result, customers received one large bill for several
months of service causing a decrease in customer satisfaction that resulted in
higher than anticipated defaults and loss of business. TriVergent believes that
its 1999 provision for uncollectible accounts has adequately reflected these
problems and that its remaining residential resale business will not require
unusual uncollectible provisions in future periods.
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DEPRECIATION AND AMORTIZATION
TriVergent's depreciation and amortization expense includes depreciation of
switch related equipment and equipment collocated in BellSouth's central
offices, network infrastructure equipment, information systems, furniture and
fixtures and amortization of initial nonrecurring charges from BellSouth for its
collocation facilities. It also includes, for a portion of 1999 and the six
months ended June 30, 2000, amortization of goodwill in connection with the
acquisitions of Carolina Online, Inc. and DCS, Inc. These acquisitions were
accounted for using the purchase method of accounting. The amount of the
purchase price in excess of the fair value of the net assets acquired will be
amortized over a 10-year period. TriVergent expects its depreciation and
amortization expense to increase as it continues to make capital expenditures
and consummate acquisitions which are accounted for using the purchase method of
accounting.
INCOME TAXES
TriVergent has not generated any taxable income to date and does not expect
to generate taxable income in the next few years. TriVergent's net operating
loss carryforwards will be available to offset future taxable income, if any,
through the year 2019, but its use may be limited by Section 382 of the Internal
Revenue Code. Therefore, TriVergent has not recorded a net deferred tax asset
relating to these net operating loss carryforwards.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES
Revenues for 2000 and 1999 consisted primarily of residential customer
billings for the resale of local and long distance voice services, Internet
access and sale of telecommunications equipment. These total revenues were $8.6
million for 2000 compared to $13.8 million for 1999, a decrease of $5.2 million.
This decrease was primarily due to a decline in the number of residential
customers, which was partially offset by the increase in revenue from Internet
access and sale of telecommunications equipment due to acquisitions.
COST OF SERVICES
Cost of services for 2000 and 1999 consisted primarily of the charges from
local and long distance providers for wholesale voice telephone services and
network operating expense. These costs were $8.7 million for 2000 compared to
$9.6 million for 1999, an decrease of $0.9 million. This decrease was primarily
due to the decreased number of residential customers subscribing to TriVergent's
services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $20.2 million for 2000
compared to $13.4 million for 1999, an increase of $6.8 million. This increase
was primarily due to additional personnel to support the broadband services
TriVergent is developing and sales and marketing expenses associated with
transitioning TriVergent's distribution channel to direct sales rather than
media and direct mail.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
Provision for uncollectible accounts was $0.4 million for 2000 compared to
$5.8 million for 1999, a decrease of $5.4 million. This decrease was primarily
due to a reduction in residential customers with poor credit quality.
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DEPRECIATION AND AMORTIZATION
TriVergent's depreciation and amortization expense was $4.7 million for
2000 compared to $0.5 million in 1999, an increase of $4.2 million. The increase
was primarily due to an increase in network equipment deployed in providing
broadband services to business customers.
INTEREST INCOME
Interest income, earned from the temporary investment of proceeds from the
sale of TriVergent preferred stock in investment grade securities, was $1.0
million for 2000 compared to $0.1 million in 1999.
INTEREST EXPENSE
Interest expense was $1.9 million for 2000 compared to $0.6 million in
1999, and was primarily interest on debt issued to finance purchases of network
equipment.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Revenues for 1999 and 1998 consisted primarily of residential customer
billings for the resale of local and long distance voice services. These total
revenues were $25.0 million for 1999 compared to $5.3 million for 1998, an
increase of $19.7 million. This increase was primarily due to the addition of
new residential customers and growth in sales to existing residential customers.
COST OF SERVICES
Cost of services for 1999 and 1998 consisted primarily of the charges from
local and long distance providers for wholesale voice telephone services. These
costs were $17.7 million for 1999 compared to $3.8 million for 1998, an increase
of $13.9 million. This increase was primarily due to the increased number of
residential customers subscribing to TriVergent's services and other increased
costs resulting from the addition of network operating personnel and the
expansion of our network.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $23.5 million for 1999
compared to $12.2 million for 1998, an increase of $11.3 million. This increase
was primarily due to expenses associated with sales growth and additional
personnel, including additional personnel to support the broadband services
TriVergent is developing.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
Provision for uncollectible accounts was $7.3 million for 1999 compared to
$2.0 million for 1998, an increase of $5.3 million. This increase was primarily
due to the relatively poor credit quality of TriVergent's initial residential
customers and to billing delays described above under the heading "Factors
Affecting Results of Operations of TriVergent -- Provision for Uncollectible
Accounts."
DEPRECIATION AND AMORTIZATION
TriVergent's depreciation and amortization expense was $1.3 million for
1999 compared to $0.2 million for 1998, an increase of $1.1 million. This
increase was primarily due to increased capital expenditures for leasehold
improvements and computers and other equipment related to increased personnel
and to the amortization of goodwill related to two acquisitions during 1999 for
a portion that year, plus depreciation for a full 12 months for equipment
acquired in 1998.
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INTEREST INCOME
Interest income, earned from the temporary investment of proceeds from the
sale of TriVergent preferred stock in investment grade securities, was $0.8
million for 1999 compared to $0.1 million in 1998.
INTEREST EXPENSE
Interest expense was $1.5 million for 1999 compared to $13,000 in 1998, and
was primarily interest on debt issued to finance purchases of network equipment
and interest on the Series 1999 Subordinated Notes.
INCEPTION THROUGH DECEMBER 31, 1997
During the period from TriVergent's inception at October 29, 1997 through
the end of 1997, it was in the development stage of operations and did not
generate any revenue. TriVergent's principal activities during this period
consisted of the following
- hiring management and other key personnel,
- raising capital,
- procuring governmental authorizations,
- acquiring equipment and facilities,
- developing, acquiring and integrating operations support and other back
office systems, and
- negotiating interconnection agreements.
This development stage continued through June 1998.
LIQUIDITY AND CAPITAL RESOURCES
The development of the Broadband Bundle business, the deployment and
start-up of switching facilities for that business and the establishment of
reliable operations support systems will require significant capital to fund the
following
- capital expenditures,
- the cash flow deficits generated by operating losses,
- working capital needs, and
- debt service.
TriVergent's principal capital expenditure requirements will include the
purchase and installation of switches and the development and integration of
operations support systems. To fund TriVergent's business strategy, it expects
to use a combination of stock, debt and funds from operations.
EQUITY AND PREFERRED FINANCING
TriVergent's equity and preferred financing has consisted of approximately
$137 million provided by institutional investors and management. Of this amount,
approximately $130 million was for preferred stock, including $67 million
received in February and March 2000. The remainder was for common stock.
CREDIT FACILITIES
In January 2000, TriVergent entered into a senior credit facility with a
group of commercial banks which permits it to borrow up to $120 million, subject
to various conditions, through December 31, 2007. The senior credit facility is
comprised of an $80 million term loan facility and a $40 million revolving
credit facility. Any borrowings under the term loan facility must be completed
by December 31, 2000. Under the revolving credit facility, $20 million will not
be available unless specified financial results are
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achieved for the third quarter of 2000. As of June 30, 2000, $25 million was
outstanding under the term loan facility at an effective interest rate of 11.28%
per annum.
TriVergent also has a credit facility with Nortel under which it may borrow
up to $45 million by March 31, 2001, subject to various conditions. Repayments
of principal will begin after March 31, 2001. As of June 30, 2000, $7.8 million
was outstanding under the Nortel credit facility at an effective interest rate
of 11.53% per annum. Borrowings under this facility require the consents of the
lenders under the senior credit facility.
CASH FLOWS
TriVergent has incurred significant operating and net losses since its
inception. TriVergent expects to experience increasing operating losses and
negative cash flow as it expands its operations and builds its customer base. As
of June 30, 2000, TriVergent had an accumulated deficit of $65.5 million. Net
cash used in operating activities was $30.0 million for the first six months of
2000. As of December 31, 1999, TriVergent had an accumulated deficit of $38.4
million. Net cash used in operating activities was $11.1 million for 1998 and
$20.0 million for 1999. The net cash used for operating activities during 1999
and the first six months of 2000 was primarily due to net losses.
Net cash provided by financing activities was $76.9 million in the first
six months of 2000. This included $66.3 million from issuances of preferred and
common stock and a net increase in the term loan of $15 million. Net cash
provided by financing activities was $13.9 million for 1998 and $72.6 million
for 1999. Net cash provided by financing activities for 1999 included $49.8
million from issuances of TriVergent's preferred stock, $17.8 million from a
term loan and warrants and $10.5 million from private placements of notes and
warrants.
Net cash used in investing activities was $49.8 million in the first six
months of 2000. Capital expenditures were $49.5 million and cash paid for
acquisitions amounted to $3.0 million, partially offset by proceeds of $2.7
million on sale of investments. Net cash used in investing activities was $1.5
million for 1998 and $38.8 million for 1999. Capital expenditures were $35.0
million, and cash paid for acquisitions and investments amounted to $3.8
million, for 1999. Capital expenditures were $1.5 million for 1998. TriVergent
expects that its capital expenditures will be substantially higher in future
periods in connection with the purchase of equipment necessary for the
construction and expansion of its network and the construction of new markets.
At June 30, 2000 and December 31, 1999, respectively, TriVergent had
purchased approximately $50 million and $25 million, respectively, of Nortel
switching equipment and services under a total current commitment of
approximately $100 million. In March 2000, TriVergent purchased transmission
capacity from Global Crossing for $14 million.
CAPITAL REQUIREMENTS
To expand and develop its business, TriVergent will need a significant
amount of additional financing. At June 30, 2000, TriVergent had cash and cash
equivalents of $12.3 million and available unused borrowing capacity under its
credit facilities of $132 million. TriVergent estimates that its current
business plan, including future capital expenditures, operating losses
associated with the roll out of its network in the initial target markets by
December 31, 2001 and working capital needs, will require approximately $436
million, until the time TriVergent anticipates these markets will become cash
flow positive.
The actual amount and timing of TriVergent's future capital requirements
may differ materially from estimates as a result of the demand for TriVergent's
services and regulatory, technological and competitive developments, including
additional market developments and new opportunities in the industry and other
factors. TriVergent may also require additional financing in order to take
advantage of unanticipated opportunities, to effect acquisitions of businesses,
to develop new services or to otherwise respond to changing business conditions
or unanticipated competitive pressures. Sources of additional financing may
include commercial bank borrowings, vendor financing and the private or public
sale of equity or debt
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securities. TriVergent's ability to obtain additional financing is uncertain. It
cannot assure you that it will be able to raise sufficient debt or equity
capital on terms that it considers acceptable, if at all. If TriVergent is
unable to obtain adequate funds on acceptable terms, its ability to deploy and
operate its network, fund its future expansion plans or respond to competitive
pressures would be significantly impaired.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2000, the carrying value of TriVergent's debt obligations was
$32.8 million and TriVergent's capital lease obligations were $1.4 million. At
December 31, 1999, the carrying value of TriVergent's debt obligations was $17.2
million and capital lease obligations were $1.4 million. The weighted average
interest rate on its debt obligations at June 30, 2000 and December 31, 1999 was
11.4% and 10.95%, respectively. Because the interest rates on TriVergent's
senior credit facility are at floating rates, TriVergent is exposed to interest
rate risks. If market interest rates had been 1% higher in the first six months
of 2000 and 1999, TriVergent's interest expense for that period would have been
increased by $227,000 and $52,000, respectively.
TriVergent has not, in the past, used financial instruments in any material
respect as hedges against financial and currency risks or for trading. However,
as TriVergent expands its operations, it may begin to use various financial
instruments, including derivative financial instruments, in the ordinary course
of business, for purposes other than trading. These instruments could include
letters of credit, guarantees of debt and interest rate swap agreements.
TriVergent does not intend to use derivative financial instruments for
speculative purposes. Interest rate swap agreements would be used to reduce its
exposure to risks associated with interest rate fluctuations and are required by
the credit facility. In March 2000, TriVergent entered into an interest rate
collar agreement with a $60 million notional amount related to its borrowings
under the credit agreement. By their nature, these instruments involve risk,
including the risk of nonperformance by counterparties, and TriVergent's maximum
potential loss may exceed the amount recognized in its balance sheet. TriVergent
would attempt to control its exposure to counterparty credit risk through
monitoring procedures and by entering into multiple contracts.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement, as subsequently amended, is effective
on a prospective basis for interim periods and fiscal years beginning January 1,
2001. This statement establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging securities. TriVergent does not anticipate that
adoption of this standard will have a material effect on its financial
statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101. This bulletin provides interpretive guidance on the
recognition, presentation and disclosure of revenue that must be applied to
financial statements no later than the second fiscal quarter of 2000. TriVergent
does not believe that its adoption of this bulletin will have a material impact
on its consolidated financial position or results of operations.
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THE COMBINED COMPANY
OVERVIEW
As of June 30, 2000, on a pro forma basis giving effect to the merger, the
combined company
- was operating in 15 markets in nine states,
- had 13 additional markets in six states under construction,
- had approximately 15,820 access lines sold to approximately 1,850
customers,
- had approximately 10,121 access lines installed on its networks, and
- was serving approximately 1,055 customers.
Management of the combined company expects that the combined company will
generate revenues primarily from the provision of local, long distance and
Internet access services, both separately and as part of bundled service
offerings. The combined company's cost of communication services will be
comprised primarily of the same components of the costs of services that Gabriel
and TriVergent have incurred in the provision of their services over their own
network facilities. Management of the combined company expects that its selling,
general and administrative expenses and depreciation and amortization expense
will increase as the combined company expands its networks. The combined
company's revenues and costs will also depend significantly on management's
ability to successfully integrate the businesses of Gabriel and TriVergent.
ANTICIPATED CAPITAL REQUIREMENTS
The combined company expects significant operating losses and negative cash
flow to continue as it expands its operations, constructs and develops its
networks and grows its customer base. Management estimates that expansion to its
targeted 40 markets would require at least $175 million of additional capital.
Collectively, as of June 30, 2000, Gabriel and TriVergent had made capital
expenditures of approximately $183 million and incurred operating losses of
approximately $91 million for the 28 markets which they currently have in
operation and under development. Management estimates that approximately $325
million in capital expenditures will be necessary to complete the build-out of
its targeted 40 markets and approximately $240 million will be necessary to fund
operations in these markets until they can generate positive free cash flow. The
combined company will have total invested and committed equity and debt capital
of approximately $700 million, consisting of
- equity capital of approximately $167.3 million invested by Gabriel
stockholders,
- equity capital of approximately $143.8 million invested by TriVergent
stockholders,
- committed equity capital of approximately $143.5 million, including
approximately $135.0 million from holders of Gabriel Series B preferred
stock as described above, and another $8.5 million from two lender
participants in Gabriel's $245 million senior secured credit facility who
have committed to purchase a total of 1,214,285 shares of Gabriel Series
B preferred stock upon the closing of the facility, and
- debt capital of up to $245 million under Gabriel's senior secured credit
facility, of which approximately $160 million is expected to be available
for future borrowings following the merger.
The combined company's available equity and debt capital is more than sufficient
to provide all the necessary capital for the combined company's initial 28
markets currently in operation and under development, including capital to fund
initial operating losses of those markets. Management of the combined company
intends to continue Gabriel's financing plan of obtaining the funding required
for additional markets to reach positive free cash flow prior to committing to
the development of those
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markets. Management expects that a typical market will begin to generate
positive free cash flow, approximately 24 months after it becomes operational.
Gabriel is currently negotiating the terms of the definitive agreement for
its expanded $245 million secured credit facility referred to above with the
group of lenders that have committed to provide this facility. Gabriel and
TriVergent intend that the $245 million secured credit facility be in place at
or prior to the effective time of the merger. Management of the combined company
intends to use a portion of the proceeds of the new facility to repay all
outstanding borrowings under the existing secured credit facilities of Gabriel
and TriVergent.
The terms of the new senior secured credit facility provide for borrowings
by Gabriel Communications Finance Company, an indirect wholly owned subsidiary
of Gabriel, of up to $245 million, consisting of $185 million in term loans and
a $60 million revolving credit facility. The term loans may be borrowed during
an availability period that ends on the second anniversary of the closing date.
The revolving credit facility will be available on a revolving basis until the
eighth anniversary of the closing date. Outstanding borrowings under the term
loans will amortize, and commitments under the revolving credit facility will be
reduced, in consecutive quarterly installments beginning December 31, 2003 in
the following percentages of the initial amount of the term loan and revolving
credit facilities for the periods set forth below:
<TABLE>
<CAPTION>
FOUR QUARTERS FACILITIES
ENDING REDUCTION/AMORTIZATION
------------- ----------------------
<S> <C>
September 30, 2004.......................................... 10%
September 30, 2005.......................................... 15%
September 30, 2006.......................................... 20%
September 30, 2007.......................................... 25%
September 30, 2008.......................................... 30%
</TABLE>
The borrower also will be required to prepay outstanding loans with the proceeds
of any sale of a significant amount of assets of the borrower or its parent that
are not promptly reinvested in assets useful in the borrower's business and,
beginning in 2005, with any excess cash flow that the borrower generates for the
immediate preceding year.
Proceeds of the new facility may be used to
- repay existing indebtedness,
- finance capital expenditures,
- finance transaction fees and expenses incurred in connection with the
credit facility and the related transactions and
- finance working capital and other general corporate purposes, including
acquisitions.
Interest on outstanding borrowings under the senior secured credit facility
will be based generally on either the prime rate or the interbank eurodollar
rate, plus a margin. The applicable margin will vary based on the borrower's
leverage and generation of positive EBITDA, if any. Until the borrower generates
positive EBITDA or its annualized gross quarterly revenues generated from at
least 21 operational markets exceeds $175 million, the prime rate margin will be
3.25% and the eurodollar rate margin will be 4.25%. As of September 28, 2000,
the applicable interest rates would be 12.75% for prime rate loans and 10.87%
for eurodollar loans. The borrower will also be required to pay a commitment fee
ranging from 0.75% to 1.50% of the total term loan and revolving credit
facilities, based upon the total usage of the facilities.
Obligations under the senior secured credit facility will be guaranteed by
the combined company, its direct wholly owned subsidiary, Gabriel Communications
Properties, Inc., and all of the existing and subsequently acquired subsidiaries
of the borrower. The facility will be secured by a pledge of all of the capital
stock of Gabriel Communications Properties, Inc., the borrower and each of the
borrower's subsidiaries and a security interest in the assets of Gabriel
Communications Properties, Inc., other than any of its unrestricted
subsidiaries, the borrower and each of the borrower's subsidiaries. Immediately
after
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the effective time of the merger, TriVergent will become a direct wholly owned
subsidiary of the borrower. The combined company is expected to make a total
equity contribution to the borrower of not less than $389 million.
The senior secured credit facility will contain limitations on
indebtedness, liens, investments, capital expenditures, dividends and other
specified transactions and payments. The facility's financial covenants, which
will generally be tested on a quarterly basis, initially will measure the
borrower's performance, on a consolidated basis, against standards set for the
ratio of indebtedness to capitalization, minimum revenues and access lines,
maximum capital expenditures, EBITDA and the ratio of indebtedness to property,
plant and equipment. After October 1, 2003, the financial covenants will measure
the borrower's performance, on a consolidated basis, against standards set for
leverage, EBITDA coverage of cash interest expense, fixed charge coverage and
debt service coverage. The financial covenants will also measure the combined
company's performance, on a consolidated basis, against standards set for ratios
of indebtedness to capitalization, leverage, senior secured debt to
capitalization and senior secured leverage.
The senior secured credit facility will contain customary events of default
including nonpayment of principal, interest or fees, violation of covenants,
incorrectness of representations and warranties, and extraordinary events such
as a change of control or bankruptcy.
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THE MERGER
BACKGROUND OF THE MERGER
As part of its business strategy, Gabriel from time to time considers
opportunities to acquire other businesses and enter into strategic relationships
to accelerate its market penetration and expand the scope of its product and
service offerings. In early April 2000, Gabriel identified TriVergent as an
attractive acquisition candidate based on the comparable product and customer
focus of the two companies and their contiguous markets. At that time, Mr. David
L. Solomon, the chairman and chief executive officer of Gabriel, contacted Mr.
Charles S. Houser, the chairman and chief executive officer of TriVergent, to
initiate discussions regarding a possible strategic combination of the two
companies. Although in mid April 2000 TriVergent had recently filed a
registration statement with the SEC for an initial public offering of its common
stock, Mr. Houser thought that it was in the best interests of TriVergent to
discuss a possible business combination with Mr. Solomon.
On April 13, 2000, TriVergent and Gabriel entered into an agreement
pursuant to which each company agreed to make information available to the other
on a confidential basis. Representatives of each company then proceeded with
their due diligence and evaluation of the other's current operations and planned
future developments.
At a regular meeting of the Gabriel board of directors on April 18, 2000,
at which all of the directors were present, Mr. Solomon discussed with the
Gabriel board a possible combination of Gabriel with TriVergent. Mr. Solomon
reported that Gabriel had retained Salomon Smith Barney Inc. as Gabriel's
financial advisor in connection with any possible transaction with TriVergent.
At a regular meeting of the board of directors of TriVergent on April 19,
2000, at which a quorum was present, the board discussed various strategic
advantages relating to a possible business combination with Gabriel such as
expansion into contiguous geographic service territories with virtually little
market overlap between markets currently served by Gabriel and TriVergent. The
board reviewed a written analysis of Donaldson Lufkin & Jenrette Securities
Corporation, which TriVergent had engaged to represent it in the proposed
transaction, regarding the possible financial benefits of the possible
combination of the two companies, such as enhanced access to capital.
Between April 19, 2000 and May 10, 2000, Mr. Solomon and Mr. Houser
continued to discuss the possibility of a merger of the two companies and
considered various factors, including each company's market development plans
and financial projections, network architecture, management team, board
composition and outside investors.
On May 9, 2000 and May 10, 2000, Salomon Smith Barney reviewed with Gabriel
management certain financial information relating to Gabriel and the proposed
combined company. On May 10, 2000, Mr. Solomon and Mr. Houser reached an
agreement in principle that the two companies would enter into a stock-for-stock
merger with Gabriel's security holders holding 54% of the equity value of the
combined company on a fully diluted basis and TriVergent's security holders
holding 46% of the equity value of the combined company on a fully diluted
basis. On May 11, 2000, Gabriel delivered to TriVergent a proposed draft letter
of intent setting forth the proposed transaction structure and economic and
other terms of the proposed merger.
On May 9, 2000 and May 10, 2000, Donaldson Lufkin & Jenrette reviewed with
TriVergent management certain financial information relating to TriVergent and
the proposed combined company. The TriVergent board of directors met on May 11,
2000 to consider proceeding with the proposed merger based on the agreement in
principle reached by Mr. Houser and Mr. Solomon. At this meeting, Donaldson
Lufkin & Jenrette presented the benefits of the transaction, its preliminary due
diligence findings and the preliminary relative values of each company and the
combined entity. Mr. Houser addressed issues including the proposed board
composition, management, headquarters location, name, sales and product
strategy, target customers and implications to employees under TriVergent's
employee incentive plan. The TriVergent board unanimously voted to authorize
TriVergent management to proceed with the negotiation of a definitive agreement.
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On May 16, 2000, at a regular meeting of the board of directors of Gabriel,
at which all directors were present, the Gabriel board of directors met to
consider the proposed merger. At this meeting, the Gabriel board considered
presentations from management and Salomon Smith Barney regarding the proposed
transaction and the draft letter of intent. The Gabriel board authorized Mr.
Solomon to proceed with the negotiation of a definitive agreement consistent
with the proposed letter of intent and the agreement in principle reached with
Mr. Houser.
Concurrently with the due diligence process, representatives of Gabriel and
TriVergent engaged in several telephone conferences to discuss the proposed
letter of intent and, in the alternative, proceeding directly to the drafting
and negotiation of a definitive agreement. On May 23, 2000, Gabriel provided to
TriVergent a first draft agreement and plan of merger, and on May 24, 2000, May
25, 2000 and May 26, 2000, Gabriel delivered to TriVergent proposed drafts of
the Gabriel charter amendment and other documents relating to the merger. During
the period from May 23, 2000 through June 8, 2000, representatives of TriVergent
and Gabriel, including Cravath, Swaine & Moore and Bryan Cave LLP, counsel to
TriVergent and Gabriel, respectively, completed their due diligence reviews and
negotiated the remaining terms of the proposed merger documents.
On June 8, 2000, at a special meeting of the board of directors, at which
all of the directors were present, the Gabriel board met to consider the
proposed merger. At the meeting, Mr. Solomon reported on the discussions with
TriVergent, including the terms of the merger and the proposed exchange ratio.
Mr. John P. Denneen, the executive vice president - corporate development and
legal affairs, secretary and a director of Gabriel, presented a summary of the
terms of the merger agreement. Salomon Smith Barney advised the Gabriel board of
directors that, as of June 8, 2000, in the opinion of Gabriel's financial
advisor, the consideration to be paid in the merger was fair, from a financial
point of view, to Gabriel, subject to the assumptions and limitations set forth
in Salomon Smith Barney's written opinion. See "Opinion of Gabriel's Financial
Advisor" beginning on page 53. Following discussion, the Gabriel board of
directors, by unanimous vote, approved, and recommended that the stockholders of
Gabriel approve, the merger agreement, the Gabriel charter amendment and the
other transactions contemplated by the merger agreement.
On June 8, 2000, the board of directors of TriVergent held a special
meeting at which Mr. Charles S. Houser, chief executive officer of TriVergent,
reported on the discussions with Gabriel, including the terms of the merger, the
proposed exchange ratio and the 46% equity interest of the combined company, on
a fully diluted basis, to be received by the TriVergent stockholders. A
representative of Donaldson, Lufkin & Jenrette presented a summary of the terms
of the merger agreement and explained the calculation of the proposed exchange
ratio. Mr. Houser discussed the strategic and financial advantages of the merger
and answered questions regarding the terms of the merger. A representative of
Donaldson, Lufkin & Jenrette delivered its written opinion to the TriVergent
board of directors that as of June 8, 2000, in the opinion of Donaldson, Lufkin
& Jenrette, based on and subject to the assumptions, limitations and
qualifications included in the written opinion, the 46%, subject to adjustment
pursuant to the merger agreement, equity interest of the combined company, on a
fully diluted basis, to be received by the TriVergent stockholders was fair to
the stockholders as a whole from a financial point of view. See "Opinion of
TriVergent's Financial Advisor" beginning on page 49. Following this discussion,
the TriVergent board of directors, by unanimous vote, approved the merger
agreement and the other transactions contemplated thereby. At this time, the
board decided it was in the best interests of TriVergent to proceed with the
possible business combination with Gabriel instead of pursuing its initial
public offering. TriVergent also engaged First Union as a financial advisor in
connection with the transaction.
On June 9, 2000, representatives of Gabriel and TriVergent met in Atlanta,
Georgia and executed the merger agreement. On June 13, 2000, Gabriel and
TriVergent issued a joint press release announcing the execution of the merger
agreement.
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<PAGE> 54
THE BOARDS' REASONS FOR THE MERGER
The TriVergent board of directors believes that the merger is fair to and
in the best interests of TriVergent and its stockholders and has unanimously
approved the merger. The Gabriel board of directors believes that the merger is
fair to and in the best interests of Gabriel and also has unanimously approved
the merger.
In reaching its decision to approve the merger, the board of directors of
TriVergent consulted with its management team and outside financial and legal
advisors and carefully considered the following factors:
- the opportunity for TriVergent to expand into contiguous geographic
service territories creating, with Gabriel, a super regional competitor
in the changing telecommunications industry,
- the additional capital requirements for TriVergent's development plans,
totaling over $400 million,
- the belief that a merger with Gabriel would provide access to cash and
enhanced access to capital because of the larger size of the combined
company and through the additional relationships with lending
institutions and investors provided by Gabriel,
- the belief that the merger would provide significant reduction in
administrative and operating expenses,
- the belief that Gabriel and TriVergent share similar business strategies
of bundling local and long distance services with data and internet
services on a single monthly bill,
- the complementary network architectures and operational support systems
of Gabriel and TriVergent coupled with the belief that the two companies'
operations could be integrated efficiently and effectively.
- the similar network deployment strategies of the two companies to pursue
the cost effective delivery of telecommunications services,
- the similar business strategy of targeting small and medium-sized
business customers,
- the pursuit of similar customer support and sales strategies of employing
locally based direct sales teams and the opportunity to leverage
TriVergent's relationships with authorized agents in the Midwest,
- the various background data and analyses reviewed by TriVergent's outside
financial and legal advisors and management, as well as the opinion of
Donaldson, Lufkin & Jenrette that, as of the date of the opinion, based
on and subject to the assumptions, limitations and qualifications
included in the opinion the 46% equity interest of the combined company,
on a fully diluted basis, to be received by the TriVergent stockholders
is fair to the stockholders as a whole from a financial point of view,
- the terms and conditions of the merger agreement and the likelihood that
the conditions to the merger will be satisfied, and
- the willingness of TriVergent's management and institutional investors to
support the merger.
In reaching its decision to approve the merger, the board of directors of
Gabriel consulted with its management team and outside financial and legal
advisors and carefully considered a variety of factors including
- the businesses, operations, prospects and strategic direction of Gabriel
and TriVergent, including:
-- their shared focus on small to medium-sized business customers in
second and third tier markets,
-- their complementary markets and network architectures,
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<PAGE> 55
-- their pursuit of similar smart-built network deployment strategies,
-- their comparable bundled product and service offerings and focus on
meeting all the data and voice communications requirements of their
customers,
-- their similar sales and marketing strategies,
-- their highly complementary, advanced, automated billing, sales
management, inventory, electronic bonding and surveillance systems, and
-- the significant telecommunications industry experience and
entrepreneurial experience of their management teams,
- the total capital required for the successful implementation of the
combined company's 28 market development plan, estimated at approximately
$600 million, and the risks of obtaining additional capital required for
its targeted 40-market development plan, estimated at over $200 million,
- the belief that a merger of Gabriel with TriVergent could create
significant synergies for the combined company, including perceived
opportunities for savings in general, administrative and operating
expenses and network equipment costs,
- the belief that a merger with TriVergent would allow Gabriel to expand
its operations into the contiguous nine state BellSouth region with a
similar smart build strategy and product offerings and create a stronger
competitor in the changing telecommunications industry,
- the various background data and analyses reviewed by Gabriel's outside
financial and legal advisors and management, as well as the opinion of
Salomon Smith Barney that the consideration to be paid in the merger is
fair to Gabriel from a financial point of view,
- the terms and conditions of the merger agreement and the likelihood that
the conditions to the merger will be satisfied, and
- the willingness of Gabriel's management and institutional investors to
support the merger.
APPROVAL OF BOARD AND STOCKHOLDERS
GABRIEL
The Gabriel board of directors has unanimously approved the merger
agreement and believes that the terms of the merger agreement are fair to, and
that the merger is in the best interests of, Gabriel.
On June 9, 2000, the holders of more than two-thirds of the outstanding
shares of Gabriel common and preferred stock agreed to vote their shares to
approve or consent to the acquisition of TriVergent by Gabriel by means of the
merger and the amendment and restatement of the amended and restated certificate
of incorporation of Gabriel. Under Delaware law and the terms of Gabriel's
amended and restated certificate of incorporation, these approvals are
sufficient to approve the acquisition of TriVergent by Gabriel by means of the
merger and to approve the amendment and restatement of the amended and restated
certificate of incorporation of Gabriel. Accordingly, Gabriel is not soliciting
proxies or consents from the Gabriel stockholders in connection with the merger
or the charter amendment.
TRIVERGENT
The TriVergent board of directors has unanimously approved the merger
agreement and believes that the terms of the merger agreement are fair to, and
that the merger is in the best interests of, TriVergent and its stockholders.
On June 9, 2000, the holders of more than ninety percent of the outstanding
shares of TriVergent Series A and Series B preferred stock and more than
two-thirds of the outstanding shares of TriVergent Series C preferred stock and
common stock agreed to vote their shares in favor of or consent to the merger.
Under Delaware law and the terms of TriVergent's certificate of incorporation,
these approvals are
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sufficient to approve the merger agreement and the transactions contemplated by
the merger agreement. Accordingly, TriVergent is not soliciting proxies or
consents from TriVergent stockholders in connection with the merger.
OPINION OF TRIVERGENT'S FINANCIAL ADVISOR
INTRODUCTION
TriVergent asked Donaldson, Lufkin & Jenrette Securities Corporation, in
its role as financial advisor to TriVergent, to render an opinion to the
TriVergent board as to the fairness to the stockholders of TriVergent as a
whole, from a financial point of view, of the percentage equity interest in the
combined entity that they will be entitled to at the effective time of the
merger -- 46% calculated on a fully diluted basis, using the treasury stock
method and including the $6.00 warrants and $10.25 warrants, subject to
adjustment pursuant to the merger agreement, which we refer to in this section
as the "fully diluted equity interest."
On June 8, 2000, Donaldson, Lufkin & Jenrette delivered to the TriVergent
board a written opinion to the effect that, as of such date, and subject to and
based on the assumptions, limitations and qualifications set forth in the
opinion, the fully diluted equity interest was fair to the stockholders of
TriVergent as a whole from a financial point of view. A copy of the June 8, 2000
Donaldson, Lufkin & Jenrette opinion is attached to this information
statement/prospectus as Annex C. You should read this opinion for the procedures
followed, the matters considered and the limits of the review made by Donaldson,
Lufkin & Jenrette. The opinion is based on economic, market, regulatory,
financial and other conditions as they existed on, and on the information made
available to Donaldson, Lufkin & Jenrette as of, June 8, 2000. Although later
events may affect the conclusion reached in its opinion, Donaldson, Lufkin &
Jenrette does not have any obligation to update, revise or reaffirm its opinion.
Donaldson, Lufkin & Jenrette prepared its opinion for the TriVergent board.
The opinion addresses only the fairness from a financial point of view of the
fully diluted equity interest to the stockholders of TriVergent as a whole.
Donaldson Lufkin & Jenrette has expressed no opinion as to
- the prices at which Gabriel common stock and preferred stock would
actually trade in the future,
- the merits of the merger relative to other business strategies considered
by the TriVergent board,
- the decision of the TriVergent board to proceed with the merger, or
- the fairness of the consideration to be received by an individual class
of securityholders of TriVergent.
The fully diluted equity interest was determined in arms length
negotiations between TriVergent and Gabriel in which Donaldson, Lufkin &
Jenrette advised TriVergent.
The TriVergent board selected Donaldson, Lufkin & Jenrette to act as its
financial advisor for the merger because Donaldson, Lufkin & Jenrette is an
internationally recognized investment banking firm with substantial expertise in
the telecommunications industry and in mergers and acquisitions. Donaldson,
Lufkin & Jenrette, as part of its investment banking services, is regularly
engaged in the valuation of businesses and securities in connection with
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
INFORMATION REVIEWED AND ASSUMPTIONS MADE
In arriving at its June 8, 2000 opinion, Donaldson, Lufkin & Jenrette
reviewed
- drafts of the merger agreement and exhibits to the merger agreement,
- financial and other information that was publicly available or furnished
to Donaldson, Lufkin & Jenrette by TriVergent and Gabriel, including
information provided during discussions with their managements,
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<PAGE> 57
- certain financial projections for the years 2000 through 2009 of
TriVergent and Gabriel prepared by their managements,
- a comparison of various financial data of TriVergent and Gabriel with
other companies whose securities are traded in public markets, and
- the prices and premiums paid in certain other business combinations
and conducted such other financial studies, analyses and investigations as it
deemed appropriate for purposes of rendering its opinion.
Donaldson, Lufkin & Jenrette did not nor was it requested to solicit the
interest of any other party in acquiring TriVergent. For its opinion, Donaldson,
Lufkin & Jenrette relied upon and assumed the accuracy and completeness of all
of the financial and other information that was available to it from public
sources or that was provided to it by TriVergent or Gabriel or their respective
representatives, or that was otherwise reviewed by Donaldson, Lufkin & Jenrette.
Donaldson, Lufkin & Jenrette assumed that all financial projections were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the managements of TriVergent and Gabriel as to the future
operating and financial performance of TriVergent and Gabriel. Donaldson, Lufkin
& Jenrette did not make any independent evaluation of the assets or liabilities
of TriVergent or Gabriel, or an independent verification of the information
reviewed by Donaldson, Lufkin & Jenrette, respectively. Donaldson, Lufkin &
Jenrette did not consider the impact of regulatory changes on TriVergent and
Gabriel. Donaldson, Lufkin & Jenrette relied as to all legal matters, including
that the merger will qualify as a tax-free "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code, on advice of counsel to
TriVergent or Gabriel.
FINANCIAL ANALYSES
The following is a summary of the financial analyses made by Donaldson,
Lufkin & Jenrette in connection with its June 8, 2000 opinion and its
presentation to the TriVergent board on June 8, 2000. No company or transaction
used in the analyses described below is directly comparable to TriVergent or the
contemplated transaction. In addition, mathematical analysis such as determining
the mean or median is not in itself a meaningful method of using selected
company or transaction data. The analyses performed by Donaldson, Lufkin &
Jenrette are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by these
analyses.
Private Financings. Donaldson, Lufkin & Jenrette compared the valuations
implied by the prices at which TriVergent and Gabriel had completed recent
rounds of private financing. TriVergent's most recent round of private financing
took place during February and March 2000 when it raised approximately $67
million through the issuance of convertible preferred stock which, based on the
number of shares of common stock into which it is convertible, implied a
valuation of $4.25 per share for TriVergent common stock. Gabriel's most recent
round of private financing took place during April 2000 when it obtained
approximately $204.5 million of commitments to purchase its convertible
preferred stock which, based on the number of shares of common stock into which
it is convertible, implied a valuation of $7.00 per share for Gabriel common
stock. The implied exchange ratio based on each companies recent private round
of financing is shown in the table below:
<TABLE>
<CAPTION>
IMPLIED VALUATIONS FROM RECENT ROUNDS OF PRIVATE FINANCING
----------------------------------------------------------
TRIVERGENT GABRIEL IMPLIED EXCHANGE RATIO
---------------------------- ---------------------------- ----------------------
<S> <C> <C>
$4.25 per share $7.00 per share 0.6
</TABLE>
The ratio of these valuations would imply an exchange ratio of 0.6 compared to
the then proposed exchange ratio of 1.1005.
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Publicly Traded Comparable Competitive Local Telephone Company
Analysis. Donaldson, Lufkin & Jenrette analyzed selected historical and
projected operating information, stock market data and financial ratios for the
following publicly traded competitive local telephone companies:
- Allegiance Telecom, Inc.,
- Choice One Communications, Inc.,
- CoreComm Ltd.,
- CTC Communications Corp.,
- Focal Communications Corp.,
- Mpower Communications Corp.,
- Net2000 Communications Inc.,
- Network Plus Corp.,
- Pac-West Telecomm Inc. and
- US LEC Corp.
Donaldson, Lufkin & Jenrette chose the comparable competitive local telephone
companies based on their industry, "smart-build" strategy and growth
characteristics. Donaldson, Lufkin & Jenrette calculated the multiple of each
company's total enterprise value, based on its current market price, to the
selected research analysts' estimates of revenues for such company for 2001. The
enterprise value of a company is equal to the value of its fully-diluted common
equity plus debt and the liquidation value of outstanding preferred stock, if
any, minus cash and the value of certain other assets, including minority
interests in other entities. The table below sets forth the results of these
analyses:
RATIO OF ENTERPRISE
<TABLE>
<CAPTION>
VALUE TO: RANGE MEAN MEDIAN
---------------------- ------------ ---- ------
<S> <C> <C> <C>
2001 Estimated Revenue 2.2x - 12.4x 5.2x 3.6x
</TABLE>
Based on the median of 3.6x, Donaldson, Lufkin & Jenrette derived a range of
ratios to apply to TriVergent's estimated 2001 revenues of 2.5x to 3.5x. For
Gabriel, Donaldson, Lufkin & Jenrette derived a slightly higher range of ratios
to apply to Gabriel's estimated 2001 revenues of 3.0x to 4.0x. In determining
the appropriate revenue multiples, Donaldson, Lufkin & Jenrette considered each
of the following: each company's financial projections, current funding
position, and management reputation and experience in the public financial
markets. These ranges of enterprise value to 2001 revenue ratios implied equity
value per share ranges for both TriVergent and Gabriel as shown in the table
below:
<TABLE>
<CAPTION>
IMPLIED EQUITY VALUE PER SHARE RANGES
-------------------------------------
TRIVERGENT GABRIEL IMPLIED EXCHANGE RATIO
----------------- ----------------- ----------------------
<S> <C> <C>
$5.93 - $8.13 $6.03 - $6.86 1.0 - 1.2
</TABLE>
These implied equity values implied an exchange ratio of 1.0 to 1.2
compared to the then proposed exchange ratio of 1.1005.
Discounted Cash Flow Analysis. Donaldson, Lufkin & Jenrette performed a
discounted cash flow analysis of Gabriel and TriVergent using projections and
assumptions provided by the managements of Gabriel and TriVergent. In a
discounted cash flow analysis a valuation is determined based on the sum of the
present values of a business' projected cash flows for a period of years and the
present value of the business at the end of that period, which is referred to as
the terminal value. In its discounted cash flow analysis, Donaldson, Lufkin &
Jenrette took the projected cash flows for the next 9 1/2 years and estimated
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the value of TriVergent and Gabriel at the end of that period based on a
multiple of EBITDA at the end of the period. The following assumptions were used
in calculating discounted cash flow values:
- Discounted cash flow projection period from July 1, 2000 through December
31, 2009,
- Discount rate of 13.0% to 15.0% for each of TriVergent and Gabriel,
respectively, and
- Terminal value was computed by using ranges of 10.0x to 12.0x projected
2009 EBITDA for TriVergent and 9.5x to 11.5x projected 2009 EBITDA for
Gabriel.
These assumptions implied values which are summarized in the table below:
<TABLE>
<CAPTION>
IMPLIED EQUITY VALUE PER SHARE RANGES
-------------------------------------
TRIVERGENT GABRIEL IMPLIED EXCHANGE RATIO
------------------ ----------------- ----------------------
<S> <C> <C>
$16 - $19 $17 - $20 0.94 - 0.95
</TABLE>
The implied range of exchange ratios based on these implied equity values
was 0.94 to 0.95 compared to the then proposed exchange ratio of 1.1005.
Contribution Analysis. Donaldson, Lufkin & Jenrette analyzed the revenue
projections for TriVergent and Gabriel and the relative contribution of each to
the combined entity. This analysis indicated, among other things, that for the
years 2000 through 2004, TriVergent would contribute between 55.7% and 67.4% of
the combined entity's revenues. Donaldson, Lufkin & Jenrette took into
consideration TriVergent's and Gabriel's net cash to derive TriVergent's and
Gabriel's implied ownership percentages. The analysis is summarized in the table
below:
<TABLE>
<CAPTION>
CONTRIBUTION IMPLIED OWNERSHIP
--------------------- --------------------- IMPLIED
TRIVERGENT GABRIEL TRIVERGENT GABRIEL EXCHANGE RATIO
---------- ------- ---------- ------- --------------
<S> <C> <C> <C> <C> <C>
2000 Estimated Revenue...................... 58.5% 41.5% 43.1% 56.9% 0.9766
2001 Estimated Revenue...................... 67.4% 32.6% 51.5% 48.5% 1.3731
2002 Estimated Revenue...................... 67.0% 33.0% 51.1% 48.9% 1.3507
2003 Estimated Revenue...................... 60.7% 39.3% 45.1% 54.9% 1.0605
2004 Estimated Revenue...................... 55.7% 44.3% 40.7% 59.3% 0.8870
</TABLE>
The analysis implied an exchange ratio range of 0.9 to 1.4 compared to the
then proposed exchange ratio of 1.1005.
This summary is not a complete description of Donaldson, Lufkin &
Jenrette's analyses. Instead, it summarizes the material elements of the
presentation made by Donaldson, Lufkin & Jenrette to the TriVergent board on
June 8, 2000. The preparation of Donaldson, Lufkin & Jenrette's opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances. Therefore, Donaldson, Lufkin & Jenrette's opinion is not readily
susceptible to summary description.
Each of Donaldson, Lufkin & Jenrette's analyses was carried out in order to
provide a different perspective on the transaction and add to the total mix of
information available. Donaldson, Lufkin & Jenrette did not form a conclusion as
to whether any individual analysis, considered by itself, supported or failed to
support an opinion as to fairness from a financial point of view. Rather, in
reaching its conclusion, Donaldson, Lufkin & Jenrette considered the results of
the analyses in light of each other and ultimately reached its opinion based on
the results of all analyses taken as a whole. Donaldson, Lufkin & Jenrette did
not place particular reliance or weight on any individual analysis, but instead
concluded that its analyses, taken as a whole, supported its determination.
Furthermore, different professionals within Donaldson, Lufkin & Jenrette
involved in the delivery of the opinion may have given different weight to
different analyses. For this reason, Donaldson, Lufkin & Jenrette believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all analyses and
factors, could create an incomplete view of the evaluation process underlying
its opinion. The
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analyses performed by Donaldson, Lufkin & Jenrette are not necessarily
indicative of actual, past or future results or values, which may be
significantly more or less favorable than suggested by these analyses.
ENGAGEMENT LETTER
TriVergent engaged Donaldson, Lufkin & Jenrette to act as its principal
financial advisor in connection with the merger with Gabriel. Under the
engagement letter, TriVergent agreed to pay Donaldson, Lufkin & Jenrette a fee
of $500,000 at the time Donaldson, Lufkin & Jenrette notified the Board of
Directors of TriVergent that it was prepared to deliver Donaldson, Lufkin &
Jenrette's opinion. TriVergent agreed to pay Donaldson, Lufkin & Jenrette
additional cash compensation in an amount equal to $3.75 million less the amount
paid by TriVergent for Donaldson, Lufkin & Jenrette's opinion, payable in cash
at consummation of the merger.
TriVergent also agreed to reimburse Donaldson, Lufkin & Jenrette for
out-of-pocket expenses. TriVergent also agreed to indemnify Donaldson, Lufkin &
Jenrette and related persons against various liabilities in connection with its
engagement, including liabilities under federal securities laws. The SEC has
taken the position that indemnification under the federal securities laws may
not be enforceable if it is found to be against public policy.
Donaldson, Lufkin & Jenrette has performed investment banking and other
services for TriVergent in the past, including acting as lead manager of its
proposed initial public offering. Donaldson, Lufkin & Jenrette may also provide
investment banking services for TriVergent or Gabriel in the future.
OPINION OF GABRIEL'S FINANCIAL ADVISOR
Gabriel retained Salomon Smith Barney to act as its financial advisor in
connection with the merger. Pursuant to Salomon Smith Barney's engagement
letter, dated April 13, 2000, Salomon Smith Barney rendered an opinion to
Gabriel's board of directors on June 8, 2000 to the effect that, based upon and
subject to the considerations set forth in the opinion, as of such date, the
consideration to be paid in the merger was fair, from a financial point of view,
to Gabriel.
Annex D to this information statement/prospectus contains the full text of
Salomon Smith Barney's opinion, which sets forth the assumptions made, general
procedures followed, matters considered and limits on the review undertaken.
GABRIEL'S STOCKHOLDERS ARE URGED TO READ THE SALOMON SMITH BARNEY OPINION
CAREFULLY AND COMPLETELY.
Although Salomon Smith Barney evaluated the fairness, from a financial
point of view, of the consideration to be paid in the merger, the consideration
was determined by Gabriel and TriVergent through arms-length negotiations.
Neither Gabriel nor its board of directors imposed any limitations with respect
to the investigations made or procedures followed by Salomon Smith Barney in
rendering its opinion.
In the process of rendering its opinion, Salomon Smith Barney reviewed,
among other things:
- a draft of the merger agreement,
- publicly available business and financial information concerning
TriVergent, and
- internal information, including financial forecasts and other information
and data regarding Gabriel and TriVergent, provided to or otherwise
discussed with Salomon Smith Barney by the managements of Gabriel and
TriVergent.
Salomon Smith Barney reviewed the financial terms of the merger in relation
to, among other things, the historical and projected earnings and other
operating data of Gabriel and TriVergent and the historical and projected
capitalization and financial condition of Gabriel and TriVergent. Salomon Smith
Barney also evaluated the pro forma financial impact of the merger on Gabriel.
Salomon Smith Barney also conducted other analyses and examinations and
considered other information and financial, economic and market criteria as it
deemed appropriate.
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In rendering its opinion, Salomon Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Salomon Smith Barney. Salomon Smith Barney also
relied upon the assurances of management of both Gabriel and TriVergent that
they were not aware of any facts that would make any of the information reviewed
by Salomon Smith Barney inaccurate or misleading. Management of Gabriel and
TriVergent have advised Salomon Smith Barney that the financial forecasts and
other information and data provided to or otherwise reviewed by, or discussed
with, Salomon Smith Barney were reasonably prepared based on the best currently
available estimates and judgments of the managements of Gabriel and TriVergent
as to the future financial performance of Gabriel and TriVergent. Salomon Smith
Barney expressed no view with respect to these forecasts and other information
and data or the assumptions on which they were based. Salomon Smith Barney
assumed, with Gabriel's consent, that the merger will be treated as a tax-free
reorganization for U.S. federal income tax purposes. Salomon Smith Barney did
not make and was not provided with an independent evaluation or appraisal of the
assets or liabilities, contingent or otherwise, of Gabriel or TriVergent nor did
Salomon Smith Barney make any physical inspection of the properties or assets of
Gabriel or TriVergent. Salomon Smith Barney also assumed that the final terms of
the merger agreement would not vary materially from those in the draft reviewed
by Salomon Smith Barney and that the merger will be consummated in a timely
fashion and in accordance with the terms of the merger agreement without waiver
of any of the conditions precedent to the merger contained in the merger
agreement.
Salomon Smith Barney's opinion relates to the relative values of Gabriel
and TriVergent. Salomon Smith Barney did not express any opinion as to what the
value of any of the Gabriel common stock, Gabriel preferred stock or Gabriel
options or warrants actually will be when issued in the merger. Nor did Salomon
Smith Barney express any opinion with respect to the allocation of the
consideration to be paid in the merger. Salomon Smith Barney was not requested
to consider, and the Salomon Smith Barney opinion does not address, the relative
merits of the merger as compared to any alternative business strategies that
might exist for Gabriel or the effect of any other transaction in which Gabriel
might engage. Salomon Smith Barney's opinion necessarily was based upon
information available and disclosed to Salomon Smith Barney as of the time it
rendered its opinion.
SALOMON SMITH BARNEY'S ADVISORY SERVICES WERE PROVIDED FOR THE INFORMATION
OF, AND ITS OPINION WAS ADDRESSED TO, GABRIEL'S BOARD OF DIRECTORS IN ITS
EVALUATION OF THE PROPOSED MERGER AND DID NOT CONSTITUTE A RECOMMENDATION OF THE
MERGER TO GABRIEL OR A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW THAT
STOCKHOLDER SHOULD VOTE ON ANY MATTERS RELATING TO THE PROPOSED MERGER.
The following is a summary of analyses performed by Salomon Smith Barney in
the course of evaluating the fairness of the consideration to be paid in the
merger. The following quantitative information, to the extent it is based on
market data, is, except as otherwise indicated, based on market data as it
existed at or prior to June 2, 2000, and is not necessarily indicative of
current or future market conditions. The summary of certain of the financial
analyses includes information presented in tabular format. IN ORDER TO
UNDERSTAND FULLY THE FINANCIAL ANALYSES USED BY SALOMON SMITH BARNEY, THESE
TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY. THE TABLES ALONE ARE
NOT A COMPLETE DESCRIPTION OF THE FINANCIAL ANALYSES.
Contribution Analyses. Using annualized results for the month ended March
31, 2000 and management projections provided by TriVergent and Gabriel,
respectively, Salomon Smith Barney performed analyses of the relative
contribution of each of TriVergent and Gabriel to the combined company with
respect to certain financial and operating data. Based on the relative
contribution of TriVergent and Gabriel with respect to each category of data,
Salomon Smith Barney derived the implied ownership interest in the combined
company of the current common and preferred stockholders of each of TriVergent
and Gabriel. The purpose of this analysis was to draw a comparison between this
implied ownership interest and the percentage ownership of the combined company
that the current Gabriel stockholders are expected to have following the merger.
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In the course of these analyses, certain information used by Salomon Smith
Barney with respect to TriVergent was on a pro forma basis to reflect pending
and recently completed transactions involving TriVergent. In performing these
analyses, Salomon Smith Barney did not take into account any anticipated cost
savings, revenue enhancements or other similar potential effects of the merger.
These analyses are set forth in the following table.
<TABLE>
<CAPTION>
TRIVERGENT GABRIEL
TRIVERGENT GABRIEL IMPLIED IMPLIED
CONTRIBUTION CONTRIBUTION OWNERSHIP OWNERSHIP
------------ ------------ ---------- ---------
<S> <C> <C> <C> <C>
ANNUAL REVENUES
Latest Month Annualized......................... 71.5% 28.5% 55.0% 45.0%
Estimated 2000.................................. 58.5 41.5 46.0 54.0
Estimated 2001.................................. 67.4 32.6 52.1 47.9
Estimated 2002.................................. 66.8 33.2 51.7 48.3
Estimated 2003.................................. 60.4 39.6 47.4 52.6
ON-NET ACCESS LINES
As of March 31, 2000............................ 2.9% 97.1% 7.9% 92.1%
Estimated as of December 31, 2000............... 49.8 50.2 40.0 60.0
Estimated as of December 31, 2001............... 67.4 32.6 52.1 47.9
Estimated as of December 31, 2002............... 65.7 34.3 51.0 49.0
Estimated as of December 31, 2003............... 63.3 36.7 49.3 50.7
NET PROPERTY, PLANT AND EQUIPMENT
As of March 31, 2000............................ 53.9% 46.1% 42.9% 57.1%
Estimated as of December 31, 2000............... 64.8 35.2 50.4 49.6
Estimated as of December 31, 2001............... 52.1 47.9 41.6 58.4
Estimated as of December 31, 2002............... 47.5 52.5 38.5 61.5
Estimated as of December 31, 2003............... 41.6 58.4 34.4 65.6
</TABLE>
Salomon Smith Barney derived a range for the implied ownership of the
Gabriel stockholders in the combined company of 49.6% to 55.6% based on the data
in the table above. Salomon Smith Barney noted that the expected pro forma fully
diluted equity interest in the combined company of the current common and
preferred stockholders of Gabriel expected to result from the merger is 54%,
which is within the derived range. This analysis therefore supported the
conclusion that the consideration to be paid in the merger was fair, from a
financial point of view, to Gabriel.
Comparable Company Analysis. Salomon Smith Barney reviewed publicly
available financial and operating information for nine competitive local
telephone companies:
- Allegiance Telecom, Inc.,
- Choice One Communications Inc.,
- CTC Communications Group, Inc.,
- Focal Communications Corporation,
- Mpower Holding Corporation,
- Net2000 Communications, Inc.,
- Network Plus Corp.,
- Pac-West Telecomm, Inc. and
- US LEC Corp.
Salomon Smith Barney considered the business segments in which these companies
operate to be reasonably similar to certain of the business segments in which
TriVergent and Gabriel operate, but noted that none of these companies has the
same management, makeup, size or combination of businesses as
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TriVergent or Gabriel. The purpose of this analysis was to use certain financial
and operating data of comparable competitive local telephone companies to derive
an implied value of the equity securities of each of Gabriel and TriVergent.
Based on those implied equity values, Salomon Smith Barney could derive the
implied ownership percentage of Gabriel's stockholders in the combined company
and compare that implied ownership percentage with the pro forma fully diluted
equity interest in the combined company of the current Gabriel stockholders
expected to result from the merger.
In performing this analysis, Salomon Smith Barney derived the adjusted firm
value of each of the comparable competitive local telephone companies. Adjusted
firm value was calculated as the sum of the value of:
- all shares of common stock assuming the exercise of all in-the-money
options, warrants and convertible securities, less the proceeds from such
exercise, plus
- non-convertible indebtedness, plus
- non-convertible preferred stock, plus
- minority interests, plus
- out-of-the-money convertible securities, minus
- certain assets not related to the company's core businesses, minus
- investments in unconsolidated affiliates and cash.
For each of the comparable competitive local telephone companies, Salomon
Smith Barney derived the ratio of adjusted firm value to each of:
- revenue for 2000, based on an annualization of revenue for the latest
quarter for which results were available,
- estimated revenue for 2000,
- estimated revenue for 2001,
- estimated revenue for 2002,
- estimated growth-adjusted revenue for 2000,
- estimated growth-adjusted revenue for 2001,
- estimated growth-adjusted revenue for 2002,
- net property, plant and equipment, and
- number of access lines.
Estimated growth-adjusted revenue for any year is the estimated revenue for that
year multiplied by the estimated compound annual growth rate over the next two
succeeding years. With respect to the comparable competitive local telephone
companies, Salomon Smith Barney used revenue estimates contained in publicly
available research reports published by various investment banks.
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The following tables set forth the results of these analyses:
<TABLE>
<CAPTION>
RATIO OF ADJUSTED
FIRM VALUE TO: RANGE MEAN MEDIAN
----------------- ---------------- ------- -------
<S> <C> <C> <C>
Revenue(1)............................................... 3.3x - 47.2x 18.7x 16.1x
2000 Estimated Revenue................................... 3.7x - 23.0x 11.7x 10.9x
2001 Estimated Revenue................................... 2.3x - 12.1x 5.5x 4.0x
2002 Estimated Revenue................................... 1.6x - 7.3x 3.3x 2.7x
2000 Estimated Growth-Adjusted Revenue................... 6.9x - 29.5x 13.6x 11.9x
2001 Estimated Growth-Adjusted Revenue................... 4.0x - 20.3x 10.0x 9.5x
2002 Estimated Growth-Adjusted Revenue................... 2.7x - 16.0x 7.6x 6.9x
Net Property, Plant and Equipment........................ 6.3x - 18.5x 10.5x 9.3x
Access Lines............................................. $3,701 - $35,576 $14,728 $12,839
</TABLE>
-------------------------
(1) Based on an annualization of revenue for the latest quarter for which
results were available.
Based upon this analysis and using projected financial information provided
by the management of TriVergent and Gabriel, respectively, Salomon Smith Barney
derived ranges of implied firm value and the implied value of the equity
securities of TriVergent and Gabriel as set forth in the following table.
Salomon Smith Barney derived the implied value of the equity securities of each
company by adjusting that company's implied firm value by subtracting debt and
minority interests and adding cash, marketable securities held by the company
and the proceeds expected to be received from the exercise of options and
warrants.
<TABLE>
<CAPTION>
TRIVERGENT GABRIEL
--------------- ---------------
(IN MILLIONS)
<S> <C> <C>
RANGE OF IMPLIED FIRM VALUE................... $450.0 - $550.0 $300.0 - $375.0
RANGE OF IMPLIED EQUITY VALUE................. $501.7 - $601.7 $523.0 - $598.0
</TABLE>
Based on the derived value of the equity securities of each company,
Salomon Smith Barney derived an implied range of the ownership of Gabriel's
stockholders in the combined company of 46.5% to 54.5%. Salomon Smith Barney
noted that the 54% equity interest in the combined company of the current
Gabriel stockholders expected to result from the merger is within that range,
which supported the conclusion that the consideration to be paid in the merger
was fair, from a financial point of view, to Gabriel.
Discounted Cash Flow Analysis. Salomon Smith Barney used a discounted cash
flow methodology to derive ranges of firm value and the implied value of the
equity securities of each of TriVergent and Gabriel. The purpose of this
analysis was to derive the value of each company's equity securities by
considering the value today of the company's expected future cash flows over a
certain number of years and the company's "terminal" value at the end of that
period. By doing that, Salomon Smith Barney could then compare the ownership
percentage of Gabriel's stockholders in the combined company implied by those
equity values with the expected pro forma fully diluted equity interest in the
combined company of the current Gabriel stockholders expected to result from the
merger.
In this analysis, Salomon Smith Barney assumed a weighted average cost of
capital ranging from 13.5% to 17.5% to derive for each of TriVergent and Gabriel
the present value as of June 30, 2000 of projected free cash flows for the ten
fiscal years from 2000 through 2009 plus each company's terminal value at the
end of fiscal 2009. Terminal values for each company were based on a range of
8.0x to 12.0x projected earnings before interest, taxes, depreciation and
amortization, or EBITDA, for 2009. In particular, Salomon Smith Barney focused
on the results obtained by utilizing a weighted average cost of capital ranging
from 14.5% to 16.5% and terminal values ranging from to 9.0x to 11.0x projected
EBITDA for 2009. Salomon Smith Barney derived the implied value of the equity
securities of each company by adjusting that company's implied firm value by
subtracting debt and minority interests and adding cash, marketable securities
held by the company and the proceeds expected to be received from the exercise
of options and warrants.
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In deriving ranges of firm value and equity value for TriVergent, Salomon
Smith Barney performed the discounted cash flow analysis using both management
projections provided by TriVergent and management projections adjusted to
reflect more conservative near-term growth of TriVergent's business, more
conservative access line growth and a more rapid shift away from resale revenues
than were reflected in TriVergent's management projections.
In deriving ranges of firm value and equity value for Gabriel, Salomon
Smith Barney performed the discounted cash flow analysis using both management
projections provided by Gabriel and management projections adjusted to reflect
more conservative near-term revenue growth, more rapidly declining prices and
lower margins than were reflected in Gabriel's management projections.
Based upon this analysis, Salomon Smith Barney derived the ranges of firm
value and the implied value of the equity securities of TriVergent and Gabriel
as set forth in the following table:
<TABLE>
<CAPTION>
TRIVERGENT GABRIEL
---------------------------- --------------------------------
MANAGEMENT ADJUSTED MANAGEMENT ADJUSTED
CASE CASE CASE CASE
------------- ----------- --------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
RANGE OF IMPLIED FIRM VALUE......... $710 - $1,078 $583 - $875 $ 885 - $1,320 $748 - $1,127
RANGE OF IMPLIED EQUITY VALUE....... $762 - $1,130 $635 - $927 $1,108 - $1,543 $971 - $1,350
</TABLE>
Based on the range of the implied equity value of each company, Salomon
Smith Barney derived ranges of the implied equity ownership of Gabriel's
stockholders in the combined company of 49.5% to 67.0% under the management case
and 51.2% to 68.0% under the adjusted case. Salomon Smith Barney noted that the
54% equity interest in the combined company of the current Gabriel stockholders
expected to result from the merger is within those ranges, which supported the
conclusion that the consideration to be paid in the merger was fair, from a
financial point of view, to Gabriel.
The preceding discussion is a summary of the material financial analyses
performed by Salomon Smith Barney in the course of evaluating the fairness of
the consideration to be paid in the merger. The preparation of financial
analyses and fairness opinions is a complex process involving subjective
judgments and is not necessarily susceptible to partial analysis or summary
description. Salomon Smith Barney made no attempt to assign specific weights to
particular analyses or factors considered, but rather made qualitative judgments
as to the significance and relevance of all the analyses and factors considered
and determined to give its fairness opinion as described above. Accordingly,
Salomon Smith Barney believes that its analyses, and the summary set forth
above, must be considered as a whole, and that selecting portions of the
analyses and of the factors considered by Salomon Smith Barney, without
considering all of the analyses and factors, could create a misleading or
incomplete view of the processes underlying the analyses conducted by Salomon
Smith Barney and its opinion. With regard to the comparable companies analyses
summarized above, Salomon Smith Barney selected comparable public companies on
the basis of various factors, including the size and similarity of the line of
business; however, no company utilized as a comparison in these analyses is
identical to TriVergent or Gabriel. As a result, these analyses are not purely
mathematical, but also take into account differences in financial and operating
characteristics of the subject companies and other factors that could affect the
transaction or public trading value of the subject companies to which TriVergent
and Gabriel are being compared. In its analyses, Salomon Smith Barney made
numerous assumptions with respect to TriVergent, Gabriel, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of TriVergent and Gabriel. Any estimates
contained in Salomon Smith Barney's analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by these analyses.
Estimates of values of companies do not purport to be appraisals or necessarily
to reflect the prices at which companies may actually be sold. Because these
estimates are inherently subject to uncertainty, none of TriVergent, Gabriel,
the Gabriel board of directors, Salomon Smith Barney or any other person assumes
responsibility if future results or actual values differ materially from the
estimates. Salomon Smith Barney's analyses were prepared solely as part of
Salomon Smith Barney's analysis of the fairness of the exchange ratio in the
merger. The opinion of Salomon Smith
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Barney was only one of the factors taken into consideration by Gabriel's board
of directors in making its determination to approve the merger agreement and the
merger.
Salomon Smith Barney is an internationally recognized investment banking
firm engaged in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions, restructurings,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Gabriel selected Salomon
Smith Barney to act as its financial advisor on the basis of Salomon Smith
Barney's international reputation and Salomon Smith Barney's familiarity with
Gabriel. In the ordinary course of its business, Salomon Smith Barney and its
affiliates may actively trade or hold the securities of both Gabriel and
TriVergent for its own account and for the account of customers and,
accordingly, may at any time hold a long or short position in those securities.
Salomon Smith Barney and its affiliates, including Citigroup Inc. and its
affiliates, may maintain relationships with Gabriel and TriVergent and their
respective affiliates.
Pursuant to Salomon Smith Barney's engagement letter, Gabriel agreed to pay
Salomon Smith Barney fees for its services rendered in connection with the
merger in the amounts of $250,000, which was payable when the merger agreement
was executed, and $3.0 million, which will become payable when the merger is
completed. Gabriel has also agreed to reimburse Salomon Smith Barney for its
reasonable travel and other out-of-pocket expenses incurred in connection with
its engagement, including the reasonable fees and disbursements of its counsel,
and to indemnify Salomon Smith Barney against specific liabilities and expenses
relating to or arising out of its engagement, including liabilities under the
federal securities laws.
INTERESTS OF TRIVERGENT DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
INTRODUCTION. Some of the members of TriVergent's board of directors and
executive officers may have interests in the merger that are different from or
in addition to the interests of stockholders of TriVergent generally. These
additional interests relate to, among other things, the effect of the merger on
employment and benefit arrangements to which directors and executive officers
are parties or under which they have rights. These interests, to the extent
material, are described below. The TriVergent board of directors was aware of
these interests and considered them, among other things, prior to approving the
merger agreement.
EMPLOYMENT AGREEMENTS. TriVergent has entered into employment agreements
with the following members of senior management of TriVergent that contain
vesting provisions that are triggered by a change in control of TriVergent:
<TABLE>
<CAPTION>
NAME POSITION
---- --------------------------------------------------------
<S> <C>
Charles S. Houser......................... Chief Executive Officer
G. Michael Cassity........................ President and Chief Operating Officer
J. W. Adams............................... Senior Vice President of Network Engineering
Shaler P. Houser.......................... Senior Vice President of Corporate Development and
Strategy
Ronald N. Kirby........................... Senior Vice President of Network Customer Operations
G. Randolph McDougald..................... Senior Vice President of Marketing
Clark H. Mizell........................... Senior Vice President and Chief Financial Officer
Riley M. Murphy........................... Senior Vice President of Law, General Counsel and
Secretary
Vincent M. Oddo........................... Senior Vice President and Chief Information Officer
Russell W. Powell......................... Senior Vice President of Sales
Judith C. Slaughter....................... Senior Vice President of Customer Operations
</TABLE>
Except for the agreement with Mr. Cassity, these agreements provide that:
- if employment is terminated by TriVergent, other than for cause, prior to
and in connection with a change in control, which would include the
merger, the employee is entitled to salary and benefits for the balance
of the term of the agreement;
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- if the employee is terminated after a change in control, the employee is
entitled to salary and benefits for periods ranging from 12 to 24 months
following the change in control; and
- the employee will receive an additional amount, on an after-tax basis, to
compensate for any taxes imposed by the U.S. federal income tax laws in
relation to the termination payments.
Mr. Cassity's employment agreement provides that if he resigns for "good
reason," as defined in the agreement, prior to a change in control, he is
entitled to salary, bonus and benefits for the greater of one year from
termination or two years after the date of the employment agreement. If he
resigns for good reason after a change in control, he is entitled to salary,
bonus, $50,000 in discretionary funds and benefits for the greater of one year
from termination or three years after the date of the employment agreement. In
addition, Mr. Cassity's employment agreement provides for a liquidity bonus upon
the sale of TriVergent equal to $500,000 if the consideration paid for
TriVergent is between $500 million and $750 million or $750,000 if the
consideration paid for TriVergent is at least $750 million. Based on the merger
consideration, Mr. Cassity will not be entitled to this liquidity bonus as
result of the merger.
By letter agreement, all but two members of TriVergent's senior management
with employment agreements have agreed that the merger shall not be treated as a
change of control under their employment agreements and that the merger shall
not be treated as an event resulting in the acceleration of exercise rights
under their options granted under the TriVergent employee incentive plan. In
exchange for this agreement, these persons will receive a three year, rather
than a five year, vesting schedule from the date of the original grant for their
options. In addition, their options may fully vest and become fully exercisable
in accordance with their terms if any of the following occurs within one year
following the effective time of the merger:
- a diminution or reduction of such holder's responsibilities, position,
authority, duties or compensation from those in effect immediately prior
to the effective time of the merger,
- a relocation of 50 miles or more of such employee's work location or
- a termination of the employment of such employee without cause.
INDEMNIFICATION. All rights of indemnification from liabilities existing in
favor of the current and former directors, officers, employees and agents of
TriVergent and its subsidiaries as provided in their certificates of
incorporation and by-laws will be assumed by the surviving corporation in the
merger, and will continue in full force and effect in accordance with the terms
of the certificate of incorporation and by-laws of the surviving corporation.
EFFECTS OF THE MERGER ON EMPLOYEE INCENTIVE PLAN. Under the terms of
TriVergent's employee incentive plan, the merger would cause all options
outstanding under the plan to become fully vested and immediately exercisable.
However, as discussed above, by letter agreement, officers and employees of
TriVergent holding in the aggregate 73.31% of options outstanding as of the date
of the merger agreement have agreed that the merger shall not be treated as an
event resulting in an acceleration of exercise rights under the TriVergent
employee incentive plan.
OTHER MERGER AGREEMENT PROVISIONS. The merger agreement also contains the
following additional provisions applicable to TriVergent senior management,
including:
- following the effective time of the merger, Gabriel has agreed to
maintain existing TriVergent employee benefits or replace TriVergent
benefits with comparable Gabriel benefits provided that, in the
aggregate, the terms offered to the TriVergent employees are no less
favorable than the aggregate benefits provided to similarly situated
employees of Gabriel and all pre-existing condition limitations, to the
extent such limitations did not apply to a pre-existing condition under
the benefit plans of TriVergent, will be waived with respect to these
participants and their eligible dependents;
- Gabriel has agreed to recognize, for TriVergent employees, credit for
years of service with TriVergent or any of the TriVergent subsidiaries
prior to the merger for purposes of eligibility and vesting to the extent
that service was recognized under the benefit plans of TriVergent;
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- Gabriel has agreed to honor the employment agreements of TriVergent's
current executive officers and employees; and
- Gabriel or the surviving corporation in the merger will offer employment
on mutually agreeable terms to all employees of TriVergent employed as of
the effective time of the merger.
INTERESTS OF GABRIEL DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
No members of Gabriel's board of directors or executive officers of Gabriel
have any interests in the merger that are different from or in addition to the
interests of stockholders of Gabriel generally.
ACCOUNTING TREATMENT
Gabriel and TriVergent intend to account for the merger using the
"purchase" method of accounting for financial reporting and accounting purposes,
in accordance with generally accepted accounting principles. After the merger,
the consolidated results of operations of TriVergent will be included in the
consolidated financial statements of Gabriel. The aggregate merger consideration
will be allocated based on the fair values of the assets acquired and the
liabilities assumed. Any excess of cost over fair value of the net tangible
assets of TriVergent acquired will be recorded first as identifiable intangible
assets and then, to the extent unallocated, as an unidentified intangible asset
or "goodwill." A final determination of the intangible asset lives and required
purchase accounting adjustments, including the allocation of the purchase price
to the assets acquired and liabilities assumed based on their respective fair
values, has not yet been made. See "Unaudited Pro Forma Condensed Combined
Financial Statements of Gabriel and TriVergent" on page 20.
U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following is a description of the material U.S. federal income
tax consequences of the merger to holders of shares of TriVergent preferred
stock, common stock, options and warrants as well as the distribution of
warrants to purchase Gabriel common stock to holders of shares of Gabriel
preferred stock. To the extent indicated below, the following sets forth the
respective opinions of Bryan Cave LLP, counsel to Gabriel, and Cravath, Swaine &
Moore, counsel to TriVergent.
This description, including the respective opinions, is based upon current
law and is subject to the qualifications contained therein. The description
assumes that the holders hold their TriVergent stock, options or warrants or
Gabriel preferred stock as capital assets within the meaning of Section 1221 of
the Internal Revenue Code.
This description does not purport to address all aspects of U.S. federal
income taxation that may be relevant to a particular holder of TriVergent stock,
options or warrants or Gabriel preferred stock. In particular, it does not apply
to holders entitled to special treatment under U.S. federal income tax law,
including, without limitation, dealers in securities, tax-exempt organizations,
banks or other financial institutions, trusts, insurance companies, persons that
hold TriVergent stock, options or warrants or Gabriel preferred stock as part of
a straddle, a hedge against currency risk or as a constructive sale or
conversion transaction, persons that have a functional currency other than the
United States dollar, investors in pass-through entities and foreign persons,
including foreign individuals, partnerships and corporations. This description
also does not describe tax consequences arising out of the tax laws of any
state, local or foreign jurisdiction.
Further, this description does not purport to address the U.S. federal
income taxation of holders of TriVergent stock or Gabriel preferred stock who
acquired such securities as compensation or holders of TriVergent warrants who
acquired such warrants other than pursuant to the borrowing of money from such
holders by TriVergent.
HOLDERS OF TRIVERGENT STOCK, OPTIONS AND WARRANTS AND GABRIEL PREFERRED
STOCK ARE URGED TO CONSULT THEIR TAX ADVISOR AS TO SPECIFIC TAX CONSIDERATIONS
OF THE MERGER AND DISTRIBUTION OF THE GABRIEL WARRANTS,
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INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN TAX
LAWS IN THEIR PARTICULAR CIRCUMSTANCES.
CONSEQUENCES OF THE MERGER. In the opinions of Bryan Cave LLP, counsel to
Gabriel, and Cravath, Swaine & Moore, counsel to TriVergent, under current law
- the merger will qualify as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code,
- Gabriel, TriVergent and Triangle Acquisition, Inc. will each be a "party
to a reorganization" within the meaning of Section 368(b) of the Internal
Revenue Code, and
- no income, gain or loss will be recognized by Gabriel, TriVergent or
Triangle Acquisition, Inc. as a result of the merger.
The opinions of Bryan Cave LLP and Cravath, Swaine & Moore are on file with
the SEC as exhibits to the registration statement of which this information
statement/prospectus is a part. These opinions are subject to qualifications set
forth herein and assume that the merger is consummated in accordance with the
terms of the merger agreement and as described in this information
statement/prospectus. These opinions also assume that the representations and
assumptions set forth in certificates of officers of Gabriel and TriVergent are
true, correct and complete as of the date hereof and will be true, correct and
complete at the effective time of the merger. These opinions are based on the
Internal Revenue Code, Treasury regulations promulgated thereunder and in effect
as of the date hereof, current administrative rulings and practice, and judicial
precedent, all of which are subject to change, possibly with retroactive effect.
Any change in law or failure of the factual representations and assumptions to
be true, correct and complete in all material respects could alter the tax
consequences discussed herein.
The parties will not request and the merger is not conditioned upon a
ruling from the Internal Revenue Service as to any of the U.S. federal income
tax consequences of the merger or the distribution of the Gabriel warrants. As a
result, there can be no assurance that the Internal Revenue Service will not
disagree with or challenge any of the conclusions set forth in this discussion.
CONSEQUENCES TO HOLDERS OF TRIVERGENT STOCK, OPTIONS AND WARRANTS. This
section sets forth the opinion of Cravath, Swaine & Moore, counsel to
TriVergent, as to the U.S. federal income tax consequences of the merger to
holders of TriVergent stock, options and warrants.
Exchange of TriVergent Common Stock. Holders of TriVergent common stock who
exchange their TriVergent common stock for Gabriel common stock in the merger
will not recognize gain or loss, except with respect to cash, if any, they
receive instead of a fractional share of Gabriel common stock. Each holder's
aggregate tax basis in the Gabriel common stock received in the merger will be
the same as his or her aggregate tax basis in the TriVergent common stock
surrendered in the merger, decreased by the amount of any tax basis allocable to
any fractional share interest in Gabriel common stock for which cash is
received. The holding period of the Gabriel common stock received in the merger
will include the holding period of the TriVergent common stock surrendered in
the merger.
Exchange of TriVergent Compensatory Options. Holders of options to acquire
TriVergent common stock who acquired such options pursuant to the TriVergent
Corporation Employee Incentive Plan will not recognize income, gain or loss on
the exchange of such options for options to acquire Gabriel common stock.
Exchange of TriVergent Warrants. Holders of warrants to acquire TriVergent
common stock who acquired such warrants pursuant to the borrowing of money from
such holder by TriVergent will not recognize income, gain or loss on the
exchange of such warrants for warrants to acquire Gabriel common stock. Holders
who otherwise acquired warrants to acquire TriVergent common stock should
consult their tax advisor as to specific tax considerations of the exchange for
warrants to acquire Gabriel common stock.
Exchange of TriVergent Preferred Stock. Holders of TriVergent preferred
stock who exchange their TriVergent preferred stock for Gabriel preferred stock
and Gabriel warrants in the merger will not
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recognize gain or loss, except with respect to cash, if any, they receive
instead of a fractional share of Gabriel preferred stock. Each holder's
aggregate tax basis in the Gabriel preferred stock and Gabriel warrants received
in the merger will be the same as his or her aggregate tax basis in the
TriVergent preferred stock surrendered in the merger, decreased by the amount of
any tax basis allocable to any fractional share interest in Gabriel preferred
stock for which cash is received. The aggregate tax basis will be allocated
between the Gabriel preferred stock and the Gabriel warrants in proportion to
the respective fair market values of the preferred stock and warrants. The
holding period of the Gabriel preferred stock and Gabriel warrants received in
the merger will include the holding period of the TriVergent preferred stock
surrendered in the merger. If the Gabriel warrants lapse unexercised, the holder
will recognize capital loss with respect to the warrants to the extent of the
tax basis allocated thereto.
Assuming the fair market value of the Gabriel warrants distributed is less
than 15% of the fair market value of the Gabriel preferred stock, it is possible
that no basis would be allocated to the Gabriel warrants unless the holder files
an election to so allocate under applicable regulations, as discussed below. In
that event, even if the election is made, if the Gabriel warrants were to lapse
unexercised, the holder would not recognize any loss with respect to the
warrants. Rather, any tax basis would be allocated back to the Gabriel preferred
stock.
Distribution of Additional Shares of TriVergent Preferred Stock or
TriVergent Common Stock As Payment of Preferred Holders' Accrued and Unpaid
Dividends. The distribution by TriVergent prior to the effective time of the
merger of shares of TriVergent preferred stock or TriVergent common stock to
holders of TriVergent preferred stock as payment of accrued and unpaid dividends
may be a taxable dividend to the extent of TriVergent's or Gabriel's current or
accumulated earnings and profits. It is expected that neither TriVergent nor
Gabriel will have earnings and profits at the time of the distribution or for
the taxable year.
Cash in Lieu of Fractional Shares; Dissenter's Rights. Each holder of
TriVergent common stock or TriVergent preferred stock who receives cash
- in lieu of a fractional share of Gabriel common or Gabriel preferred
stock or
- as a result of the exercise of the right to dissent from the merger,
assuming thereafter that, directly or indirectly, the holder owns no
Gabriel capital stock,
will recognize gain or loss equal to the difference between the amount of cash
received and the holder's allocable tax basis in stock exchanged for cash. That
gain or loss generally will constitute capital gain or loss. It will constitute
long-term gain or loss if the holder has held the TriVergent common stock or
TriVergent preferred stock for more than 12 months at the effective time of the
merger.
Backup withholding. Noncorporate holders of TriVergent common stock or
TriVergent preferred stock may be subject to backup withholding at a rate of 31%
on cash payments received upon exercise of dissenter's rights or received in
lieu of fractional shares of Gabriel common stock or Gabriel preferred stock.
Backup withholding will not apply, however, to a holder of TriVergent common
stock or TriVergent preferred stock who
- furnishes a correct taxpayer identification number and certifies under
penalty of perjury that he or she is not subject to backup withholding on
the substitute Form W-9 or any successor form included in the letter of
transmittal to be delivered to holders of TriVergent common stock or
TriVergent preferred stock following consummation of the merger,
- provides a certification of foreign status on Form W-8 or any successor
form, or
- is otherwise exempt from backup withholding.
Any amount withheld under these rules will be credited against the holder's U.S.
federal income tax liability.
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CONSEQUENCES TO HOLDERS OF GABRIEL PREFERRED STOCK. This section sets forth
the opinion of Bryan Cave LLP, counsel to Gabriel, as to the material U.S.
federal income tax consequences of the distribution of the Gabriel warrants to
the holders of Gabriel preferred stock.
The distribution of the Gabriel warrants should be treated as a nontaxable
distribution made in connection with a recapitalization reorganization. The
amendment to the Gabriel articles of incorporation which increases the per share
liquidation preference of the Gabriel preferred stock and adds an 8% accrual
thereto should constitute such a recapitalization. A warrant distribution in
connection with a recapitalization reorganization is not taxable unless the
distribution is pursuant to a plan to periodically increase a shareholder's
proportionate interest in the assets or earnings and profits of the corporation.
Because the distribution of warrants to holders of Gabriel preferred stock is
calculated according to such holder's proportion of invested capital in Gabriel
and TriVergent as of the effective time, the distribution should not be pursuant
to such a plan. Each holder's aggregate tax basis should be allocated between
the Gabriel preferred stock and the Gabriel warrants in proportion to the
respective fair market values of the preferred stock and warrants. The holding
period of the Gabriel warrants will include the holding period of the Gabriel
preferred stock on which such warrants are distributed. If the warrants lapse
unexercised, the holder will recognize capital loss with respect to the warrants
to the extent of the tax basis allocated thereto.
It is possible, assuming the fair market value of the Gabriel warrants
distributed is less than 15% of the fair market value of the Gabriel preferred
stock, that no basis would be allocated to the Gabriel warrants. However, the
holder may file an election to so allocate under applicable regulations. If this
election were made, such electing holder's tax basis would be allocated between
the Gabriel preferred stock and warrants in proportion to their respective fair
market values. In the event of such an election, if the Gabriel warrants were to
lapse unexercised, the holder will not recognize any loss with respect to such
warrants. Rather, any tax basis will be allocated back to the Gabriel preferred
stock.
The Internal Revenue Service might take the position that the distribution
of the Gabriel warrants constituted a taxable distribution or was pursuant to a
plan to periodically increase a shareholder's proportionate interest in the
assets or earnings and profits of Gabriel. In such case, a recipient of the
Gabriel warrants would recognize a dividend, taxable as ordinary income, in an
amount equal to the fair market value of the Gabriel warrants. The amount
recognized as a dividend would be limited to the extent of the current or
accumulated earnings and profits of Gabriel. To the extent that the amount of
the distribution exceeds the earnings and profits of Gabriel, the distribution
of the Gabriel warrants would be treated first as a tax-free return of capital
to the extent of the holder's tax basis in the Gabriel preferred stock, and
thereafter as capital gain. Gabriel does not anticipate having any current or
accumulated earnings and profits at the time of the distribution or for the
taxable year. Each holder would have a tax basis in the warrants received equal
to the fair market value of the warrants on the date of their distribution and a
holding period that begins on the day following the date of distribution of the
Gabriel warrants. If the Gabriel warrants lapse unexercised, the holder will
recognize capital loss with respect to the warrants to the extent of the tax
basis allocated thereto.
Upon a sale of the Gabriel warrants, the holder will recognize gain or
loss, if any, in an amount equal to the difference between the proceeds of such
sale and the tax basis, if any, allocated to such warrants. If the warrants are
exercised, the tax basis allocated to the warrants will be added to the tax
basis in the Gabriel common stock that the holder will receive as a result of
exercising the warrants. Upon exercise of the warrants, the holder would have a
holding period for the Gabriel common stock that begins on the day following the
date of exercise.
Adjustment of Conversion Price of Gabriel Preferred Stock. Section 305 of
the Internal Revenue Code treats as a distribution, taxable as a dividend to the
extent of the issuing corporation's current or accumulated earnings and profits,
certain actual or constructive distributions of stock with respect to stock,
stock rights or convertible securities. Certain adjustments in the conversion
ratio of stock, stock rights or convertible securities are considered
distributions of stock. For example, Treasury regulations treat holders of
preferred stock or stock rights as having received such a constructive
distribution where the conversion
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price of such preferred stock or stock rights is adjusted to reflect certain
taxable distributions with respect to the stock into which such preferred stock
or stock rights is convertible or exercisable. Adjustment of the conversion
rates at which the Gabriel preferred stock can be converted could cause the
holders thereof to be viewed as having received a deemed distribution taxable as
a dividend whether or not such holders exercise their conversion rights. An
adjustment to the number of shares of Gabriel common stock to be issued on the
exercise of a warrant may also be deemed to be a constructive distribution from
Gabriel.
THE TAX LAWS ARE COMPLEX, AND THE TAX CONSEQUENCES TO ANY PARTICULAR HOLDER
OF TRIVERGENT STOCK, OPTIONS OR WARRANTS OR GABRIEL PREFERRED STOCK MAY BE
AFFECTED BY MATTERS NOT DISCUSSED HEREIN. ACCORDINGLY, HOLDERS OF TRIVERGENT
STOCK, OPTIONS AND WARRANTS AND GABRIEL PREFERRED STOCK ARE URGED TO CONSULT
THEIR PERSONAL TAX ADVISOR CONCERNING THE APPLICABILITY TO THEM OF THE FOREGOING
DISCUSSION, AS WELL AS OF ANY OTHER TAX CONSEQUENCES OF THE MERGER.
REGULATORY MATTERS
UNITED STATES ANTITRUST. Under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 and related rules, the merger may not be completed unless waiting
period requirements have been satisfied. On June 15, 2000, Gabriel and
TriVergent each filed a Notification and Report Form with the Antitrust Division
of the Department of Justice and the FTC. The required waiting period under the
Hart-Scott-Rodino Act expired on July 10, 2000. In addition, stockholders of
TriVergent who will own in excess of $15 million in voting securities of Gabriel
as a result of the merger were required to furnish information to the Antitrust
Division and the FTC. These stockholders have each filed the required
notification and report forms with the Antitrust Division and the FTC, and their
respective waiting periods have expired. However, at any time before or after
the effective time of the merger, the Antitrust Division, the FTC or others
could take action under the antitrust laws. These parties may take action
seeking to prevent the merger, to rescind the merger or to conditionally approve
the merger upon the divestiture of substantial assets of Gabriel or TriVergent.
There can be no assurance that a challenge to the merger on antitrust grounds
will not be made or, if such a challenge is made, that it would not be
successful.
FCC. TriVergent also must receive the approval from the FCC for transfer of
control of its Section 214 international long distance authorization. TriVergent
has already filed an application seeking this approval.
STATE PUBLIC UTILITY COMMISSIONS. TriVergent also must receive the approval
of the merger from various state public utility commissions. TriVergent has
already received all material approvals.
GENERAL. It is possible that any of the governmental entities with which
filings are made may seek, as conditions for granting approval of the merger,
various regulatory concessions. We cannot assure you that
- Gabriel or TriVergent will be able to satisfy or comply with such
conditions,
- compliance or non-compliance will not have adverse consequences for
Gabriel or TriVergent after completion of the merger, or
- the required regulatory approvals will be obtained within the time frame
contemplated by Gabriel or TriVergent and referred to in this document or
on terms that will be satisfactory to Gabriel and TriVergent.
See "The Merger Agreement -- Conditions to Completion of the Merger."
APPRAISAL RIGHTS
Under Delaware law, holders of shares of TriVergent common stock and
preferred stock are entitled to exercise appraisal rights if they
- are holders of issued and outstanding shares of common stock or preferred
stock immediately prior to the effective time of the merger,
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- have not voted in favor of the merger nor consented thereto in writing
and
- have properly demanded their appraisal rights.
Shares to which appraisal rights are applicable will not be converted into the
right to receive the merger consideration unless and until such time as these
shares become ineligible for appraisal.
TriVergent stockholders who have not consented to the merger in writing
will receive, within 10 days of the effective date of the merger, notice that
the merger has been approved by written consent and that he or she is entitled
to appraisal rights. The notice will attach a copy of Section 262 of the General
Corporation Law of the State of Delaware pertaining to the appraisal rights of
TriVergent stockholders and will include the effective date of the merger.
Within 20 days of the mailing of the notice, any TriVergent stockholder who
is entitled to appraisal rights must notify the surviving corporation of the
merger in writing if he or she is demanding appraisal of his or her shares.
Within 120 days of the effective date of the merger, any TriVergent stockholder
who has not consented to the merger and who has made a written demand for
appraisal may file a petition with the Delaware Court of Chancery demanding a
determination of the value of the stock of all TriVergent stockholders entitled
to appraisal.
Also within 120 days of the effective date of the merger and upon written
request, any TriVergent stockholder demanding appraisal rights may request a
statement from the combined company setting forth the aggregate number of shares
not voted in favor of or consenting to the merger and with respect to which
demands for appraisal have been received and the aggregate numbers of holders of
these shares. This statement will be mailed within 10 days of the combined
company's receipt of the request for the statement or within 10 days after
expiration of the period for delivery of demands, whichever is later.
Within 60 days of the effective date of the merger, any TriVergent
stockholder may withdraw his or her demand for appraisal and accept the merger
consideration and other terms of the merger by providing written notice to the
combined company.
RESALE OF GABRIEL COMMON STOCK AND GABRIEL PREFERRED STOCK
This information statement/prospectus does not cover resales of Gabriel
common stock or preferred stock received by any person upon completion of the
merger or upon conversion of Gabriel preferred stock or exercise of any Gabriel
warrants or options issued in connection with the merger. No person is
authorized to make any use of this information statement/prospectus in
connection with any such resale. There is no established public trading market
for either the Gabriel or the TriVergent common or preferred stock. Gabriel has
not applied and does not intend to apply for listing or authorization for
quotation of its common or preferred stock on any securities exchange or any
quotation system in connection with the merger.
OWNERSHIP OF GABRIEL FOLLOWING THE MERGER
Based on the exchange ratio of 1.1071, TriVergent common and preferred
stockholders will receive 13,353,461 shares of Gabriel common stock and
38,935,617 shares of Gabriel preferred stock, respectively. This will represent
44.0% of all of the outstanding and committed shares of common and preferred
stock of the combined company. Holders of TriVergent options and warrants will
receive Gabriel options and warrants exercisable for 12,228,221 shares of
Gabriel common stock in the merger at the exchange ratio of 1.1071. Based on
those numbers, following the merger, former holders of TriVergent common and
preferred stock, options and warrants would beneficially own approximately 46.1%
of the shares of Gabriel stock, assuming all options and warrants outstanding
and issuable in connection with the merger, including the Gabriel $6.00 warrants
and $10.25 warrants, are fully exercised. If the Gabriel $6.00 warrants and
$10.25 warrants were not issued in the merger, former TriVergent securityholders
would have beneficially owned approximately 47.7% of Gabriel stock, assuming
full conversion of all options and warrants, following the merger.
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MATERIAL RELATIONSHIPS BETWEEN GABRIEL AND TRIVERGENT
As of the date of this information statement/prospectus, neither Gabriel
nor TriVergent is aware of any past, present or proposed material relationship
between Gabriel or any of its directors, executive officers or affiliates, on
the one hand, and TriVergent or any of its directors, executive officers or
affiliates, on the other hand, except as contemplated by the merger agreement
and except that some of the same financial institutions that are lenders to
TriVergent are also lenders to Gabriel.
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THE MERGER AGREEMENT
The following is a description of the material terms of the merger
agreement, a copy of which is attached as Annex A to this information
statement/prospectus. Gabriel and TriVergent encourage you to read the entire
merger agreement for details of the merger and the terms and conditions of the
merger agreement. The merger agreement is a legal document governing the merger
and related transactions, and in the event of any discrepancy between the terms
of the merger agreement and the following description, the merger agreement will
control.
STRUCTURE OF THE MERGER
Gabriel and TriVergent entered into the merger agreement on June 9, 2000.
Under the terms of the merger agreement, at the closing, TriVergent will be
merged with and into Triangle Acquisition, Inc., a newly formed Delaware
corporation and wholly owned subsidiary of Gabriel. Triangle will survive the
merger as a wholly owned subsidiary of Gabriel and be renamed TriVergent
Corporation. The merger will take place pursuant to the General Corporation Law
of the State of Delaware. Upon completion of the merger, TriVergent will cease
to exist, but the business of TriVergent will then be continued by Triangle as a
wholly owned subsidiary of Gabriel. In connection with the merger, the
certificate of incorporation and by-laws of the surviving corporation will be
amended. The directors and executive officers of Gabriel and the surviving
corporation will be those provided for in the merger agreement.
If the merger is completed, holders of TriVergent common stock, preferred
stock, warrants or options will no longer hold any interest in TriVergent other
than through their interest in shares of Gabriel common stock, preferred stock,
warrants or options, respectively. They will become stockholders or option or
warrant holders of Gabriel and their rights will be governed by Gabriel's
amended and restated certificate of incorporation and by-laws and by the laws of
the State of Delaware. See "Comparison of Rights of Stockholders of Gabriel and
TriVergent" beginning on page 142 for information about the relative rights of
stockholders of Gabriel and TriVergent.
EFFECTIVE TIME OF THE MERGER
The merger will become effective upon the filing of the signed certificate
of merger with the Secretary of State of Delaware, or at a later time as may be
specified in that document, in accordance with the laws of Delaware. The merger
agreement provides that the contracting parties will cause the certificate of
merger to be filed as soon as practicable after
- all required regulatory approvals have been obtained or taken and
- all other conditions to the consummation of the merger have been
satisfied or waived.
There can be no assurance that the conditions to the merger will be
satisfied. Moreover, the merger agreement may be terminated by either Gabriel or
TriVergent under various conditions as specified in the merger agreement.
Therefore, there can be no assurance as to whether or when the merger will
become effective.
ISSUANCE OF TRIVERGENT STOCK IN LIEU OF PAYMENT OF ACCRUED AND UNPAID DIVIDENDS
IMMEDIATELY PRIOR TO THE MERGER
The merger agreement provides that immediately prior to the effective time
of the merger, TriVergent will issue 814,210 additional shares of TriVergent
preferred stock, or to the extent there are not sufficient authorized shares of
TriVergent preferred stock, TriVergent common stock, at a price of $7.6776 per
share, in payment in full of all accrued and unpaid dividends on each series of
TriVergent preferred stock as of August 31, 2000, as set forth in the merger
agreement. These additional shares will be deemed outstanding for purposes of
determining the exchange ratio at the effective time of the merger in accordance
with the merger agreement. Holders of TriVergent preferred stock will not be
entitled to any dividends, and no dividends on any series of TriVergent
preferred stock will be deemed to have accrued during or been payable for any
period of time after August 31, 2000.
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WHAT SECURITYHOLDERS WILL RECEIVE IN THE MERGER
COMMON STOCK. TriVergent common stockholders will be entitled to receive
1.1071 shares of Gabriel common stock for each share of TriVergent common stock.
We refer to the number of shares of Gabriel stock into which one share of
TriVergent stock is converted as the "exchange ratio." The exchange ratio is
subject to appropriate adjustment in the event of any stock changes and
issuances prior to the effective time of the merger, as discussed below.
PREFERRED STOCK. TriVergent preferred stockholders will be entitled to
receive Gabriel preferred stock in exchange for shares of TriVergent preferred
stock. TriVergent preferred stockholders will be entitled to receive Gabriel
preferred stock as follows
- 1.1071 shares of Gabriel Series C-1 preferred stock for each share of
TriVergent Series A preferred stock,
- 1.1071 shares of Gabriel Series C-2 preferred stock for each share of
TriVergent Series B preferred stock, and
- 1.1071 shares of Gabriel Series C-3 preferred stock for each share of
TriVergent Series C preferred stock.
The Series C-1, C-2 and C-3 preferred stock will each be a new series of Gabriel
preferred stock and will have terms which are substantially identical to the
Series A, A-1 and B preferred stock, respectively, except as to the respective
conversion prices and liquidation preferences for each series, which liquidation
preferences will include a preferred return of 8% per annum from the date as of
which the accrued dividends on the TriVergent preferred stock will have been
paid.
GABRIEL $6.00 AND $10.25 WARRANTS. Each of the holders of TriVergent
preferred stock and each of the holders of Gabriel preferred stock will receive
warrants to purchase Gabriel common stock as follows. A holder of Gabriel or
TriVergent preferred stock will receive
- warrants to purchase Gabriel common stock at an exercise price of $6.00
per share for a period of one year following the effective time of the
merger. We refer to these warrants as the "one-year warrants," and
- warrants to purchase Gabriel common stock at an exercise price of $10.25
per share for a period of two years following the effective time of the
merger. We refer to these warrants as the "two-year warrants."
The number of one-year warrants that a particular holder of Gabriel or
TriVergent preferred stock will be entitled to receive will be calculated based
upon that investor's total invested capital as follows:
- the number 8,000,000 will be multiplied by a fraction
- the numerator of the fraction will equal the "total invested capital" of
the holder immediately prior to the effective time of the merger. "Total
invested capital" means the total dollar amount invested in shares of
TriVergent preferred stock or Gabriel preferred stock as of the
effective time of the merger, as shown on the books and records of
TriVergent or Gabriel, as the case may be, not including any accrued and
unpaid dividends which were invested in shares of TriVergent stock
immediately prior to the effective time of the merger as provided in the
merger agreement, and
- the denominator of the fraction will equal the sum of the total invested
capital of all holders of preferred stock in both TriVergent and Gabriel
at the effective time of the merger and the "total committed capital" of
all holders of shares of Series B preferred stock of Gabriel as of the
effective time of the merger. "Total committed capital" means the total
dollar amount committed to be invested in shares of Gabriel Series B
preferred stock as of the effective time of the merger as provided in
the "Gabriel Series B Purchase Agreement," as defined in the merger
agreement.
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The number of two-year warrants that a particular holder of Gabriel or
TriVergent preferred stock will be entitled to receive will be calculated based
upon that investor's total invested capital by multiplying 5,000,000 by the same
fraction.
After the effective time of the merger and at the time that a holder of
Gabriel Series B preferred stock that has committed to make a further investment
in additional shares of Gabriel Series B preferred stock purchases these shares,
that holder will receive additional Gabriel warrants allocated to the additional
dollar amount invested as determined in accordance with the formula described
above.
The exercise of any one-year warrants by a holder thereof is deemed to be
an exercise of all of the one-year warrants and two-year warrants held by that
holder. Gabriel, however, will not be obligated to issue any of the shares of
common stock that may be purchased upon such deemed exercise of the one-year and
two-year warrants until the holder has fully complied with the terms and
conditions of the warrant agreement, including, but not limited to, the full
payment of the purchase price prior to the expiration date of the warrants.
FRACTIONAL SHARES. No fractional shares of Gabriel common stock or Gabriel
preferred stock will be issued in the merger. Instead, if you would otherwise be
entitled to receive a fraction of a share, you will receive cash equal to the
product of the fraction multiplied by $7.00.
OPTIONS AND WARRANTS. Holders of outstanding and unexercised warrants and
options exercisable for shares of TriVergent common stock will be entitled to
receive warrants or options, as the case may be, to acquire on the same terms
and conditions, warrants or options, as the case may be, to purchase the number
of shares of Gabriel common stock determined by multiplying the number of shares
of TriVergent common stock subject to the warrants or options by the exchange
ratio, at an exercise price per share of Gabriel common stock equal to the
exercise price per share of the warrants or options divided by the exchange
ratio. For example, a holder of an option to purchase 10,000 shares of
TriVergent common stock at $2.40 per share would receive in exchange for this
option, at the 1.1071 exchange ratio, an option to purchase 11,071 shares of
Gabriel common stock at $2.17 per share.
The merger agreement provides additional terms relating to the conversion
of options including:
- The Gabriel options issued to any TriVergent employee holding TriVergent
options constituting "incentive stock options," as defined by Section 422
of the Internal Revenue Code, or nonqualified stock options granted
pursuant to the TriVergent Corporation Employee Incentive Plan who
acknowledges that the merger and the other transactions contemplated by
the merger agreement shall not be treated as an event resulting in an
acceleration of the exercise rights of the employee's options will
contain a three year vesting schedule from the date of original grant,
versus the five years currently provided for in the TriVergent options,
and the employee's options may fully vest and become fully exercisable in
accordance with their terms if one of the following three events occurs
within one year of the merger:
- a diminution or reduction of the employee's responsibilities, position,
authority, duties or compensation from those in effect immediately prior
to the effective time of the merger;
- a relocation of 50 miles or more of the employee's work location; or
- a termination of the employment of the employee without cause.
- Gabriel will take all corporate action necessary to assume and adopt, at
the effective time, the relevant plan under which the TriVergent options
were granted and to make sufficient reservation for issuance of Gabriel
common stock; and
- Gabriel and TriVergent will deliver, to those who should receive these
items, this information statement/prospectus and a form of agreement
providing for the acknowledgment by the option holder that the merger
shall not result in the acceleration of exercise rights under any
TriVergent option.
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POSSIBLE ADJUSTMENT OF THE EXCHANGE RATIO
In the event of any other changes in the outstanding equity securities of
either company during the period from September 27, 2000 to the effective time
of the merger, the exchange ratio will be adjusted so that Gabriel and
TriVergent security holders will own securities representing 54% and 46%,
respectively, of the fully diluted equity value of the combined company at the
effective time of the merger. By fully diluted equity value, we mean that all
shares of common stock and preferred stock, and all shares of common stock
issuable upon exercise of all in-the-money options and warrants, except for the
additional Gabriel warrants to be issued to TriVergent and Gabriel preferred
stockholders described below, outstanding at the effective time of the merger
are used to calculate the final exchange ratio. This fully diluted equity value
and in-the-money options and warrants have been calculated on the basis of the
$7.00 per share price.
In addition to shares, and options and warrants to purchase shares, of
Gabriel and TriVergent stock outstanding as of September 27, 2000, the exchange
ratio of 1.1071 assumes the following shares are outstanding for purposes of
calculating the exchange ratio:
- 814,210 shares of TriVergent preferred stock representing payment of
accrued and unpaid dividends as of August 31, 2000;
- 19,289,160 shares of Gabriel Series B preferred stock committed to be
purchased by holders of Gabriel Series B preferred stock; and
- 1,214,285 shares of Gabriel Series B preferred stock committed to be
purchased by two lender participants in Gabriel's expanded senior secured
credit facility.
The number of shares of Gabriel common stock, preferred stock, warrants or
options to be issued in the merger will not increase or decrease due to
fluctuations in the value of these securities. In the event that the value of
Gabriel common stock decreases or increases prior to the effective time of the
merger, the value of Gabriel common stock to be received by TriVergent
stockholders in the merger would correspondingly decrease or increase.
TriVergent does not have "walk-away" rights and cannot terminate the merger
agreement because the value of Gabriel stock declines.
AMENDMENT OF GABRIEL CHARTER
At the effective time, Gabriel's amended and restated certificate of
incorporation will be amended to, among other things, state the terms of the new
Series C-1, C-2 and C-3 preferred stock, increase the authorized shares of
common stock and preferred stock to 400,000,000 and 200,000,000, respectively,
and to add a preferred return to the liquidation preferences of each series of
Gabriel preferred stock from the original issue date of the Series A, A-1 and B
preferred stock and from the date as of which dividends cease to accrue on the
TriVergent preferred stock, in the case of the Series C-1, C-2 and C-3 preferred
stock.
The proposed amended and restated certificate of incorporation of Gabriel
reduces the per share initial public offering price that will trigger automatic
conversion of the Gabriel preferred stock from $20.00 per share to $12.00 per
share, in each case, with aggregate proceeds of at least $50 million.
EXCHANGE OF TRIVERGENT STOCK CERTIFICATES; OTHER AGREEMENTS
Upon consummation of the merger, certificates representing outstanding
shares of TriVergent common stock or TriVergent preferred stock will no longer
represent any rights with respect to such stock but will be deemed to represent
only the right to receive the merger consideration into which such certificates
are convertible. No dividends, distributions or voting rights will apply to
outstanding certificates until the certificates and the applicable letters of
transmittal are surrendered and delivered.
However, under Delaware law if a holder of shares of TriVergent common or
TriVergent preferred stock has not voted for or consented to adoption of the
merger agreement and if appraisal rights have been properly demanded, then such
shares will not be converted into the right to receive the merger consideration
until such time as the holder of such shares becomes ineligible for such
appraisal.
As soon as practicable after the effective time, Gabriel will mail to each
holder of record of a certificate representing outstanding shares of TriVergent
common stock or preferred stock a letter of
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transmittal with instructions to be used by the stockholder in exchanging
certificates which, prior to the merger, represented shares of TriVergent common
or preferred stock.
The merger agreement provides that, by execution and delivery of a letter
of transmittal, each TriVergent stockholder will agree to become a party to
Gabriel's stockholders' agreement and registration rights agreement. In
addition, by such execution, delivery, surrender and exchange, persons
identified to Gabriel as employees of TriVergent will agree to acquire the
Gabriel securities subject to the restrictions contained in, and such person
will become a party to, the shareholders agreement by and among Gabriel and its
employee stockholders. These agreements are described in "Description of Gabriel
Capital Stock" beginning on page 134 below.
Upon the surrender of a TriVergent common or preferred stock certificate
together with a duly executed letter of transmittal and the other documents that
may be reasonably required, the holder of such certificate will be entitled to
receive a certificate representing the number of whole shares of Gabriel common
stock, or preferred stock and warrants, as the case may be. Moreover, after such
surrender and exchange, such record holder of the Gabriel securities will be
entitled to receive any dividends or other distributions declared on such
securities following the effective time of the merger, without interest.
VOTING AND CONSENT AGREEMENTS
On June 9, 2000, concurrently with the execution and delivery of the merger
agreement, holders of the TriVergent and Gabriel preferred stock and common
stock entered into voting agreements, pursuant to which they agreed, among other
things, to consent to or vote their shares of preferred stock and common stock
of either TriVergent or Gabriel, as the case may be, in favor of the merger
agreement and the transactions contemplated by the merger agreement.
Adoption of the merger agreement requires the affirmative vote or consent
of the holders of at least two-thirds of the total votes entitled to be cast by
holders of TriVergent common stock and TriVergent preferred stock, voting
together as a single class. In addition, adoption of the merger agreement
requires the affirmative vote or consent of
- holders of at least 75% of the outstanding shares of TriVergent Series A
preferred stock and the consent of Richland Ventures II, L.P. and First
Union Capital Partners, Inc.,
- holders of a majority of the outstanding shares of TriVergent Series B
preferred stock, and
- holders of a majority of the outstanding shares of TriVergent Series C
preferred stock if the consideration to be received by them in the merger
is valued at greater than $7.00 per share or consent of the holders of
more than two-thirds of the shares of TriVergent Series C preferred stock
if the consideration to be received by them in the merger is valued at
less than or equal to $7.00 per share.
Holders of more than ninety percent of the outstanding shares of TriVergent
Series A and Series B preferred stock and more than two-thirds of the
outstanding shares of TriVergent common and Series C preferred stock have agreed
to vote in favor of or consent to the adoption of the merger agreement.
Approval and adoption of the Gabriel charter amendment requires the
affirmative vote or consent of the holders of
- at least two-thirds of the outstanding shares of Gabriel common stock,
Gabriel Series A preferred stock, Gabriel Series A-1 preferred stock and
Gabriel Series B preferred stock, voting together as a class, and
- at least two-thirds of each series of Gabriel preferred stock, voting as
separate classes.
Approval of the acquisition of TriVergent by Gabriel pursuant to the merger
agreement requires the affirmative vote or consent of the holders of at least a
majority of the outstanding shares of Gabriel common and preferred stock, voting
together as a class.
Holders of a sufficient number of shares of each class of Gabriel stock
have agreed to vote in favor of or consent to the adoption of the Gabriel
charter amendment and the acquisition of TriVergent by Gabriel pursuant to the
merger agreement.
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EMPLOYEES AND EMPLOYEE BENEFIT PLANS
Gabriel has agreed that, after the effective time of the merger, it will
- maintain existing TriVergent employee benefits or replace TriVergent
benefits with comparable Gabriel benefits provided that, in the
aggregate, the terms offered to the TriVergent employees are no less
favorable than the aggregate benefits provided to similarly situated
employees of Gabriel and all pre-existing condition limitations, to the
extent these limitations did not apply to a pre-existing condition under
the benefit plans of TriVergent, shall be waived with respect to
TriVergent benefit plan participants and their eligible dependents,
- recognize, for TriVergent employees, credit for years of service with
TriVergent or any of the TriVergent subsidiaries prior to the merger for
purposes of eligibility and vesting to the extent their prior service was
recognized under the benefit plans of TriVergent,
- honor the employment agreements of TriVergent's current executive
officers and employees, and
- offer or cause the surviving corporation to offer employment on mutually
agreeable terms to all employees of TriVergent employed as of the
effective time of the merger.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains a number of representations and warranties
with respect to the past and current conduct of each of the respective
businesses of TriVergent and Gabriel. The representations and warranties of
Gabriel and TriVergent are parallel in all material respects and terminate at
the effective time of the merger. These representations and warranties relate to
- the corporate organization and good standing of Gabriel, TriVergent and
their respective subsidiaries,
- the capital structure of Gabriel and TriVergent and their respective
subsidiaries,
- the authorization, execution, delivery, performance and enforceability of
the merger agreement and related transactions,
- the absence of conflicts under articles or certificates of incorporation
or by-laws, contracts and laws,
- the receipt of required consents or approvals and the absence of
violations of any instruments or law,
- the absence of material litigation,
- the provision and preparation and accuracy of financial statements,
- the absence of events or changes that would have a material adverse
effect or other specified events or changes,
- compliance with laws,
- holding of all material permits and other authorizations required in
connection with the operation of the businesses of Gabriel and
TriVergent,
- the provision of a complete list of material contracts and the validity,
binding nature and absence of material breaches of such contracts,
- tax, employee benefit and labor matters,
- the absence of material undisclosed liabilities,
- compliance with all applicable environmental laws and absence of events
which may give rise to environmental liability,
- intellectual property matters,
- title to and condition of material personal property,
- the inapplicability of anti-takeover or business combination statutes to
TriVergent, and
- receipt by Gabriel and TriVergent of fairness opinions from its financial
advisors.
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COVENANTS
TriVergent and Gabriel also have agreed not to take actions specified in
the merger agreement without the prior written consent of the other party during
the interim between signing the merger agreement and effective time of the
merger. These actions are
- the conduct of their respective businesses outside the ordinary course of
business,
- the issuance of additional equity securities other than under specified
exceptions,
- the incurrence of additional debt or other obligations not provided for
in the current business plan of each company, other than, in each case,
liabilities or obligations which are not in excess of $1 million in the
aggregate, and
- the solicitation, initiation, encouragement or recommendation of any
other acquisition proposal.
In addition, in accordance with the merger agreement, Gabriel has requested the
purchasers of its Series B preferred stock to satisfy approximately one-half of
their remaining Series B preferred stock subscription obligations in accordance
with the Series B preferred stock purchase agreement on October 5, 2000. Gabriel
also agreed that, no later than November 30, 2000, it would request each of
these purchasers to satisfy the balance of their respective Series B preferred
stock subscription obligations. Pursuant to the terms of the Gabriel Series B
preferred stock purchase agreement, each purchaser is required to satisfy its
subscription obligation within 35 days after receiving these requests from
Gabriel, and in any event no later than December 31, 2000. In determining the
exchange ratio of 1.1071, Gabriel and TriVergent agreed that the remaining
unissued shares of Series B preferred stock subject to these subscription
obligations would be treated as if they were fully issued and outstanding.
CONDITIONS TO COMPLETION OF THE MERGER
Each party's obligations to effect the merger is subject to the
satisfaction or waiver of the following material conditions:
- Stockholder Approval. The requisite stockholder approvals necessary to
effect the merger and the amendment to the Gabriel charter will have been
obtained.
- No Injunction or Action. No legal action will have been taken and
remained effective by any court or other governmental authority, which
prohibits or prevents the consummation of the merger.
- Third-Party Consents and Governmental Approvals. All consents, as set
forth on schedules to the merger agreement, of any governmental authority
required for the consummation of the merger and the transactions
contemplated by the merger agreement will have been obtained. In
addition, each of Gabriel and TriVergent will have received consents for
the consummation of the transactions contemplated by the merger agreement
from third parties who have contractual rights to consent to the merger,
including TriVergent's bank lenders.
- Hart-Scott-Rodino Act. The waiting period applicable to the merger under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 will have
expired or earlier termination thereof will have been granted without any
material legal action that remained effective by applicable governmental
authorities. All waiting periods have expired.
- Securities laws. The registration statement on Form S-4, of which this
information statement/prospectus is part, will have been declared
effective, no stop order or proceeding suspending the effectiveness of
the registration statement will have been issued or threatened, and
Gabriel will have received all state securities law authorizations
necessary to consummate the transactions contemplated by the merger
agreement.
- Representations, Warranties and Performance. There will have been no
material breaches in the representations or warranties of the other party
set forth in the merger agreement. In addition, the other party to the
merger agreement will have performed and complied with all of its
covenants and
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agreements in the merger agreement in all material respects and satisfied
in all material respects all of the conditions required by the merger
agreement.
- Tax Opinions. Each party will have received an opinion of counsel, based
on customary representations contained in certificates, to the effect
that, if conducted as indicated in the merger agreement, the merger will
qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code.
- Option Holder Agreements. TriVergent will have delivered, or cause to be
delivered, to Gabriel, agreements, that have been duly executed and
delivered in accordance with the merger agreement and any supporting
documentation as may be reasonably requested by Gabriel. These documents
will evidence the acknowledgment and agreement of holders of TriVergent
options representing not less than 85% of all TriVergent options held by
holders of TriVergent options to purchase at least 7,500 shares of
TriVergent common stock, excluding holders identified on a schedule to
the merger agreement, that the merger will not be treated as a change of
control resulting in the acceleration of exercise rights under their
options.
Gabriel and TriVergent cannot assure you that all of the conditions to the
merger will be satisfied or waived by the party permitted to do so.
TERMINATION
The merger agreement may be terminated, whether before or after approval by
the stockholders of TriVergent or Gabriel, by notice as provided in the merger
agreement, at any time prior to the effective time of the merger,
- by mutual written consent of TriVergent and Gabriel, duly authorized by
the board of directors of each,
- by either TriVergent or Gabriel if
- the merger shall not have been consummated on or before October 31,
2000, or any other date as may be agreed to by TriVergent and Gabriel;
provided, that, no party may terminate the merger agreement for this
reason if that party's breach of the agreement has caused or resulted in
the failure of the merger to occur on or before that date,
- any of the conditions specified in the merger agreement to both parties'
or that party's obligations under the merger agreement becomes incapable
of satisfaction prior to October 31, 2000, or
- the other party has breached or failed to perform, in any material
respect, any of its material covenants or agreements contained in the
merger agreement, subject to cure periods contained in the agreement.
In the event the merger agreement is terminated as described above, the
merger will be deemed abandoned and no party will be liable to another in
connection with the termination, except for liability for breach of the merger
agreement and except for any provisions relating to confidentiality, fees and
expenses and termination, which will survive any termination.
WAIVER AND AMENDMENT
The merger agreement may be amended, modified or supplemented only by a
written agreement among TriVergent, Gabriel and Triangle.
EXPENSES; GOVERNING LAW
Each of Gabriel and TriVergent will bear its own expenses it incurs in
connection with the merger whether or not the merger and the transactions
contemplated by the merger agreement are consummated. The merger agreement is
governed by the laws of the State of Delaware.
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THE GABRIEL BUSINESS
Gabriel Communications, Inc. is a rapidly growing integrated communications
and applications services provider. Gabriel offers its services through its own
facilities. Gabriel offers integrated communications products and services,
including
- local voice and data services,
- domestic and international long distance services,
- dedicated, high speed Internet access, web page hosting and domain name
services, and
- unified voice, e-mail and fax messaging and other advanced data services.
Gabriel targets its services primarily to small to mid-sized businesses, which
it believes represent approximately two-thirds of the business market for
telecommunications services and are generally underserved by the incumbent
telephone company.
Gabriel's mission is to be the leading integrated communications solutions
provider in selected U.S. markets, continuously redefining the way Gabriel's
customers communicate. In order to accomplish its objective, Gabriel is
deploying advanced, data-focused networks that enable it to provide its
customers with customized solutions for all of their voice, data, fax and video
communications requirements.
Gabriel offers its customers the convenience of meeting all of their
communications needs through one provider, with a single consolidated monthly
bill. Gabriel intends to distinguish itself as the leading provider of
integrated business communications solutions and services in selected U.S.
markets by providing
- a comprehensive suite of integrated voice, data, DSL, Internet and
browser-based products, services and applications,
- timely customer service initiation and changes, customized, accurate
billing and 24/7 network surveillance through its advanced, integrated
operations support systems, and
- personalized, responsive customer service through its locally based sales
forces and customer support personnel.
Gabriel was founded in June 1998 by a management team led by the late
Robert A. Brooks, a founder of several successful telecommunications companies,
including, most recently, Brooks Fiber Properties and CenCom Cable. Gabriel's
chairman and chief executive officer, David L. Solomon, is an experienced
telecommunications entrepreneur who most recently has served as a board member
and advisor to Diginet Americas, Inc. and executive vice president and chief
financial officer of Brooks Fiber. Gabriel's president and chief operating
officer and co-founder, Gerard J. Howe, has over 20 years of experience in the
telecommunications industry, including, most recently, Brooks Fiber and SBC
CableComms, U.K.
Since its inception in June 1998, Gabriel's principal activities have
consisted of
- developing its business plans,
- hiring management and other key personnel,
- designing its network architecture, operations support systems and other
back office systems,
- raising capital,
- acquiring equipment and facilities and deploying its network operations
control center,
- negotiating interconnection agreements,
- securing regulatory authorizations,
- commencing operations in its initial markets and
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- rolling out its bundled product offerings.
BUSINESS STRATEGY
Gabriel's strategic business plan includes the following components:
OFFER A COMPREHENSIVE, BUNDLED SUITE OF VOICE AND DATA PRODUCTS AND
SERVICES. Gabriel's integrated network platforms allow for the delivery of a
wide range of integrated telecommunications products and services. Gabriel
markets a comprehensive set of local and long distance voice services, as well
as dedicated, high speed Internet access and other basic and enhanced data
services supporting its customers' external and internal communications needs.
Gabriel bundles its local, long distance and Internet services to meet all of
the communications needs of its customers and provides its customers a single,
consolidated monthly bill. Gabriel's network technology also allows it to offer
innovative ways, such as its unified messaging and remote access services, for
customers to better manage their telecommunications requirements.
PRIMARILY TARGET SMALL TO MEDIUM-SIZED BUSINESS CUSTOMERS IN SECOND AND
THIRD TIER MARKETS. Gabriel is primarily targeting small to medium-sized
business customers because it believes these customers are increasingly seeking
integrated, cost-effective communications solutions delivered by a single
service provider. Gabriel believes these businesses generally are underserved by
the incumbent telephone companies largely because the incumbent providers devote
greater marketing focus on more profitable, larger businesses. In addition,
under the current regulatory environment, the incumbent providers generally
cannot offer long distance service in their regions and, thus, cannot bundle
local, long distance, data and Internet services. Gabriel also believes that
these providers often choose not to cannibalize their revenue bases with new
products and services that competitive providers are offering. Gabriel believes
that its targeted business customers are subjected to the cost and complexity of
utilizing multiple service providers, including local dial tone providers, long
distance carriers, Internet service providers and equipment integrators. Gabriel
also believes that small and medium-sized businesses are increasingly demanding
high-speed data and Internet services that provide them with access to critical
business information and enable them to communicate more effectively with
employees, customers, vendors and business partners. Gabriel is primarily
targeting second and third tier markets because it believes these markets are
also generally underserved by the incumbent telephone companies, who devote
greater marketing focus to larger markets. While competition from other
facilities-based competitive local telephone companies and integrated
communications providers is growing in many of these markets, Gabriel believes
that its ability to provide a comprehensive bundled suite of voice and data
products and services over its advanced, data-focused networks helps distinguish
Gabriel from many of the other competitive local telephone companies and
integrated communications providers in its markets.
DEPLOY NETWORKS IN A CAPITAL EFFICIENT MANNER. The recent significant
advancements in technology, coupled with changes in regulations, permit Gabriel
to more efficiently deploy the strategic elements of its networks and lease
those elements which are not essential or cost-effective for it to own or
control. Gabriel takes advantage of these opportunities in two ways:
DEPLOY PACKET-SWITCHED NETWORKS THAT ACCOMMODATE INTEGRATED HIGH SPEED
DATA AND VOICE TRANSMISSIONS. Gabriel's networks currently utilize both
asynchronous transfer mode packet-switching and traditional Class 5
voice-switching platforms at their core. Circuit-based switches, which
traditionally have been used in the public telephone network, establish a
dedicated channel for each communication, such as a telephone call for
voice or fax, maintain the channel for the duration of the call, and
disconnect the channel at the conclusion of the call. Packet-based
switches, on the other hand, format the information to be transmitted into
a series of shorter digital messages called "packets," consisting of a
portion of the complete message plus the addressing information to identify
the destination and return address. Packet switch-based networks can
commingle packets from several communications sources together
simultaneously onto a single channel, which allows for more efficient
network utilization and the transmission of more information through a
given communications channel. Asynchronous transfer mode, or "ATM," is a
packet-switching technology that was
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specifically developed to allow simultaneous switching and transmission of
integrated voice and data traffic at varying rates of transmission.
Gabriel's network architecture allows it to efficiently use various
transmission access elements to provide integrated voice and data services
over a single network platform.
Gabriel has initially deployed Class 5 voice switches to support a
complete range of voice services and the interfaces to the public switched
telephone network necessary for voice transmission. The public switched
telephone network is the worldwide voice telephone network accessible to
all persons with telephones and access privileges. Electronic interfaces
are hardware and software links connecting different equipment and
technologies that facilitate the transfer of voice or data transmissions to
and from the public switched telephone network. Gabriel has been working
closely with equipment vendors to support their efforts to develop more
advanced equipment that will allow Gabriel to offer a complete range of
voice services without the need for voice switches. Gabriel's network
architecture, which is designed to accommodate the high-speed transmission
of data with packet-switching technology at its core, allows it to
efficiently accommodate the increasing demands placed on telecommunications
networks by Internet and other data-focused applications without the
congestion and bottlenecking that the incumbent telephone companies are
experiencing on their circuit-switched networks. Gabriel's data-focused,
packet-switched networks also allow it to use network capacity more
efficiently by handling peak demand more effectively and avoiding network
congestion, and provide it the flexibility to deliver new and advanced,
integrated voice and data services that meet Gabriel's customers' changing
communications and business applications needs.
OBTAIN ACCESS TO ALL TARGETED BUSINESS CUSTOMERS IN EACH
MARKET. Initially, Gabriel has leased unbundled network and customer access
elements and various dedicated circuits from the incumbent telephone
company in each of its markets to provide access to its customers. This has
allowed Gabriel to
- avoid the time-consuming and costly process of overbuilding the
incumbent telephone company's network,
- reduce time to market, and
- provide access to the total addressable targeted customer base
in each market.
To further reduce its transmission costs and enable it to
cost-effectively address smaller business customers, Gabriel is
constructing approximately 190 collocation sites within incumbent
telephone company central offices in its initial markets, other than
Nashville. The equipment in Gabriel's collocation sites enables Gabriel
to provide its voice and data products and services over unbundled
loops, DSL and other customer access facilities, which it believes are
less costly than leased dedicated transmission facilities. Leased
dedicated transmission facilities are non-switched, point-to-point
telecommunications lines leased from a telecommunications provider and
dedicated to, or reserved for use by, a particular user along
predetermined routes, in contrast to links which are temporarily
established.
ADD MARKETS ON A REGION BY REGION BASIS. Gabriel is rolling out its
networks and services in selected markets on a region by region basis, to enable
it to focus on compliance with the procedures of the incumbent telephone company
serving each region for order processing and provisioning of facilities. Gabriel
has entered into interconnection agreements with Southwestern Bell in Missouri,
Kansas, Oklahoma and Arkansas, with Ameritech in Illinois, Indiana and Ohio,
with Cincinnati Bell in Ohio and Kentucky, and with GTE and BellSouth in
Kentucky. Gabriel is currently negotiating additional interconnection agreements
with BellSouth in Tennessee and GTE in Oklahoma. Gabriel is certified as a
competitive local telephone company in Missouri, Kansas, Arkansas, Oklahoma,
Illinois, Indiana, Ohio, and Kentucky, and has applied for certification in
Tennessee and Texas.
PURSUE STRATEGIC BUSINESS RELATIONSHIPS AND ACQUISITIONS. In order to
capitalize on the increasing convergence of telecommunications technologies and
services and the competitive dynamics in the evolving telecommunications
industry, Gabriel intends to continue to pursue relationships with potential
strategic
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business partners to complement its business and allow it to accelerate its
market penetration, expand the scope of its product and service offerings and
acquire additional experienced personnel. In December 1999, Gabriel invested $2
million in convertible preferred stock of Tachion Networks, Inc., and agreed to
cooperate with Tachion in the design and testing of its advanced switching
equipment. In March 2000, Gabriel acquired a 50% interest in WebBizApps, a
provider of outsourced web-enabled business applications and information
technology services to small and medium-sized businesses. Gabriel has agreed to
acquire Shared Telcom Services, Inc., an Indianapolis-based reseller of
telecommunications voice and data services, for $9.9 million in cash and
assumption of approximately $750,000 of liabilities. Closing of the transaction
is subject to receipt of Indiana regulatory approval. Gabriel plans to serve the
customers of Shared Telcom Services from its Indianapolis network. Other
potential strategic partners include telecommunications providers in other
markets, other applications service providers, suppliers of database hosting
services, Internet service providers, cable operators, electric utilities and
other complementary service providers. Gabriel believes these relationships can
help it in various ways, including expanding the product and geographic scope of
its business, obtaining access to needed transmission capacity and equipment,
leveraging its sales channels and expanding its customer base.
USE DIRECT, LOCAL SALES AND MARKETING PERSONNEL. Gabriel has assembled an
experienced direct sales force to market to its targeted customer base through
face-to-face, personal interaction. Gabriel also has established agency
relationships with value added resellers to support the marketing efforts of its
direct sales force in each of its markets. Gabriel believes this approach gives
it a competitive advantage over the incumbent telephone companies in smaller
markets, where the incumbent telephone companies generally do not have a
significant local presence. Gabriel believes that its sales force's personal,
local interaction with its customers helps it establish strong customer
relationships, grow its customer base and reduce churn. Gabriel also supports
its sales force through local promotions and advertising.
LEVERAGE ADVANCED OPERATIONS SUPPORT SYSTEMS. Gabriel's advanced, automated
operations support systems and procedures are designed to provide rapid and high
quality throughput of customer and service order activity, customized accurate
billing and a superior level of customer service. Operations support systems are
systems required to enter, schedule, provision and track a customer's order from
the point of sale to the installation and testing of service and include trouble
management, inventory, billing, collection and customer service systems.
Throughput means the actual amount of useful and non-redundant information that
is transmitted to or processed by an automated system. Gabriel's operations
support systems provide it with complete business automation with the
scalability to permit it to leverage its investment as Gabriel grows its
business. Gabriel's management team has extensive experience in the design and
management of operations support systems. Gabriel has established relationships
with key third-party vendors, who have helped Gabriel to implement critical
portions of its operations support system modules developed to its
specifications. These critical information systems not only automate Gabriel's
customer care, provisioning and billing processes but also serve as critical
operational and reporting tools designed to highlight the status of all of its
network facilities, service order activity and customer account activity. The
databases created by these information systems are designed to allow Gabriel to
track its performance on all key operational standards. Gabriel believes its
operations support systems, by allowing it to provide superior, timely customer
service, customized, accurate billing and real-time system monitoring and
reporting, is critical to its business success.
ESTABLISH ELECTRONIC BONDING WITH THE INCUMBENT TELEPHONE COMPANIES IN EACH
MARKET. To improve the efficiency of its customer service initiation processes,
Gabriel is aggressively pursuing electronic bonding with the incumbent telephone
companies in each of its markets. Electronic bonding refers to the on-line and
real-time connection of Gabriel's operations support systems with those of
another carrier. Gabriel believes electronic bonding allows it to reduce its
costs, efficiently process customer orders and improve its customer care because
it is able to more readily identify any problems with a customer's service
order. Without electronic bonding with the incumbent telephone companies, the
service initiation process must be accomplished via fax and e-mail to the
incumbent telephone companies. This process creates numerous opportunities for
errors and delays in provisioning. Electronic bonding reduces errors and
decreases the time required to install and initiate customer service. Gabriel
established electronic bonding
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with Southwestern Bell, Ameritech and NeuStar's local number portability
database during the first half of 2000 and expects to commence electronic
bonding with additional incumbent telephone companies and other trading partners
during the second half of 2000.
AGGRESSIVELY IMPLEMENT NEW PRODUCTS AND SERVICES. Gabriel leverages the
flexible capabilities of its networks to deliver to its customers a wide range
of innovative products and services that provide comprehensive business
solutions that complement their communications requirements. Gabriel currently
provides a comprehensive bundled suite of local voice and data services,
domestic and international long distance services, dedicated, high-speed
Internet access, web page hosting, domain name services, unified voice, e-mail
and fax messaging, and other advanced data services. During 2000, Gabriel is
rolling out a variety of new products and services, including digital subscriber
line, or "DSL," Internet access, web design, remote access, e-commerce solutions
and voice conferencing. Gabriel also offers other business applications services
which may be hosted on servers in its data center to complement its product and
service offerings, including a variety of browser-based business applications
and enterprise planning solutions for human resources, sales, corporate
communications, project and accounting management, and other business functions.
LEVERAGE THE SIGNIFICANT TELECOMMUNICATIONS INDUSTRY EXPERIENCE OF THE
GABRIEL MANAGEMENT TEAM. Gabriel's management team has significant
telecommunications industry and entrepreneurial experience in emerging
telecommunications companies. Gabriel's Chairman and Chief Executive Officer,
David L. Solomon, was instrumental in the business development and success of
Brooks Fiber as its chief financial officer and executive vice president. Gerard
J. Howe, president and chief operating officer, has more than 20 years of
operational and financial experience in the telecommunications industry. The
members of Gabriel's management team have extensive experience in
telecommunications network management, provisioning, billing, customer service,
operations support system design and implementation, sales, marketing, finance,
and legal and regulatory affairs, including significant entrepreneurial
experience in emerging telecommunications companies.
GABRIEL'S NETWORK ARCHITECTURE AND TECHNOLOGY
Telecommunications technology has evolved considerably in the past several
years as a result of the increased demand for data services, which has been
driven in large part by the significant growth in Internet usage. The incumbent
telephone companies' traditional circuit-switched networks are becoming
increasingly congested as they try to cope with traffic demands for data
transmission services which often exceed the capacity of their networks. Gabriel
believes that the transmission of data places significant pressure on
traditional circuit-switched infrastructures, which were designed primarily to
handle voice transmissions. This creates significant business opportunities for
competitive providers who deploy networks specifically designed to handle both
voice and data transmissions and can accommodate the increasing demand for high
speed data transmission services, make more efficient use of their network
capacity, and enable them to provide packaged solutions to their customers.
Gabriel's network architecture provides a flexible platform on which to
offer basic and enhanced services. Gabriel's broadband network platforms allow
it to provide its customers with customized solutions for all of their voice,
data, fax and video communications requirements, including dedicated high speed
access to the Internet and other enhanced services applications. Gabriel
installs advanced ATM and traditional Class 5 circuit switching platforms and
related equipment in each of its markets in a Gabriel-leased hub facility.
Gabriel's voice switches are connected to the incumbent telephone company tandem
switch and long distance carriers' points of presence through leased fiber
trunks to provide voice services. Points of presence typically refer to the
physical locations where a long distance telephone company electronically
communicates and exchanges traffic with the network of a local telephone
company. High speed, fiber-based connections are placed between its ATM switches
and Internet service providers for Internet data traffic.
Gabriel's networks are designed to be transmission agnostic, meaning
Gabriel can utilize a variety of transmission facilities to reach its customers
through leased or owned transmission capacity, including
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dedicated access facilities, unbundled loops and wireless transmission.
Initially, Gabriel has been leasing dedicated transmission capacity from
incumbent telephone companies and competitive local telephone companies in order
to connect customers to its switching platforms. With this leased transmission
capacity, Gabriel was able to quickly enter its initial markets, reduce its
up-front investments in facilities and cost-effectively access the entire
customer base in each of its markets. Gabriel is now collocating its access
equipment within incumbent telephone company central offices to allow it to
deliver its services over unbundled loops, DSL and other customer access
facilities.
At its customer sites, Gabriel connects its leased transmission facilities
to a customer premise device that Gabriel owns, which allows for added features
and functionality and the efficient use of its leased facilities for the
transmission of voice and data traffic. This customer premise equipment is
purchased as needed to provision individual customers who have contracted for
its services.
The following diagram represents Gabriel's current network layout,
including equipment in incumbent telephone company central offices and at
customer premises.
GABRIEL NETWORK ARCHITECTURE
[GRAPH]
Gabriel's Class 5 voice switches provide the functionality to support basic
voice services as well as advanced features such as call forwarding, caller ID,
etc. The Class 5 switches also provide the needed interfaces to the public
switched telephone network using standard interfaces such as the SS7 signaling
network, as well as interfaces to other telecommunications service providers
such as 911 emergency agencies and operator services providers. As of June 30,
2000, Gabriel had installed nine ATM data switches and seven voice switches in
its nine operational networks and was deploying seven additional ATM switches
and two additional voice switches to support the six additional networks under
construction.
Gabriel expects that, by the end of 2000, more advanced equipment will be
available that will include fully integrated data and voice routing in a single
switching platform. This platform will include asynchronous transfer mode
switching, complete voice functionality and signaling interfaces necessary to
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switch traffic to and from the public switched telephone network. At that point,
Gabriel expects to be able to eliminate the need to install additional Class 5
circuit switches in its networks, further reducing its capital requirements and
operating costs. The switching equipment developed by Gabriel's strategic
partner, Tachion Networks, known as the Fusion 5000(TM) Collapsed Central
Office, includes a signaling gateway that will allow packet-switching network
elements and service providers to interface directly to the public switched
telephone network. This switching equipment will also support various legacy
protocols without the need for separate circuit switches and signaling
interfaces. This equipment incorporates industry-standard interfaces and
combines the features of both asynchronous transfer mode packet-switching and
circuit switching networks in a single network platform.
The key components and characteristics of Gabriel's networks which utilize
the more advanced switching equipment will include
- a single switch installed in its hub site that combines transmission,
switching, routing and signaling technologies into the same network
platform,
- the capability to deliver a flexible range of high quality voice and data
services over a packet-switched network and add new services quickly and
efficiently,
- enhanced feature servers that support web-based access to services not
currently available from traditional circuit-switched telephone
companies, and
- integrated access devices that combine multiple service connections, such
as voice or local area network, into a single data stream connected to
the packet-switched network hub elements. A local area network is a
short-distance data communications network used to link computers and
peripheral devices under some form of standard control.
Gabriel believes this new network architecture will allow it to further
reduce its capital requirements and simplify its network operations by
delivering bundled voice and data services without deploying multiple overlay
networks. Gabriel is taking an active role in directing the development efforts
of Tachion Networks and other equipment suppliers to support this new network
architecture.
HOW GABRIEL DEPLOYS ITS NETWORKS
Gabriel is constructing its networks using what is generally referred to as
a "smart build" approach. In contrast to the traditional network build-out
strategy, under which carriers install their own telecommunications switch and
construct their own fiber optic networks in each market to reach customers,
Gabriel installs its own switch and then leases the transmission elements of the
network from the incumbent telephone companies or other providers. This strategy
specifically involves
- leasing existing incumbent telephone company connections throughout a
local market area, also called the "local loop," which connect customers
to the central offices or "hubs" of an incumbent telephone company
network, and
- leasing dedicated trunks or circuits from the incumbent telephone
companies or other fiber-based competitive local telephone companies.
This enables Gabriel to reach the entire customer base in its markets without
having to build network connections to each individual customer.
Initially, Gabriel has not constructed its own fiber optic networks.
Gabriel's network hubs are connected to a single incumbent telephone company
central office. From this central office, Gabriel leases dedicated transmission
facilities to connect to end user customers. At the customer site, the leased
facility is connected to customer premise equipment that is owned by Gabriel.
The customer premise equipment allows for added features and functionality, the
commingling of voice and data traffic and the efficient use of the leased
facilities.
To reduce its transmission costs and enable it to cost-effectively address
smaller business customers, Gabriel is constructing approximately 190
collocation sites within the incumbent telephone company
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central offices in its initial markets, other than Nashville. This build-out
coincides with Gabriel's roll-out of DSL product offerings. Gabriel's plans
contemplate collocation in approximately 125 central offices by year-end 2000,
with the balance to be completed in 2001. In its initial markets, these
collocations will give it access to over 2.4 million business lines, or
approximately 75% of the business lines in these markets. Gabriel plans to build
additional collocation sites as it expands into additional markets. The
equipment in its collocation sites will enable it to provide its voice and data
products and services over unbundled loops, DSL and other customer access
facilities, which Gabriel believes are less costly than leased dedicated
transmission capacity. The equipment in its collocation sites will also
eliminate the need for customer premise equipment in some customer applications
because it will incorporate some of the features and functions of the customer
premise equipment Gabriel is currently using.
Once traffic volume justifies further investment, Gabriel may lease unused
fiber to which it can connect its electronic transmission equipment or construct
its own fiber networks. This unused fiber is known as "dark fiber" because it is
leased without the electronic equipment required to transmit traffic over the
fiber. Gabriel believes that dark fiber will be readily available in most of its
markets.
Gabriel believes that its smart-build approach offers a number of
advantages over the network build-out strategy of the fiber-based competitive
local telephone company by allowing Gabriel to
- accelerate its market entry by nine to 18 months through eliminating or
at least deferring the need for city franchises, rights-of-way and
building access permits,
- reduce its initial capital expenditures in each market, allowing Gabriel
to focus its capital resources on the critical areas of network
equipment, sales, marketing, and operations support systems, instead of
constructing extensive fiber optic transmission facilities to reach its
customers,
- improve its return on capital by generating revenue with a smaller
capital investment,
- defer capital expenditures for additional network assets until the time
when revenue generated by customer demand justifies such expenditures,
and
- address business customers throughout its target markets and not just in
those areas reachable by owned fiber transmission facilities.
GABRIEL'S PRODUCTS AND SERVICES
As each of its switching platforms becomes operational in a market, Gabriel
offers and provides customers in that market a broad array of integrated
telecommunications products and services. Gabriel currently offers the following
voice and data services on a stand-alone or bundled basis:
<TABLE>
<CAPTION>
TYPE OF SERVICE WHAT GABRIEL PROVIDES
--------------- ---------------------
<S> <C>
LOCAL SWITCHED....................... Gabriel offers a full complement of local switched services,
including local dial tone, 911, directory assistance and
operator-assisted calling. Gabriel also offers local number
portability and expanded local area calling plans that are
generally unavailable from the incumbent telephone company.
</TABLE>
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<TABLE>
<CAPTION>
TYPE OF SERVICE WHAT GABRIEL PROVIDES
--------------- ---------------------
<S> <C>
ADVANCED LOCAL FEATURES.............. The advanced software and equipment on its networks also
allows Gabriel to offer advanced local features to
supplement its local switched services, including
- three-way calling,
- speed dialing,
- call waiting,
- call forwarding,
- caller ID,
- last number redial,
- caller call-back,
- priority call,
- local and long distance account codes,
- 900 number blocking,
- hunting, which refers to a service that rolls over
calls to lines that are not busy,
- calling number delivery, also referred to as
automatic number identification and dialed number
identification service,
- direct inward dialing,
- voice conferencing,
- remote network access, and
- web-based account access.
LONG DISTANCE........................ Gabriel provides a full range of domestic, international and
toll-free long distance services, including
- "one-plus" outbound calling,
- inbound toll free,
- directory assistance,
- calling cards, and
- time-of-day routing and other enhanced features.
Gabriel purchases these services wholesale from long
distance carriers for resale to its customers.
DEDICATED ACCESS..................... Gabriel offers private line, dedicated access services to
customers who desire high capacity transmission connections
to interconnect multiple locations.
INTERNET............................. Gabriel offers dedicated, high speed Internet access
services, including DSL Internet access, as well as e-mail,
web page hosting and domain name services.
ADVANCED DATA SERVICES............... Gabriel offers high speed, digital packet-switched
transmission services, such as wide area network
interconnection and virtual private networks. Data services
include high-speed data file transfer, data network linking
and other enhanced services that use a variety of voice,
data and digital interface standards, including unified
voice mail, e-mail and fax messaging. Gabriel also offers
integrated services digital network and primary rate
interface services, which are services based on
international standards that allow two-way, simultaneous
voice and data transmission in digital formats over the same
transmission line and thereby reduce costs for end-users and
result in more efficient use of available facilities,
</TABLE>
Gabriel plans to introduce additional products and services during the
second half of 2000, including web design and e-commerce solutions.
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To complement its local, long distance and Internet services, Gabriel
offers comprehensive business solutions to customers interested in integrating
many of their critical business applications with their internal and external
communications capabilities. In March 2000, Gabriel invested $4.5 million in
WebBizApps, a joint venture with Solutech, Inc., a leading consulting and
training company specializing in building e-business solutions. WebBizApps
provides small and medium-sized businesses a comprehensive suite of tools to
unify their employees and streamline their company operations, all delivered via
an "any time, anywhere" Internet platform. Unlike traditional client-server
applications that are designed to run on a company's local area network, these
web-enabled tools run on Internet Information Server and Microsoft SQL7.0
databases. WebBizApps' products and features allow businesses to
cost-effectively lease commonly used business applications over the Internet
using the Microsoft Internet Explorer 5.0 browser or through the Palm VII
personal organizer or the Sprint PCS Wireless Internet Access telephone.
WebBizApps' applications include modules with associated management
reports, charts and features for:
- employee time and expense reporting,
- contact and sales channel management,
- employee database management,
- internal and external corporate communications,
- project tracking, and
- fixed asset accounting.
WebBizApps also offers templates for creating brochureware marketing web
sites and for basic business-to-consumer web sites. Gabriel believes these
business applications will further enhance its ability to leverage its broadband
network platforms and deliver its customers comprehensive solutions for all of
their data and voice communications requirements.
GABRIEL'S CURRENT MARKETS
The following table presents information concerning Gabriel's initial 15
markets:
<TABLE>
<CAPTION>
ESTIMATED
SWITCH AND ADDRESSABLE
NETWORK BUSINESS BUSINESS LINES APPROXIMATE INCUMBENT LOCAL
MSA(1) OPERATIONAL(2) LINES(3) IN SERVICE(4) POPULATION(5) EXCHANGE CARRIER
------ -------------- ----------- -------------- ------------- -------------------------------
<S> <C> <C> <C> <C> <C>
St. Louis, MO......... 2Q99 554,315 3,943 2,548,238 Southwestern Bell
Springfield, MO....... 3Q99 57,000 1,501 296,345 Southwestern Bell
Kansas City, MO....... 3Q99 295,069 2,000 1,800,000 Southwestern Bell
Wichita, KS........... 3Q99 85,053 1,147 512,965 Southwestern Bell
Little Rock, AR....... 4Q99 89,376 996 548,352 Southwestern Bell
Tulsa, OK............. 1Q00 120,268 955 756,493 Southwestern Bell
Oklahoma City, OK..... 1Q00 168,865 646 1,026,657 Southwestern Bell
Indianapolis, IN...... 2Q00 373,128 48 1,492,297 Ameritech
Akron, OH............. 2Q00 164,271 156 680,142 Ameritech
Cincinnati, OH........ 3Q00 308,236 -- 1,597,352 Cincinnati Bell; Sprint/United
</TABLE>
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<TABLE>
<CAPTION>
ESTIMATED
SWITCH AND ADDRESSABLE
NETWORK BUSINESS BUSINESS LINES APPROXIMATE INCUMBENT LOCAL
MSA(1) OPERATIONAL(2) LINES(3) IN SERVICE(4) POPULATION(5) EXCHANGE CARRIER
------ -------------- ----------- -------------- ------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Columbus, OH.......... 3Q00 315,990 -- 1,447,646 Ameritech
Dayton, OH............ 3Q00 147,087 -- 950,661 Ameritech
Lexington, KY......... 3Q00 77,209 -- 441,073 GTE
Louisville, KY........ 4Q00 156,504 -- 991,765 BellSouth
Nashville, TN(6)...... 4Q00 186,091 -- 1,117,178 BellSouth
</TABLE>
-------------------------
(1) Metropolitan Statistical Areas.
(2) Quarter during which the network became or is planned to become commercially
operational, as the case may be.
(3) Addressable business lines are the access lines used by businesses in a
particular market and capable of being served by a provider. Management
considers addressable business lines an indicator of the size of the market
that Gabriel may serve. These numbers are estimates based upon business line
information obtained annually from PNR and Associates, Inc., which maintains
a database of the number of business access lines in the respective markets,
and increased based on an assumed annual growth rate of 7%, which is based
on historical growth rate information available from the FCC.
(4) As of August 31, 2000.
(5) Populations are based on 1996 U.S. Census Data.
(6) Market also targeted by TriVergent.
In total, these markets have approximately 3.1 million business access
lines which will be addressable from Gabriel's initial 15 networks. As of June
30, 2000, Gabriel was serving a total of approximately 805 customers with a
total of approximately 9,185 access lines connected to its own networks.
GABRIEL'S OPERATIONS SUPPORT SYSTEMS
To effectively serve its customers and manage its business, Gabriel is
implementing advanced operations support systems which have been designed to
automate its critical business functions. Gabriel has either acquired these
systems from, or developed them with, third party vendors with proven software
and extensive knowledge of these systems.
Gabriel's operations support system platforms
- are scalable,
- may be employed either centrally or in more than one location, and
- automate many of the functions that previously required multiple manual
entries of customer information to accomplish order entry, provisioning,
switch administration, customer care and billing.
The legacy systems previously used by incumbent telephone companies and other
providers were not only labor-intensive but also created numerous opportunities
for errors in provisioning services and billing, delays in installation, poor
customer service, and significant added expenses due to duplicated efforts and
the need to correct service and billing problems.
To initiate service for a customer, Gabriel must interface with the systems
of the incumbent telephone companies and wholesale long distance providers.
Gabriel is aggressively pursuing "electronic bonding," the online and real-time
connection of its operations support systems with those of other carriers, with
the incumbent telephone companies in each of its targeted markets. These
electronic interfaces allow Gabriel to create service requests online, leading
to faster installations of customer orders through a reduction in errors
associated with manually inputting orders received via fax or e-mail. Gabriel
expects electronic bonding to improve productivity by decreasing the period
between the time of sale and the time a
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customer's line is installed and provisioned over its network. Gabriel activated
electronic bonding with Southwestern Bell, Ameritech and NeuStar's local number
portability database during the first half of 2000. It expects to establish
electronic bonding with additional incumbent telephone companies and other
trading partners during the second half of 2000.
Gabriel's operations support system platforms are designed to integrate all
of its essential business applications, covering such functions as
- entering, scheduling, provisioning and tracking of customer service
orders,
- real-time trouble-shooting, 24/7 network surveillance and network
inventory,
- accurate, customized billing,
- customer "self-service" capabilities, including web-based bill payment
and customer service,
- electronic bonding with incumbent telephone companies and other business
partners,
- sales force management applications,
- customer relationship management,
- credit verification, electronic funds transfer, and credit and debit card
processing, and
- financial and operational reporting.
To date, Gabriel has implemented its billing, customer relationship
management, sales, network surveillance, service tracking, maintenance, trouble
ticketing, and financial and operational reporting systems. Gabriel expects to
complete implementation and integration of all of the principal elements of its
operations support systems by the end of the fourth quarter of 2000.
Gabriel's operations support system platforms allow it to issue a single
billing statement for all of its local, long distance and Internet services.
Gabriel's customized, "user friendly" billing statement provides its customers
with more enhanced billing detail and is easier to read and understand.
Gabriel's billing system has the ability to handle multiple hierarchies for
commercial accounts and accommodate a variety of output media, including paper,
electronic datafile, web site access and diskette. Gabriel's operations support
system platforms also allow it to access customer usage statistics on a
real-time basis and to make such usage data available to its customers through
its web site.
SALES AND MARKETING
To support its strategy of gaining early entry into its markets, Gabriel
establishes a local sales force in each market. Gabriel believes that rapidly
establishing a broad, local market presence and brand name recognition across
its customer base is critical to its success in its markets. Gabriel has
assembled an experienced direct sales force to market and sell its services
through face-to-face interaction with its targeted customers. Gabriel believes
this approach provides it with a competitive advantage over the incumbent
telephone companies in smaller markets, where the incumbent telephone companies
generally do not have a significant local presence, and reflects one of
Gabriel's core values: personalized, responsive customer service.
Gabriel believes that its sales force's personal, local interaction with
its customers helps it establish strong customer relationships, grow its
customer base and reduce churn. Gabriel also believes that a personalized,
responsive approach is more effective with smaller businesses, which typically
do not have management personnel focusing on their telecommunications
requirements. Gabriel targets small to medium-sized business customers who
typically have up to 250 employees and use up to 50 access lines. As of June 30,
2000, Gabriel's average customer had approximately 10 access lines.
Gabriel establishes sales offices serving, and recruits its local managers
from, each of its local markets. Each local sales office has a sales manager,
who manages an average of eight sales account executives and support staff.
Gabriel uses quota-based commission plans and incentive programs to reward and
retain its
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top sales performers and to encourage building and maintaining strong customer
relationships. As of June 30, 2000, Gabriel had 126 full-time sales employees
operating out of local sales offices in its initial 10 markets.
Gabriel also supports its direct sales force through indirect channels such
as its value-added reseller relationships, media campaigns and local promotions.
Through its value-added reseller program, Gabriel has established relationships
with resellers who sell Gabriel-branded products and services. In addition to
developing media and other promotional campaigns, Gabriel's marketing department
supports the company's sales efforts by performing competitive product and
service analyses through the review of other providers' tariffs and offerings.
EMPLOYEES
As of June 30, 2000, Gabriel had approximately 400 full-time employees,
including approximately 150 sales and sales support personnel, of whom
approximately 75 were quota-bearing direct sales persons. None of Gabriel's
employees is represented by a labor union or subject to a collective bargaining
agreement. Gabriel has not experienced any work stoppages due to labor disputes
and believes that its relations with its employees are good.
LEGAL PROCEEDINGS
Gabriel is not a party to any pending legal proceedings that it believes
would, individually or in the aggregate, have a material adverse effect on its
financial condition or results of operations.
FACILITIES
Gabriel is headquartered in Chesterfield, Missouri, and leases offices and
space in a number of locations, primarily for sales offices and network
equipment installations. The table below lists its leased facilities and number
of collocation sites secured, as of June 30, 2000:
<TABLE>
<CAPTION>
APPROXIMATE SQUARE NUMBER OF COLLOCATION
LOCATION PURPOSE LEASE EXPIRATION FOOTAGE SITES SECURED
-------- ----------------- ---------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Chesterfield, Missouri....... Headquarters 3/31/2002 50,600 --
St. Louis, Missouri.......... Hub Site Facility 7/27/2009 6,143 16
Switch Location
Springfield, Missouri........ Hub Site Facility 4/15/2009 13,660 2
Switch Location
Kansas City (Lenexa),
Kansas..................... Hub Site Facility 3/31/2009 7,452 20
Switch Location
Wichita, Kansas.............. Hub Site Facility 2/18/2009 7,500 4
Switch Location
Little Rock, Arkansas........ Hub Site Facility 4/9/2009 7,200 6
Switch Location
Tulsa, Oklahoma.............. Hub Site Facility 8/28/2009 8,592 5
Switch Location
Oklahoma City, Oklahoma...... Hub Site Facility 10/31/2009 6,161 14
Switch Location
Akron, Ohio.................. Hub Site Facility 2/1/2010 7,261 8
Switch Location
Dayton, Ohio................. Hub Site Facility 1/17/2010 7,814 11
Switch Location
</TABLE>
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<TABLE>
<CAPTION>
APPROXIMATE SQUARE NUMBER OF COLLOCATION
LOCATION PURPOSE LEASE EXPIRATION FOOTAGE SITES SECURED
-------- ----------------- ---------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Cincinnati, Ohio............. Hub Site Facility 2/1/2010 7,980 15
Switch Location
Columbus, Ohio............... Hub Site Facility 5/30/2010 4,600 14
Switch Location
Lexington, Kentucky.......... Hub Site Facility 4/1/2010 8,438 0
Switch Location
Louisville, Kentucky......... Hub Site Facility 3/20/2010 7,690 0
Switch Location
Indianapolis, Indiana........ Hub Site Facility 1/1/2009 7,921 12
Switch Location
</TABLE>
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THE TRIVERGENT BUSINESS
TriVergent is a broadband telecommunications company offering automated web
site design and web hosting, high-speed data and voice services. TriVergent's
principal product is its Broadband Bundle, which provides automated web site
design and web hosting, high-speed data and Internet access and local and long
distance voice services. The Broadband Bundle is sold for a single price based
on the customer's selected bandwidth capacity and number of access lines.
TriVergent believes it is the only company providing this all-inclusive bundle
in its markets. To complement its Broadband Bundle, TriVergent is constructing
data centers for dedicated web hosting and bandwidth connectivity in many of its
target markets. TriVergent also offers network and data integration services,
such as dedicated server collocation, and local area network and wide area
network solutions, as well as on-premise voice and data equipment, hubs, routers
and cabling services.
As part of its Broadband Bundle, TriVergent offers a proprietary web site
design service that enables its customers to design and maintain their own web
sites. TriVergent's customers can edit their web sites and update e-mail
addresses through a secure on-line, interactive control panel 24 hours a day
without contacting TriVergent's customer care representatives. The Broadband
Bundle also includes high-speed Internet connectivity, unlimited local service
and 100 minutes of long distance usage per line, as well as web hosting.
TriVergent believes this affordable, scalable solution enables its small and
medium-sized business customers to take advantage of web related and
connectivity services more typically utilized by larger companies. TriVergent
also intends to release a new version of its web site design service in the
fourth quarter of 2000, which will allow customers to develop e-commerce
applications and conduct transactions using their web sites.
As of June 30, 2000, TriVergent had 14 markets in operation or under
construction in four southeastern states with 3.5 million addressable business
lines and 936 business lines in service. TriVergent expects to construct
additional markets in these states during 2001. TriVergent believes its networks
will ultimately cover over 90% of the business access lines in its target
markets.
At June 30, 2000, TriVergent had
- secured 269 central office collocation sites,
- installed voice and data equipment in 32 of these collocation sites, with
144 others under construction, and
- deployed four Nortel DMS 100/500 digital switches and four Nortel
asynchronous transfer mode switches in its switching sites and 77
asynchronous transfer mode switches in its unified collocation
facilities.
TriVergent's network is designed to include six voice switches complemented
by asynchronous transfer mode switches in each market. TriVergent's network
design supports its Broadband Bundle, combining data and voice service to its
customers. As of June 30, 2000, TriVergent had four voice switches installed and
expects to install two more by the end of 2000 which will complete the voice
switch deployment necessary to cover all of its currently planned markets.
TriVergent anticipates migrating to a soft switch platform in the future, which
platform is designed to be compatible with its current network. TriVergent's
collocation facilities are connected using redundant routes, which are multiple
network routes or paths, to its asynchronous transfer mode switches which then
transmit the data to one of its host switches. TriVergent believes this method
of network deployment allows it to build its target markets faster, use less
capital and reduce ongoing circuit costs.
TriVergent believes the soft switch design, once implemented, will enhance
the functionality and efficiencies of its existing voice and data switches by
allowing it to
- effectively switch voice and data traffic on its asynchronous transfer
mode network,
- extend its network to reach additional customers, and
- lower transmission costs.
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TriVergent intends to construct data centers in many of its markets to
house its asynchronous transfer mode switches and provide dedicated and shared
web hosting services to its customers. Because many of the traditional data
service providers have targeted only the largest cities in the Southeast,
TriVergent believes the market for data centers in small and medium-sized cities
in this region is currently underserved. TriVergent expects to house its data
centers in 1,500 to 5,000 square foot facilities connected directly to its
asynchronous transfer mode switch. These carrier-grade data centers will include
auxiliary battery and diesel power restoration, fire suppression, security
clearance and access to customers' workstations. TriVergent's data centers will
provide access to its Internet backbone, allowing it to provide a complete
solution that includes web hosting and high-speed Internet connections.
TriVergent intends to be the first to market this service in many of its target
markets.
TriVergent is authorized to provide local and long distance services in
Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina,
South Carolina and Tennessee. It also is authorized to provide long distance
services in New York, New Jersey, Pennsylvania, Texas, Illinois, Indiana,
Minnesota, Colorado and California. TriVergent has a region-wide interconnection
agreement with BellSouth and one with GTE for Florida.
TriVergent's management team is led by Charles S. Houser, its chairman and
chief executive officer, who has had a distinguished career in the
telecommunications industry, including serving as
- chairman and chief executive officer of Corporate Telemanagement Group,
Inc., a switch-based long distance carrier that was acquired by LCI
International, Inc. in 1995,
- president and chief executive officer of Tel/Man, Inc., a switch-based
long distance carrier that was acquired by SouthernNet in 1988,
- chief operating officer of SouthernNet, Inc., a switch-based long
distance carrier that was acquired by MCI in 1989, and
- chairman and chief executive officer of Teleco, Inc.
Mr. Houser has also served on the board of directors of LDDS Communications,
CompTel, Corporate Telemanagement Group, Tel/Man, and Teleco and was chairman of
the Telecommunications Resellers Association. He also presently serves on the
board of directors of Ibasis.
BUSINESS STRATEGY
TriVergent's current business strategy is to:
OFFER A COMPLETE, BROADBAND BUNDLED INTERNET COMMUNICATIONS
SOLUTION. TriVergent's Broadband Bundle is a complete Internet communications
solution that includes automated web site design and web hosting, with local and
long distance telephone service for a single monthly price based upon the number
of access lines and transmission speed selected by the customer. When customers
purchase the Broadband Bundle, TriVergent becomes, in effect, their Internet and
telecommunications manager. TriVergent believes that bundling services in this
manner allows its customers to receive a high level of service and enables
TriVergent to leverage its sales force to generate higher revenues per account
executive. TriVergent believes it is the only company in its region that
provides a single bundle of Internet access, automated web site design and web
hosting, and local and long distance telephone services to its customers.
TARGET SMALL AND MEDIUM-SIZED BUSINESSES IN THE SOUTHEASTERN UNITED
STATES. TriVergent targets small and medium-sized businesses in the southeastern
United States that it believes have been underserved by the incumbent telephone
companies in these markets. In particular, TriVergent attempts to sell its
services to businesses that cannot afford to maintain a communications staff,
but that have increasingly complex telecommunications and Internet needs. When
targeting these businesses, TriVergent offers its customers a high bandwidth,
fixed price and flexible communications solution. With its Broadband Bundle,
TriVergent believes it is able to provide all of the services a typical small
and medium-sized business needs to have a presence on the worldwide web.
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CAPITALIZE ON FIRST-TO-MARKET ADVANTAGE IN BUNDLED SERVICES. TriVergent has
been the first communications service provider in its initial seven markets to
offer a full suite of data and telecommunications services as a single bundle.
This bundle includes automated web site design and web hosting, high-speed data
and Internet access and local and long distance voice services. TriVergent
believes it can maintain its first-to-market advantage by continuing to offer
product innovations. For example, TriVergent intends to release a new version of
its web site design service in the fourth quarter of 2000, which will allow
customers to develop e-commerce applications and conduct transactions using
their web sites. With a first-to-market advantage, TriVergent believes it will
be able to capture larger portions of its target markets before its competitors
can provide comparable services.
TriVergent intends to maintain a first-to-market advantage by providing
carrier-grade data center space in 12 of its initial 18 markets. These
carrier-grade data centers will include auxiliary battery and diesel power
restoration, fire suppression, security clearance and access to customers'
workstations. TriVergent will provide its customers with either dedicated or
shared data service and broadband connections. TriVergent data centers will
provide access to its Internet backbone allowing TriVergent to provide a
complete solution that includes web hosting and high-speed Internet
connectivity.
LEVERAGE DIRECT AND INDIRECT DISTRIBUTION CHANNELS. TriVergent uses both a
direct sales force and authorized agents to distribute its products and
services. TriVergent believes that the key to its success will be finding direct
sales people and authorized agents with strong community relationships and
technical backgrounds. In most markets, TriVergent will have a locally-based
direct sales force that uses a consultative approach to offer clients a full
range of sophisticated, cost-effective Internet, data and voice solutions. A
consultative approach means that a TriVergent sales person meets with a
prospective customer to discuss the telecommunications and data requirements for
the customer's particular business. The sales person then analyzes the
customer-specific information to recommend alternatives to address those
requirements. For example, the sales person may describe the trade off between
transmission speed and price, as well as explore the capabilities of the web
site design product for that customer's business applications.
CAPITALIZE ON THE NUMBER AND SIZE OF COLLOCATIONS. TriVergent believes the
number and size of its collocations will allow TriVergent to accommodate future
access line growth in its target markets both rapidly and cost-effectively. With
269 central office collocation sites secured, TriVergent believes it will have
one of the broadest collocation service territories for converged voice and data
services in the BellSouth region.
TriVergent is deploying integrated voice and data switches within each of
its collocation sites. By designing its collocations in this manner, TriVergent
is able to allocate the overhead costs associated with deploying collocations
across multiple products and revenue streams. This unified collocation
architecture can be extended to support emerging applications as customer
requirements dictate.
IMPLEMENT SCALABLE AND INTEGRATED BACK OFFICE SYSTEMS. TriVergent is
developing an integrated strategy for its operations support systems and other
back-office systems that it believes will implement more advanced technologies
and will provide superior customer service and significant competitive
advantages in terms of accuracy, efficiency, and capacity to process customer
orders. In December 1999, TriVergent initiated its back office system by
installing the Metasolv Total Business Solutions provisioning system and the
Daleen BillPlex billing system. These systems, which are integrated and readily
expandable, will enable TriVergent to reduce its operating costs and shorten its
provisioning times by minimizing data entries and the potential for errors.
TriVergent also plans to implement electronic bonding with BellSouth's and other
carriers' customer support and local service request systems using DSET's
gateway software.
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RECENT ACQUISITIONS
To accelerate its business strategy, TriVergent has acquired several
companies with a customer base to which it believes it can successfully market
its Broadband Bundle including:
- In March 1999, TriVergent acquired Carolina Online, Inc., a regional
Internet service provider headquartered in Greenville, South Carolina.
Carolina Online currently provides Internet access to approximately 7,000
business and residential customers.
- In July 1999, TriVergent acquired DCS, Inc., a data integrator and
equipment provider headquartered in Greenville, South Carolina.
- In February 2000, TriVergent acquired Ester Communications, Inc., a
provider of voice and data equipment and services. Ester has 3,000 small
business customers to which it provides equipment and services, including
local exchange and long distance services through agency arrangements
with various network providers.
- In February 2000, TriVergent also acquired Information Services and
Advertising Corporation, a regional Internet service provider
headquartered in Wilmington, North Carolina that currently has
approximately 1,200 Internet access customers.
- In June 2000, TriVergent acquired InterNetMCR, Inc., a Greensboro, North
Carolina based Internet service provider. InterNetMCR serves
approximately 2,800 businesses and consumers in the greater Greensboro,
North Carolina market.
TriVergent currently has no definitive understandings relating to any other
acquisitions.
PRODUCTS AND SERVICES
Through its Broadband Bundle, TriVergent offers a complete package of
communications services, including automated web design and web hosting,
high-speed data and Internet access and local and long distance voice services.
These services are offered for a single monthly price based on the number of
access lines and transmission speeds selected by the customer. Each Broadband
Bundle also includes ancillary features such as call waiting, hunting and
three-way calling, as well as 100 minutes per month of long distance usage per
telephone line.
BUNDLED SERVICES
TriVergent's Broadband Bundle includes the following:
Broadband Access -- TriVergent provides high speed Internet access at
speeds up to 1.544 megabits.
Web Page Design -- TriVergent's web site design software system allows its
customers to produce template-driven web pages. TriVergent's customers have
unlimited use of this software through its control panel function that enables
them to access their web site 24 hours a day to maintain and update information,
such as adding e-mail accounts.
Web Hosting -- TriVergent provides web hosting services for all customers
that sign up for the Broadband Bundle. TriVergent provides each customer with up
to 24 megabytes of storage for its web site. Customers have the ability to
utilize more storage capacity for an additional fee through TriVergent's control
panel.
Local Exchange Telephone Services -- TriVergent provides local exchange
telephone service and the ancillary services typically provided by incumbent
telephone companies, such as call waiting, caller ID and hunting.
Long Distance Telephone Service -- TriVergent provides traditional long
distance telephone services and the ancillary services, such as calling cards,
800 numbers, account codes, online billing and various management reports. For
the basic fee, TriVergent provides each customer with 100 minutes of long
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distance service per month. Customers who exceed the basic bundle are billed for
overage on a per-minute basis.
Data Centers -- During the third quarter of 2000, TriVergent began offering
managed server services in its initial data facilities. These services include
the provision and use of vertical rack space, cabinet units, and secure cages
for collocations and services on NT and UNIX platforms with guaranteed
bandwidth.
TriVergent offers its services on a bundled basis where its customers pay a
fixed price, based on the number of access lines and desired access speed, for
all of its services whether the customer takes one or all of the services
offered.
OTHER SERVICES
Network Equipment -- TriVergent also provides voice and data networking
design, equipment sales and installation, including routers and hubs from Cisco
Systems, BayStack, NetGear and 3Com. This equipment allows customers to
integrate digital subscriber line service with current or new local area
networks.
Cabling Services -- TriVergent also provides inside wiring services to
customers on a custom basis, including cable drops, telephone drops and other
wire-based installation services.
PLANNED SERVICES
TriVergent plans to release new versions of its software that will permit
greater utilization of the Internet. These services will revolve around customer
content, delivered over its high-speed platforms, as well as scalable e-commerce
initiatives for product transactions through TriVergent's web site design
software.
Web Page e-commerce -- TriVergent expects to release an update to its web
architecture software in the fourth quarter of 2000 that will have a catalogue
feature allowing customers to develop a catalogue of their products and services
on their web page, as well as e-commerce, shopping cart functions and credit
card billing, which will be enhanced to include online verification and
settlement capabilities by the second quarter of 2001.
Broadband Internet Portal -- TriVergent plans to release by the first
quarter of 2001 a custom Internet portal application with broadband
capabilities, including video streaming. This application will include local
news, sports and weather, along with access to online pay-per-view events.
Remote Local Area Network Access Services -- TriVergent believes that the
desire of businesses to have their employees access e-mail and conduct business
electronically from outside their offices will increase the demand for
high-speed digital communications for remote local area network access.
TriVergent plans to offer these services by the first quarter of 2001.
Virtual Private Network Services -- TriVergent intends to combine its
broadband access services with its virtual private network equipment to provide
clients with high-speed and secure connections to their corporate local area
network and the Internet by the first quarter of 2001. Virtual private networks
enable customers to have a flexible, cost-effective solution that supports both
telecommuters and site-to-site connections. TriVergent's virtual private network
services will provide its clients with the convenience of an always-on high
speed connection and high speed Internet access.
SALES AND MARKETING
TriVergent uses both a direct sales force and authorized agents to
distribute its products and services. In most markets TriVergent will have a
locally-based sales force that uses a consultative selling approach to offer
clients a full range of sophisticated, cost-effective Internet and data and
voice solutions. Most of TriVergent's sales teams will be led by a sales manager
and will include from six to 40 account executives responsible for the
acquisition and retention of customers in those markets. To support its sales
force
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TriVergent has a central office staff that includes service order coordinators,
client development representatives and technical consultants. TriVergent's sales
staff is assisted by a support staff that maintains competitive pricing
information, develops proposals and assists in post sales account management. In
addition to TriVergent internal sales staff at June 30, 2000, TriVergent's agent
sales force consisted of 52 authorized agents.
TriVergent's authorized agents include interconnect dealers and data
integrators. TriVergent provides its agents with a training program and
marketing literature to help its agents become familiar with its Broadband
Bundle. Agents typically sell TriVergent's services into existing customer bases
using TriVergent's brand name. TriVergent provides the sales support, proposals,
customer care, billing and collection functions. Agents are compensated with
monthly residual commissions, based entirely on production. TriVergent intends
to capitalize on prior relationships with many of the agents formerly associated
with Corporate Telemanagement Group to sell its services. Corporate
Telemanagement Group, where a number of TriVergent's senior executives were
previously employed, achieved $100 million in aggregate revenues over
approximately five years largely through utilizing authorized agents, such as
telecommunications equipment vendors, consultants and systems integrators, to
sell its switched long distance services.
TRIVERGENT'S CURRENT MARKETS
The following tables list TriVergent's markets in operation and under
construction as of August 31, 2000 and related information, including the number
of secured collocation sites, the estimated number of addressable business lines
and the number of business lines in service, for each market:
<TABLE>
<CAPTION>
ESTIMATED DATA CENTERS
INITIAL ADDRESSABLE BUSINESS COLLOCATION ----------------------
SERVICE BUSINESS LINES SITES ESTIMATED OPENING
MARKET DATE LINES(1) IN SERVICE(2) SECURED SQUARE FEET DATE
------ ------- ----------- ------------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Greenville/Spartanburg, SC........ 1Q00 143,671 1,435 10 1,500 3Q00
Atlanta, GA....................... 1Q00 824,065 186 19 1,000 3Q00
Greensboro, NC.................... 1Q00 116,685 137 6 1,500 3Q00
Burlington, NC.................... 1Q00 22,710 48 2 -- --
Winston-Salem, NC................. 1Q00 90,621 25 4 -- --
Wilmington, NC.................... 2Q00 437,427 62 3 1,500 3Q00
Miami/Ft. Lauderdale, FL.......... 3Q00 724,849 -- 37 1,500 3Q00
Charlotte, NC..................... 3Q00 278,152 -- 11 1,500 3Q00
Raleigh, NC....................... 3Q00 233,186 -- 7 2,500 3Q00
Columbia, SC...................... 3Q00 84,282 -- 5 2,500 (4)
Jacksonville, FL.................. 3Q00 190,406 -- 17 2,500 3Q00
Nashville, TN(3).................. 4Q00 186,091 -- 13 2,500 3Q00
Knoxville, TN..................... 4Q00 110,734 -- 5 2,500 (4)
Charleston, SC.................... 4Q00 82,805 -- 7 2,500 4Q00
</TABLE>
-------------------------
(1) The addressable business lines referenced in the above tables are
TriVergent's estimates based upon business line information obtained
annually from PNR and Associates, Inc., which maintains a database of the
number of business access lines in the respective markets, and increased
based on an assumed annual growth rate of 7%, which is based on historical
growth rate information available from the FCC.
(2) As of August 31, 2000.
(3) Market also targeted by Gabriel.
(4) Not yet determined.
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NETWORK INFRASTRUCTURE
TriVergent is deploying a unified voice and data network that allows it to
provide all services included in the Broadband Bundle. The planned network will
consist of six Nortel DMS 100/500 digital switches that are connected together
through transmission capacity purchased from long haul telecommunications
service providers. TriVergent currently has four of these switches installed and
expects to install the other two by the end of 2000. The six Nortel switches
will provide the primary voice switching functions for all of TriVergent's
planned markets throughout the southeastern United States. TriVergent is also
deploying asynchronous transfer mode switch sites in most of its markets.
TriVergent plans to connect these switch sites with multiple redundant routes
from various long haul providers. The final step in TriVergent's unified network
is to connect its unified collocation facilities with the small asynchronous
transfer mode switch sites. This will be accomplished through the lease of
redundant DS-1 and DS-3 or OC-3 routes from BellSouth or alternative fiber optic
network providers. DS-1 and DS-3 or OC-3 circuits are standard North American
telecommunications industry digital signal formats, which are distinguishable by
the information carrying capacity, or "bandwidth," of the circuit, measured in
millions of bits of information, or megabits, per second. DS-1 service has
bandwidth or capacity to carry 1.544 megabits per second and DS-3 or OC-3
service has bandwidth or capacity to carry 44.736 megabits per second.
TriVergent anticipates in the future migrating to the soft switch platform,
which it expects to be compatible with its current network. TriVergent's
collocation facilities are typically secured in caged-in areas which contain
both voice and data equipment. TriVergent believes these unified collocation
facilities will enable it to transmit integrated voice and data traffic over a
standard copper pair or leased unbundled network element, thus significantly
increasing the potential revenue per line in relation to voice-only or data-only
equipped collocations.
INFORMATION SYSTEMS
TriVergent is deploying its integrated operations support systems and other
back-office systems that it believes will provide superior customer service and
significant competitive advantages in terms of accuracy, efficiency, and
capacity to process customer orders. TriVergent has already installed the
Metasolv Total Business Solution provisioning system and the Daleen BillPlex
billing system. Once TriVergent successfully installs its seamless end-to-end
back office system, it expects that customer orders will be entered a single
time, with the information then shared between the various components of
TriVergent's information systems. TriVergent expects to have its operations
support systems and other back office systems fully integrated by the third
quarter of 2000.
TriVergent believes that its planned single entry system will be superior
to many existing systems, which generally require multiple entries of customer
information. Multiple information entry can result in billing problems, service
interruptions and delays in installation. TriVergent's single entry process
should be less labor intensive and reduce the margin for error. In addition, the
sales to billing interval should be significantly shortened.
ORDER ENTRY AND PROVISIONING
Order entry involves the initial loading of customer data into TriVergent's
information systems. TriVergent utilizes the Metasolv Total Business Solutions
provisioning system software for this purpose. TriVergent's sales executives are
able to take orders and upload them via the web to credit and provisioning
representatives who enter the initial customer information into the Total
Business Solutions system. When the Total Business Solutions system is fully
integrated with the capabilities of the DSET electronic bonding gateways, orders
can be submitted to business partners electronically, thereby minimizing
implementation time, coordination complexities and installation costs.
In addition to cost benefits associated with electronic installation of
access lines and inventory management system, the Metasolv system should improve
TriVergent's internal processes in various other ways through its "workflow"
management capabilities. The system routes tasks to the appropriate employee
groups, tracks order progress and is capable of alerting operations personnel of
any "jeopardy"
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situations. The system is designed to allow sales executives or customer care
coordinators to maintain installation schedules and notify customers of any
potential delays. Once an order has been completed, the Metasolv system
electronically updates its billing system to initiate billing of installed
services.
ELECTRONIC BONDING
TriVergent is implementing integrated interfaces with some BellSouth
systems for the electronic exchange of order information utilizing the DSET
gateway software. While it is currently necessary to submit local service
requests for a customer by sending the incumbent telephone company a fax or
e-mail or by remote data entry, the electronic interfaces which TriVergent is in
the process of implementing will link its operations support systems directly to
BellSouth's system, so that it will be able to process these requests on an
automated basis. Once fully installed and implemented, TriVergent will be able
to confirm receipt of service requests and the availability of facilities
on-line and in real-time. Due to issues relating to BellSouth's internal
operations support systems, TriVergent expects to experience some difficulties
with the electronic interfaces, which may require some manual intervention.
Other incumbent telephone companies in TriVergent's region are just beginning to
develop automated interfaces on a limited basis. TriVergent anticipates
establishing similar connections with other incumbent telephone companies.
BILLING SYSTEM
For billing, TriVergent utilizes the Daleen BillPlex system, which provides
its customers with a consolidated invoice for all of its services. Customer
telecommunications usage generates billing records that are automatically
transmitted from the switch to the billing systems. These records are then
processed by the billing software that calculates usage costs, integrates fixed
monthly charges and assembles bills. For those customers who request electronic
billing, TriVergent can provide the invoice and call detail records in
electronic form over the web. The Daleen system allows TriVergent to add
advanced features such as discounts based on call volume or number of lines or
amount of bandwidth ordered. It will also allow TriVergent to calculate complex
local, state and federal taxation and discrete billing options by type of
service ordered.
CUSTOMER CARE AND TROUBLE MANAGEMENT
TriVergent has entered into a service agreement with Nortel to assist it in
the continuous monitoring and operation of TriVergent's switch network. In the
third quarter of 2000, TriVergent expects to begin performance of all of the
network management functions in-house upon completion of its new network
operations center. TriVergent's back office system and trouble management system
will allow customer care representatives to call a customer while simultaneously
accessing that customer's service profile. It will also enable TriVergent's
customer care personnel to track customer problems proactively, assign repair
work to the appropriate technical teams and provide employees and management
access to comprehensive reports on the status of service activity. The network
management system is also designed to identify failures and intervene before
significant service interruptions or service degradations occur.
INTELLECTUAL PROPERTY
TriVergent regards its products, services and technology as proprietary and
attempts to protect them with copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. TriVergent also generally enters
into confidentiality or license agreements with its employees and consultants,
and generally controls access to and distribution of its documentation and other
proprietary information. Despite its precautions, TriVergent may not be able to
prevent misappropriation or infringement of its proprietary information,
products, services and technology.
TriVergent's logo and some titles and logos of its services mentioned in
this information statement/ prospectus are either its service marks or service
marks that have been licensed to it. Each trademark, trade name or service mark
of any other company appearing in this information statement/prospectus belongs
to its holder.
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EMPLOYEES
At June 30, 2000, TriVergent had approximately 540 full-time employees,
including approximately 135 sales and sales support personnel. TriVergent also
hires temporary employees and independent contractors as needed. In connection
with its growth strategy, TriVergent anticipates hiring a significant number of
additional personnel in sales and other areas of its operations by the end of
2000. TriVergent's employees are not unionized, and it believes its relations
with its employees are good. TriVergent's success will significantly depend on
its ability to continue to attract and retain qualified employees.
LEGAL PROCEEDINGS
From time to time TriVergent becomes engaged in legal proceedings that
occur in the normal course of business. There are no pending legal proceedings
that TriVergent believes would individually or in the aggregate, have a material
adverse effect on its business or financial condition.
FACILITIES
TriVergent is headquartered in Greenville, South Carolina and leases
offices and space in a number of locations, primarily for sales offices and
network equipment installations. The table below lists its leased facilities,
other than collocation facilities, as of June 30, 2000:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION PURPOSE LEASE EXPIRATION SQUARE FOOTAGE
-------- ------------------- ---------------- --------------
<S> <C> <C> <C>
Greenville, SC Ivey Square............... Office space
1st floor January 2004 9,600
3rd floor August 2003 13,075
Landmark................................. Office space
5th & 7th floors December 2010 75,839
8th floor August 2010 11,209
6th floor July 2009 11,209
20th floor December 2010 5,605
14th floor October 2010 11,209
Wachovia................................. Office space
4th floor October 2000 7,333
7th floor September 2000 12,858
Augusta Road............................. Equipment warehouse February 2003 9,000
Atlanta, GA.............................. Sales office December 2004 4,500
Switch site July 2009 6,400
Greensboro, NC........................... Sales office January 2005 4,800
Switch site October 2009 4,500
Jacksonville, FL......................... Sales office January 2005 4,700
Switch site May 2010 6,600
Miami, FL................................ Sales office August 2005 6,989
Switch site July 2009 13,500
Charleston, SC........................... Sales office June 2005 3,700
Switch site August 2010 5,000
</TABLE>
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<TABLE>
<CAPTION>
APPROXIMATE
LOCATION PURPOSE LEASE EXPIRATION SQUARE FOOTAGE
-------- ------------------- ---------------- --------------
<S> <C> <C> <C>
Charlotte, NC............................ Sales office May 2005 4,363
Switch site April 2010 9,314
Wilmington, NC........................... Sales office July 2005 12,122
Switch site June 2010 5,000
Nashville, TN............................ Sales office August 2005 5,700
Switch site June 2010 8,645
Raleigh, NC.............................. Sales office July 2005 5,023
Switch site August 2010 6,000
Knoxville, TN............................ Sales office August 2005 4,582
Columbia, SC............................. Sales office August 2005 2,400
</TABLE>
TriVergent believes that its leased facilities are adequate to meet its
current needs and that additional facilities are available to meet its
development and expansion needs in existing markets and markets currently under
construction.
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COMPETITION
OVERVIEW
The combined company will operate in a highly competitive environment and
neither TriVergent nor Gabriel currently has a significant market share in any
of their respective markets. Further, the continuing trend toward business
alliances in the telecommunications industry and the further reduction of
regulatory and technological barriers to entry, will likely give rise to
significant new competition.
While there are many competitors in the broadly defined telecommunications
market, the combined company will focus its attention on actual and near-term
potential competitors in the geographic areas and market segments in which it
offers and plans to offer service. Current and potential competitors and their
strengths and weaknesses are summarized below. Gabriel and TriVergent perform
competitor analyses as part of its market evaluation process prior to entering
each of its targeted markets.
EXISTING COMPETITORS
INCUMBENT TELEPHONE COMPANIES. In each of the markets in which the combined
company will operate, the incumbent telephone company will be its principal
competitor. Incumbent telephone companies currently dominate the combined
company's targeted markets with an approximate 95% market share. Incumbent
telephone companies benefit from favorable regulations and have long standing
customer relationships, brand name recognition, significant financial, technical
and marketing resources and, subject to regulatory approval, the ability to
lower prices or engage in substantial volume or term discounts. In addition,
incumbent telephone companies have existing fiber optic networks and switches.
Management of the combined company believes it can compete with incumbent
telephone companies by focusing on the communications requirements of small and
medium-sized business customers and by providing high quality, market-driven
products and services with responsive customer service at prices below those
charged by the incumbent telephone companies.
Each of TriVergent and Gabriel believes that the incumbent telephone
company in each of its markets in operation and under construction controls more
than 90% of the business access lines in the central offices where TriVergent or
Gabriel, as the case may be, collocates its equipment. As a result, TriVergent
and Gabriel must purchase or lease a significant portion of their underlying
network from the incumbent telephone company, which is currently BellSouth in
TriVergent markets and Southwestern Bell or Ameritech in Gabriel markets. Some
of the network components that TriVergent and Gabriel purchase or lease from the
incumbent telephone company include unbundled network elements, inside wiring
and transmission services. This significant reliance on a primary competitor is
burdensome and typically time consuming. See "Regulation" beginning on page 103
for a discussion of the regulatory requirements that apply to the incumbent
telephone companies' provision of unbundled network elements and other services
to other providers such as TriVergent and Gabriel.
The combined company will face significant competition from Southwestern
Bell, Ameritech and BellSouth in the local services business in its markets.
These large, entrenched companies currently offer digital subscriber line and
other data services as well as Internet services. Each of these incumbent
companies competes aggressively to retain as much of its dominant market share
as possible. Each has significantly more capital, technological and management
resources and poses a significant competitive threat to the combined company's
success.
LONG DISTANCE TELEPHONE COMPANIES. AT&T, WorldCom and Sprint are among the
long distance telephone companies that are now offering bundled local and long
distance services to their existing and prospective customers. Some of these
long distance carriers have entered the local service market primarily through
acquisitions of local service providers, such as AT&T's purchase of Teleport
Communications Group and WorldCom's acquisitions of MFS Communications Company
and Brooks Fiber Properties. Management of the combined company believes that
although these long distance companies have acquired significant local markets,
they are not primarily focused on the provision of local services in second and
third tier markets. Instead, they have continued to focus on their primary
service offering, long
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distance, and are attempting to leverage their customer relationships to offer
basic local services. Management of the combined company believes that its
advanced network platforms, integrated product and service offerings and local
sales presence will position it to distinguish itself from the long distance
telephone companies in its targeted markets.
COMPETITIVE LOCAL TELEPHONE COMPANIES. The combined company will face
significant competition from facilities-based competitive local telephone
companies in markets in which it offers and plans to offer its products and
services. The principal facilities-based competitive local telephone company
competitors that provide local services in Gabriel's and TriVergent's existing
markets include
- Adelphia Business Solutions,
- Birch Telecom,
- Business Telecom, Inc.,
- e.spire Communications,
- ICG Communications,
- ITC DeltaCom,
- Intermedia Communications,
- KMC Telecom,
- Logix Communications,
- McLeodUSA,
- NewSouth Communications,
- NEXTLINK Communications,
- Time Warner Communications and
- US LEC.
Management of the combined company believes that additional competitors may
also develop plans to enter its existing and target markets in the future.
RECENT AND POTENTIAL NEW COMMUNICATIONS PROVIDERS
In addition to the incumbent telephone companies, long distance carriers
and competitive local telephone companies, the combined company will face
potential competition from other recent and potential entrants in local service
markets. These non-traditional providers include
- cable television operators,
- electric utilities,
- fixed and mobile wireless and PCS operators, and
- Internet service providers.
CABLE TV OPERATORS. Management of the combined company expects cable
television operators will attempt to leverage their broadband networks to deploy
local telecommunications services to their existing, largely residential,
customer base. In addition to technology and network architecture issues, cable
operators must overcome the public perception of historically poor levels of
customer service and high prices. Management of the combined company believes
that, because the strength of these entities is in the service territories of
their existing facilities, their primary focus is and will continue to be the
residential market and that they will position themselves as a low cost, high
bandwidth alternative to the incumbent telephone company with bundled local,
long distance, Internet access and cable television product offerings.
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ELECTRIC UTILITIES. Electric utilities have a large customer base, and many
have fiber networks that could be used to provide telecommunications services.
Many electric utilities have increased their installation of fiber optic cable
to augment their current core services. Unlike cable television operators,
electric utilities have extensive networks covering both business and
residential customers. Electric utilities also have the advantage of having
existing customer relations, access to rights of way, building access and, in
most cases, regional political influence. Disadvantages include inexperience in
telecommunications, a generally poor record in diversification investments,
little experience in competitive markets, and stringent regulatory and capital
market limitations on the use of rate base capital.
WIRELESS OPERATORS. Cellular and PCS operators may also be a source of
competitive local telephone service, using available bandwidth on their networks
to provide access in traditional landline applications. With the significant
capital outlays made by wireless operators for license fees as well as equipment
purchases to build their network infrastructures, management of the combined
company expects that, in the near term, these companies will continue to focus
their marketing and operational efforts on the wireless mobile market. Moreover,
management of the combined company believes that these wireless operators will
largely be users of competitive local telephone company services to transmit
their calls among radio/transmitter sites and generally avoid the traditional
local services market.
INTERNET SERVICE PROVIDERS. Management of the combined company believes
that Internet service providers may try to expand their scope of operations to
provide more traditional telecommunications services to complement their
Internet access services and leverage their subscriber bases. Management of the
combined company believes Internet service providers will initially focus on the
long distance market, in which it is easier to administer and provision quality
customer service, and eventually may vertically integrate to provide full
service local telecommunications or be acquired by existing local or long
distance telecommunications providers to allow the acquiring companies to
further their own vertical integration into the Internet access market.
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REGULATION
The combined company's telecommunications services business is subject to
federal, state and local regulation.
FEDERAL REGULATION
The FCC regulates interstate and international telecommunications services,
including the use of local telephone facilities to originate and terminate
interstate and international calls. Gabriel and TriVergent provide such services
on a common carrier basis. The FCC imposes extensive regulations on common
carriers that have some degree of market power, like the incumbent telephone
companies. However, the FCC to date has imposed less regulation on common
carriers, such as Gabriel and TriVergent, that lack significant market power.
The FCC requires Gabriel and TriVergent to receive and maintain authorizations
to provide and resell telecommunications services between the United States and
international points.
Under the Telecommunications Act of 1996, any entity, including cable
television companies and electric and gas utilities, may enter any
telecommunications market, subject to conditions in the Telecommunications Act
and reasonable state regulation of safety, quality and consumer protection.
Because implementation of the Telecommunications Act is subject to numerous
federal and state policy rulemaking proceedings, legislative initiatives and
judicial review, there is still uncertainty as to what impact the
Telecommunications Act and any additional legislation will have on the combined
company in the future.
The Telecommunications Act is intended to increase competition. The
Telecommunications Act opens the local services market by requiring incumbent
telephone companies to permit interconnection to their networks and imposing on
incumbent telephone companies or, in some areas, all local telephone companies
other obligations, including:
- INTERCONNECTION. All local telephone companies must permit their
competitors to interconnect with their facilities. Incumbent telephone
companies are required to permit interconnection at any technically
feasible point within their networks, on nondiscriminatory terms, and at
prices based on cost, which may include a reasonable profit. At the
option of the carrier seeking interconnection, the incumbent telephone
company must offer to collocate the requesting carrier's equipment in the
incumbent telephone company's premises, except where the incumbent
telephone company can demonstrate space limitations or other technical
impediments to collocation.
- UNBUNDLED ACCESS. All incumbent telephone companies are required to
provide nondiscriminatory unbundled access to FCC and state
telecommunications regulatory commission-defined network elements, which
include network facilities, equipment, features, functions, and
capabilities, at any technically feasible point within their networks, on
nondiscriminatory terms, and at prices based on cost, which may include a
reasonable profit.
- ACCESS TO RIGHTS-OF-WAY. All local telephone companies are required to
permit competing carriers access to poles, ducts, conduits and
rights-of-way at regulated prices.
- RECIPROCAL COMPENSATION. All local telephone companies are required to
complete calls originated by other local telephone companies under
reciprocal compensation arrangements at prices based on costs or
otherwise negotiated by the parties.
- RESALE. All local telephone companies must permit resale of their
telecommunications services without unreasonable restrictions or
conditions. In addition, incumbent telephone companies are required to
offer wholesale versions of all retail services to other
telecommunications carriers for resale at discounted rates, based on the
costs avoided by the incumbent telephone company in the wholesale
offering.
- NUMBER PORTABILITY. All local telephone companies must permit users of
telecommunications services to retain existing telephone numbers without
impairment of quality, reliability or convenience when switching from one
telecommunications carrier to another.
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- DIALING PARITY. All local telephone companies must provide equal access
to competing providers of telephone exchange service and toll service,
and they must also provide nondiscriminatory access to telephone numbers,
operator services, directory assistance, and directory listing, with no
unreasonable dialing delays.
Incumbent telephone companies 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 prescribed time, either carrier may
request binding arbitration of the disputed issues by the state regulatory
commission. Where an agreement has not been reached, incumbent telephone
companies remain subject to interconnection obligations established by the FCC
and state telecommunication regulatory commissions.
INTERCONNECTION AND UNBUNDLED ACCESS
In August 1996, the FCC established rules implementing the incumbent
telephone company interconnection obligations described above. On July 18, 1997,
the Eighth Circuit vacated portions of the FCC's decision and narrowly
interpreted the FCC's power to prescribe and enforce rules implementing the
Telecommunications Act. On January 25, 1999, the United States Supreme Court
reversed the Eighth Circuit decision and reaffirmed the FCC's broad authority to
issue rules implementing the Telecommunications Act, although it did vacate a
rule determining which network elements the incumbent telephone companies must
provide to competitors on an unbundled basis.
On November 5, 1999, the FCC released a ruling in response to the Supreme
Court's decision that detailed three significant changes affecting the incumbent
telephone companies' obligations to provide unbundled network elements to
competitors. First, the FCC indicated that the incumbent telephone companies no
longer were required to provide access to operator and directory assistance
services. However, the FCC expanded the definitions of two previously defined
unbundled network elements so that the incumbent telephone companies are now
required to provide unbundled access to portions of local loops and dark fiber
optic loops and transport. The FCC also ruled that the incumbent telephone
companies are no longer required to provide access to unbundled local circuit
switching for customers with four or more lines that are located in the densest
parts of the top 50 metropolitan statistical areas in the country, provided that
they provide access to combinations of loop and transport network elements known
as "enhanced extended links." Neither TriVergent nor Gabriel has plans to
utilize the circuit switching network element but may incorporate the use of
enhanced electronic links in their affected networks to reduce costs. Fifteen of
the networks in operation or under construction by Gabriel or TriVergent are in
the top 50 metropolitan statistical areas. The United States Telecom Association
has appealed the FCC's November 5 order, and neither Gabriel, TriVergent nor the
combined company can predict the outcome of that appeal or other proceedings
that might arise from the FCC's 1999 orders on remand from the Supreme Court.
On July 18, 2000, the Eighth Circuit issued a decision on remand from the
Supreme Court's reversal of its 1997 decision. In the July 18 decision, the
Eighth Circuit vacated parts of the FCC's interconnection pricing standard
included in the local competition rules adopted in August 1996. Those rules had
required state commissions to base the rates that incumbent telephone companies
charge to competitive local telephone companies for interconnection and for the
use of unbundled network elements on the costs that would be incurred by the
incumbent carriers using the most efficient technology available, rather than
the technology actually used by the incumbent carrier and furnished to the
competitive carrier. The Eighth Circuit held that the FCC should have based such
rates on the cost of the incumbent carrier's actual facilities. On September 22,
2000, the Eighth Circuit stayed that part of its July 18 decision vacating the
FCC's pricing rule basing interconnection rates on the most efficient technology
available pending Supreme Court disposition of any appeal of that decision. If
the July 18 decision is upheld by the Supreme Court, it is not clear to what
extent, or how quickly, the pricing standard required by the Eighth Circuit
would be reflected in state commission-approved interconnection agreements.
Eventually, however, if upheld, such pricing standard could result in higher
interconnection and unbundled element rates, which could make it more difficult
for competitive carriers such as Gabriel and TriVergent to compete profitably
with the incumbent telephone companies.
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On December 9, 1999, the FCC released an order requiring the incumbent
carriers to offer "line sharing" arrangements that will permit competitors to
offer DSL service over the same copper wires used by the incumbent to provide
voice service, and several incumbent providers have entered into line sharing
agreements with DSL providers that will compete with the combined company. The
specific prices and terms of particular line sharing arrangements will be
determined by negotiation or by future decisions of state utility commissions,
and cannot be predicted at this time. The FCC's ruling also has been challenged
in court by the United States Telecom Association. The combined company expects,
however, that this order will allow competing carriers to offer DSL services at
a significantly lower cost than is now possible.
On March 31, 1999, the FCC established rules addressing how incumbent
telephone companies must allow competitive local telephone companies like
Gabriel and TriVergent to collocate in the incumbent carriers' central offices.
The FCC required the incumbent telephone companies to allow competitors to
collocate equipment that is "used or useful" for either interconnection or
access to unbundled network elements. In March 2000, the United States Court of
Appeals for the District of Columbia Circuit vacated portions of the FCC's March
1999 collocation ruling. The court concluded that, in requiring the incumbents
to provide collocation for equipment that is "used and useful" for
interconnection or access to unbundled elements, the FCC had applied an
overbroad interpretation of the relevant statutory language, which requires
incumbent carriers to provide collocation only for equipment that is "necessary
for interconnection or access." The appeals court did not identify the specific
types of equipment that would be considered necessary but remanded the portion
of the FCC's order as to the definition of "necessary" to the FCC for
reconsideration. Similarly, the court decided that the FCC must reconsider its
reasons for requiring incumbent telephone companies, under its collocation
rules, to give competitors the option of collocating equipment in any unused
space within the incumbent telephone company's premises, to the extent
technically feasible, and prohibiting incumbent telephone companies from
requiring competitors to collocate in isolated space separate from the incumbent
telephone company's own equipment. The appeals court did preserve portions of
the FCC's collocation rules, however, including "cageless" collocation and
collocation cost allocation provisions.
On August 10, 2000, the FCC released an order reconsidering its March 1999
collocation ruling that strengthened its collocation requirements in some
respects, including a new requirement that an incumbent carrier provide physical
collocation space within 90 calendar days of a competitor's request, with
exceptions, and allow competitors to construct "adjacent structures" on land
owned or controlled by the incumbent carrier if there is no space left inside
the central office. Competitive providers like TriVergent and Gabriel hope to
utilize these adjacent structures to collocate their equipment and interconnect
with remote terminals of the incumbent telephone companies, thereby increasing
the addressable market for their DSL services. The FCC also requested further
comment on the issues remanded by the D.C. Circuit's ruling. Until the remanded
issues are resolved, incumbent telephone companies may attempt to restrict the
scope of their collocation obligations, at least as to those matters that were
not explicitly addressed in the FCC's August 10 reconsideration order. This
could delay the implementation, or otherwise limit the scope, of the
functionality and equipment that the combined company and other competitive
local telephone companies plan to collocate in incumbent telephone company
premises. However, neither Gabriel nor TriVergent has experienced any
significant problems in obtaining and building out any collocation sites, as a
result of the uncertainties created by these rulings.
While these court and FCC proceedings were pending, Gabriel and TriVergent
have entered into interconnection agreements with a number of incumbent
telephone companies through negotiations or adoption of another competitive
local telephone company's approved agreements. These agreements remain in
effect, although in some cases one or both parties may be entitled to demand
renegotiation of particular provisions based on intervening changes in the law.
However, it is uncertain whether the combined company will be able to obtain
renewal or renegotiation of these agreements on favorable terms when they
expire, particularly with regard to the types of equipment it can collocate at
an incumbent's premises and the rates it will be charged for interconnection and
access to unbundled network elements.
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INCUMBENT TELEPHONE COMPANIES' PROVISION OF LONG DISTANCE SERVICES
The Telecommunications Act codifies the incumbent telephone companies'
equal access and nondiscrimination obligations and preempts inconsistent state
regulations. The Telecommunications Act also contains special provisions that
replace prior antitrust restrictions that prohibited the regional Bell operating
companies, including Southwestern Bell, Ameritech and BellSouth, from providing
long distance services and engaging in telecommunications equipment
manufacturing. The Telecommunications Act permits the regional Bell operating
companies to enter the long distance service market outside their local service
areas immediately upon its enactment. Further, the Telecommunications Act
permits a regional Bell operating company to enter the long distance market in
its in-region states upon FCC approval, if it satisfies several procedural and
substantive requirements, including:
- a showing that the regional Bell operating company has entered into
interconnection agreements or, under some circumstances, has offered to
enter into such agreements in those states in which it seeks long
distance relief,
- satisfaction by these interconnection agreements of a 14-point
"checklist" of competitive requirements, and
- a showing that the regional Bell operating company's entry into long
distance markets is in the public interest.
Verizon and Southwestern Bell recently received permission from the FCC to
begin providing in-region long distance services in New York and Texas,
respectively, and Verizon's approval for New York recently was upheld by the
D.C. Circuit. Southwestern Bell has recently filed petitions in Missouri and
Arkansas, two of Gabriel's markets, and it is likely that Southwestern Bell,
Ameritech and BellSouth will petition and receive approval to offer long
distance services in additional states. This may have an unfavorable effect on
the combined company's business. Gabriel and TriVergent are legally able to
offer their customers both long distance and local services, which the regional
Bell operating companies in the combined company's markets currently may not do.
This ability to offer "one-stop shopping" gives the combined company a marketing
advantage that it would no longer enjoy if Southwestern Bell, Ameritech and
BellSouth are permitted to offer in-region long distance services. The other
incumbent telephone companies, including Sprint and Cincinnati Bell, already may
do so.
INTERSTATE ACCESS CHARGES
In three orders released on December 24, 1996, May 16, 1997, and May 31,
2000, the FCC made major changes in the interstate access charge structure. In
the 1996 order, the FCC removed restrictions on incumbent telephone companies'
ability to lower access prices and relaxed the regulation of new switched access
services in those markets where there are other providers of access services. If
this increased pricing flexibility is not effectively monitored by federal
regulators, it could have a material adverse effect on the combined company's
ability to compete in providing interstate access services.
In the 1997 order, the FCC announced and began to implement its plan to
bring interstate access rate levels more in line with costs. Pursuant to this
plan, the FCC has adopted rules that grant incumbent telephone companies subject
to price cap regulation increased pricing flexibility upon demonstrations of
increased competition or potential competition in relevant markets. The FCC
elaborated on these access pricing flexibility rules in an order released on
August 27, 1999. The manner in which the FCC implements this approach to
lowering access charge levels could have a material effect on the combined
company's access charge revenues and on its ability to compete in providing
interstate access services. Several parties appealed the 1997 order and on
August 19, 1998, the 1997 order was affirmed by the U.S. Court of Appeals for
the Eighth Circuit.
In the 2000 order, the FCC adopted several proposals to further reform
access charge rate structures, relying heavily on a proposal submitted by a
coalition of long distance companies and incumbent telephone companies referred
to as "CALLS." These and related actions will result in significant changes to
access charge rate structures and rate levels. As incumbents' access rates are
reduced, the combined company
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may experience downward market pressure on its own access rates. The impact of
these new changes will not be fully known until they are fully implemented.
In August 1999, the FCC asked for comment on claims by some long distance
carriers that competitive local telephone companies were charging those carriers
excessively high rates for access to competitive local telephone company
customers. Specifically, the FCC asked whether it should regulate competitive
local telephone company access charges to ensure that these charges are not
unreasonable. More recently, two coalitions of competitive local telephone
companies asked the FCC to prevent AT&T from withdrawing its long distance
services from customers of those local telephone companies. These FCC
proceedings are pending. Although we are unable to predict the outcome of these
proceedings, a decision by the FCC to regulate the level of competitive local
telephone company access charges could result in lower competitive local
telephone company access charges and decrease the revenues some competitive
carriers, such as Gabriel and TriVergent, receive from providing access
services. Notably, AT&T and Sprint have disputed and refused payment of switched
access charges billed by certain competitive local telephone companies at rates
which exceed the incumbent telephone company tariffed rate levels. Since
TriVergent currently charges switched access rates which exceed the access rates
charged by incumbent telephone companies, it is possible that one or more long
distance carriers will dispute its charges as well.
RECIPROCAL COMPENSATION FOR CALLS TO INTERNET SERVICE PROVIDERS
A number of incumbent telephone companies throughout the country, including
Southwestern Bell, Ameritech and BellSouth, have been contesting whether the
obligation to pay reciprocal compensation should apply to telephone calls
received by end users who provide Internet access services. These end users are
commonly known as Internet service providers or "ISPs," who have large amounts
of incoming calls. As interpreted by the FCC, the Telecommunications Act
requires that, where a subscriber of one local telephone company places a local
call that must be handed off to a second local telephone company for delivery to
the called party, the first carrier must pay reciprocal compensation to the
second carrier for terminating the call. The incumbent telephone companies claim
that calls made to ISPs are interstate in nature and that calls to ISPs
therefore should be exempt from reciprocal compensation arrangements applicable
to local calls carried by two local telephone companies. Competitive local
telephone companies have contended that interconnection agreements providing for
reciprocal compensation contain no exception for local calls to ISPs and
reciprocal compensation is therefore applicable. In response to carriers'
requests for clarification, the FCC, on February 25, 1999, declared that, while
Internet traffic is jurisdictionally mixed, it is largely interstate in nature.
The FCC also found that the reciprocal compensation requirement in the
Telecommunications Act does not apply to calls to ISPs. The FCC did not,
however, determine whether calls to ISPs are subject to reciprocal compensation
in any particular instance. In this regard, the FCC concluded that carriers are
bound by their existing interconnection agreements, as interpreted by state
commissions, and thus are subject to reciprocal compensation obligations to the
extent provided in their interconnection agreements or as determined by state
commissions. Concurrent with its decision, the FCC opened a rulemaking
proceeding to adopt an appropriate prospective inter-carrier compensation
mechanism for calls to ISPs.
In March 2000, the U.S. Court of Appeals for the D.C. Circuit vacated the
FCC's February 1999 ruling, finding that the FCC order did not include a
satisfactory explanation for its holding that calls to ISPs are not subject to
the Telecommunications Act's reciprocal compensation provisions. The FCC
currently is seeking comment on the impact of the Court's ruling and then may
either clarify its former decision or adopt a new one. We are unable to predict
the outcome of that proceeding. In addition, Congress is considering draft
legislation that would, if enacted in its current form, eliminate mandatory
reciprocal compensation requirements not only for termination of calls to ISPs,
but also for all other local telecommunications traffic in favor of a so-called
"bill-and-keep" scheme that offsets or otherwise waives these termination
charges. Gabriel and TriVergent cannot predict whether the pending legislation
will be enacted or, if enacted, the impact on the business of the combined
company. Until the FCC or Congress finally acts on these measures, we expect
that incumbent telephone companies will continue to
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challenge reciprocal compensation payments in cases before state regulators. To
the extent that state commissions are persuaded to find that interconnected
calls to ISPs are not subject to reciprocal compensation obligations, the
revenues of the combined company could be negatively affected, since it would
not receive reciprocal compensation on calls terminated on its networks to its
ISP customers in those states. However, at present, no significant portion of
Gabriel's or TriVergent's revenues are attributable to calls terminated to ISPs
and TriVergent has signed an agreement with BellSouth that provides that
BellSouth will pay reciprocal compensation on ISP-bound traffic at agreed rates
through 2002.
DETARIFFING
In November 1996, the FCC ordered non-dominant long distance carriers, like
Gabriel and TriVergent, to cease filing tariffs for domestic long distance
services. The FCC's order required mandatory detariffing for long distance
services and gave interstate long distance service providers nine months to
withdraw federal tariffs and move to contractual relationships with their
customers. This order subsequently was stayed by a federal appeals court.
In March 1999, the FCC adopted further rules that, while still maintaining
mandatory detariffing, required long distance carriers to make specific public
disclosures on the services providers' Internet web sites of their rates, terms
and conditions for domestic interstate services. The effective date of these
rules also was delayed until an appeals court could rule on the appeal of the
FCC's detariffing order. On April 8, 2000, the United States Court of Appeals
for the D.C. Circuit upheld the FCC's mandatory detariffing decision. The FCC
subsequently issued a notice establishing a nine-month transition to mandatory
detariffing. By January 31, 2001, carriers must cancel all tariffs for
interstate domestic long distance services. After that date, the prices, terms
and conditions pursuant to which domestic providers offer service to customers
will be governed by contract, and service providers will have to rely more
heavily on individually negotiated agreements with customers. The transition to
contracts contemplated by this FCC rule change may require significant resources
to implement. Manpower and cash expenditures associated with such a transition
may negatively impact the combined company.
In June 1997, the FCC allowed non-dominant local service providers to
withdraw their tariffs for interstate access services provided to long distance
carriers. More recently, the FCC initiated proceedings to consider whether such
local service providers, such as Gabriel and TriVergent, should be required to
withdraw their interstate access services tariffs. We are unable to predict the
outcome of this proceeding.
The FCC continues to require that service providers obtain authority to
provide services between the United States and foreign points and file tariffs
for international services.
UNIVERSAL SERVICE SUBSIDIES
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries. The FCC also expanded the federal
subsidies for local telephone services provided to low-income consumers.
Providers of interstate telecommunications service, such as Gabriel and
TriVergent, must pay for a portion of these programs. The combined company's
share of these federal subsidy funds will be based on its share of certain
defined telecommunications end user revenues. Currently, the FCC is assessing
such payments on the basis of a provider's revenue for the previous year. The
FCC recently adopted rules for subsidizing service provided to consumers in high
cost areas, which may result in further substantial increases in the overall
cost of the subsidy program. Gabriel and TriVergent estimate that their
contribution liability for 2000 will be immaterial. With respect to subsequent
periods, however, the combined company is currently unable to quantify the
amount of subsidy payments that it will be required to make or the effect that
these required payments will have on its financial condition.
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STATE REGULATION
To provide intrastate services, the operating subsidiaries of the combined
company will be required to have certificates of public convenience and
necessity from state regulatory agencies and to comply with state requirements
for telecommunications utilities, including state tariffing requirements.
State agencies will require the combined company to file periodic reports,
pay various fees and assessments, and comply with rules governing quality of
service, consumer protection and other issues. Although the specific
requirements vary from state to state, state regulations tend to be more
detailed than FCC regulations because of the strong public interest in the
quality of basic local service. The combined company intends to comply with all
applicable state regulations, and as a general matter does not expect that these
requirements of industry-wide applicability will have a material adverse effect
on its business. However, no assurance can be given that the imposition of new
regulatory burdens in a particular state will not affect the profitability of
the combined company's services in that state.
LOCAL REGULATION
Gabriel's and TriVergent's networks are subject to numerous local
regulations such as building codes and licensing. Such regulations often vary on
a city by city and county by county basis. If the combined company decides in
the future to install its own fiber optic transmission facilities, it will need
to obtain rights-of-way over private and publicly owned land.
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MANAGEMENT OF GABRIEL FOLLOWING THE MERGER
The following table sets forth the persons who will be the executive
officers and directors of Gabriel upon completion of the merger.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- ---------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS
David L. Solomon.......................... 41 Chief Executive Officer, Chairman and Director
G. Michael Cassity........................ 50 President and Chief Operating Officer and Director
Gerard J. Howe............................ 45 President -- Strategic Initiatives
John P. Denneen........................... 60 Executive Vice President -- Corporate Development
and Legal Affairs, and Secretary
Marguerite A. Forrest..................... 46 Senior Vice President -- Human Resources and
Administration and Assistant Secretary
Michael E. Gibson......................... 41 Senior Vice President and Chief Financial Officer
Shaler P. Houser.......................... 30 Senior Vice President -- Corporate Development and
Strategy
NON-MANAGEMENT DIRECTORS
Charles S. Houser......................... 57 Vice Chairman and Director
Watts Hamrick............................. 40 Director
Michael R. Hannon......................... 39 Director
William Laverack, Jr...................... 42 Director
Byron D. Trott............................ 40 Director
Jack Tyrrell.............................. 53 Director
</TABLE>
Gabriel's board of directors is classified into three classes of three
board seats each. The terms of Messrs. Cassity, Hamrick and Laverack will expire
in 2001, the terms of Messrs. Trott and Tyrrell will expire in 2002 and the
terms of Messrs. Hannon, Houser and Solomon will expire in 2003. There will be
one vacancy in the class of 2002.
The board of directors has an executive committee, a finance committee, an
audit committee and a compensation committee. Directors are not compensated for
their services as directors, but non-employee directors are reimbursed for
expenses incurred in connection with board and committee meetings attended. Upon
completion of the merger, the board of directors will reappoint committee
members and the chairmen of the finance, audit and compensation committees.
EXECUTIVE OFFICERS
DAVID L. SOLOMON, Chief Executive Officer, Chairman and a director of
Gabriel and the combined company, is an experienced telecommunications
entrepreneur. He served as Executive Vice President and Chief Financial Officer
of Brooks Fiber from 1994 until its acquisition by WorldCom in 1998. During this
period, he played a major role in its capital raising and growth activities,
raising more than $1.5 billion of debt and equity and completing numerous
acquisitions. Prior to joining Gabriel in December 1999, Mr. Solomon served as
an advisor to Diginet Americas, Inc., a competitive telecommunications provider
with operations throughout South America, and he also serves as a director of
that company. Mr. Solomon is also an investment director and founder of Meritage
Private Equity Fund, L.P., a private investment fund specializing in
communications network and services companies. Prior to joining Brooks Fiber, he
was a partner of KPMG LLP, where he gained more than 13 years' public company
accounting and financial experience. He is a member of the American Institute
and Tennessee Society of CPAs.
G. MICHAEL CASSITY, President and Chief Operating Officer of the combined
company, became TriVergent's President and Chief Operating Officer and a
director in March 2000. Prior to joining TriVergent, Mr. Cassity served as Vice
President and Chief Procurement Officer of BellSouth Corporation, Vice President
of Network Operations for BellSouth's northern states, Vice President of
BellSouth's Strategic Management unit and Vice President of Organization
Planning and Development. Prior to
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becoming an officer at BellSouth, Mr. Cassity served in numerous positions
including network operations, human resources, strategic planning, financial
management, corporate and community affairs and regulatory vice president for
Tennessee.
GERARD J. HOWE, President and Chief Operating Officer and a director and
co-founder of Gabriel and President -- Strategic Initiatives and of the combined
company, has more than 20 years of operational and management experience in the
telecommunications industry. Mr. Howe also currently serves as a director of
Gabriel. Prior to joining Gabriel, Mr. Howe was Senior Vice President of Finance
at Brooks Fiber, where he oversaw the company's financial operations. Prior to
joining Brooks Fiber, Mr. Howe spent 18 years with SBC Communications
(Southwestern Bell) and held a number of executive positions in operations,
finance, regulatory and information processing. From 1993 to 1995, Mr. Howe
served as an executive and director of SBC CableComms, U.K., a UK-based cable
television/telephony business in its formative stages of development. During his
tenure in the UK, Mr. Howe was responsible for all aspects of financial
operations, corporate development, human resources and regulatory and
legislative affairs. Prior to his assignment in the UK, Mr. Howe served as Vice
President, Chief Financial Officer and a director of Southwestern Bell Yellow
Pages.
JOHN P. DENNEEN, Executive Vice President -- Corporate Development and
Legal Affairs and Secretary of Gabriel and the combined company, has more than
30 years' experience in U.S. and international corporate and business law with
particular emphasis on securities transactions, mergers and acquisitions,
corporate finance and joint ventures. Mr. Denneen is also currently a director
of Gabriel. Prior to joining Gabriel in August 1999, Mr. Denneen was a senior
partner of Bryan Cave LLP, a leading international law firm, for over 12 years,
where he headed the legal teams that assisted Brooks Fiber in issuing more than
$1.5 billion of debt and equity securities and completing numerous acquisitions,
concluding with its $3 billion merger with WorldCom, Inc. While at Bryan Cave
LLP, Mr. Denneen also represented several other competitive telecommunications
providers in connection with their capital raising activities.
MARGUERITE A. FORREST, Senior Vice President -- Human Resources and
Administration and Assistant Secretary of Gabriel and the combined company,
brings more than 20 years of professional management, operational and technical
experience in the communications industry. Most recently, Ms. Forrest served as
Vice President and Assistant Secretary for Brooks Fiber. She was a member of the
start-up management team since that corporation was founded in 1993, charged
with the responsibilities for human resources, corporate administration and
shareholder communication. Previous management and technical experience included
responsibility for drafting and system design activities for Cencom Cable
Associates, Group W Cablevision and Telcom Engineering, Inc.
MICHAEL E. GIBSON, Senior Vice President and Chief Financial Officer of the
combined company, is highly experienced in financial operations in the
telecommunications industry. Mr. Gibson is currently Senior Vice
President -- Finance and Corporate Development of Gabriel. Most recently, Mr.
Gibson has been employed as a financial advisor to telecommunications start-up
companies, playing a major role in negotiating and closing over $250 million of
debt/equity financing during 1999. He served as Vice President and Treasurer of
Brooks Fiber from that company's inception in 1993 until its acquisition by
WorldCom in 1998. Mr. Gibson oversaw all activities related to financial
operations, planning and analysis, including acquisitions, treasury, SEC
reporting and risk management. Prior to joining Brooks Fiber, Mr. Gibson served
as a finance director for Cencom Cable for five years, with responsibility for
budgeting, financial planning, accounting, payment processing and human
resources. Prior to joining Cencom Cable, Mr. Gibson was an audit manager at
Arthur Andersen & Co., gaining extensive experience in providing auditing and
business advisory services mainly to telecommunications and cable television
companies.
SHALER P. HOUSER, Senior Vice President -- Corporate Development and
Strategy of the combined company, is a co-founder, Senior Vice President of
Corporate Development and Strategy and director of TriVergent. Mr. Houser has
nine years of experience in the telecommunications industry. Prior to
co-founding TriVergent in 1997, Mr. Houser was Senior Vice President and
co-founder of Seruus Ventures, LLC. From 1991 to 1996, Mr. Houser served in
various capacities, including product
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development, business development, international development and carrier sales,
at Corporate Telemanagement Group and its successor parent company, LCI
International, both long distance companies. Shaler P. Houser is Charles S.
Houser's son.
NON-MANAGEMENT DIRECTORS
CHARLES S. HOUSER, vice chairman of the combined company and a co-founder
and chairman of the board of directors and chief executive officer of
TriVergent, has more than 17 years of experience in the telecommunications
industry as an investor and a senior manager. In 1996 and 1997, Mr. Houser was a
principal and co-founder of Seruus Ventures, LLC and Seruus Telecom Fund LP,
both venture capital firms specializing in telecommunications companies. From
1989 to 1996, Mr. Houser was chairman and chief executive officer of Corporate
Telemanagement Group, Inc., a long distance company that merged with LCI
International Inc. in 1995. From 1987 to 1989, Mr. Houser was president of The
Consilium Group, Inc., a venture capital firm. From 1983 to 1987, he was
president and in 1986 became chief executive officer of Tel/Man, Inc., a long
distance company that merged with SouthernNet, Inc., where he also served as
chief operating officer. Mr. Houser serves on the board of directors of Seruus
Ventures, LLC; Seruus Telecom Fund, L.P.; Teleco, Inc., a national
telecommunications equipment distributor and manufacturer; iBasis, Inc., an
Internet-based communications carrier; and from 1981 until March 2000, Summit
Financial Corporation, a Greenville, South Carolina-based bank holding company.
WATTS HAMRICK has been a director of TriVergent since October 1998. Mr.
Hamrick has been a senior vice president with First Union Capital Partners, an
equity and mezzanine capital investment group of First Union Corp., since March
1995. Mr. Hamrick joined First Union Capital Partners in 1988. Prior to joining
First Union Capital Partners, Mr. Hamrick was a senior tax consultant at Price
Waterhouse in New York. Mr. Hamrick was nominated to serve on TriVergent's board
by First Union Capital Partners, which is entitled to nominate one member of
TriVergent's board under TriVergent's stockholders' agreement.
MICHAEL R. HANNON, a director of Gabriel since May 2000, has been a general
partner of Chase Capital Partners, a general partnership with approximately $7.5
billion under management, since January 1988. Chase Capital Partners invests in
a wide variety of international private equity opportunities including
management buyouts, growth equity, and venture capital situations, and its chief
limited partner is The Chase Manhattan Corporation, one of the largest bank
holding companies in the United States. At Chase Capital Partners, he focuses on
the media/telecom and financial services industry. Mr. Hannon is currently a
director of Formus Communications, Entercom Communications, Financial Equity
Partners and Telecorp PCS, Inc.
WILLIAM LAVERACK, JR., a director of Gabriel since December 1998, has been
a general partner of Whitney & Co. since 1993. Previously, he was with Gleacher
& Co., Inc. and Morgan Stanley & Co., Incorporated. He is a director of TeleCorp
PCS, Inc., HOB Entertainment, Inc., PRAECIS Pharmaceuticals, Inc., NeuroMetrix,
Inc., and Ariat International, Inc.
BYRON D. TROTT, a director of Gabriel since October 1998, is a managing
director of Goldman, Sachs & Co. responsible for its Midwest Region and co-head
of its Chicago office. He joined Goldman, Sachs & Co. in 1982 and became vice
president in 1987 and a partner in 1994.
JACK TYRRELL has been a director on TriVergent's board since October 1998.
Currently a managing partner at Richland Ventures, Mr. Tyrrell has been a
founding partner of five venture capital funds since 1985. Mr. Tyrrell serves on
the boards of Genus.net, PRIMIS, Aperture Credentialing, Media1st.com,
TriVergent Communications, First Insight, Darwin Networks and National Health
Investors. Mr. Tyrrell has served on the boards of Regal Cinemas, Premier Parks,
Oxford Health Plans, Medaphis and Regent Communications. Mr. Tyrrell was
nominated to serve on TriVergent's board by Richland Ventures II, L.P., which is
entitled to nominate one member of TriVergent's board under TriVergent's
stockholders' agreement.
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EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid
during fiscal 1999 to or by TriVergent and Gabriel's chief executive officers
and the persons whose fiscal 1999 salary and bonus exceeded $100,000 and who
would have constituted the four most highly compensated executive officers of
the combined company during 1999. We refer to these officers as the "named
executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND OPTIONS AND COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) WARRANTS(#)(4) ($)
------------------ ---- --------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Robert A. Brooks....................... 1999 200,000 100,000 150,000(3) --
Chief Executive Officer of Gabriel(1)
David L. Solomon....................... 1999 -- -- 1,550,000(3) --
Chief Executive Officer of Gabriel(1)
Charles S. Houser...................... 1999 62,188 7,500 480,000(5) --
Chief Executive Officer of
TriVergent(4)
Gerard J. Howe......................... 1999 175,000 35,000 125,000(3) --
President and Chief Operating Officer
Shaler P. Houser....................... 1999 156,380 18,000 50,000(5) 4,752(6)
Senior Vice President of Corporate
Development and Strategy
Marguerite A. Forrest.................. 1999 120,000 24,000 50,000(3) --
Senior Vice President-Human Resources
and Administration and Assistant
Secretary
</TABLE>
-------------------------
(1) Robert A. Brooks served as chief executive officer of Gabriel until December
13, 1999. David L. Solomon was elected vice chairman and chief executive
officer of Gabriel effective December 13, 1999.
(2) Represents bonuses earned in the reported year, which were paid in the
following year. The payment of bonuses is at the discretion of the
compensation committee of the board of directors.
(3) Represents shares of Gabriel common stock subject to compensatory stock
options and warrants granted during 1999.
(4) Charles S. Houser joined TriVergent as chief executive officer on May 13,
1999, and the compensation disclosed is for the period from that date
through December 31, 1999.
(5) Represents shares of TriVergent common stock subject to compensatory stock
options and warrants granted during 1999.
(6) Reflects matching contributions made under TriVergent's 401(k) plan on
behalf of Mr. Houser.
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The following table sets forth information regarding option grants with
respect to common stock made by TriVergent and Gabriel to the named executive
officers during the fiscal year ended December 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
OF THAT COMPANY GRANTED TO FOR OPTION/WARRANT
UNDERLYING EMPLOYEES OF EXERCISE TERM(3)
OPTIONS/WARRANTS THAT COMPANY BASE PRICE EXPIRATION ----------------------
NAME GRANTED(#) IN 1999 ($/SH)(1) DATE(2) 5% 10%
---- ---------------- ------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
GABRIEL
Robert A. Brooks........ 150,000(4) 5.50% 2.40 12/13/09 226,402 573,747
David L. Solomon........ 1,000,000(4) 36.66% 2.40 12/13/09 1,509,347 3,824,982
550,000(5) 20.16% 3.00 12/13/09 1,037,676 2,629,675
Gerard J. Howe.......... 125,000(4) 4.58% 2.40 12/13/09 113,201 286,874
Marguerite A. Forrest... 50,000(4) 1.83% 2.40 12/13/09 75,467 191,249
TRIVERGENT
Charles S. Houser....... 400,000(6) 15.0% 3.75 8/13/09 75,000 150,000
40,000(6) 1.5% 3.75 11/13/09 7,500 15,000
40,000(6) 1.5% 3.75 12/15/09 7,500 15,000
Shaler P. Houser........ 50,000(6) 1.9% 3.75 12/15/09 9,375 18,750
</TABLE>
-------------------------
(1) The exercise base price was set at the respective board's determination of
the fair market value of common stock of Gabriel or TriVergent, as the case
may be, on the date of grant.
(2) The plans pursuant to which the options were granted provide for earlier
expiration dates upon the option holder's termination of employment.
(3) The dollar amounts under the 5% and 10% columns were calculated as required
by the rules of the Securities and Exchange Commission and, therefore, are
not intended to forecast possible future appreciation, if any, of the price
of the common stock of Gabriel, TriVergent or the combined company. The
amounts shown reflect differences between the appreciation and the exercise
price at the assumed annual rates of appreciation through the tenth
anniversary of the dates of grant.
(4) All options vest in one-third increments on the first, second and third
anniversaries of the date of grant and expire on the tenth anniversary of
the date of grant.
(5) Warrants are fully vested.
(6) All options vest with respect to 20% of the underlying shares on each of the
first five anniversaries following the grant date and expire on the tenth
anniversary of the date of grant. Pursuant to letter agreements entered into
by such officers in connection with the merger, one-third of the underlying
shares will vest on each of the first three anniversaries of the grant date.
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<PAGE> 122
The following table sets forth information regarding aggregate option
exercises during the fiscal year ended December 31, 1999 and the number and
value of exercisable and unexercisable options to purchase Gabriel common stock
or TriVergent common stock, as the case may be, held by the named executive
officers as of December 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES OF
THAT COMPANY UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED ON ---------------------------- ----------------------------
NAME EXERCISE(#) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
GABRIEL(1)
Robert A. Brooks.................... -- -- 150,000 -- --
David L. Solomon.................... -- -- 1,000,000 -- --
Gerard J. Howe...................... -- -- 125,000 -- --
Marguerite A. Forrest............... -- -- 125,000 -- --
50,000 -- --
TRIVERGENT(2)
Charles S. Houser................... -- -- 480,000 -- --
Shaler P. Houser.................... -- 160,000 690,000 $216,000 $864,000
</TABLE>
-------------------------
(1) Based on the fair market value of Gabriel's common stock on December 31,
1999 of $2.40 per share, as determined by Gabriel's board of directors,
there were no in-the-money Gabriel options at December 31, 1999.
(2) Calculated based on a price of $3.75 per share, the fair market value of
TriVergent's common stock on December 31, 1999 as determined by TriVergent's
board of directors, minus the per share exercise price, multiplied by the
number of shares underlying the option.
GABRIEL STOCK PLAN
The Gabriel Communications, Inc. 1998 Stock Incentive Plan, as amended,
provides for grants to selected employees, outside directors, consultants and
advisers of up to 9,000,000 shares of common stock subject to awards in the form
of awards of
- incentive and nonqualified stock options,
- stock appreciation rights,
- restricted stock and restricted stock units,
- performance stock and performance units,
- phantom stock, and
- stock acquired through a stock purchase program or granted under merit
awards.
As of September 27, 2000, options to purchase a total of 3,342,680 shares
at exercise prices ranging from $2.40 to $5.60 per share were outstanding, of
which options to purchase a total of 366,510 shares at $2.40 per share are
exercisable within the next 60 days. All options vest in one-third increments on
the first, second and third anniversaries of the dates of grant.
The plan is administered by Gabriel's compensation committee of its board
of directors and will remain in effect until terminated by Gabriel's board of
directors. However, no incentive stock options may be granted under the plan
after November 15, 2007. Gabriel's board, in its sole discretion, has the
authority to determine the terms and provisions of all awards under the plan,
subject to specific limitations
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<PAGE> 123
set forth in the plan and applicable law. In the event that any options or
awards granted under the plan terminate, expire or are canceled, new options or
awards may be granted with respect to the shares covered by such options or
awards. However, to the extent that options or awards granted under the plan are
exercised or become vested, the stock available for grant under the plan is
reduced.
The plan contains standard anti-dilution provisions to take into account
stock dividends, stock splits, recapitalizations, reorganizations, mergers,
split ups and similar matters. The plan also provides that in the event of a
change in control, as defined in the plan, outstanding awards may become
immediately exercisable. Moreover, the plan provides that each participant
granted an award shall sign a written agreement as set forth in the plan.
Generally, awards under the plan are not transferable except by will or by the
laws of descent and distribution. Awards under the plan are forfeited if the
participant's affiliation or employment is terminated for cause or for any
reason other than death, disability or retirement.
Incentive stock options granted under the plan are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code. These options are subject to the various provisions of the
Internal Revenue Code, including specific rules regarding the exercise price of
incentive stock options. Only employees of Gabriel may be granted incentive
stock options. Non-incentive stock options are not so limited.
Stock appreciation rights under the plan may be in tandem with an option or
may be limited stock appreciation rights that only entitle the participant to
receive a cash payment in connection with a change in control. Restricted stock
awards and units are subject to conditions, including vesting, as established by
Gabriel's board. Performance stock awards and performance units are subject to
the terms set forth by the board including the achievement of any goals
specified by the board. The plan also allows the board to establish one or more
stock purchase programs, to award stock in its discretion as a merit award and
to issue phantom stock awards in which an amount of stock or cash may be awarded
based on the value of the underlying shares, solely on earnings or appreciation,
or both.
TRIVERGENT STOCK PLAN
The TriVergent Corporation Amended and Restated Employee Incentive Plan was
most recently amended and restated on June 21, 2000. Under the plan, TriVergent
may issue stock options, bonus stock awards and restricted stock awards to its
employees and may issue non-qualified options, which are described below, to
other persons selected by the board. The plan is administered by the TriVergent
board of directors and terminates on January 12, 2008, subject to the board's
right to terminate it at an earlier date. The plan provides for a maximum of ten
million shares of TriVergent common stock to be issued thereunder. As of
September 27, 2000, TriVergent had granted options to purchase 9,960,624 shares
of common stock under the plan. No bonus stock or restricted stock awards have
been granted. In the event that any options or awards granted under the plan
terminate, expire or are canceled, new options or awards may be granted with
respect to the shares covered by these options or awards. However, to the extent
that options or awards granted under the plan are exercised or become vested,
the stock available for grant under the plan is reduced. The plan contains
standard antidilution provisions to account for stock dividends, stock splits,
recapitalizations, reorganizations, mergers, split ups and similar matters.
Options granted under the employee option plan may be either qualified
options or non-qualified options. Qualified options are options that meet the
requirements of Section 422 of the Internal Revenue Code and are also known as
"incentive stock options."
The exercise price of a qualified option granted to an individual who owns
shares possessing more than 10% of the total combined voting power of all
classes of TriVergent stock will be at least 110% of the fair market value of a
share of common stock on the date of grant. The exercise price of a qualified
option granted to an individual other than a 10% owner will be at least 100% of
the fair market value of a share of TriVergent common stock on the date of
grant, as determined by the most recent valuation of the common stock made for
general stock transaction purposes. The exercise price of a non-qualified option
will be 100% of the fair market value, determined as described above, of a share
of TriVergent common stock or, subject to the board's authority, either less or
more than fair market value, but not less than 85%
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<PAGE> 124
of the fair market value. Qualified options, bonus stock awards and restricted
stock awards may be granted only to TriVergent employees. Non-qualified options
may be granted to employees and other persons selected by the board. Of the
total options granted through September 27, 2000, 5,899,428 were qualified
options and 4,061,196 were non-qualified options.
Both qualified and non-qualified options are evidenced by written stock
option agreements in such form as may be determined by the board. The term,
vesting schedule and exercise price of stock options are determined by the
board, subject to the exercise price limitations discussed above; however,
substantially all options to date have a ten-year term and vest 20% per year
over the first five years of the term and have a fair market value exercise
price. In the event of a change in control, all outstanding options become
immediately exercisable. A change in control includes a sale of substantially
all of TriVergent's assets, a merger of TriVergent and another company where
TriVergent is not the surviving corporation, the acquisition of beneficial
ownership of more than 50% of the voting securities of TriVergent by any person
and a substantial change in board composition. However, a change in control does
not include any transactions contemplated by the merger agreement with respect
to any options or bonus or restricted stock awards granted on or after June 9,
2000. Therefore, the merger will not accelerate in the vesting of these options.
Prior to an initial public offering of TriVergent common stock, all shares
issued pursuant to the exercise of stock options are subject to TriVergent's
right to buy back such shares within six months after the optionee's employment
with TriVergent is terminated for any reason. The purchase price for the
repurchased shares is the most recent evaluation of TriVergent common stock
which has been made for general stock transaction purposes unless the board
determines that an appraisal by an independent appraiser should be made. All
shares issued pursuant to stock options are also subject to TriVergent's right
of first refusal and may not be sold, assigned or otherwise transferred unless
first offered to TriVergent on the same terms and conditions.
The TriVergent board may impose such conditions and restrictions upon the
exercise of options as it may deem advisable. However, special rules apply to
qualified options. The plan provides that if an employee dies while still a
TriVergent employee, qualified stock options granted under the plan may be
exercised after his death only to the extent that they were exercisable at death
and then for a period not to exceed the lesser of the remaining term of the
option and nine months after the employee's death. Except where employment is
terminated for reasons other than the death of the employee, qualified options
are exercisable after the employee ceases to be a TriVergent employee, for a
period that does not exceed the lesser of the remaining term of the qualified
option and 90 days following employee's termination.
Options are generally exercisable only by the employee to whom they are
granted and are not assignable other than by will or by the laws of descent and
distribution. Grants of tandem stock options are prohibited. Also, qualified and
non-qualified options may not be granted under any sort of arrangement where the
exercise of one affects the right to exercise the other.
EMPLOYMENT AGREEMENTS
GABRIEL EMPLOYMENT AGREEMENTS
Gabriel has entered into employment agreements with the following
individuals who will also serve as executive officers of the combined company:
- David L. Solomon, its Chairman and Chief Executive Officer;
- Gerard J. Howe, its President-Strategic Initiatives;
- John P. Denneen, its Executive Vice President -- Corporate Development
and Legal Affairs and Secretary;
- Marguerite A. Forrest, its Senior Vice President -- Human Resources and
Administration and Assistant Secretary; and
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<PAGE> 125
- Michael E. Gibson, its Senior Vice President and Chief Financial Officer.
The terms of these agreements will expire on December 31, 2002, with
respect to Mr. Solomon, and on varying dates ranging from August 15, 2002 to
August 15, 2003 for the other officers, unless sooner terminated or extended. As
compensation for their respective services, each officer will receive an annual
base salary at a rate determined by Gabriel's compensation committee, which may
be increased but not decreased. Each employee is also eligible for an annual
performance bonus at varying maximum percentages of his or her annual base
salary. These percentages are 100% for Mr. Solomon and range from 40% to 50% for
the other officers. During 2000, Mr. Solomon's annual bonus will be at least 50%
of his annual base salary and payable in shares of Gabriel common stock valued
at $3.00 per share. During subsequent years, his annual bonus may be paid, at
his option, in any combination of cash or shares of our common stock, provided
that the stock portion of the bonus does not exceed 50% of the bonus.
In addition, pursuant to his employment agreement, Mr. Solomon purchased
425,000 shares of our common stock at $2.40 per share. He was also granted a
warrant to purchase, at any time until December 12, 2009, 550,000 shares of
common stock at $3.00 per share and a ten year option to purchase 1,000,000
shares of common stock at $2.40 per share. Mr. Solomon's stock option vests
one-third on each of the first, second and third anniversaries of his
employment.
Mr. Solomon's employment agreement provides that, following a sale of
Gabriel or upon change of control or liquidation events during the term of his
employment and prior to December 13, 2001, in which the consideration received
by Gabriel stockholders is less than $6.00 per share, on an as-converted common
equivalent basis, Mr. Solomon may elect to terminate his employment and Gabriel
will, in such event, pay him $2,500,000. Upon termination of the employment of
any of the above-named employees, he or she will be eligible, depending on the
reason for termination, for the salary and lump sum payments, if any, described
below:
- if his or her employment is terminated by death or incapacity, the
employee will receive his or her then current annual base salary for the
remainder of the month and for an additional 12 months and a lump sum
payment of the maximum bonus for which he or she was eligible in the year
in which the termination occurred,
- if the employee is terminated without "good cause," as defined in the
agreements, he or she will receive his or her salary for the remainder of
the year and an amount equal to two times, in the case of Mr. Solomon,
Mr. Denneen and Mr. Howe, and one times in the case of the other
officers, of his or her then current annual base salary,
- if the employee is terminated upon a "change of control," as defined in
the agreements, he or she will receive an amount equal to three times, in
the case of Mr. Solomon, Mr. Denneen and Mr. Howe, and two times in the
case of the other officers, of his or her then current annual base salary
and the maximum bonus for which he or she was eligible for that year,
- if the employee is terminated with "good cause" or if the employee
resigns for serious personal reasons, he or she shall receive only the
salary and benefits accrued through the termination date,
If any such payment would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code or any interest or penalties with respect to
such tax, the employee would also be entitled to receive an additional payment,
net of income and excise taxes, to compensate him or her for such tax, interest
and penalties. In the event of a termination without "good cause" or upon a
"change of control," Gabriel would be obligated to continue the employee's
benefits for the remainder of the employment period then provided for in his or
her agreement.
TRIVERGENT EMPLOYMENT AGREEMENTS
TriVergent has entered into employment agreements with Charles S. Houser as
chief executive officer on September 17, 1999, with G. Michael Cassity as
president and chief operating officer on March 6, 2000, and with Shaler P.
Houser as senior vice president of corporate development on July 20, 1999.
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<PAGE> 126
Pursuant to these agreements, each employee is paid an initial annual base
salary, which may be increased but not decreased, a bonus at the board's
discretion and additional benefits. These agreements contain standard
confidentiality and non-disclosure provisions, and standard provisions providing
for assignment of any intellectual property created by each employee in his or
her capacity as an officer of TriVergent.
Messrs. C. Houser's and S. Houser's employment agreements have rolling
terms of two years. TriVergent may fix the term at any time. The agreement may
be terminated immediately if the employee is terminated for "cause," as defined
in the agreement. The definition of "cause" differs depending on whether it is
considered before or after a "change in control," as defined in the agreement.
After a "change in control," the standard for cause is more difficult to
achieve, and there are increased rights to cure. If the agreement is terminated
due to the employee's death or disability, he or she, or his or her estate, as
the case may be, is entitled to compensatory payments for the remainder of the
term. If TriVergent terminates the agreement prior to a "change in control" for
any reason other than for cause after it fixes the term, the employee is
entitled to receive the compensation and benefits payable under the agreement
for the remainder of the term. If the employee terminates the agreement because
TriVergent materially breaches the agreement or there is an "involuntary
termination," as defined in the agreement, he is entitled to severance payments
of 24 months, immediate vesting of his options, and other benefits. The employee
is entitled to have his severance payments grossed up for tax purposes if his
termination occurs after a "change in control."
Mr. Cassity's employment agreement will remain in effect until terminated
by
- death,
- disability,
- termination for cause, in which case TriVergent may terminate the
agreement immediately,
- resignation for "good reason," as defined in the agreement or
- termination without cause or resignation without good reason, in either
case, between 180 and 90 days prior to the third anniversary of the
agreement and each subsequent anniversary.
If the agreement is terminated due to Mr. Cassity's death or disability, he, or
his estate, is entitled to compensatory payments for one year. If Mr. Cassity
resigns for good reason before a change in control, he will receive compensatory
payments for the greater of one year or two years after the effective date. If
Mr. Cassity resigns for good reason after a change in control, he will receive
compensatory payments for the greater of one year or three years after the
effective date. In either case, he will be entitled to immediate vesting of his
options and other benefits. Mr. Cassity's employment agreement does not provide
for any tax "gross up" of severance payments if his employment is terminated
after a change in control.
Each of Messrs. C. Houser, S. Houser and Cassity has agreed that the merger
will not be treated as a "change in control" for purposes of his employment
agreement. Mr. Charles Houser has agreed to serve as Vice Chairman of the board
of directors of Gabriel following the effective time of the merger.
TRIVERGENT NONCOMPETITION AGREEMENTS
TriVergent has entered into substantially identical, standard
noncompetition agreements with substantially all of its executive officers that
preclude such officer from participating in, or in any respect being associated
with, any telecommunications business that competes with it within any
metropolitan statistical service area in which it provides services on the date
of the termination of the officer's employment. This period of noncompetition is
applicable during such officer's employment and for the two year period
following termination of his or her employment. The applicable officer may,
however, be a passive investor owning less than 5% of a competing business. The
agreement prohibits the solicitation of TriVergent's employees or customers and
contains standard confidentiality provisions with respect to proprietary and
confidential information. The agreement also contains provisions that treat as
TriVergent's property all property, including intellectual property, created by
the officer during his or her employment that relates to TriVergent's business.
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<PAGE> 127
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GABRIEL
STOCK PURCHASES
Since Gabriel's inception, some of the executive officers and directors of
Gabriel who will serve as executive officers or directors of the combined
company have purchased shares of Gabriel's common and preferred stock. Gabriel
entered into a stockholders' agreement and a registration rights agreement with
each purchaser of Gabriel stock. In addition, each employee of Gabriel who
purchased Gabriel stock is also party to a shareholders agreement by and among
Gabriel and its employee stockholders. These agreements are described in
"Description of Gabriel Capital Stock" beginning on page 134 below
The executive officers of Gabriel have made the following investments in
Gabriel:
- David L. Solomon purchased 425,000 shares of Gabriel common stock for
$2.40 per share and receive ten-year warrants to purchase 550,000 shares
of Gabriel common stock for $3.00 per share in January 2000 and purchased
and committed to purchase an aggregate of 75,000 shares of Gabriel Series
B preferred stock for $7.00 per share in April 2000;
- Gerard J. Howe purchased 450,000 shares of Gabriel common stock for $0.50
per share and received ten-year warrants to purchase 70,000 shares of
Gabriel common stock for $3.00 per share in August 1998 and purchased and
committed to purchase an aggregate of 75,000 shares of Gabriel Series B
preferred stock for $7.00 per share in April 2000;
- John P. Denneen purchased 30,000 shares of Gabriel common stock for $0.50
per share in September 1999, purchased 100,000 shares of Gabriel common
stock for $2.40 per share and received ten-year warrants to purchase
70,000 shares of Gabriel common stock for $3.00 per share in October 1999
and purchased and committed to purchase an aggregate of 75,000 shares of
Gabriel Series B preferred stock for $7.00 per share in April 2000;
- Marguerite A. Forrest purchased 300,000 shares of Gabriel common stock
for $0.50 per share and received ten-year warrants to purchase 30,000
shares of Gabriel common stock for $3.00 per share in August 1998 and
purchased and committed to purchase an aggregate of 205,514 shares of
Gabriel Series B preferred stock for $7.00 per share in April 2000; and
- Michael E. Gibson purchased 100,000 shares of Gabriel common stock for
$2.40 per share and received ten-year warrants to purchase 50,000 shares
of Gabriel common stock for $3.00 per share in May 2000.
Institutions affiliated with non-management directors of Gabriel have made
the following investments in Gabriel:
- institutions affiliated with Goldman, Sachs & Co., of which Byron D.
Trott is a managing director, purchased 840,000 shares of Gabriel common
stock for $0.50 per share in August 1998 and 6,535,621 shares of Gabriel
Series A preferred stock for $3.00 per share pursuant to Gabriel's
November 1998 securities purchase agreement and purchased and committed
to purchase an aggregate of 7,500,000 shares of Gabriel Series B
preferred stock for $7.00 per share pursuant to Gabriel's March 2000
securities purchase agreement;
- institutions affiliated with Whitney & Co., of which William Laverack Jr.
is a general partner, purchased 5,000,000 shares of Gabriel Series A
preferred stock for $3.00 per share pursuant to Gabriel's November 1998
securities purchase agreement and purchased and committed to purchase an
aggregate of 6,107,143 shares of Gabriel Series B preferred stock for
$7.00 per share pursuant to Gabriel's March 2000 securities purchase
agreement; and
- institutions affiliated with Chase Capital Partners, of which Michael R.
Hannon is a general partner, purchased 1,666,667 shares of Gabriel Series
A preferred stock for $3.00 per share pursuant to Gabriel's November 1998
securities purchase agreement and purchased and committed
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<PAGE> 128
to purchase an aggregate of 3,857,143 shares of Gabriel Series B
preferred stock for $7.00 per share pursuant to Gabriel's March 2000
securities purchase agreement.
TRIVERGENT
STOCK PURCHASES
Since TriVergent's inception, some of the executive officers and directors
of TriVergent who will serve as executive officers or directors of the combined
company have purchased shares of TriVergent's capital stock. Each purchase of
preferred stock was made pursuant to a preferred stock purchase agreement
containing representations, warranties and covenants typical of transactions of
this type. In these transactions, TriVergent and the purchasers entered into
registration rights agreements and a stockholders' agreement, the parties to
which have agreed to terminate these agreements upon completion of the merger.
In October 1997, Charles S. Houser and Shaler P. Houser purchased 1,200,000
and 1,900,000 shares of TriVergent's common stock, respectively, for $0.125 per
share. Janie P. Houser, Jennifer L. Houser, and Seruus Ventures, LLC purchased
600,000, 100,000 and 200,000 shares of TriVergent's common stock, respectively,
for $0.098 per share. Russell Powell purchased 800,000 shares of TriVergent's
common stock for $0.005 per share. Janie P. Houser is the wife of Charles S.
Houser and the mother of Shaler P. Houser. Jennifer L. Houser is the daughter of
Charles S. Houser and the sister of Shaler P. Houser. Seruus Ventures, LLC is a
Greenville, South Carolina-based venture capital firm of which Charles S. Houser
and Shaler P. Houser are principals.
In March 1998, Seruus Telecom Fund, L.P. purchased 750,000 shares of
TriVergent's common stock for $1.00 per share. Charles S. Houser and Shaler P.
Houser are principals of Seruus Capital Partners, LLC, which is the manager of
Seruus Telecom Fund, L.P.
In May 1998, Shaler P. Houser, Charles S. Houser, Seruus Telecom Fund,
L.P., the Houser Charitable Remainder Unitrust of which Charles S. Houser and
Janie P. Houser are trustees, and Jennifer L. Houser purchased 4,000, 55,114,
111,110, 44,444 and 44,446 shares of TriVergent's common stock, respectively,
for $2.25 per share.
In October 1998, TriVergent sold 2,083,334 shares of its Series A preferred
stock to each of Richland Ventures II, L.P. and First Union Capital Partners for
$2.40 per share. In December 1998, TriVergent sold Charles S. Houser, the Houser
Charitable Remainder Unitrust and Willou & Co. 41,667, 41,667 and 416,670 shares
of its Series A preferred stock, respectively, for $2.40 per share. Messrs. Jack
Tyrrell and Watts Hamrick, who will serve as directors of the combined company,
are a managing partner of Richland Ventures and a senior vice president with
First Union Capital Partners, respectively.
In July 1999, TriVergent sold Richland Ventures II, L.P., Richland Ventures
III, L.P., an affiliate of Richland Ventures II, L.P., First Union Capital
Partners, Inc., Jack Tyrrell, Charles S. Houser and the Houser Charitable
Remainder Unitrust 666,666, 2,666,667, 1,466,667, 20,000, 166,666 and 66,666
shares of its Series B preferred stock, respectively, at $3.75 per share.
In February 2000, TriVergent sold Richland Ventures II, L.P., Richland
Ventures III, L.P. and First Union Capital Partners, Inc., 588,235, 1,035,295
and 1,176,471 shares of its Series C preferred stock, respectively for $4.25 per
share.
In March 2000, TriVergent sold Jack Tyrrell and G. Michael Cassity 51,765
and 212,940 shares of its Series C preferred stock, respectively, for $4.25 per
share. Mr. Cassity will serve as president and chief operating officer of the
combined company.
In April 1998, TriVergent issued Charles S. Houser a warrant for 100,000
shares of its common stock with an exercise price of $2.25 per share as
consideration for a personal guaranty of a $1,000,000 line of credit from a
commercial bank.
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<PAGE> 129
In connection with the purchase of its Series 1999 notes, TriVergent issued
the following warrants:
- warrants for 9,000 shares of its common stock with an exercise price of
$2.00 per share to each of Charles S. Houser and the Houser Charitable
Remainder Unitrust in March 1999; and
- warrants for 18,000 shares of its common stock with an exercise price of
$2.00 per share to each of Richland Ventures II, L.P. and First Union
National Bank in April 1999.
Charles S. Houser, the Houser Charitable Remainder Unitrust, Richland
Ventures II, L.P. and First Union National Bank each purchased an aggregate
principal amount of its Series 1999 notes equal to $250,000, $250,000, $500,000
and $500,000 respectively.
RELATED PARTY TRANSACTIONS
On November 13, 1998, TriVergent entered into an arrangement with Seruus
Ventures, LLC, an investment services firm, to provide investment-related
services to TriVergent. During 1998 and 1999, TriVergent paid $13,788 and
$61,448, respectively, to Seruus Ventures under this arrangement. Charles S.
Houser and Shaler P. Houser are principals of Seruus Ventures, LLC.
In connection with G. Michael Cassity's employment, TriVergent loaned Mr.
Cassity $749,998 at an interest rate of 8.12% per year, with the principal on
such loan being due and payable on the earlier of March 6, 2003 and sixty days
after the termination of Mr. Cassity's employment with TriVergent. TriVergent,
in its sole discretion, may extend the maturity date of the note one or more
times by a period of one year. Interest is payable annually in arrears. The
proceeds of this loan were used to purchase TriVergent's preferred stock.
In June 2000, TriVergent engaged First Union Securities, Inc., an affiliate
of First Union Capital Partners, to provide financial advice in connection with
the merger. In connection therewith, TriVergent paid First Union Securities,
Inc. a fee of $400,000.
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<PAGE> 130
ACTION BY STOCKHOLDERS TO APPROVE THE MERGER
The holders of more than ninety percent of the outstanding shares of
TriVergent Series A and Series B preferred stock and more than two-thirds of the
outstanding shares of TriVergent Series C preferred stock and common stock have
agreed to consent to or vote their shares in favor of the merger. The holders of
more than two-thirds of the outstanding shares of Gabriel common and preferred
stock also have agreed to consent to or vote their shares in favor of the merger
and the amended and restated certificate of incorporation of Gabriel provided
for in the merger agreement. Under Delaware law and the terms of TriVergent's
certificate of incorporation and Gabriel's amended and restated certificate of
incorporation, these approvals are sufficient to approve the merger and the
transactions contemplated by the merger agreement. As a result, no vote or
meeting will be held in order to consider the merger, but we will circulate
consents to approve the adoption of the merger by TriVergent and Gabriel
stockholders and adoption of the amended and restated certificate of
incorporation by Gabriel stockholders.
TRIVERGENT
As of September 27, 2000, there were 12,061,658 shares of TriVergent common
stock outstanding, 4,711,672 shares of TriVergent Series A preferred stock
outstanding, 13,866,663 shares of TriVergent Series B preferred stock
outstanding and 15,776,471 shares of TriVergent Series C preferred stock
outstanding.
Adoption of the merger agreement requires the affirmative vote or consent
of the holders of at least 2/3 of the total votes entitled to be cast by holders
of TriVergent common stock and TriVergent preferred stock, voting together as a
single class. In addition, adoption of the merger agreement requires the
affirmative vote or consent of
- holders of at least 75% of the outstanding shares of TriVergent Series A
preferred stock and the consent of Richland Ventures II, L.P. and First
Union Capital Partners, Inc.,
- holders of a majority of the outstanding shares of TriVergent Series B
preferred stock, and
- holders of a majority of the outstanding shares of TriVergent Series C
preferred stock if the consideration to be received by them in the merger
is valued at greater than $7.00 per share or by holders of more than
two-thirds of the shares of TriVergent Series C preferred stock if the
consideration to be received by them in the merger is valued at less than
or equal to $7.00 per share.
Each share of TriVergent common stock and each share of TriVergent
preferred stock is entitled to one vote. Each share of TriVergent preferred
stock is entitled to one vote when voting as a separate class and is entitled to
such number of votes equal to the number of shares of TriVergent common stock
into which the share of preferred stock is then convertible when voting together
with holders of common stock. Holders of TriVergent stock at the time TriVergent
circulates consents, or receives the requisite consents, will be entitled to
consent to the merger.
Holders of a sufficient number of shares of each class of TriVergent stock
have agreed to give their written consent in favor of the adoption of the merger
agreement. As a result, no vote will be held and TriVergent will circulate
consents in order to approve the merger. YOU ARE NOT BEING ASKED TO PROVIDE A
PROXY OR CONSENT AT THIS TIME, AND YOUR VOTE IS NOT NEEDED TO APPROVE THE
MERGER.
GABRIEL
As of September 27, 2000, there were 6,048,200 shares of Gabriel common
stock outstanding, 26,850,000 shares of Gabriel Series A preferred stock
outstanding, 3,125,000 shares of Gabriel Series A-1 preferred stock outstanding
and 9,930,294 shares of Gabriel Series B preferred stock outstanding.
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<PAGE> 131
Approval and adoption of the Gabriel charter amendment and the merger
agreement requires the affirmative vote or consent of the holders of
- at least two-thirds of the outstanding shares of Gabriel common stock,
Gabriel Series A preferred stock, Gabriel Series A-1 preferred stock and
Gabriel Series B preferred stock, voting together as a class, and
- at least two-thirds of each series of Gabriel preferred stock, voting as
separate classes.
Each share of Gabriel common stock and Gabriel preferred stock is entitled
to one vote per share, and holders of Gabriel common stock and each series of
Gabriel preferred stock vote together as one class. Holders of Gabriel stock at
the time Gabriel circulates consents, or receives the requisite consents, will
be entitled to consent to the merger.
Holders of a sufficient number of shares of each class of Gabriel stock
have agreed to consent to the adoption of the Gabriel charter amendment and to
the acquisition of TriVergent by Gabriel pursuant to the merger agreement. Under
Delaware law and the provisions of Gabriel's amended and restated certificate of
incorporation, these consents are sufficient to approve and adopt the Gabriel
charter amendment and to approve the acquisition of TriVergent by Gabriel
pursuant to the merger agreement. ACCORDINGLY, YOU ARE NOT BEING ASKED TO
PROVIDE A PROXY OR CONSENT AT THIS TIME, AND YOUR VOTE IS NOT NEEDED TO APPROVE
THE CHARTER AMENDMENT OR THE MERGER.
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<PAGE> 132
VOTING SECURITIES OF GABRIEL
The following table sets forth information regarding the beneficial
ownership of Gabriel's voting securities as of September 27, 2000 by
- each of Gabriel's directors who will serve as a director of the combined
company,
- each of the named executive officers of the combined company who are
Gabriel stockholders,
- each person or entity who is known by Gabriel to beneficially own 5% or
more of Gabriel's voting securities, and
- all of Gabriel's directors and executive officers as a group.
Unless otherwise indicated below, the individuals listed below maintain a
mailing address of c/o Gabriel Communications, Inc., 16090 Swingley Ridge Road,
Suite 500, Chesterfield, Missouri 63107. Unless otherwise indicated below, to
Gabriel's knowledge, each person or group identified possesses sole voting and
investment power with respect to the shares beneficially owned by that person or
group, subject to community property laws where applicable.
The number of shares and percentages are determined on the basis of
- 6,048,200 shares of common stock,
- 26,850,000 shares of Series A preferred stock,
- 3,125,000 shares of Series A-1 preferred stock,
- 9,930,294 shares of Series B preferred stock, all outstanding as of
September 27, 2000 and
- treating shares issuable pursuant to options or warrants that are
exercisable currently or within 60 days of September 27, 2000, as owned
by the person holding those securities and as outstanding for computing
the percentage ownership of that person, but not the percentage ownership
of any other person.
As of the date of this information statement/prospectus, all shares of preferred
stock are convertible into common stock on a one-for-one basis.
<TABLE>
<CAPTION>
PERCENTAGE OF
BENEFICIAL OWNER VOTING VOTING
(INCLUDES RELATED ENTITIES) SECURITIES SECURITIES
--------------------------- ---------- -------------
<S> <C> <C>
Goldman, Sachs & Co. affiliates(1).......................... 10,006,667 21.78%
Whitney & Co.(2)............................................ 7,035,714 15.31%
Brooks Investments, L.P.(3)................................. 4,500,000 9.79%
Meritage Private Equity Fund L.P.(6)........................ 4,257,857 9.27%
The Centennial Funds(4)..................................... 3,814,286 8.30%
Telecom Partners II, L.P.(5)................................ 3,571,428 7.77%
Chase Venture Capital Associates, L.P.(7)................... 2,952,381 6.42%
David L. Solomon(8)......................................... 1,000,000 2.15%
Gerard J. Howe(9)........................................... 586,667 1.27%
Marguerite A. Forrest(10)................................... 415,172 *
William Laverack, Jr.(11)................................... 7,035,714 15.31%
Byron D. Trott.............................................. -- --
Michael R. Hannon(12)....................................... 2,952,381 6.42%
Directors and executive officers, as a group(13)............ 13,487,675 28.69%
</TABLE>
-------------------------
* Less than 1%
(1) Includes (i) 572,260 shares of common stock, 4,541,748 shares of Series A
preferred stock and 1,703,155 shares of Series B preferred stock
beneficially owned by GS Capital Partners III, L.P., (ii) 157,321 shares of
common stock, 1,248,579 shares of Series A preferred stock and 468,217
125
<PAGE> 133
shares of Series B preferred stock beneficially owned by GS Capital
Partners III Offshore, L.P., (iii) 26,419 shares of common stock, 209,674
shares of Series A preferred stock and 78,628 shares of Series B preferred
stock beneficially owned by Goldman, Sachs & Co. Verwaltungs GmbH, (iv)
64,526 shares of common stock and 512,113 shares of Series A preferred
stock beneficially owned by Stone Street Fund 1998, L.P., (v) 19,474 shares
of common stock and 154,553 shares of Series A preferred stock beneficially
owned by Bridge Street Fund 1998, L.P., (vi) 150,000 shares of Series B
preferred stock owned by Stone Street Fund 2000 LP; and (vii) 100,000
shares of Series B preferred stock beneficially owned by Bridge Street
Special Opportunities Fund 2000, LP. Goldman, Sachs & Co. maintains a
mailing address at 85 Broad Street, New York, NY 10004.
(2) Includes (i) 4,882,353 shares of Series A preferred stock and 2,035,714
shares of Series B preferred stock beneficially owned by J.H. Whitney III,
L.P., and (ii) and 117,647 shares of Series A preferred stock beneficially
owned by Whitney Strategic Partners III, L.P. Mr. William Laverack, Jr. is
a general partner of Whitney & Co. and shares but disclaims beneficial
ownership in these shares. Whitney & Co. and Mr. Laverack maintain a
mailing address at 177 Broad Street, Stamford, CT 06901.
(3) Includes (i) 2,000,000 shares of common stock, 1,333,333 shares of Series A
preferred stock and 761,905 shares of Series B preferred stock beneficially
owned by Brooks Investments, L.P., and (ii) 333,333 shares of Series A
preferred stock and 71,429 shares of Series B preferred stock beneficially
owned by RAB Partnership, L.P. Brooks Investments, L.P. and RAB
Partnership, L.P. maintain a mailing address at 16650 Chesterfield Grove
Road, S110, Chesterfield, MO 63005.
(4) Includes (i) 3,333,333 shares of Series A preferred stock beneficially
owned by Centennial Fund V, L.P., and (ii) 100,000 shares of Series A
preferred stock beneficially owned by Centennial Entrepreneurs Fund V, L.P.
and (iii) 380,943 shares of Series B preferred stock beneficially owned by
Centennial Fund V, L.P. The Centennial Funds maintains a mailing address at
1428 Fifteenth Street, Denver, Colorado 80202.
(5) Represents 3,333,333 shares of Series A preferred stock and 238,095 shares
of Series B preferred stock. Telecom Partners II, L.P. maintains a mailing
address at 4600 S. Syracuse Street, S 1000, Denver, Colorado 80237.
(6) Includes (i) 2,740,000 shares of Series A-1 preferred stock and 1,002,057
shares of Series B preferred stock beneficially owned by Meritage Private
Equity Fund L.P., (ii) 335,000 shares of Series A-1 preferred stock and
112,514 shares of Series B preferred stock beneficially owned by Meritage
Private Equity Parallel Fund L.P., and (iii) 50,000 shares of Series A-1
preferred stock and 18,286 shares of Series B preferred stock beneficially
owned by Meritage Entrepreneurs Fund, LP. Meritage Private Equity Fund,
L.P. maintains a mailing address at 1600 Wynkoop, S300, Denver, Colorado
80202. Mr. David L. Solomon is an investment director of Meritage Private
Equity Fund, L.P. and may share but disclaims beneficial ownership in these
shares.
(7) Includes (i) 1,666,667 shares of Series A preferred stock and (ii)
1,285,714 shares of Series B preferred stock. Mr. Michael R. Hannon is a
general partner of Chase Capital Partners and shares but disclaims
beneficial ownership in these shares. Chase Venture Capital Associates,
L.P. and Mr. Hannon maintain a mailing address at 380 Madison Avenue, 12th
floor, New York, NY 10017.
(8) Includes 425,000 shares of common stock and 25,000 shares of Series B
preferred stock beneficially owned by Mr. Solomon and 550,000 shares of
common stock issuable upon exercise of currently exercisable warrants. Does
not include the 3,125,000 shares of Series A-1 preferred stock or 112,514
shares of Series B preferred stock beneficially owned by Meritage Private
Equity Fund, L.P., a private investment fund for which Mr. Solomon serves
as an investment director and member of the general partner, or the
3,333,333 shares of Series A preferred stock or 761,905 shares of Series B
preferred stock beneficially owned by Brooks Investments, L.P., in which
Mr. Solomon is an investor.
(9) Includes (i) 25,000 shares of Series B preferred stock; (ii) 70,000 shares
of common stock issuable upon exercise of currently exercisable warrants;
(iii) 41,667 shares of common stock issuable upon exercise of currently
exercisable options; and (iv) 450,000 shares of common stock of which
410,000
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<PAGE> 134
shares are owned by Gerard J. Howe, 20,000 shares of which are owned by
Heather H. Howe and Thomas P. Erickson, Trustees of Catherine B. Howe
Irrevocable Trust U/T/A dated November 17, 1998 in which Gerard J. Howe may
be deemed to share investment and voting power and 20,000 shares of which
are owned by Heather H. Howe and Thomas P. Erickson, Trustees of Margaret
A. Howe Irrevocable Trust U/T/A dated November 17, 1998 in which Gerard J.
Howe may be deemed to share investment and voting power. Mr. Howe disclaims
beneficial ownership in these latter 40,000 shares.
(10) Includes shares owned by the MAF Revocable Trust and includes 30,000 shares
issuable upon exercise of currently exercisable warrants, 16,667 shares of
common stock issuable upon the exercise of currently exercisable options
and 68,505 shares of Series B preferred stock. Does not include the
3,333,333 shares of Series A preferred stock or the 761,905 shares of
Series B preferred stock beneficially owned by Brooks Investments, L.P., in
which Ms. Forrest is an investor, or the 333,333 shares of Series A
preferred stock or the 71,429 shares of Series B preferred stock owned by
RAB Partnership, in which Ms. Forrest has an interest.
(11) Includes all shares attributable to Whitney & Co on the basis that Mr.
Laverack is a general partner of Whitney & Co. See footnote 2. Mr. Laverack
disclaims beneficial ownership of those shares.
(12) Includes all shares attributable to Chase Venture Capital Associates, L.P.
on the basis that Mr. Hannon is a General Partner of Chase Capital
Partners. See footnote 7. Mr. Hannon disclaims beneficial ownership of
those shares.
(13) Includes (i) 203,333 shares of common stock issuable upon exercise of
currently exercisable options, (ii) 860,000 shares of common stock issuable
upon exercise of currently exercisable warrants, (iii) 2,270,000 shares of
common stock, (iv) 6,666,667 shares of Series A preferred stock, including
5,000,000 attributed to Mr. Laverack through Whitney & Co and 1,666,667
attributed to Mr. Hannon through Chase Venture Capital Associates, L.P.,
and (v) 3,487,675 shares of Series B preferred stock, including 2,035,714
shares attributed to Mr. Laverack through Whitney & Co. and 1,285,714
shares attributed to Mr. Hannon through Chase Venture Capital Associates,
L.P.
127
<PAGE> 135
VOTING SECURITIES OF TRIVERGENT
The following table sets forth information regarding the beneficial
ownership of TriVergent common stock, including preferred stock on an as
converted basis, as of September 27, 2000, by
- each of TriVergent's directors who will serve as a director of the
combined company,
- each of the named executive officers of the combined company who are
TriVergent stockholders,
- each person or entity who is known by TriVergent to beneficially own 5%
or more of TriVergent's voting securities, and
- all of TriVergent's directors and executive officers as a group.
Unless otherwise indicated below, each entity or person listed below
maintains a mailing address of c/o State Communications, Inc., 301 North Main
Street, Suite 2000, Greenville, SC 29601. Unless otherwise indicated below, to
TriVergent's knowledge, each person or group identified possesses sole voting
and investment power with respect to the shares beneficially owned by that
person or group, subject to community property laws where applicable.
The numbers of shares and percentages are determined on the basis of
- 12,061,658 shares of common stock,
- 4,711,672 shares of Series A preferred stock,
- 13,866,663 shares of Series B preferred stock,
- 15,776,471 shares of Series C preferred stock, all outstanding on
September 27, 2000 and
- treating shares issuable pursuant to options or warrants that are
exercisable currently or within 60 days of September 27, 2000, as owned
by the person holding those securities and as outstanding for computing
the percentage ownership of that person, but not the percentage ownership
of any other person.
<TABLE>
<CAPTION>
PERCENT OF
BENEFICIAL OWNER VOTING SECURITIES VOTING SECURITIES
---------------- ----------------- -----------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Charles S. Houser........................................... 7,527,280(1) 16.22%
G. Michael Cassity.......................................... 294,118 *
Shaler P. Houser............................................ 2,150,669(2) 4.63%
Jack Tyrrell................................................ 7,062,510(3) 15.22%
Watts Hamrick............................................... 4,744,472(4) 10.22%
ALL DIRECTORS & EXECUTIVE OFFICERS AS A GROUP (15 PEOPLE)... 23,950,318 51.60%
5% OWNERS (NOT INCLUDED ABOVE)
Houser Group................................................ 7,519,280(5) 16.20%
Moore Group................................................. 7,686,276(6) 16.56%
Richland Group.............................................. 7,062,510(7) 15.22%
First Union Group........................................... 4,744,472(8) 10.22%
Boston Millennia Group...................................... 2,760,785(9) 5.95%
Toronto Dominion Capital (USA), Inc......................... 2,352,941 5.07%
</TABLE>
-------------------------
* Denotes less than one percent.
(1) Includes shares directly owned by Charles S. Houser, 125,000 shares
issuable upon the exercise of options and warrants exercisable within 60
days of September 27, 2000, and shares that might be construed as
beneficially owned by Mr. Houser. See note 5 for a description of the
latter of these shares. Mr. Houser disclaims beneficial ownership of such
shares.
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<PAGE> 136
(2) Includes only shares directly owned by Shaler P. Houser and 320,000 shares
issuable upon the exercise of options and warrants exercisable within 60
days of September 27, 2000. See note 5 for a description of other shares
that might be construed as beneficially owned by Mr. Houser.
(3) Includes 7,062,510 shares beneficially owned by the Richland Group. See
note 7 below. Mr. Tyrrell disclaims beneficial ownership of all of these
shares.
(4) Includes 2,083,334 shares beneficially owned by First Union Merchant
Banking, 1998-II, LLC and 2,661,138 shares beneficially owned by First
Union Merchant Banking, 1999-II, LLC. Mr. Hamrick disclaims beneficial
ownership of all of these shares. See note 8 below.
(5) The following table sets forth common stock beneficial ownership
information with respect to all members of the Houser family and entities
controlled by members of the Houser family:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY
NAME RELATIONSHIP OWNED
---- ---------------------------------------- ------------
<S> <C> <C>
Charles S. Houser....................... 1,165,349
Shaler P. Houser........................ Charles S. Houser's son 2,150,669
Charles L. Houser....................... Charles S. Houser's son 1,575,000
Seruus Telecom Fund, L.P................ Charles S. and Shaler P. Houser are
principals 861,110
Janie P. Houser......................... Charles S. Houser's wife 549,098
Houser Enterprises, L.P................. Family Limited Partnership
Shaler P. Houser, general partner 360,000
Melissa Houser.......................... Charles L. Houser's wife 240,000
Seruus Ventures, LLC.................... Charles S. and Shaler P. Houser are
principals 150,000
Jennifer L. Houser...................... Charles S. Houser's daughter 92,000
Houser Charitable Remainder Unitrust.... Charles S. and Janie P. Houser are
trustees 161,777(10)
Irrevocable Trust FBO Jennifer L.
Houser................................ Trust for Charles S. Houser's daughter 50,000
Investment Co. of Florida, FBO Charles
S. Houser............................. Trust for Charles S. Houser 44,446
Mr. & Mrs. Robert L. Sims............... Charles L. Houser's parents-in-law 35,000
Charles S. Houser Family Trust Agreement
I..................................... Estate Planning Trust 13,333.33
Charles S. Houser Family Trust Agreement
II.................................... Estate Planning Trust 13,333.33
Charles S. Houser Family Trust Agreement
III................................... Estate Planning Trust 13,333.33
Nicole Houser........................... Shaler P. Houser's wife 26,000
Charles Davis Houser.................... Shaler P. Houser's minor son 6,831
Charles Davis Houser Trust.............. Trust for Shaler P. Houser's son 4,000
David R. Houser......................... Charles S. Houser's brother 5,000
John R. Houser.......................... Charles S. Houser's brother 5,000
Morton Houser........................... Charles S. Houser's brother 5,000
Sue M. Houser........................... Charles S. Houser's mother 5,000
---------
Total................................... 7,519,280
=========
</TABLE>
-------------------------
* Denotes less than one percent.
Each person listed above disclaims beneficial ownership of all shares not
shown on the table as being directly owned by that person. The number of
shares shown as beneficially owned by the Houser Charitable Remainder
Unitrust includes 9,000 shares issuable upon exercise or warrants. The
numbers of shares shown as beneficially owned by Charles S. Houser, Shaler
P. Houser and
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<PAGE> 137
Charles L. Houser include 125,000, 320,000, and 80,000 shares, respectively,
issuable upon exercise of options which are exercisable within 60 days of
September 27, 2000.
(6) Includes 1,850,981 shares owned by Moore Overseas Technology Venture Fund,
LDC, 1,850,981 owned by Moore Technology Venture Fund, LLC, 1,992,157
shares owned by Moore Global Investments, Ltd., 1,992,157 shares owned by
Remington Investment Strategies, L.P. All of the foregoing entities are
affiliates.
(7) Includes 3,701,962 shares owned by Richland Ventures III, L.P., 3,204,901
shares owned by Richland Ventures II, L.P. and 18,000 shares issuable upon
exercise of warrants held by Richland Ventures II, L.P., 71,765 shares
owned by John R. Tyrrell, 28,236 shares owned by Portia B. Ortale, 11,765
shares owned by the Laura Farish Chadwick Management Trust, 11,765 shares
owned by The Chadwick 1998 Children's Trust, 5,882 shares owned by Patrick
S. Hale, 5,882 shares owned by Mark Eric Isaacs, 1,176 shares owned by
Linda Swafford and 1,176 shares owned by Beverly Ann Schrichte. All of the
foregoing entities and individuals are affiliates.
(8) Includes 18,000 shares issuable upon exercise of warrants held by First
Union Capital Partners, Inc.
(9) Includes 606,670 shares owned by Boston Millennia Partners, 37,448 shares
owned by Boston Millennia Associates I Partnership and 26,667 owned by Leon
Seynave.
(10) Includes 9,000 shares issuable upon exercise of warrants held by Houser
Charitable Remainder Unitrust.
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<PAGE> 138
VOTING SECURITIES OF THE COMBINED COMPANY
The following table sets forth information regarding the beneficial
ownership of the combined company's voting securities as of September 27, 2000
on a pro forma basis assuming that the merger had been completed as of that date
by
- each of the persons who will serve as directors of the combined company,
- the named executive officers,
- each person or entity, to the best of Gabriel's knowledge, who will
beneficially own 5% or more of the combined company's voting securities,
and
- all of combined company's directors and executive officers as a group.
The individuals listed below maintain the mailing addresses described in
the sections captioned "Voting Securities of Gabriel" or "Voting Securities of
TriVergent," as the case may be. Unless otherwise indicated below, to Gabriel's
knowledge, each person or group identified possesses sole voting and investment
power with respect to the shares beneficially owned by that person or group,
subject to community property laws where applicable.
The percentages set forth in the table below were determined on the basis
of
- 19,401,662 shares of common stock,
- 26,850,000 shares of Series A preferred stock,
- 3,125,000 shares of Series A-1 preferred stock,
- 30,433,739 shares of Series B preferred stock,
- 5,379,831 shares of Series C-1 preferred stock,
- 15,802,428 shares of Series C-2 preferred stock,
- 17,753,359 shares of Series C-3 preferred stock,
The foregoing numbers of shares reflect
- the shares of Gabriel common and preferred stock outstanding as of
September 27, 2000,
- the shares of TriVergent common and preferred stock outstanding as of
September 27, 2000 multiplied by the exchange ratio of 1.1071,
- the additional shares of Gabriel preferred stock issuable in exchange for
shares of TriVergent preferred stock deemed to have been issued in lieu
of accrued and unpaid dividends, which we refer to in the footnotes below
as "dividend shares,"
- the additional shares of Gabriel Series B preferred stock committed to be
purchased by holders of Gabriel Series B preferred stock pursuant to the
terms of the Gabriel Series B preferred stock purchase agreement, which
shares we refer to in the footnotes below as "additional Series B
shares,"
- the additional shares of Gabriel Series B preferred stock committed to be
purchased by two of the lenders of the combined company's senior secured
credit facility, and
- shares issuable pursuant to options or warrants, including the one-year
and two-year warrants issuable pursuant to the merger agreement which we
refer to in the footnotes below as "new warrants," that are exercisable
currently or within 60 days of September 27, 2000, as owned by the person
holding those securities and as outstanding for computing the percentage
ownership of that person, but not the percentage ownership of any other
person.
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As of the date of this information statement/prospectus, all shares of preferred
stock are convertible into common stock on a one-to-one basis.
<TABLE>
<CAPTION>
BENEFICIAL OWNER PERCENTAGE OF
(INCLUDES RELATED ENTITIES) VOTING SECURITIES VOTING SECURITIES
--------------------------- ----------------- -----------------
<S> <C> <C>
Goldman, Sachs & Co. affiliates(1).......................... 17,166,154 14.20%
Whitney & Co.(2)............................................ 12,827,291 10.65%
Richland Ventures III, L.P.(3).............................. 8,752,268 7.32%
Houser Group(4)............................................. 8,375,702 7.02%
Brooks Investments, L.P.(5)................................. 6,836,850 5.73%
Meritage Private Equity Fund L.P.(15)....................... 6,940,190 5.80%
Moore Group(16)............................................. 9,621,853 8.04%
Chase Venture Capital Associates, L.P.(17).................. 6,476,965 5.41%
Charles S. Houser(6)........................................ 8,375,702 7.02%
Watts Hamrick(7)............................................ 5,857,791 4.91%
Michael R. Hannon(8)........................................ 6,476,965 5.41%
William Laverack, Jr.(9).................................... 12,827,291 10.65%
Byron D. Trott.............................................. -- --
Jack Tyrrell(10)............................................ 8,752,268 7.32%
David L. Solomon(11)........................................ 1,065,637 *
Gerard J. Howe(12).......................................... 652,304 *
Shaler P. Houser(13)........................................ 2,381,006 2.0%
Marguerite A. Forrest(14)................................... 595,030 *
G. Michael Cassity(18)...................................... 355,798 *
Directors and executive officers, as a group(19)............ 47,847,095 38.39%
</TABLE>
-------------------------
* Less than 1%
(1) See note 1 on page 125. Also includes 2,159,487 new warrants and 5,000,000
additional Series B shares.
(2) See note 2 on page 126. Also includes 1,720,148 new warrants and 4,071,429
additional Series B shares.
(3) See note 7 on page 130. Also includes 722,450 new warrants and 210,914
dividend shares.
(4) See note 5 on page 129. Also includes 32,018 new warrants and 10,232
dividend shares.
(5) See note 3 on page 126. Also includes 670,184 new warrants and 1,666,666
additional Series B shares.
(6) See note 1 on page 128. Also includes 32,018 new warrants and 10,232
dividend shares.
(7) See note 4 on page 129. Also includes 461,683 new warrants and 143,503
dividend shares.
(8) See note 12 on page 127. Also includes 953,155 new warrants and 2,571,429
additional Series B shares.
(9) See note 11 on page 127. Also includes 1,720,148 new warrants and 4,071,429
additional Series B shares.
(10) See note 3 on page 129. Also includes 722,450 new warrants and 210,914
dividend shares.
(11) See note 8 on page 126. Also includes 15,637 new warrants and 50,000
additional Series B shares.
(12) See note 9 on page 126. Also includes 15,637 new warrants and 50,000
additional Series B shares.
(13) See note 2 on page 129.
(14) See note 10 on page 127. Also includes 42,849 new warrants and 137,009
additional Series B shares.
(15) See note 6 on page 126. Also includes 968,047 new warrants and 1,714,286
additional Series B shares.
(16) See note 6 on page 130. Also includes 893,576 new warrants and 218,801
dividend shares.
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<PAGE> 140
(17) See note 7 on page 126. Also includes 953,155 new warrants and 2,571,429
additional Series B shares.
(18) Also includes 26,955 new warrants and 3,225 dividend shares.
(19) See note 13 on page 127 and TriVergent directors and executive officers as
a group on page 128. Also includes 4,006,169 new warrants, 367,874 dividend
shares and 6,929,867 additional Series B shares.
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<PAGE> 141
DESCRIPTION OF GABRIEL CAPITAL STOCK
The following is a description of the material terms of the capital stock
of Gabriel under the amended and restated certificate of incorporation of
Gabriel which will be in effect immediately after the merger is completed. The
following also describes relevant provisions of Gabriel's by-laws and the
General Corporation Law of the State of Delaware, which we refer to as Delaware
law. The terms of Gabriel's amended and restated certificate of incorporation,
Gabriel's by-laws and Delaware law are more detailed than the general
information provided below. You should carefully consider the actual provisions
of those documents. If you would like to read Gabriel's existing amended and
restated certificate of incorporation or by-laws, these documents are on file
with the SEC as exhibits to the registration statement of which this information
statement/prospectus is a part. The amended and restated certificate of
incorporation of Gabriel, as proposed to be amended, is attached as Annex B to
this information statement/prospectus. Additional information regarding
Gabriel's capital stock is contained below under the heading "Comparison of
Rights of Stockholders of Gabriel and TriVergent."
GENERAL
Gabriel's authorized capital stock will consist of 400,000,000 shares of
common stock, par value $.01 per share, and 200,000,000 shares of preferred
stock, par value $0.01 per share. Of the preferred stock,
- 26,850,000 shares will be designated as Series A preferred stock,
- 3,125,000 shares will be designated as Series A-1 preferred stock,
- 32,500,000 shares will be designated as Series B preferred stock,
- 6,000,000 shares will be designated as Series C-1 preferred stock,
- 16,500,000 shares will be designated as Series C-2 preferred stock, and
- 18,500,000 shares will be designated as Series C-3 preferred stock.
As of September 27, 2000, there were 6,048,200 shares of common stock,
26,850,000 shares of Series A preferred stock, 3,125,000 shares of Series A-1
preferred stock and 9,930,294 shares of Series B preferred stock outstanding,
all of which were fully paid and nonassessable. Gabriel is issuing the Series
C-1, C-2 and C-3 preferred stock to holders of TriVergent Series A, B and C
preferred stock, respectively, in exchange for TriVergent preferred stock in
connection with the merger.
AMENDMENTS TO EXISTING PROVISIONS OF CERTIFICATE OF INCORPORATION
In addition to designating the new Series C-1, C-2 and C-3 preferred stock
to be issued to holders of TriVergent preferred stock, Gabriel is proposing to
amend its amended and restated certificate of incorporation to
- increase the authorized amount of common stock from 200,000,000 to
400,000,000 shares and the authorized amount of preferred stock from
100,000,000 to 200,000,000 shares,
- modify the liquidation preferences of the Series A, A-1 and B preferred
stock to provide for a preferred annual rate of return of 8.0% from the
dates of original issuance in the event of liquidation of Gabriel, as
more fully described below, and
- change the per share offering price triggering the automatic conversion
provisions of the Series A, Series A-1 and Series B preferred stock into
common stock in the event of firm commitment, underwritten public
offering of common stock from $20.00 per share to $12.00 per share, in
each case with aggregate proceeds of at least $50 million, as more fully
described below.
COMMON STOCK
VOTING RIGHTS. Each holder of common stock is entitled to cast one vote for
each share held of record on all matters submitted to a vote of stockholders.
The holders of the shares of common stock, along with
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the holders of any series of preferred stock entitled to vote with the holders
of common stock, will vote together as a single class on all matters as to which
such holders are entitled to vote.
DIVIDENDS. No cash dividends may be declared or paid upon the common stock
so long as any Series A, Series A-1, Series B, Series C-1, Series C-2 or Series
C-3 preferred stock is outstanding. At such point as there are no shares of
Series A, Series A-1, Series B, Series C-1, Series C-2 or Series C-3 preferred
stock outstanding, holders of common stock will be entitled to receive dividends
or other distributions declared by the board of directors. The right of the
board of directors to declare dividends, however, is subject to the availability
of sufficient funds under Delaware law to pay dividends.
LIQUIDATION RIGHTS. In the event of the dissolution of Gabriel, common
stockholders will share ratably in the distribution of all assets that remain
after Gabriel pays all of its liabilities and satisfies its obligations to the
holders of any preferred stock, as described below.
PREEMPTIVE AND OTHER RIGHTS. Except as provided under the stockholders'
agreement described below, holders of common stock have no preemptive rights to
purchase or subscribe for any stock or other securities of Gabriel. In addition,
there are no conversion rights or redemption or sinking fund provisions with
respect to the common stock.
PREFERRED STOCK
The board of directors is authorized to issue shares of preferred stock
from time to time, without stockholder approval, in one or more series. Subject
to the requirements under Delaware law, the board has the authority to fix the
designations, preferences and rights of additional preferred stock, including
the following
- the designation and number of shares up to the maximum authorized by the
amended and restated certificate of incorporation,
- dividend rates and preferences,
- voting rights,
- conversion and exchange rights,
- terms of redemption, including redemption prices,
- sinking fund provisions,
- liquidation rights and preferences, and
- any other relative powers, preferences and rights.
Any of these terms could have an adverse effect on the availability of earnings
for distribution to the holders of Gabriel stock or for other corporate
purposes. The voting rights of holders of any preferred shares could adversely
affect the voting power of Gabriel's other stockholders and could have the
effect of delaying, deferring or impeding a change of control of Gabriel.
VOTING RIGHTS. On all matters submitted to a vote of stockholders, each
holder of Series A, Series A-1, Series B, Series C-1, Series C-2 and Series C-3
preferred stock will be entitled to cast one vote per share of common stock into
which the shares of Series A, Series A-1, Series B, Series C-1, Series C-2 and
Series C-3 preferred stock held by the holder are then convertible. The holders
of the Series A, Series A-1, Series B, Series C-1, Series C-2 and Series C-3
preferred stock and common stock will vote together as a single class, unless
otherwise required by Delaware law.
DIVIDENDS. No cash dividends may be declared or paid upon the Series A,
Series A-1, Series B, Series C-1, Series C-2 or Series C-3 preferred stock.
CONVERSION RIGHTS. Each outstanding share of the Series A, Series A-1,
Series B, Series C-1, Series C-2 and Series C-3 preferred stock will be
convertible at any time at the option of the holder into
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that number of whole shares of common stock as is equal to the stated
liquidation preference for the particular series of preferred stock divided by
an initial conversion price of
- $3.00, with respect to the Series A preferred stock,
- $4.00 with respect to the Series A-1 preferred stock,
- $7.00, with respect to the Series B preferred stock,
- $2.17 with respect to the Series C-1 preferred stock,
- $3.39 with respect to the Series C-2 preferred stock and
- $3.84 with respect to the Series C-3 preferred stock, as the case may be.
We refer to the initial conversion price and the conversion price, as it
may be adjusted in accordance with anti-dilution provisions of the preferred
stock, as the conversion price. The Series A, Series A-1, Series B, Series C-1,
Series C-2 and Series C-3 preferred stock also will be automatically converted
into common stock at the then-effective applicable conversion price in the event
of a firm commitment, underwritten public offering of common stock registered
under the Securities Act of 1933, subject to limited exceptions and to the
following conditions:
- the public offering price per share of the common stock, prior to
underwriters' discounts and expenses, must be at least $12.00, as
adjusted for any common stock dividends, combinations or splits; and
- the offering must generate aggregate proceeds to Gabriel and any selling
stockholders, prior to underwriters' discounts and expenses, of at least
$50 million.
The conversion price is subject to customary adjustments for stock
dividends, for combinations or subdivisions of common stock and as a result of
any capital reorganization or reclassification. The conversion price is also
subject to adjustment for any issuance or sale of shares of common stock or any
securities convertible into or exchangeable for shares of common stock without
consideration or for consideration per share of less than the then-existing
conversion price, except for issuances
- upon conversion of shares of Series A, Series A-1, Series B, Series C-1,
Series C-2 or Series C-3 preferred stock,
- to officers, directors, employees, consultants or advisers of Gabriel
pursuant to stock option or stock purchase plans, warrants or agreements
from time to time approved by the board of directors,
- upon the issuance or exercise of the warrants issued or to be issued
under and pursuant to the terms of merger agreement and referred to as
the "$6.00 Warrants" and the "$10.25 Warrants," as a dividend or
distribution on Series A, Series A-1, Series B, Series C-1, Series C-2 or
Series C-3 preferred stock, or
- in connection with board-approved acquisitions.
REDEMPTION PROVISIONS. Gabriel may not redeem the Series A, Series A-1,
Series B, Series C-1, Series C-2 or Series C-3 preferred stock at any time,
except pursuant to the terms of an agreement between Gabriel and the holder or
holders of such stock.
LIQUIDATION RIGHTS. In the event of the liquidation, dissolution or winding
up of the business of Gabriel, the holders of Series A, Series A-1, Series B,
Series C-1, Series C-2 or Series C-3 preferred stock will be entitled to
receive, prior to and in preference to any distribution to the holders of common
stock, a liquidation preference for each share in an amount equal to $3.00,
$4.00, $7.00, $2.17, $3.39 and $3.84 per share, respectively. These liquidation
preference amounts will be adjusted
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for any stock dividends, combinations or splits with respect to Gabriel's
capital stock. These series of preferred stock will also be entitled to the
greater of
- an amount equal to a preferred return, for each share of such series of
preferred stock, on the respective initial liquidation preference amount
of 8% per annum, with such return to begin accruing as of the original
issue date of the Series A, Series A-1 and Series B preferred stock and
as of September 1, 2000 for the Series C-1, Series C-2 and Series C-3
preferred stock, or
- an amount such holders would have received if they had converted their
preferred stock into common stock immediately prior to the liquidation.
After receiving the per share liquidation preference holders of the Series
A, Series A-1, Series B, Series C-1, Series C-2 or Series C-3 preferred stock
will have no right or claim to Gabriel's remaining assets and funds, if any.
OUTSTANDING OPTIONS AND WARRANTS
The Gabriel Communications, Inc. 1998 Stock Incentive Plan provides for
grants to selected employees, outside directors, consultants and advisers of
awards with respect to up to 10,000,000 shares of common stock in the form of
- incentive and nonqualified stock options,
- stock appreciation rights,
- restricted stock and restricted stock units,
- performance stock and performance units,
- phantom stock, and
- stock acquired through a stock purchase program or granted under merit
awards.
As of September 27, 2000, options to purchase a total of 3,342,680 shares of
common stock at exercise prices ranging from $2.40 per share to $5.60 per share
were outstanding, of which options to purchase a total of 366,510 shares at
$2.40 per share were exercisable within the next 60 days.
As of September 27, 2000, eight of Gabriel's senior executive officers held
warrants to purchase a total of 930,000 shares at an exercise price of $3.00 per
share, 670,000 of which were granted under the 1998 Stock Incentive Plan. A
total of 260,000 of these warrants expire on October 31, 2008, 70,000 of these
warrants expire on July 31, 2009, 550,000 of these warrants expire on December
12, 2009 and 50,000 of these warrants expire on May 16, 2010.
GABRIEL OPTIONS AND WARRANTS TO BE ISSUED IN THE MERGER
Gabriel will issue to each of the holders of TriVergent preferred stock,
including those converted, and each of the holders of Gabriel preferred stock
- one-year warrants to purchase shares of Gabriel common stock which will
be exercisable at an exercise price of $6.00 per share for a period of
one year following the effective time of the merger, and
- two-warrants to purchase shares of Gabriel common stock which will be
exercisable at an exercise price of $10.25 per share for a period of two
years following the effective time of the merger.
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The number of one-year warrants that a particular holder of Gabriel or
TriVergent preferred stock will be entitled to receive will be calculated based
upon each investor's total invested capital as follows:
- The number 8,000,000 will be multiplied by a fraction
- the numerator of the fraction will equal the "total invested capital" of
such holder immediately prior to the effective time of the merger. "Total
invested capital" means the total dollar amount invested in shares of
TriVergent preferred stock or Gabriel preferred stock as of the effective
time of the merger, as shown on the books and records of the TriVergent
or Gabriel, as the case may be, not including any accrued and unpaid
dividends which were invested in shares of TriVergent preferred stock
immediately prior to the effective time of the merger as provided in the
merger agreement, and
- the denominator of the fraction will equal the sum of the total invested
capital of all holders of preferred stock in both TriVergent and Gabriel
at the effective time of the merger and the "total committed capital" of
all holders of shares of Series B preferred stock of Gabriel as of the
effective time of the merger. "Total committed capital" means the total
dollar amount committed to be invested in shares of Gabriel Series B
preferred stock as of the effective time of the merger as provided in the
"Gabriel Series B Purchase Agreement," as defined in the merger
agreement. Total committed capital will not exceed $135,024,120.
The number of two-year warrants that a particular holder of Gabriel or
TriVergent preferred stock will be entitled to receive will be calculated based
upon each investor's total invested capital by multiplying 5,000,000 by the same
fraction.
The exercise of any one-year warrants by a holder thereof is deemed to be
an exercise of all of the one-year warrants and two-year warrants held by that
holder. Gabriel, however, will not be obligated to issue any of the shares of
common stock that may be purchased upon such deemed exercise of the one-year and
two-year warrants until the holder has fully complied with the terms and
conditions of the warrant agreement, including, but not limited to, the full
payment of the purchase price prior to the expiration date of the warrants.
STOCKHOLDERS' AGREEMENT
All Gabriel stockholders are parties to, and all holders of TriVergent
stock who receive Gabriel stock in the merger will become parties to, a
stockholders' agreement by and among Gabriel and its stockholders. The
stockholders' agreement provides the holders rights and sets forth restrictions
on their shares. These rights and restrictions will exist until Gabriel
completes an initial public offering pursuant to which all shares of its
preferred stock are automatically converted into shares of Gabriel common stock
pursuant to the terms of its amended and restated certificate of incorporation.
A copy of the stockholders' agreement has been filed with the SEC as an exhibit
to the registration statement of which this information statement/prospectus is
a part.
PREEMPTIVE RIGHTS. The stockholders' agreement affords preemptive rights to
the holders of Gabriel's common stock and preferred stock. Subject to
exceptions, if Gabriel issues or sells any equity securities, or securities
convertible into or containing any options or rights to acquire any equity
securities, Gabriel will first offer to sell to the stockholders who are parties
to the agreement an aggregate of 80% of those securities. Within 35 days of
receiving notice of such offer from Gabriel, each stockholder may then purchase
an amount of the offered securities based on the percentage of all outstanding
stock of Gabriel then held by the stockholder, on a fully diluted basis. Each
stockholder will be entitled to purchase all or part of the offered securities
at the same price and on the same terms as the securities are offered to any
other person. If the stockholders do not fully subscribe to all of the offered
securities, then Gabriel will reoffer the unsubscribed securities to the
stockholders who have elected to purchase their full allotment and who elect to
purchase any of such securities within 10 days of receiving notice of such
reoffer. After the expiration of the 35-day period and, if applicable, the
10-day period, Gabriel may sell any
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unsubscribed securities to other purchasers on terms no more favorable than
those offered to the stockholders.
RESTRICTIONS ON TRANSFER. In the event a holder of preferred stock desires
to sell or otherwise transfer any of its shares of preferred stock or any shares
of stock issued upon conversion of or with respect to such stock, the selling
stockholder must first offer the shares to Gabriel and the other stockholders.
If terms cannot be agreed upon with Gabriel or the other stockholders in 30
days, the selling stockholder may then offer the shares to a third party, but at
terms no less favorable to the selling stockholder than those terms offered to
Gabriel and the other stockholders. Such restrictions will not apply to
transfers to "affiliates," transfers pursuant to a "public sale" or a "capital
transaction," as each of these terms is defined in the stockholders agreement,
or transfers pursuant to a distribution to a stockholder's partners, members or
stockholders.
In the event that any stockholder or group of stockholders elects to sell
51% or more of the stock then issued and outstanding and has received a bona
fide written offer for the purchase of such stock, the stockholder or group of
stockholders must notify Gabriel and the other stockholders in writing of its
intention to sell. Each other stockholder may elect to participate in the
intended sale by delivering written notice to the selling stockholder or group
of stockholders and Gabriel not more than 25 days after the original notice from
the selling stockholder(s). Each selling stockholder and participating
stockholder will be entitled to sell its pro rata portion of the number of
shares to be purchased, based upon the number of shares owned by all of the
selling and participating stockholders, on the same terms and at the same price
offered to the selling stockholder(s).
SUPERMAJORITY VOTE REQUIREMENT. The affirmative vote of the holders of
66 2/3% of the outstanding common stock and preferred stock of Gabriel, voting
as a single class, is required for the authorization of any additional class of
capital stock or an increase in the number of shares of authorized capital
stock. This supermajority vote is also required for approval of the sale of
Gabriel, whether by merger, consolidation, sale of stock or assets or otherwise.
REGISTRATION RIGHTS AGREEMENT
All Gabriel stockholders are parties to, and all holders of TriVergent
stock who receive Gabriel stock in the merger will become parties to, a
registration rights agreement by and among Gabriel and its stockholders.
Pursuant to the registration rights agreement, holders of common and preferred
stock have rights to register under the Securities Act the common stock they own
or which are issuable upon conversion of their shares of preferred stock. A copy
of the registration rights agreement has been filed with the SEC as an exhibit
to the registration statement of which this information statement/prospectus is
a part.
DEMAND REGISTRATION. Holders of not less than 20% of the total number of
outstanding shares of preferred stock or common stock, including common stock
issuable upon conversion of preferred stock or issuable upon the exercise of any
outstanding warrants or options, may demand that Gabriel register the resale of
the number of shares of stock that holders then desire to sell. Holders may make
this demand at any time after the earlier of November 18, 2002 or the effective
date of Gabriel's initial public offering of common stock. In any request for a
demand registration prior to Gabriel's initial public offering, the proposed
public offering price must be at least $15.00 per share and the proposed
aggregate proceeds to the stockholders and Gabriel must be at least $30,000,000.
In addition, at such time as we are eligible to utilize SEC Form S-3 or any
successor form thereto, holders of not less than 10% of the total number of
outstanding shares of Gabriel's preferred and common stock, including common
stock issuable upon conversion of preferred stock or issuable upon the exercise
of any outstanding warrants or options, may demand that Gabriel register the
resale of the number of shares of its common stock that such holders then desire
to sell on SEC Form S-3 or any successor form. In any request for a demand
registration on SEC Form S-3 or any successor form thereto, the proposed
aggregate public offering price must be at least $5 million.
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PIGGYBACK REGISTRATION. If Gabriel proposes to register any of its equity
securities or securities convertible into equity securities under the Securities
Act of 1933, other than a registration for an employee plan or an acquisition,
the holders of the outstanding preferred stock and common stock will be entitled
to notice of the proposed registration and the opportunity to include a resale
of their shares of common stock in the registration. The holders of preferred
stock must convert their shares of preferred stock to common stock prior to the
effectiveness of the registration.
RESTRICTIONS. In the event the managing underwriter of any underwritten
offering initiated by Gabriel for its own account determines that the amount of
stock included in any such registration should be limited, the number of shares
included by holders may be limited to the amount determined by the managing
underwriter. The registration rights agreement contains provisions restricting
sales of any equity securities of Gabriel, except securities sold as part of the
offering, during the period commencing on the seventh day prior to, and ending
on the ninetieth day, or later, if so required by the managing underwriter,
following the effective date of any underwritten offering.
EXPENSES AND INDEMNIFICATION. The registration rights agreement requires
Gabriel, in connection with the first two demand registrations and each
piggyback registration, to pay all registration and filing fees and expenses,
printing expenses, fees and disbursements of counsel for Gabriel, one counsel
representing all of the holders of the stock included in the registration and
the accountants for Gabriel and some other expenses. The registration rights
agreement also contains customary cross-indemnification by Gabriel and the
holders of the stock included in the registration for liabilities arising under
the Securities Act of 1933 as a result of any registration.
EMPLOYEE SHAREHOLDERS AGREEMENT
All employees of Gabriel who own Gabriel common stock are parties to, and
TriVergent employees who receive Gabriel common stock in the merger will become
parties to, a shareholders agreement, by and between Gabriel and the
shareholders named therein. This agreement governs the transfer of the
shareholders' shares, the re-purchase by Gabriel of Gabriel shares and contains
confidentiality and non-solicitation provisions. A copy of the shareholders
agreement has been filed with the SEC as an exhibit to the registration
statement of which this information statement/prospectus is a part.
RESTRICTIONS ON TRANSFER. No shareholder who is party to the shareholders
agreement may voluntarily transfer shares of Gabriel common stock until Gabriel
has issued an aggregate of $10 million in shares of common stock. After this
threshold is met, to sell shares of common stock to a party other than Gabriel,
a shareholder must give 30 days written notice. Gabriel will then have a 60 day
option to purchase all of the shares, and after this period, the other common
shareholders will have a 90 day option to purchase a proportionate number of all
of the shares offered. The shareholders may transfer their shares to or for the
benefit of family members if the board of directors approves, the consideration
does not exceed the original payment for the shares, and other conditions are
met.
Upon an involuntary transfer of a shareholder's shares, i.e. property
division in divorce, distribution by bankruptcy trustee, etc., Gabriel and the
remaining shareholders will have a 70-day option to purchase all, but not less
than all, of the shares transferred. The purchase price for the shares pursuant
to an option granted upon an involuntary transfer will be the lesser of
- the fair market value,
- the latest price per share at which the shares were traded in an
arm's-length transaction, or
- the price at which the shares are being transferred.
If neither Gabriel nor the common shareholders choose to exercise their options
described above, the preferred shareholders will have a 10-day option to
purchase all of the shares subject to the option.
TERMINATION OF EMPLOYMENT. Upon the death of a shareholder, the
shareholder's estate has a 180 day option to sell, and Gabriel has a 180 day
option to buy, all of the deceased shareholder's shares. Upon the disability of
a shareholder, the shareholder has the option to sell, and Gabriel has the
option to buy, all of
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the disabled shareholder's shares. If the shareholder's estate or the disabled
shareholder exercises the option on the same day as Gabriel, Gabriel's option
controls.
The purchase price for the shares pursuant to an option granted upon death
or disability will be
- for the shareholder's or shareholder's estate's option to sell, the
greater of the fair market value, as determined by the board of
directors, or the latest price per share at which the shares were traded
in an arm's-length transaction, and
- for Gabriel's option to purchase, the appraised value of Gabriel divided
by the number of issued and outstanding shares owned by the parties to
the agreement.
Upon the termination of an employee shareholder's employment for any reason
other than death or permanent disability, Gabriel will have the option to
purchase all of the shareholder's shares. The purchase price for the shares will
be
- upon termination for cause, the lesser of the fair market value, as
determined by the board of directors, or the book value per share of
Gabriel as determined as of the end of the prior fiscal year, and
- upon any other termination of employment, the greater of the fair market
value, as determined by the board of directors, or the latest price per
share at which shares were traded in an arm's length transaction.
CONFIDENTIALITY AND NONCOMPETITION PROVISIONS. During the period during
which a party to the shareholders agreement is a shareholder and for two years
following the date on which the shareholder ceases to own Gabriel stock, the
shareholder will not divulge any confidential information to anyone or use this
confidential information to compete with Gabriel. During this same period, no
shareholder may knowingly solicit any material client or customer of Gabriel for
the provision of competitive local communications services. In addition, no
shareholder may solicit for employment any Gabriel employee during the period
which the shareholder owns any Gabriel stock.
CLASSIFIED BOARD OF DIRECTORS AND OTHER ANTI-TAKEOVER CONSIDERATIONS
Gabriel's by-laws provide for a classified board of directors. One-third of
the directors will be elected at each annual meeting of stockholders to serve
for three-year terms. As a result, at least two annual meetings of shareholders
may be required for the shareholders to change a majority of Gabriel's board of
directors. Because the stockholders never elect a majority of the board members
at one time, the classified board could delay or prevent the change in control
or make removal of Gabriel's management more difficult. In addition, Gabriel's
amended and restated certificate of incorporation allows its board to issue,
without stockholder approval, preferred stock with terms set by the board. The
preferred stock could be issued quickly with terms that delay or prevent the
change in control or make removal of Gabriel's management more difficult.
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COMPARISON OF RIGHTS OF STOCKHOLDERS
OF GABRIEL AND TRIVERGENT
Upon completion of the merger, TriVergent stockholders will become holders
of Gabriel stock and their rights will be governed by the General Corporation
Law of the State of Delaware, which we refer to as Delaware law, and Gabriel's
amended and restated certificate of incorporation and by-laws. The rights of
TriVergent stockholders are now governed by the Delaware law and TriVergent's
certificate of incorporation and by-laws.
The following is a description of the material differences between the
rights of stockholders of Gabriel and TriVergent. TriVergent stockholders should
read carefully the relevant provisions of Delaware law, Gabriel's amended and
restated certificate of incorporation and by-laws, and TriVergent's certificate
of incorporation and by-laws.
CAPITALIZATION
GABRIEL
Gabriel's authorized capital stock is described above under "Description of
Gabriel Capital Stock," beginning on page 134.
TRIVERGENT
As of August 30, 2000, the date on which TriVergent was reincorporated as a
Delaware corporation, and as of September 27, 2000, the total number of
authorized shares of capital stock of TriVergent consists of 100,000,000 shares
of common stock, par value $0.0001 per share, and 50,000,000 shares of preferred
stock, par value $0.0001 per share, of which 5,500,000 shares have been
designated as Series A convertible preferred stock, 15,000,000 shares have been
designated as Series B convertible preferred stock and 16,500,000 shares have
been designated as Series C convertible preferred stock.
VOTING RIGHTS
GABRIEL
Each holder of common stock is entitled to cast one vote for each share
held of record on all matters submitted to a vote of shareholders, including the
election of directors. Holders of common stock have no cumulative voting rights.
Each holder of preferred stock is entitled to cast one vote for each share of
common stock into which such holder's preferred stock may be converted.
TRIVERGENT
Each holder of common stock is entitled to cast one vote for each share
held of record on all matters submitted to a vote of stockholders, including the
election of directors. Holders of common stock have no cumulative voting rights.
Each holder of preferred stock is entitled to cast one vote for each share of
common stock into which such holder's preferred stock may be converted.
NUMBER AND ELECTION OF DIRECTORS
Under Delaware law, directors are elected at each annual meeting of
stockholders unless the certificate of incorporation or by-laws provide
otherwise, or if their terms are staggered. The certificate of incorporation may
authorize the election of directors by one or more classes or series of shares,
and the certificate of incorporation or by-laws may provide for staggered terms
for directors. Under Delaware law, stockholders do not have cumulative voting
rights for the election of directors unless the certificate of incorporation so
provides.
GABRIEL
Under Gabriel's by-laws, the number of members of the board of directors of
Gabriel is fixed at nine. Under Gabriel's certificate of incorporation and
by-laws, at each annual meeting of stockholders, the
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successors of the class of directors whose term expires at the meeting will be
elected to hold office for a term expiring at the annual meeting of stockholders
held in the third year following the year of their election.
Gabriel's certificate of incorporation does not provide for cumulative
voting. Gabriel's certificate of incorporation and by-laws provide for a
staggered board of directors consisting of three classes of directors
TRIVERGENT
Under TriVergent's certificate of incorporation, the number of members of
the board of directors of TriVergent is initially fixed at nine but may be
increased or decreased by a resolution adopted by a majority of the board,
provided that there must not be more than 24 nor less than three. Directors are
elected by a plurality of all votes voting as a single class at each annual
meeting of stockholders. TriVergent's certificate of incorporation does not
provide for cumulative voting.
VACANCIES ON THE BOARD OF DIRECTORS
Under Delaware law, unless the certificate of incorporation or by-laws
provide otherwise, vacancies on the board of directors may be filled by the
stockholders or the directors.
GABRIEL
Gabriel's certificate of incorporation and by-laws provide that vacancies
and newly created directorships resulting from an increase in the authorized
number of directors will be filled by the holders of the majority of stock
entitled to vote for the election of directors or by the affirmative vote of a
majority of the remaining directors then in office, even if less than a quorum,
or by a sole remaining director so elected, except as may be required by law. A
director elected to fill a vacancy or newly created directorship will serve
until the next annual meeting of stockholders and until such director's
successor has been elected and qualified.
TRIVERGENT
TriVergent's certificate of incorporation provides that, except as
otherwise provided by law, newly created directorships resulting from an
increase in the authorized number of directors or vacancies on the board may be
filled only with a majority of the directors then in office, though less than a
quorum, or by the sole remaining director.
REMOVAL OF DIRECTORS
Under Delaware law, any director may be removed with or without cause by
the affirmative vote of the holders of a majority of stock. But, if the board is
classified and the certificate of incorporation does not otherwise provide,
shareholders may remove directors only for cause. In addition, if the
corporation has cumulative voting and less than the entire board is to be
removed, no director may be removed without cause if the votes against the
director's removal would be enough to elect him if then cumulatively voted at an
election of the board.
GABRIEL
Gabriel's by-laws provide that any director may be removed from office with
or without cause by the affirmative vote of the holders of a majority of the
stock of Gabriel entitled to vote in the election of directors, voting together
as a single class.
TRIVERGENT
TriVergent's certificate of incorporation states that directors may only be
removed for cause by at least 66 2/3% of the outstanding stock of TriVergent
entitled to vote in the election of directors, voting together as a single
class.
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AMENDMENTS TO CHARTER
Under Delaware law, an amendment to the certificate of incorporation of a
corporation requires the approval of the board of directors and the approval of
the holders of a majority of the outstanding stock entitled to vote upon the
proposed amendment. The holders of the outstanding shares of a class are
entitled to vote as a separate class on a proposed amendment that would
- increase or decrease the aggregate number of authorized shares of such
class,
- increase or decrease the par value of the shares of such class, or
- alter or change the powers, preferences or special rights of the shares
of such class, so as to affect them adversely.
If any proposed amendment would alter or change the powers, preferences or
special rights of one or more series of any class so as to affect them
adversely, but would not so affect the entire class, then only the shares of the
series so affected by the amendment will be considered a separate class.
GABRIEL
Under Gabriel's certificate of incorporation, the affirmative vote of
66 2/3% of outstanding shares entitled to vote, voting together as a single
class, is required for any amendment of provisions of the certificate of
incorporation relating to the terms of the common and preferred stock which is
inconsistent with the current terms. In addition, Gabriel's certificate of
incorporation provides that the number of authorized shares of common stock may
be increased or decreased by the affirmative vote of the holders of a majority
of the outstanding shares entitled to vote, voting together as a single class.
TRIVERGENT
Under TriVergent's certificate of incorporation, the affirmative vote of
66 2/3% of outstanding shares entitled to vote, voting together as a single
class, is required to amend or repeal any provision of the certificate of
incorporation relating to the terms of the common and preferred stock which are
inconsistent with the current terms. Holders of common stock are not entitled to
vote on any amendment to the certificate of incorporation that relates solely to
the terms of the preferred stock.
AMENDMENTS TO BY-LAWS
Under Delaware law, unless a corporation's certificate of incorporation
provides otherwise, the stockholders have the power to adopt, amend or repeal
the by-laws.
GABRIEL
Gabriel's certificate of incorporation allows the directors and
stockholders to amend or repeal the by-laws, subject to the rights of the
stockholders to adopt by-laws and to amend or repeal by-laws made by the board
of directors.
TRIVERGENT
Under TriVergent's certificate of incorporation, the affirmative vote of
66 2/3% of outstanding shares entitled to vote, voting together as a single
class, and a majority of the directors, is required to amend or repeal the
by-laws, subject to the rights of the stockholders to adopt by-laws and to amend
or repeal by-laws made by the board of directors.
SHAREHOLDER ACTION
Delaware law provides that, unless otherwise provided in the certificate of
incorporation, any action that could be taken by the stockholders at a meeting
may be taken without a meeting if a consent or consents in writing, setting
forth the action taken, is signed by the holders of record of outstanding stock
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having at least the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote on the
matter were present and voted. Neither Gabriel's nor TriVergent's certificate of
incorporation provides otherwise.
SPECIAL STOCKHOLDER MEETINGS
Under Delaware law, a special meeting of the stockholders may be called by
the board of directors or by other persons authorized by the certificate of
incorporation or the by-laws.
GABRIEL
Gabriel's by-laws provide that special meetings of the stockholders may be
called by any two members of the board of directors or by the chairman of the
board of directors.
TRIVERGENT
TriVergent's certificate of incorporation provides that special meetings of
the stockholders of TriVergent may be called only by the board of directors
pursuant to a resolution approved by a majority of the total number of directors
which TriVergent would have if there were no vacancies.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
Delaware law provides that a certificate of incorporation may contain a
provision eliminating or limiting the personal liability of directors to the
corporation or its stockholders for monetary damages for breach of a fiduciary
duty as a director, except no provision in the certificate of incorporation can
eliminate or limit the liability of a director
- for any breach of a director's duty of loyalty to the corporation or its
stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- statutory liability for unlawful payment of dividends or unlawful stock
purchase or redemption, or
- for any transaction from which the director derived an improper personal
benefit.
GABRIEL AND TRIVERGENT
Each of Gabriel's amended and restated certificate of incorporation and
TriVergent's certificate of incorporation provides that, to the fullest extent
permitted by law, no director will be personally liable to the respective
company or its stockholders for or with respect to any acts or omissions in the
performance of his or her duties as a director of the company.
INDEMNIFICATION OF DIRECTORS
Under Delaware law, a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any proceeding, other than an
action by or on behalf of the corporation, because the person is or was a
director, against liability incurred in connection with the proceeding if
- the director acted in good faith and in a manner the director reasonably
believed to be in the best interests of the corporation, and
- with respect to any criminal action or proceeding, had no reasonable
cause to believe the director's conduct was unlawful.
Under Delaware law, a corporation may not indemnify a director in
connection with any proceeding in which the director has been adjudged to be
liable to the corporation unless and only to the extent that the court in which
the proceeding was brought determines that, in view of all the circumstances of
the case, the director is fairly and reasonably entitled to indemnity for such
expenses which the court deems proper.
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Delaware law provides that any indemnification for a director, unless
ordered by a court, is subject to a determination that the director has met the
applicable standard of conduct. The determination will be made
- by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum, or
- if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or
- by the stockholders.
Under Delaware law, a corporation may advance expenses before the final
disposition of a proceeding and the director undertakes to repay the amount if
it is ultimately determined that the director is not entitled to
indemnification. These expenses incurred by former directors may be paid upon
the terms and conditions, if any, as the corporation deems appropriate.
Under Delaware law, to the extent that a present or former director of a
corporation has been successful on the merits or otherwise in defense of the
proceeding, that person must be indemnified against expenses actually and
reasonably incurred in connection with any claim.
Delaware law gives a corporation the power to purchase and maintain
insurance on behalf of any director against any liability asserted against, and
incurred in his or her capacity as a director, whether or not the corporation
would have the power to indemnify the director against this liability under
Delaware law.
GABRIEL AND TRIVERGENT
Gabriel's amended and restated certificate of incorporation and
TriVergent's certificate of incorporation provide that each will indemnify their
directors to the fullest extent allowed by law. Gabriel's amended and restated
certificate of incorporation recognizes this right as a contract right that may
be enforced in any manner desired by the directors.
DIVIDENDS
Under Delaware law, dividends may be declared and paid upon stock so long
as the corporation's capital is not less than the capital represented by the
issued and outstanding stock of all classes with a distribution reference.
GABRIEL
No cash dividends may be declared and paid upon Gabriel common stock so
long as any Gabriel preferred stock is outstanding. Thereafter, cash dividends
may be declared and paid upon the common stock in such amounts and at such times
as the board of directors may determine subject to the availability of
sufficient funds under Delaware law to make distributions to its stockholders.
Holders of Gabriel preferred stock are not entitled to receive cash dividends.
Gabriel has never paid any dividends on its common or preferred stock and does
not anticipate paying dividends in the foreseeable future.
TRIVERGENT
Under TriVergent's certificate of incorporation, holders of common stock
are entitled to dividends payable in cash, capital stock or otherwise if
declared by the TriVergent board and subject to the availability of sufficient
funds as required under Delaware law to make distributions to its stockholders.
APPRAISAL RIGHTS
Under Delaware law, a stockholder of a Delaware corporation is generally
entitled to demand an appraisal and to obtain payment of the fair value of his
or her shares in the event of a merger or
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consolidation in which the corporation is to be a party. This right to demand an
appraisal does not apply to holders of shares of any class or series of stock
which are
- shares of a surviving corporation and if a vote of the stockholders of
that corporation is not necessary to authorize the merger or
consolidation,
- listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., such as The Nasdaq National
Market, or
- held of record by more than 2,000 holders.
Appraisal rights are available for holders of shares of any class or series
of stock of a Delaware corporation if the holders are required by the terms of
the merger or consolidation agreement to accept in exchange for their stock
anything except
- shares of stock of the corporation surviving or resulting from the merger
or consolidation,
- shares of stock of any other corporation which, at the effective time of
the merger or consolidation, will be listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, such as The Nasdaq National Market, or held of record by more
than 2,000 holders,
- cash instead of fractional shares of the corporations described above, or
- any combination of the shares of stock and cash instead of fractional
shares described above.
PREEMPTIVE RIGHTS
Delaware law does not provide for preemptive rights to acquire a
corporation's unissued stock, but preemptive rights may be provided to
stockholders in a corporation's certificate of incorporation.
GABRIEL AND TRIVERGENT
Neither Gabriel's amended and restated certificate of incorporation nor
TriVergent's certificate of incorporation provides for preemptive rights except
for those that may exist by agreement among stockholders of either company.
CONVERSION
Holders of Gabriel common stock and TriVergent common stock have no rights
to convert their shares into any other securities.
PREFERRED STOCK
Pursuant to the merger, shares of the TriVergent preferred stock will be
exchanged for shares of the Gabriel preferred stock. The terms of the Gabriel
shares of preferred stock will have terms substantially identical to those of
the other series of Gabriel preferred stock, except as to the respective
liquidation preferences and conversion prices of each such series. The terms of
the Gabriel preferred stock are summarized above under "Description of Gabriel
Capital Stock" beginning on page 134.
SHAREHOLDER SUITS
Under Delaware law and applicable court decisions, a stockholder may file a
lawsuit on behalf of the corporation. Delaware law provides that a stockholder
must state in the complaint that he or she was a stockholder of the corporation
at the time of the transaction of which he or she complains. However, no action
may be brought by a stockholder unless he first seeks remedial action on his
claim from the corporation's board of directors, unless the demand for redress
is excused.
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The board of directors may appoint an independent litigation committee to
review a stockholder's request for a derivative action, and the litigation
committee, acting reasonably and in good faith, can terminate the stockholder's
action subject to a court's review of the committee's independence, good faith
and reasonable investigation.
Under Delaware law, the court in a derivative action may apply a variety of
legal and equitable remedies on behalf of the corporation that vary depending on
the facts and circumstances of the case and the nature of the claim brought.
As noted above, Delaware law contains provisions allowing a corporation,
through a provision in its restated certificate of incorporation, to limit or
eliminate the personal liability of a director to the corporation or its
stockholders for breach of a fiduciary duty as a director, except that the
provision cannot eliminate or limit the liability of a director in some
circumstances, as described above under "-- Limitation of Personal Liability of
Directors" beginning on page 145.
VOTE ON EXTRAORDINARY CORPORATE TRANSACTIONS
Under Delaware law, mergers or consolidations or sales or exchanges of all
or substantially all of a corporation's assets, require the affirmative vote of
the board of directors, except in limited circumstances. In addition, the
affirmative vote of a majority of the outstanding stock of the corporation
entitled to vote on the matter may be required. Stockholder consent is not
required under the following circumstances:
- for a corporation which survives a merger and does not issue in the
merger more than 20% of its outstanding shares immediately prior to the
merger,
- the merger agreement does not amend in any respect the survivor's
certificate of incorporation,
- each share of the surviving corporation outstanding immediately prior to
the merger remains an identical outstanding share of the surviving
corporation after the merger, and
- stockholder approval is not required by the survivor's certificate of
incorporation; and
- for either corporation where one corporation owns 90% of each class of
outstanding stock of the other corporation.
BUSINESS COMBINATION RESTRICTIONS
Gabriel and TriVergent are subject to the anti-takeover provisions in
Delaware law. The anti-takeover provisions prohibit business combinations
between a Delaware corporation and an interested stockholder, as described
below, within three years of the time the interested stockholder became an
interested stockholder unless:
- before that time, the board of directors approved either the business
combination or the transaction in which the interested stockholder became
an interested stockholder;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the stockholder owned at least 85% of
the voting stock of the corporation, excluding shares held by directors
who are also officers of the corporation and by employee stock ownership
plans that do not permit employees to determine confidentially whether
shares held by the plan will be tendered in a tender or exchange offer;
or
- on or following that time, the business combination is approved by the
board of directors and the business combination transaction is approved
by the holders of at least 66 2/3% of the outstanding voting stock of the
corporation not owned by the interested stockholder.
The business combination restrictions described above do not apply if:
- the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by the antitakeover
provisions in Delaware law;
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- the holders of a majority of the voting stock of the corporation approve
an amendment to its certificate of incorporation or by-laws expressly
electing not to be governed by the antitakeover provisions, which
election will be effective 12 months after the amendment's adoption and
will not apply to any business combination with a person who was an
interested stockholder at or prior to the time the amendment was
approved; or
- the corporation does not have a class of voting stock that is listed on a
national securities exchange, authorized for quotation on The Nasdaq
National Market, or owned by more than 2,000 stockholders.
The anti-takeover provisions do not apply to a business combination that:
- is proposed after the public announcement of, and before the consummation
or abandonment of
- a merger or consolidation of the corporation,
- a sale of 50% or more of the aggregate market value of the assets of the
corporation and its subsidiaries determined on a consolidated basis or
the aggregate market value of all outstanding shares of the corporation,
or
- a tender or exchange offer for 50% or more of the outstanding shares of
the corporation; and
- is with a person who either was not an interested stockholder during the
previous three years or who became an interested stockholder with the
approval of the board of directors; and
- is approved by a majority of the current directors who were also
directors before any person became an interested stockholder during the
previous three years.
An "interested stockholder" generally is defined as a person that owns 15% or
more of the corporation's outstanding voting stock and the affiliates and
associates of that person.
The term "business combination" includes the following transactions with an
interested stockholder
- a merger or consolidation of the corporation with an interested
stockholder,
- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, except proportionately as a stockholder of the corporation,
of assets of the corporation or its subsidiaries having an aggregate
market value equal to 10% or more of either the aggregate market value of
all assets of the corporation and its subsidiaries determined on a
consolidated basis or the aggregate market value of all the outstanding
stock of the corporation,
- any transaction which results in the issuance or transfer by the
corporation or any of its subsidiaries of stock of the corporation or the
subsidiary to the interested stockholder, except for transactions
involving the exercise, conversion or exchange of securities outstanding
before the interested stockholder became an interested stockholder and
other transactions which do not increase the interested stockholder's
proportionate share of any class or series of the corporation's stock,
- any transaction involving the corporation or any of its subsidiaries
which increases the proportionate share of any class or series of stock,
or securities convertible into the stock of any class or series, of the
corporation or any subsidiary which is owned by the interested
stockholder, except as a result of immaterial changes due to fractional
share adjustments or as a result of any purchase or redemption of any
shares of stock not caused by the interested stockholder, or
- any receipt by the interested stockholder of the benefit, except
proportionately as a stockholder of the corporation, of any loans,
advances, guarantees, pledges or other financial benefits provided by the
corporation or its subsidiaries.
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EXPERTS
GABRIEL
The consolidated financial statements and schedule of Gabriel and
subsidiaries as of December 31, 1998 and 1999, and for the year ended December
31, 1999 and for the period from June 15, 1998 (inception) to December 31, 1998,
included in this information statement/prospectus have been included in this
information statement/prospectus in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
TRIVERGENT
The consolidated financial statements of State Communications, Inc. as of
December 31, 1998 and 1999, and for the period from October 29, 1997 (date of
inception) through December 31, 1997 and for the years ended December 31, 1998
and 1999, have been included in this information statement/prospectus in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
GABRIEL
Certain legal matters will be passed upon for Gabriel by Bryan Cave LLP,
St. Louis, Missouri. In April 2000, LeadingEdge Investors 2000, L.L.C., an
investment vehicle comprised of partners of Bryan Cave LLP, purchased and
currently beneficially owns approximately 10,714 shares of Series B Preferred
Stock of Gabriel through its investment in Brooks Investments, L.P., an existing
stockholder of Gabriel. Various regulatory matters in connection with the merger
are being passed upon for Gabriel by Morrison & Foerster LLP.
TRIVERGENT
Certain legal matters will be passed upon for TriVergent by Cravath, Swaine
& Moore, New York, New York. Various regulatory matters in connection with the
merger are being passed upon for TriVergent by Kelley Drye & Warren LLP,
Washington, D.C.
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AVAILABLE INFORMATION
This information statement/prospectus constitutes a part of a registration
statement on Form S-4 filed by Gabriel under the Securities Act of 1933, as
amended, with respect to the offering of Gabriel securities in connection with
the merger. As permitted by the rules and regulations of the SEC, this
information statement/prospectus omits some of the information contained in the
registration statement. Reference is made to the registration statement for
further information with respect to Gabriel and the Gabriel securities.
Statements contained in this information statement/prospectus as to the contents
of any contract or other document filed as an exhibit to the registration
statement are materially complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the registration
statement. Since the prospectus may not contain all the information that you
find important, you should review the full text of these documents. We have
included copies of these documents as exhibits to our registration statement.
The registration statement and the exhibits thereto filed with the SEC may be
inspected, without charge, and copies may be obtained at prescribed rates, at
the public reference facility maintained by the SEC at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
SEC located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
CitiCorp. Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-
2511. The Registration Statement and other information filed by us with the SEC
are also available at the SEC's World Wide Web site on the internet at
http://www.sec.gov.
All information contained in this information statement/prospectus relating
to TriVergent was provided by the management and board of directors of
TriVergent. Gabriel assumes no responsibility for the accuracy of this
information. All information contained in this information statement/prospectus
relating to Gabriel was provided by the management and board of directors of
Gabriel. TriVergent assumes no responsibility for the accuracy of this
information.
NO PERSON HAS BEEN AUTHORIZED BY GABRIEL OR TRIVERGENT TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, THIS INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY EITHER GABRIEL OR
TRIVERGENT. THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OR A SOLICITATION TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE GABRIEL SECURITIES TO WHICH IT RELATES OR AN OFFER OR
SOLICITATION TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS INFORMATION
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED HEREBY
SHALL, UNDER ANY CIRCUMSTANCES, IMPLY OR CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF GABRIEL OR TRIVERGENT OR IN THE INFORMATION SET
FORTH OR INCORPORATED BY REFERENCE HEREIN SUBSEQUENT TO THE DATE HEREOF.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GABRIEL COMMUNICATIONS, INC.:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and as of June 30, 2000................................... F-3
Consolidated Statements of Operations for the period from
June 15, 1998 (inception) to December 31, 1998, for the
year ended December 31, 1999 and for the six months ended
June 30, 1999 and 2000.................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the period from June 15, 1998 (inception) to December
31, 1998, for the year ended December 31, 1999 and for the
six months ended June 30, 1999 and 2000................... F-5
Consolidated Statements of Cash Flows for the period from
June 15, 1998 (inception) to December 31, 1998, for the
year ended December 31, 1999 and for the six months ended
June 30, 1999 and 2000.................................... F-6
Notes to Consolidated Financial Statements.................. F-7
STATE COMMUNICATIONS, INC. (TRIVERGENT):
Report of Independent Auditors.............................. F-16
Consolidated Balance Sheets as of December 31, 1998 and 1999
and as of June 30, 2000................................... F-17
Consolidated Statements of Operations for the period from
October 29, 1997 (date of inception) Through December 31,
1997, for the years ended December 31, 1998 and 1999 and
for the
six months ended June 30, 1999 and 2000................... F-18
Consolidated Statements of Stockholders' Equity for the
period from October 29, 1997 (date of inception) Through
December 31, 1997, for the years ended December 31, 1998
and 1999 and for the six months ended June 30, 1999 and
2000...................................................... F-19
Consolidated Statements of Cash Flows for the period from
October 29, 1997 (date of inception) Through December 31,
1997, for the years ended December 31, 1998 and 1999 and
for the six months ended June 30, 1999 and 2000........... F-20
Notes to Consolidated Financial Statements.................. F-21
</TABLE>
F-1
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gabriel Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Gabriel
Communications, Inc. (a Delaware corporation) and subsidiaries (Gabriel) as of
December 31, 1998 and 1999 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the period from
June 15, 1998 (inception) to December 31, 1998 and for the year ended December
31, 1999. These consolidated financial statements are the responsibility of
Gabriel's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gabriel Communications, Inc.
and subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for the period from June 15, 1998 (inception) to
December 31, 1998 and for the year ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
February 4, 2000
F-2
<PAGE> 161
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- -------------
1998 1999 2000
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 28,682,294 $ 63,080,026 $ 78,875,562
Accounts receivable, net of allowance for
doubtful accounts of $15,602 and $74,258 in
1999 and 2000, respectively.................. -- 405,354 1,748,496
Prepaid expenses and other current assets....... 3,463 762,861 1,949,198
------------ ------------ -------------
Total current assets......................... 28,685,757 64,248,241 82,573,256
------------ ------------ -------------
Property and equipment, net....................... 147,697 33,805,919 76,275,931
Other noncurrent assets:
Investments..................................... -- 2,000,000 2,000,000
Other assets, net............................... -- 2,657,859 2,559,229
------------ ------------ -------------
Total other noncurrent assets................ -- 4,657,859 4,559,229
------------ ------------ -------------
Total assets................................. $ 28,833,454 $102,712,019 $ 163,408,416
============ ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 139,597 $ 1,306,127 $ 2,987,263
Accrued liabilities and other current
liabilities.................................. -- 3,188,697 8,508,809
------------ ------------ -------------
Total current liabilities.................... 139,597 4,494,824 11,496,072
Long-term debt.................................... -- 20,000,000 20,000,000
------------ ------------ -------------
Total liabilities............................ 139,597 24,494,824 31,496,072
------------ ------------ -------------
Minority interest................................. -- -- 3,951,336
Stockholders' equity:
Preferred stock -- Series A, $.01 par value,
30,200,000 shares authorized; 8,950,000;
26,850,000 and 26,850,000 issued and
outstanding in 1998, 1999 and 2000,
respectively................................. 89,500 268,500 268,500
Preferred stock -- Series A-1, $.01 par value,
3,125,000 shares authorized; 3,125,000 issued
and outstanding in 1999 and 2000............. -- 31,250 31,250
Preferred stock Series B, $.01 par value,
32,500,000 shares authorized; 9,930,294
issued and outstanding 2000; 19,289,160
subscribed................................... -- -- 292,194
Common stock, $.01 par value, 60,000,000 shares
authorized; 5,200,000; 5,469,200 and
6,008,200 issued and outstanding in 1998,
1999 and 2000, respectively.................. 52,000 54,692 60,082
Additional paid-in capital...................... 82,819,552 95,726,049 301,127,613
Treasury stock at cost, 100,000 shares in
2000......................................... -- -- (400,000)
Accumulated deficit............................. (567,199) (17,863,296) (38,394,516)
------------ ------------ -------------
82,393,853 78,217,195 262,985,123
Preferred stock subscriptions receivable........ (53,699,996) -- (135,024,115)
------------ ------------ -------------
Total stockholders' equity................... 28,693,857 78,217,195 127,961,008
------------ ------------ -------------
Total liabilities and stockholders' equity... $ 28,833,454 $102,712,019 $ 163,408,416
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 162
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM JUNE 15,
1998 (INCEPTION) YEAR ENDED SIX MONTHS
TO DECEMBER 31, DECEMBER 31, ENDED JUNE 30,
-------------------- ------------ ---------------------------
1998 1999 1999 2000
-------------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue............................. $ -- $ 452,597 $ 4,007 $ 3,267,599
Operating expenses:
Cost of communication services
(exclusive of depreciation and
amortization shown separately
below)......................... -- 495,808 4,581 2,634,251
Selling, general and
administrative................. 693,382 16,559,283 4,674,015 17,337,316
Depreciation and amortization..... 5,624 1,955,366 112,622 4,476,127
---------- ------------ ----------- ------------
Total operating expenses....... 699,006 19,010,457 4,791,218 24,447,694
---------- ------------ ----------- ------------
Loss from operations........... (699,006) (18,557,860) (4,787,211) (21,180,095)
---------- ------------ ----------- ------------
Other income (expense):
Interest income................... 131,807 1,476,940 549,187 1,859,912
Interest expense.................. -- (215,177) -- (1,439,701)
---------- ------------ ----------- ------------
Total other income (expense)... 131,807 1,261,763 549,187 420,211
---------- ------------ ----------- ------------
Net loss before minority
interest..................... (567,199) (17,296,097) (4,238,024) (20,759,884)
Minority interest................... -- -- -- 228,664
---------- ------------ ----------- ------------
Net loss after minority
interest..................... $ (567,199) $(17,296,097) $(4,238,024) $(20,531,220)
========== ============ =========== ============
Basic and diluted loss per share.... $ (0.16) $ (3.25) $ (.81) $ (3.54)
========== ============ =========== ============
Weighted average common shares
outstanding....................... 3,550,755 5,322,409 5,225,022 5,800,670
========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 163
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK -- PREFERRED STOCK -- PREFERRED STOCK --
SERIES A SERIES A-1 SERIES B COMMON STOCK ADDITIONAL
--------------------- ------------------- --------------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- -------- --------- ------- ---------- -------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 15, 1998
(inception)............ -- $ -- -- $ -- -- $ -- -- $ -- $ --
Net loss for the period
ended December 31,
1998................... -- -- -- -- -- -- -- -- --
Issuance of stock........ 8,950,000 89,500 -- -- -- -- 5,200,000 52,000 82,819,552
---------- -------- --------- ------- ---------- -------- --------- ------- ------------
Balance, December 31,
1998................... 8,950,000 89,500 -- -- -- -- 5,200,000 52,000 82,819,552
Net loss for the year
ended December 31,
1999................... -- -- -- -- -- -- -- -- --
Issuance of stock........ 17,900,000 179,000 3,125,000 31,250 -- -- 269,200 2,692 12,906,497
---------- -------- --------- ------- ---------- -------- --------- ------- ------------
Balance, December 31,
1999................... 26,850,000 268,500 3,125,000 31,250 -- -- 5,469,200 54,692 95,726,049
Net loss for the six
months ended June 30,
2000 (unaudited)....... -- -- -- -- -- -- -- -- --
Issuance of stock
(unaudited)............ -- -- -- -- 29,219,454 292,194 539,000 5,390 205,401,564
Purchase of treasury
stock, at cost
(unaudited)............ -- -- -- -- -- -- -- -- --
---------- -------- --------- ------- ---------- -------- --------- ------- ------------
Balance, June 30, 2000
(unaudited)............ 26,850,000 $268,500 3,125,000 $31,250 29,219,454 $292,194 6,008,200 $60,082 $301,127,613
========== ======== ========= ======= ========== ======== ========= ======= ============
<CAPTION>
PREFERRED
STOCK TOTAL
TREASURY ACCUMULATED SUBSCRIPTIONS STOCKHOLDERS'
STOCK DEFICIT RECEIVABLE EQUITY
--------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance, June 15, 1998
(inception)............ $ -- $ -- $ -- $ --
Net loss for the period
ended December 31,
1998................... -- (567,199) -- (567,199)
Issuance of stock........ -- -- (53,699,996) 29,261,056
--------- ------------ ------------- ------------
Balance, December 31,
1998................... -- (567,199) (53,699,996) 28,693,857
Net loss for the year
ended December 31,
1999................... -- (17,296,097) -- (17,296,097)
Issuance of stock........ -- -- 53,699,996 66,819,435
--------- ------------ ------------- ------------
Balance, December 31,
1999................... -- (17,863,296) -- 78,217,195
Net loss for the six
months ended June 30,
2000 (unaudited)....... -- (20,531,220) -- (20,531,220)
Issuance of stock
(unaudited)............ -- -- (135,024,115) 70,675,033
Purchase of treasury
stock, at cost
(unaudited)............ (400,000) -- -- (400,000)
--------- ------------ ------------- ------------
Balance, June 30, 2000
(unaudited)............ $(400,000) $(38,394,516) $(135,024,115) $127,961,008
========= ============ ============= ============
</TABLE>
F-5
<PAGE> 164
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998
(INCEPTION) TO YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED JUNE 30,
-------------- ------------ ----------------------------
1998 1999 1999 2000
-------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss after minority interest..... $ (567,199) $(17,296,097) $ (4,238,024) $(20,531,220)
Adjustments to reconcile net loss
after minority interest to net
cash used in by operating
activities:
Depreciation and amortization..... 5,624 1,955,366 112,622 4,476,127
Minority interest................. -- -- -- (228,664)
Provision for doubtful accounts... -- 15,602 -- 58,656
Changes in assets and liabilities:
Increase in accounts
receivable................... -- (420,955) (4,007) (1,334,406)
Increase in prepaid expenses and
other assets................. (3,463) (3,467,002) (142,952) (1,315,521)
Increase in accounts payable.... 139,597 1,166,530 866,818 1,681,136
Increase in accrued liabilities
and other current
liabilities.................. -- 3,188,697 396,607 5,320,112
----------- ------------ ------------ ------------
Net cash provided by used in
operating activities....... (425,441) (14,857,859) (3,008,936) (11,873,780)
----------- ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and
equipment......................... (153,321) (35,563,844) (13,276,716) (42,285,717)
Purchase of investments.............. -- (2,000,000) -- --
----------- ------------ ------------ ------------
Net cash used in investing
activities................. (153,321) (37,563,844) (13,276,716) (42,285,717)
----------- ------------ ------------ ------------
Cash flows from financing activities:
Net distributions to (from) minority
interests......................... -- -- -- (320,000)
Proceeds from long-term debt......... -- 20,000,000 -- --
Proceeds from issuance of stock...... 29,261,056 66,819,435 27,193,435 70,275,033
----------- ------------ ------------ ------------
Net cash provided by provided
by financing activities.... 29,261,056 86,819,435 27,193,435 69,955,033
----------- ------------ ------------ ------------
Net increase in cash......... 28,682,294 34,397,732 10,907,783 15,795,536
Cash, beginning of period.............. -- 28,682,294 28,682,294 63,080,026
----------- ------------ ------------ ------------
Cash, end of period.................... $28,682,294 $ 63,080,026 $ 39,590,077 $ 78,875,562
=========== ============ ============ ============
Supplemental disclosures of cash flow
information --
Cash paid during the period for
interest.......................... $ -- $ 141,944 $ -- $ 713,844
Non-cash contributed assets.......... $ -- $ -- $ -- $ 4,500,000
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 165
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
(1) NATURE OF BUSINESS
Gabriel Communications, Inc. (Gabriel) was incorporated as a Delaware
Corporation in June 1998 for the purpose of being a facilities based provider of
integrated voice and data telecommunications services in selected markets in the
United States. As of June 30, 2000, Gabriel was operational in seven markets:
St. Louis, Kansas City, Springfield, Wichita, Little Rock, Tulsa and Oklahoma
City. Gabriel was also in the process of deploying networks in seven other
markets: Akron, Indianapolis, Cincinnati, Columbus, Dayton, Louisville and
Lexington.
Until May 1999, Gabriel was in the development stage. From its inception in
June 1998 through May 1999, Gabriel's principal activities included developing
its business plan, hiring management and other key personnel, designing its
planned network architecture and operations support systems, and completing its
initial equity financings.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the accrual
basis of accounting in conformity with generally accepted accounting principles.
The presentation of 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 reported period. Actual
results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The interim financial information as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 is unaudited and has been prepared on the
same basis as the audited consolidated financial statements. In the opinion of
management, such unaudited information includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
interim information. Operating results for the six months ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Gabriel Communications, Inc., its wholly owned subsidiaries and, for the period
ended June 30, 2000, affiliated companies in which Gabriel has a controlling
interest and a 50% owned joint venture in which Gabriel exercises management
control. Affiliated companies in which Gabriel does not have a significant
influence are accounted for using the cost method. All significant intercompany
balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Excess cash totaling approximately $26.9 million and $46.4 million at
December 31, 1998 and 1999, respectively, is invested overnight in money market
accounts. Gabriel considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The cost of these
investments approximates fair value.
F-7
<PAGE> 166
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of prepaid rent, prepaid
insurance, prepaid software maintenance, and facility installation costs.
Prepayments are expensed on a straight-line basis over the life of the
underlying agreements. Facility installation costs are amortized on a
straight-line basis over the life of the customer contracts.
PROPERTY AND EQUIPMENT
Property and equipment includes network equipment, leasehold improvements,
computer software, computer hardware, office equipment, furniture and fixtures,
vehicles, and construction-in-progress. These assets are stated at cost. The
cost of construction, additions, and substantial betterments of property and
equipment is capitalized. The cost of maintenance and repairs is expensed as
incurred. Property and equipment are depreciated using the straight-line method
over estimated economic lives as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Network equipment........................................... 5-7
Leasehold improvements...................................... 5
Computer hardware and software.............................. 3-5
Furniture and office equipment.............................. 7
Vehicles.................................................... 5
</TABLE>
OTHER ASSETS
Other assets are stated at cost and include long-term debt origination
fees. These fees are being amortized on a straight-line basis over the term of
the credit facility.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
ASSET IMPAIRMENT
Gabriel management evaluates the recoverability of long-lived assets,
including investments, property, and equipment, on a periodic basis. Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. There have been no impairments through
June 30, 2000.
STOCK-BASED COMPENSATION
Gabriel applies the intrinsic value method in accounting for employee stock
options and warrants. The financial impact on the net loss as calculated under
the fair value method is disclosed in note 7.
F-8
<PAGE> 167
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
REVENUE RECOGNITION
Revenue is recognized in the month in which service is provided.
EARNINGS PER SHARE
Basic and diluted loss per share have been computed using the weighted
average number of shares of common stock outstanding. The weighted average
number of shares was based on common stock outstanding for basic loss per share
and common stock outstanding, assumption of preferred stock conversion and
common stock options and warrants for diluted loss per share in periods when
such preferred stock conversion, and the common stock options and warrants are
not antidilutive.
SEGMENT INFORMATION
In 1998, Gabriel adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
which requires a "management approach" to segment information. The management
approach designates the internal reporting that is used by management for making
operating decisions and assessing performance as the source of reportable
segments. Gabriel operates in a single industry segment, "Communication
Services." Operations are managed and financial performance is evaluated based
on the delivery of multiple communications services to customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires that every derivative be recorded as either an asset or liability
in the balance sheet and measured at its fair value. SFAS No. 133 also requires
that changes in the derivative's fair market value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate and assess the effectiveness of transactions that
require hedge accounting. Gabriel is required to adopt SFAS No. 133, as amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," and SFAS No. 138 "Accounting for Certain
Derivatives Instruments and Certain Hedging Activities -- an amendment to FASB
Statement No. 133" on a prospective basis for interim periods and fiscal years
beginning January 1, 2001. Gabriel does not anticipate that adoption SFAS No.
133 will have a material effect on its financial statements.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in financial statements. SAB 101 must be applied to financial statements no
later than the fourth fiscal quarter of 2000. Gabriel does not believe adoption
will have a material impact on the Company's consolidated financial position or
results of operations.
F-9
<PAGE> 168
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1998 1999 2000
-------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Network equipment........................................ $ -- $12,259,144 $24,100,063
Leasehold improvements................................... -- 3,949,354 4,648,344
Computer hardware........................................ 100,574 3,561,316 5,372,633
Computer software........................................ 34,033 4,371,879 11,736,474
Furniture and office equipment........................... 18,714 1,551,241 2,025,658
Vehicles................................................. -- 192,552 756,340
Other.................................................... -- 30,450 42,378
-------- ----------- -----------
Property and equipment, in service..................... 153,321 25,915,936 48,681,890
Less accumulated depreciation and amortization........... 5,624 1,909,495 6,225,200
-------- ----------- -----------
Property and equipment, in service, net............. 147,697 24,006,441 42,456,690
Construction-in-progress................................. -- 9,799,478 33,819,241
-------- ----------- -----------
Property and equipment, net............................ $147,697 $33,805,919 $76,275,931
======== =========== ===========
</TABLE>
During 1999, 17% of Gabriel's capital expenditures were from a single
vendor and were related to network equipment.
(4) INVESTMENTS
On December 2, 1999, Gabriel invested $2,000,000 to purchase 583,090 Series
B convertible preferred shares of Tachion Networks, Inc. (Tachion), a
privately-held "next generation" switch manufacturer. Conversion of such shares
would result in Gabriel owning approximately 2% of Tachion.
On March 21, 2000, Gabriel contributed $3,850,000 in exchange for a 70%
interest in a joint venture, GCI Transportation Company, LLC. Brooks
International Aviation, L.L.C. contributed cash of $1,650,000 in exchange for a
30% interest in the joint venture.
On March 22, 2000, Gabriel entered into a joint venture, WebBizApps, L.L.C.
Under the terms of the agreement, Gabriel must contribute $4,500,000 in exchange
for a 50% interest in the joint venture. Gabriel contributed $3,250,000 in
March. The joint venture partner contributed $4,500,000 in assets and received a
distribution of $2,000,000.
The pro forma effect of the above acquisitions on revenues and net loss
would be minimal.
(5) RELATED PARTY TRANSACTIONS
Gabriel rents office space and obtains certain other services from Brooks
Investments, L.P. and Brooks International Aviation, L.L.C. The Chairman of the
Board of Gabriel is a majority owner in Brooks Investments, L.P. and Brooks
International Aviation, L.L.C. For the period from June 15, 1998 (inception) to
December 31, 1998 and for the year ended December 31, 1999 and the six months
ended June 30, 2000, Gabriel incurred expenses totaling $25,780, $207,277 and
$31,389, respectively. Gabriel had $15,808 in accounts payable at December 31,
1998, no accounts payable at December 31, 1999 and $682 in accounts payable at
June 30, 2000 related to Brooks Investments, L.P. and Brooks International
Aviation, L.L.C.
F-10
<PAGE> 169
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
(6) LONG-TERM DEBT
As of October 28, 1999, Gabriel Communications Finance Company (Borrower),
a wholly owned subsidiary of the Company, entered into a $90,000,000 senior
secured credit facility primarily to finance capital expenditures and to provide
working capital. This facility consists of an $80,000,000 term loan facility and
a $10,000,000 revolving credit facility. The term loan facility may be borrowed
during an availability period which ends on September 30, 2001. The term loan
facility provides that principal payments commence on December 31, 2002 ending
with a final payment on September 30, 2007. The revolving credit facility is
available until November 9, 2007, subject to a $4,000,000 reduction in
availability on the revolving credit facility on June 30, 2007. The credit
facility is secured by a pledge of all of the capital stock of the Borrower and
Gabriel's other wholly-owned subsidiaries, a security interest in all of the
assets of the Borrower and Gabriel's other wholly-owned subsidiaries, and in
certain assets of the Company.
The credit facility contains certain restrictive covenants that, among
other things, require the maintenance of certain financial ratios, limit the
ability of the Borrower to incur indebtedness, make investments, and pay
dividends and limit Gabriel's ability to incur indebtedness. Gabriel and the
Borrower were in compliance with all such restrictive covenants at December 31,
1999.
At December 31, 1999 and June 30, 2000, the Borrower had borrowed
$20,000,000 under the term loan facility at an interest rate of 10.12% and
10.96%, respectively. The Borrower incurred $215,177 in interest expense during
1999 and $1,439,701 in interest expense for the six months ended June 30, 2000.
The carrying amount of the long-term debt approximates fair value.
(7) STOCK-BASED COMPENSATION
Pursuant to Gabriel's 1998 Stock Incentive Plan, Gabriel has granted
non-qualified stock options and warrants to employees. Gabriel has also
implemented a Stock Purchase Program under the Plan in which selected employees
have been afforded the opportunity to purchase shares of common stock at fair
market value. No compensation expense has been recognized under the intrinsic
method for the stock options and warrants issued. Had compensation expense been
determined based on the fair value at the grant date, Gabriel's net loss would
have been higher than reported by approximately $27,000, $612,000 and $1,067,800
in 1998, 1999 and 2000, respectively. The fair value of options and warrants
granted in 1998, 1999 and 2000 is estimated on the date of grant using the
Black-Scholes option-pricing model (excluding a volatility assumption) with the
following weighted average assumptions: risk-free interest rate of 5.0%,
expected life equal to the term of the respective option or warrant, and no
expected dividend yield.
The options issued under the 1998 Stock Incentive Plan have an exercise
price of $2.40, $3.20 or $5.60 per share and the warrants have an exercise price
of $3.00 per share. Each option and warrant enables the employee to purchase one
share of common stock at the exercise price, subject to applicable vesting
provisions. The nonqualified stock options and warrants have terms of 10 years
from the date of the grant. The nonqualified stock options vest equally upon
completion of the first, second, and third full year of service after the date
of grant. The warrants are fully vested on the date of issuance.
Gabriel has authorized the issuance of 10,000,000 shares of common stock
under the 1998 Stock Incentive Plan and Stock Purchase Program, of which
1,000,000 shares have been allocated for purchase under the Stock Purchase
Program.
F-11
<PAGE> 170
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
The following is a summary of activity with respect to stock options and
warrants under the 1998 Stock Incentive Plan:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998 SIX MONTHS
(INCEPTION) TO YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
-------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Options and warrants outstanding at beginning of
period................................................. -- 78,000 2,765,500
Granted.................................................. 78,000 2,697,950 1,262,450
Cancelled................................................ -- (10,450) 140,101
Exercised................................................ -- -- --
------ --------- ---------
Options and warrants outstanding at end of period........ 78,000 2,765,500 3,887,849
====== ========= =========
Options and warrants exercisable at end of period........ -- 645,500 736,616
====== ========= =========
</TABLE>
Gabriel's Stock Purchase Program is intended as an aid to hire and retain
management personnel. Only management is eligible to participate in this
program. Gabriel issued 269,200 and 539,000 shares of common stock at $2.40 and
$3.20 per share under this program during 1999 and the first six months of 2000,
respectively.
(8) STOCKHOLDERS' EQUITY
Gabriel's authorized common stock consists of 60,000,000 shares, of which
5,469,200 shares were issued and outstanding as of December 31, 1999. Gabriel's
authorized preferred stock consists of 82,500,000 shares of preferred stock of
which 30,200,000 shares are authorized for Series A Convertible Preferred Stock,
3,125,000 shares are authorized for Series A-1 Convertible Preferred Stock,
32,500,000 are authorized for Series B Convertible Preferred Stock and the
remaining 16,675,000 shares are undesignated. The preferred shares outstanding
consists of 26,850,000 shares of Series A Convertible Preferred Stock, 3,125,000
shares of Series A-1 Convertible Preferred Stock and 9,930,924 of Series B
Convertible Preferred Stock which were issued and outstanding as of June 30,
2000. During 1999, Gabriel received the proceeds from subscriptions for an
aggregate of 17,900,000 shares of Series A Convertible Preferred Stock at $3.00
per share, or $53,699,996, and 3,125,000 shares of Series A-1 Convertible
Preferred Stock at $4.00 per share, or $12,500,000. On April 19, 2000 Gabriel
closed a $204.5 million private placement of 29,219,454 shares of Series B
Convertible Preferred Stock. At June 30, 2000 9,930,924 shares were outstanding.
The remaining 19,289,160 subscribed shares will be called on or before November
30, 2000.
Each share of preferred stock may be converted into one share of common
stock at the option of the holder. Additionally, each share of preferred stock
automatically converts into one share of common stock upon consummation of a
public offering of the common stock at a price of at least $15 per share in
which the aggregate proceeds are at least $30 million. In the event of
liquidation, dissolution, or winding up Gabriel, holders of shares of the
preferred stock are entitled first to receive preferential distributions of
$3.00 per share of Series A Convertible Preferred Stock and $4.00 per share of
Series A-1 Convertible Preferred Stock and then holders of shares of the common
stock are entitled to receive preferential distributions of $0.50 per share;
thereafter, the holders of shares of the preferred stock and the common stock
share ratably in all distributions until the total amount paid is $175 million;
thereafter, the holders of the preferred stock have no right or claim to the
remaining assets and funds of Gabriel, if any.
F-12
<PAGE> 171
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
Holders of shares of the preferred stock are not entitled to receive cash
dividends. No cash dividends may be declared and paid to holders of shares of
the common stock so long as any shares of the preferred stock are outstanding.
The shares of the preferred stock are entitled to the number of votes for
each share held after taking into consideration conversion features and vote
together with shares of the common stock as a single class, except when a
separate class vote is required by Delaware law.
In 1998, Gabriel granted an aggregate of 260,000 founder's warrants with an
exercise price of $3.00. The warrants are exercisable for 10 years from the date
of grant. Each warrant enables the holder to purchase one share of common stock
at the exercise price. The warrants vested upon issuance.
(9) INCOME TAXES
No income tax expense or benefit has been recognized. The primary
differences between income tax benefit and the amount of tax benefit that would
be expected to result by applying the federal statutory rate of 34% to the loss
before income taxes for the period from June 15, 1998 (inception) to December
31, 1998 and for the year ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- ------------
<S> <C> <C>
Expected federal income tax benefit......................... $ 192,848 $ 5,880,673
State income tax benefit.................................... 17,016 518,521
Valuation allowance......................................... (209,864) (6,399,194)
--------- -----------
Income tax benefit........................................ $ -- $ --
========= ===========
</TABLE>
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets:
Start-up costs and other assets........................... $ 125,000 $ 771,633
Net operating loss carryforward........................... 84,864 6,806,777
--------- -----------
Gross deferred tax assets............................ 209,864 7,578,410
Less valuation allowance.................................... (209,864) (6,609,058)
--------- -----------
Total deferred tax assets............................ -- 969,352
--------- -----------
Deferred tax liabilities:
Depreciation and amortization............................. -- 874,081
Accrued liabilities....................................... -- 95,271
--------- -----------
Total deferred tax liabilities....................... -- 969,352
--------- -----------
Net deferred tax asset............................... $ -- $ --
========= ===========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of
F-13
<PAGE> 172
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers projected future taxable income and tax planning strategies
in making this assessment. Based upon the level of historical taxable losses and
projections for future losses over the periods which the deferred tax assets are
deductible, management does not believe it is more likely than not Gabriel will
realize the benefits of these deductible differences. Accordingly, a valuation
allowance has been established for the excess of the deferred tax assets over
deferred tax liabilities.
At December 31, 1999, Gabriel had net operating loss carryforwards for
federal income tax purposes of $18,396,694, which are available to offset future
federal taxable income, if any, through 2019.
(10) EARNINGS PER SHARE
A reconciliation of the number of shares used in the calculation of basic
and diluted earnings per share and the calculated amounts of earnings per share
follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998 SIX MONTHS
(INCEPTION) TO YEAR ENDED ENDING
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
-------------- ------------ ----------
<S> <C> <C> <C>
Shares outstanding -- beginning of period................ -- 5,200,000 5,469,200
Weighted average number of common shares issued.......... 3,550,755 122,409 331,470
--------- --------- ---------
Weighted average number of common shares
outstanding -- end of period........................... 3,550,755 5,332,409 5,800,670
Dilutive effect of preferred stock conversion and
employee stock options and warrants.................... -- -- --
--------- --------- ---------
Diluted shares outstanding............................... 3,550,755 5,332,409 5,800,670
========= ========= =========
Net loss (in thousands).................................. $ (567) $ (17,296) $ (20,531)
========= ========= =========
Basic and diluted earnings per common share.............. $ (0.16) $ (3.25) $ (3.54)
========= ========= =========
</TABLE>
In calculating diluted earnings per share for the period ended December 31,
1998, the year ended December 31, 1999 and the six-month period ended June 30,
2000, employee stock options and warrants to purchase 338,000, 3,025,000 and
4,107,999 shares of common stock, respectively, and preferred stock convertible
into common shares of 8,950,000, 29,975,000 and 59,194,454, respectively, were
outstanding but were not included in the computation of diluted earnings per
share due to their antidilutive effect.
(11) COMMITMENTS AND CONTINGENCIES
Gabriel has entered into various operating lease agreements for office
space. Rent expense totaled $27,754 for the period from inception to December
31, 1998 and $824,977 for the year ended December 31, 1999. Gabriel has also
entered into software maintenance contracts. Future commitments
F-14
<PAGE> 173
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
under the noncancelable operating leases and the software maintenance contracts
at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $1,782,624
2001........................................................ 1,707,468
2002........................................................ 975,869
2003........................................................ 680,569
2004........................................................ 669,222
Thereafter.................................................. 3,198,597
----------
Total.................................................. $9,014,349
==========
</TABLE>
Gabriel has also entered into various leases for network facilities. These
leases have expirations of one to five years. The network facilities lease
expense totaled $326,104 in 1999 and is recorded as cost of communication
services.
During the six months ended June 30, 2000, Gabriel entered into additional
noncancelable operating leases. The future minimum rental payments under all
leases as of June 30, 2000 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 2,602,161
2001........................................................ 3,849,594
2002........................................................ 2,026,005
2003........................................................ 1,644,927
2004........................................................ 1,295,090
Thereafter.................................................. 6,096,609
-----------
Total.................................................. $17,514,386
===========
</TABLE>
(12) CONTINUED OPERATIONS AND LIQUIDITY
Gabriel has experienced losses and negative operating cash flows since
inception and expects to continue to experience losses and negative operating
cash flows until such time as it develops a revenue-generating customer base
sufficient to fund expenses. Gabriel expects to achieve positive operating
margins over time by increasing the number of revenue-generating customers.
Gabriel intends to fund the negative operating cash flows through the debt and
equity markets until Gabriel develops a significant revenue-generating customer
base.
(13) SUBSEQUENT EVENTS
In May 2000, Gabriel secured underwritten commitments from a group of
financial institutions, including four of its existing five lenders, to provide
an expanded $200 million senior secured credit facility, consisting of a $60
million revolving credit facility and $140 million of term loan facilities.
Closing of the expanded credit facility is subject to certain conditions,
including completion of definitive documentation.
On June 9, 2000, the Company and State Communications, Inc. entered into an
Agreement and Plan of Merger to combine the two companies to form a regional,
facilities-based integrated communications provider. The merger has been
unanimously approved by the Boards of Directors of both companies and
stockholders holding more than two-thirds of the voting stock of both companies
have agreed to approve the merger. Further action regarding the registration
statement is pending the contemplated merger with State Communications, Inc.
F-15
<PAGE> 174
INDEPENDENT AUDITORS' REPORT
The Board of Directors
State Communications, Inc.:
We have audited the accompanying consolidated balance sheets of State
Communications, Inc. as of December 31, 1998 and 1999 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the period from October 29, 1997 (date of inception) through December
31, 1997 and for the years ended December 31, 1998 and 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
State Communications, Inc. as of December 31, 1998 and 1999, and the results of
their operations and their cash flows for the period from October 29, 1997 (date
of inception) through December 31, 1997 and for the years ended December 31,
1998 and 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Greenville, South Carolina
February 25, 2000
F-16
<PAGE> 175
STATE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,399,204 $ 15,236,706 $ 12,294,553
Investments held to maturity.............................. -- 2,691,377 --
Accounts receivable, net of allowance for uncollectible
accounts of $1,976,000 in 1998, $186,000 in 1999 and
$423,432 at June 30, 2000............................... 2,603,643 1,316,695 840,157
Stock subscriptions receivable............................ 4,208,002 -- --
Prepaid expenses and other current assets................. 222,933 694,829 1,383,014
------------ ------------ ------------
Total current assets.................................. 8,433,782 19,939,607 14,517,724
Property and equipment...................................... 1,464,939 45,362,889 95,083,288
Less accumulated depreciation............................. (150,595) (1,305,658) (5,576,253)
------------ ------------ ------------
Net property and equipment............................ 1,314,344 44,057,231 89,507,035
Goodwill, net of accumulated amortization of $163,214 in
1999 $263,380 in 2000 and $718,057 at June 30, 2000....... -- 2,283,087 8,575,480
Deferred financing costs and other assets................... 194,275 996,739 7,379,547
------------ ------------ ------------
Total assets.......................................... $ 9,942,401 $ 67,276,664 $119,979,786
============ ============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Accounts payable.......................................... $ 1,820,561 $ 10,564,550 $ 2,200,481
Accrued expenses.......................................... 2,684,205 3,498,294 5,369,852
Current portion of capital lease obligation............... -- 392,086 490,107
------------ ------------ ------------
Total current liabilities............................. 4,504,766 14,454,930 8,060,440
Term loans.................................................. -- 17,099,889 32,831,615
Long-term portion of capital lease obligation............... -- 1,042,632 944,611
Note payable to bank........................................ 83,382 57,396 --
------------ ------------ ------------
Total liabilities..................................... 4,588,148 32,654,847 41,836,666
------------ ------------ ------------
Redeemable preferred stock:
Series A 5.5% cumulative convertible preferred stock $.01
par value; 10,000,000 shares authorized; 4,711,672
shares issued and outstanding in 1998 and 1999;
(redemption value of $11,365,876, $18,282,174 and
$29,900,305 in 1998, 1999 and June 30, 2000)............ 11,295,468 12,685,163 14,881,229
Series B 5.5% cumulative convertible preferred stock $.01
par value; 14,133,329 shares authorized; 13,866,662
shares issued and outstanding in 1999; (redemption value
of $53,213,327 and $87,919,398 in 1999 and June 30,
2000)................................................... -- 53,094,446 58,119,950
Series C 5.5% cumulative convertible preferred stock $.01
par value; 15,776,471 shares authorized; 15,776,471
shares issued and outstanding at June 30, 2000;
(redemption value of $98,462,535 at June 30, 2000)...... -- -- 69,357,333
Notes receivable from officers............................ -- -- (898,750)
------------ ------------ ------------
Total redeemable preferred stock...................... 11,295,468 65,779,609 141,459,762
------------ ------------ ------------
Stockholders' deficit:
Common stock, $.001 par value, 50,000,000 shares
authorized in 1998 and 100,000,000 in 1999 and at June
30, 2000; 10,324,462, 11,147,920 and 12,061,160 shares
issued in 1998, 1999 and June 30, 2000, respectively.... 10,324 11,148 12,131
Additional paid-in-capital................................ 6,811,359 7,466,423 2,339,717
Accumulated deficit....................................... (12,762,898) (38,426,743) (65,459,870)
Treasury stock, 69,540 common shares in 1999 and June 30,
2000, at cost........................................... -- (208,620) (208,620)
------------ ------------ ------------
Total stockholders' deficit........................... (5,941,215) (31,157,792) (63,316,642)
------------ ------------ ------------
Total liabilities, redeemable preferred stock, and
stockholders' deficit.............................. $ 9,942,401 $ 67,276,664 $119,979,786
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 176
STATE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 29, 1997 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1997 AND THE YEARS ENDED DECEMBER 31, 1998 AND 1999
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
THROUGH YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
DECEMBER 31, ---------------------------- ----------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................. $ -- $ 5,261,146 $ 25,037,450 $ 13,818,441 $ 8,626,845
Cost of services.......... -- 3,802,036 17,703,754 9,648,183 8,730,835
--------- ------------ ------------ ------------ ------------
Gross profit
(loss).......... -- 1,459,110 7,333,696 4,170,258 (103,990)
--------- ------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative
expenses............. (39,851) (12,165,893) (23,523,165) (13,440,656) (20,210,473)
Provision for
uncollectible
accounts............. -- (1,976,000) (7,285,528) (5,815,916) (382,095)
Depreciation and
amortization......... -- (150,595) (1,318,277) (517,656) (4,725,273)
--------- ------------ ------------ ------------ ------------
Total operating
expenses........ (39,851) (14,292,488) (32,126,970) (19,774,228) (25,317,841)
--------- ------------ ------------ ------------ ------------
Operating loss..... (39,851) (12,833,378) (24,793,274) (15,603,970) (25,421,831)
Interest income (expense):
Interest income......... -- 123,233 816,057 70,452 986,195
Interest expense........ -- (12,902) (1,468,991) (571,436) (1,872,723)
Interest income
(expense),
net............. -- 110,331 (652,934) (500,984) (886,528)
--------- ------------ ------------ ------------ ------------
Loss before
extraordinary
item............ (39,851) (12,723,047) (25,446,208) (16,104,954) (26,308,359)
Extraordinary item-early
extinguishment of
debt.................... -- -- (217,637) -- (724,768)
--------- ------------ ------------ ------------ ------------
Net loss........... (39,851) (12,723,047) (25,663,845) (16,104,954) (27,033,127)
Preferred stock
accretion............... -- (57,863) (2,603,040) (299,877) (9,737,189)
--------- ------------ ------------ ------------ ------------
Net loss to common
stockholders............ $ (39,851) $(12,780,910) $(28,266,885) $(16,404,831) $(36,770,316)
========= ============ ============ ============ ============
Net loss per common share,
basic and dilutive...... $ (.01) $ (1.37) $ (2.60) $ (1.54) $ (3.12)
========= ============ ============ ============ ============
Weighted average common
shares outstanding,
basic and dilutive...... 6,390,476 9,308,771 10,868,729 10,645,897 11,773,102
========= ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 177
STATE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM OCTOBER 29, 1997 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1997 AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
AND SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN- TOTAL
COMMON CAPITAL ACCUMULATED TREASURY STOCKHOLDERS'
STOCK AMOUNT DEFICIT STOCK EQUITY (DEFICIT)
------- ----------- ------------ --------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, October 29, 1997 (date of
inception)....................... $ -- $ -- $ -- $ -- $ --
Issuance of common stock, 6,600,000
shares in initial private
offering at average price of $.11
per share........................ 6,600 698,400 -- -- 705,000
Net loss........................... -- -- (39,851) -- (39,851)
------- ----------- ------------ --------- ------------
Balance, December 31, 1997......... 6,600 698,400 (39,851) -- 665,149
Issuance of common stock, 1,761,000
shares at $1.00 per share........ 1,761 1,759,239 -- -- 1,761,000
Issuance of common stock, 1,963,462
shares at $2.25 per share, net of
$4,243 issue costs............... 1,963 4,411,583 -- -- 4,413,546
Net loss........................... -- -- (12,723,047) -- (12,723,047)
Accretion of preferred stock....... -- (57,863) -- -- (57,863)
------- ----------- ------------ --------- ------------
Balance, December 31, 1998......... 10,324 6,811,359 (12,762,898) -- (5,941,215)
Issuance of common stock in
acquisitions, 808,792 shares at
$2.40 per share.................. 809 1,940,292 -- -- 1,941,101
Issuance of 14,666 shares of common
stock at $1.50 and $2.25 per
share pursuant to exercise of
stock options.................... 15 22,484 -- -- 22,499
Issuance of 884,649 common stock
detachable warrants, net of
$7,933 issue costs............... -- 1,295,328 -- -- 1,295,328
Acquisition of 69,540 shares of
common stock at $3.00 per
share............................ -- -- -- (208,620) (208,620)
Net loss........................... -- -- (25,663,845) -- (25,663,845)
Accretion of preferred stock....... -- (2,603,040) -- -- (2,603,040)
------- ----------- ------------ --------- ------------
Balance, December 31, 1999......... 11,148 7,466,423 (38,426,743) (208,620) (31,157,792)
Issuance of common stock in
acquisitions, 705,402 shares at
$4.25 per share (unaudited)...... 705 2,997,254 -- -- 2,997,959
Issuance of 200 shares of common
stock at $3.00 per share pursuant
to exercise of stock options
(unaudited)...................... 1 599 -- -- 600
Issuance of 81,178 shares of common
stock at $4.25 per share
(unaudited)...................... 81 344,926 -- -- 345,007
Issuance of common stock in
acquisitions, 196,000 shares at
$6.15 per share (unaudited)...... 196 1,205,204 -- -- 1,205,400
Compensation expense for stock
based awards (unaudited)......... -- 62,500 -- -- 62,500
Net loss (unaudited)............... -- -- (27,033,127) -- (27,033,127)
Accretion of preferred stock
(unaudited)...................... -- (9,737,189) -- -- (9,737,189)
------- ----------- ------------ --------- ------------
Balance at June 30, 2000
(unaudited)...................... $12,131 $ 2,339,717 $(65,459,870) $(208,620) $(63,316,642)
======= =========== ============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 178
STATE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 29, 1997 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1997 AND THE YEARS ENDED DECEMBER 31, 1998 AND 1999
AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION SIX MONTHS ENDED
THROUGH JUNE 30,
DECEMBER 31, ---------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(39,851) $(12,723,047) $(25,663,845) $(16,104,954) $(27,033,127)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for uncollectible accounts........... -- 1,976,000 7,285,528 5,815,916 382,095
Depreciation and amortization.................. -- 150,595 1,318,277 517,656 4,725,273
Other amortization............................. -- -- 145,833 -- 47,775
Amortization of debt discount.................. -- -- 339,727 -- --
Extraordinary item -- early extinguishment of
debt......................................... -- -- 217,637 -- 724,768
Compensation expense........................... -- -- -- -- 62,500
Changes in operating assets and liabilities:
Accounts receivable.......................... -- (4,579,643) (5,568,734) (6,230,747) 300,510
Other assets................................. -- (194,275) 194,275 -- (2,045,120)
Prepaid expenses and other current assets.... (16,607) (206,326) (229,100) (533,291) (597,402)
Accounts payable............................. -- 1,820,561 1,196,743 215,050 (8,400,434)
Accrued expenses............................. -- 2,684,205 807,198 563,219 1,860,366
-------- ------------ ------------ ------------ ------------
Net cash used in operating activities.... (56,458) (11,071,930) (19,956,461) (15,757,151) (29,972,796)
-------- ------------ ------------ ------------ ------------
Cash flows from investing activities:
Investments held to maturity..................... -- -- (2,691,377) -- 2,691,377
Purchases of property and equipment.............. -- (1,464,939) (34,965,980) (1,687,653) (35,484,021)
Purchase of indefeasible right to use fiber
lines.......................................... -- -- -- -- (14,002,592)
Cash paid for acquisitions, net of cash
acquired....................................... -- -- (1,106,630) (494,004) (3,026,791)
-------- ------------ ------------ ------------ ------------
Net cash used in investing activities.... -- (1,464,939) (38,763,987) (2,181,657) (49,822,027)
-------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of note payable to bank... -- 90,000 -- -- --
Principal payments on note payable to bank....... -- (6,618) (25,986) -- (57,396)
Proceeds from Series 1999 notes payable and
warrants....................................... -- -- 10,460,000 10,574,809 --
Payment of Series 1999 notes payable............. -- -- (4,210,000) -- --
Purchase of treasury stock....................... -- -- (208,620) -- --
Proceeds from exercise of stock options.......... -- -- 22,499 -- 600
Proceeds from issuance of preferred stock........ -- 7,029,603 49,839,121 4,208,002 65,942,964
Proceeds from issuance of common stock........... 109,500 6,770,046 -- -- 345,007
Deferred financing costs......................... -- -- (1,142,572) -- (4,385,463)
Proceeds from term loan and warrants............. -- -- 17,834,394 2,008,206 32,831,615
Payment on term loan............................. -- -- -- -- (17,824,657)
Other............................................ -- -- (10,886) -- --
-------- ------------ ------------ ------------ ------------
Net cash provided by financing
activities............................. 109,500 13,883,031 72,557,950 16,791,017 76,852,670
-------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... 53,042 1,346,162 13,837,502 (1,147,791) (2,942,153)
Cash and cash equivalents at beginning of period... -- 53,042 1,399,204 1,399,204 15,236,706
-------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period......... $ 53,042 $ 1,399,204 $ 15,236,706 $ 251,413 $ 12,294,553
======== ============ ============ ============ ============
Supplemental disclosures:
Interest paid.................................... $ -- $ 1,952 $ 939,381 $ 296,758 $ 1,334,271
======== ============ ============ ============ ============
Stock subscriptions receivable................... $595,500 $ 4,208,002 $ -- $ -- $ --
======== ============ ============ ============ ============
Notes payable exchanged for preferred stock...... $ -- $ -- $ 6,250,000 $ -- $ --
======== ============ ============ ============ ============
Accounts payable incurred for property and
equipment...................................... $ -- $ -- $ 7,380,319 $ -- $ --
======== ============ ============ ============ ============
Notes receivable from officers exchanged for
preferred stock................................ $ -- $ -- $ -- $ -- $ 898,750
======== ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 179
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
State Communications, Inc., (the "Company") a broadband telecommunications
provider, was organized in October 1997 as a South Carolina corporation. The
Company offers broadband data and voice telecommunications services primarily to
residential and small and medium-sized business markets in the southeastern
United States. The Company's services include high speed data and Internet
service, principally utilizing digital subscriber line technology, local
exchange service and long distance service.
The Company has limited operating history and is changing certain of its
business strategies. As a result, the Company is in the process of entering
additional markets. Since inception, the Company has recognized operating losses
and negative cash flows and expects to incur losses in the future as the Company
expands its network. The expansion and development of the Company's business and
deployment of its networks, services and systems will require significant
amounts of additional capital.
(B) INTERIM FINANCIAL STATEMENTS
The interim financial information as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 is unaudited and has been prepared on the
same basis as the audited consolidated financial statements. In the opinion of
management, such unaudited information includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
interim information. Operating results for the six months ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
(C) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its wholly owned subsidiaries, which include TriVergent
Communications, Inc., TriVergent Communications South, Inc., TriVergent Leasing
LLC and Carolina OnLine, Inc. All significant intercompany transactions are
eliminated in consolidation.
(D) REVENUE RECOGNITION
The Company bills customers in advance for fixed monthly service fees and
in arrears for actual local and long-distance usage amounts. Revenues are
recognized ratably over the service period for fixed fees and on usage for local
and long distance services. Accounts receivable as of December 31, 1998 and 1999
include revenues of approximately $728,161 and $226,276, respectively, for which
services were provided in December and billed in the subsequent period.
(E) CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
trade accounts receivable and investments held to maturity. In determining the
nature of the Company's cash and cash equivalents and held to maturity
investments, the Company's policy is to invest in highly rated commercial paper
and corporate bonds. Although the Company's customer base is fairly centralized
geographically, there is no particular concentration of industry. As a result,
management believes no additional credit risk beyond amounts provided for
collection losses is inherent in accounts receivable.
F-21
<PAGE> 180
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
(F) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with maturities
from time of purchase of three months or less. The cost of the cash equivalents
approximates fair market value.
The Company had letters of credit totaling $313,000 for vendor guarantees
as of December 31, 1999. Letters of credit are primarily collateralized by cash.
(G) INVESTMENT SECURITIES
The Company does not have any trading securities or available-for-sale
securities at December 31, 1999 or December 31, 1998. The investments
held-to-maturity include highly rated corporate bonds with original maturities
of six months or less and are reported at amortized cost. The carrying value of
the corporate bonds approximates the fair value. The investments have been
classified as held-to-maturity because the Company has the intent and the
ability to hold all such securities until maturity.
(H) DEFERRED FINANCING COSTS
Deferred financing costs consist of legal fees and other fees related to
the Company's debt obligations. These costs are being amortized on a
straight-line basis over the term of the related debt. Amortization expense for
these costs is included as a component of interest expense in the consolidated
statements of operations.
(I) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation on property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets ranging from 3 to 7 years. Switch equipment will be
depreciated when placed in service during fiscal year 2000 using the
straight-line method over a useful life of 7 years.
(J) EQUIPMENT UNDER CAPITAL LEASE
The Company leases certain of its data communication equipment under a
lease agreement accounted for as a capital lease. The assets and liabilities
under capital leases are recorded at the lesser of the present value of
aggregate future minimum lease payments, including estimated bargain purchase
options, or the fair value of the assets under lease. Assets under the capital
lease are amortized over the term of the lease and such amortization is included
in depreciation expense.
(K) GOODWILL
Goodwill represents the excess of the purchase price and related costs over
the value assigned to the net tangible and identifiable intangible assets of
businesses acquired. Goodwill is amortized on a straight-line basis over 10
years.
(L) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets including goodwill in accordance
with the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison
F-22
<PAGE> 181
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
of the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. There have been no
impairments through December 31, 1999. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
(M) INCOME TAXES
The Company records income taxes under the asset and liability method. As
such, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(N) STOCK SPLIT
On May 1, 1998, the Company issued a two-for-one stock split of its common
stock in the form of a stock dividend. A total of 4,180,500 shares of common
stock were issued in connection with the two-for-one stock split. The stated par
value of each share was not changed from $.001. All common stock share data have
been retroactively adjusted to reflect this change.
(O) STOCK OPTION PLAN
SFAS No. 123 allows an entity to apply the provisions of APB Opinion No. 25
and provide pro forma net loss and, if loss per share is presented, pro forma
loss per share disclosures for employee stock option grants made as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the intrinsic-value-based method under the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123. Compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeds the exercise price.
(P) SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which requires a "management approach" to
segment information. The management approach designates the internal reporting
that is used by management for making operating decisions and assessing
performance as the source of reportable segments. The Company operates in a
single industry segment, "Communication Services." Operations are managed and
financial performance is evaluated based on the delivery of multiple
communications services to customers.
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires that every derivative be recorded as either an asset or liability
in the balance sheet and measured at its fair value. SFAS No. 133 also requires
that changes in the derivative's fair market value be recognized currently in
F-23
<PAGE> 182
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate and assess the effectiveness of transactions that
require hedge accounting. The Company is required to adopt SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities an Amendment of FASB
Statement No. 133," on a prospective basis for interim periods and fiscal years
beginning January 1, 2001. The Company does not anticipate that adoption of SFAS
No. 133 will have a material effect on its financial statements.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in financial statements. SAB 101 must be applied to financial statements no
later than the fourth fiscal quarter of 2000. The Company does not believe
adoption will have a material impact on its consolidated financial position or
results of operations.
(R) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company considers the recorded value of its current assets and
liabilities, consisting primarily of cash and cash equivalents, investments,
accounts receivable, other current assets, accounts payable, and accrued
expenses to approximate fair value because of the short term maturity of the
instruments. The fair value of long-term debt, including the current portion, is
estimated based on quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same maturities. Due to the
fact that the Company's long-term debt has a variable interest rate, the
carrying value approximates fair value.
(S) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, such as
the allowance for uncollectible accounts, 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 those estimates.
(T) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 established reporting and
disclosure requirements for comprehensive income and its components within the
financial statements. Other than net loss, there were no comprehensive income
components for the three years ended December 31, 1999.
F-24
<PAGE> 183
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998 1999 2000
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Switch equipment....................................... $ -- $34,920,377 $65,152,576
Indefeasible right to use fiber lines.................. -- -- 14,002,592
Computer equipment and software........................ 1,338,688 9,090,448 12,344,225
Furniture, fixtures and other equipment................ 126,251 986,645 2,751,079
Leasehold improvements................................. -- 365,419 832,816
---------- ----------- -----------
1,464,939 45,362,889
Less accumulated depreciation.......................... (150,595) (1,305,658) (5,576,253)
---------- ----------- -----------
$1,314,344 $44,057,231 $89,507,035
========== =========== ===========
</TABLE>
No depreciation expense was recorded in 1999 on the switch equipment costs.
Depreciation of the switch equipment began once the switches were placed in
service in 2000. Depreciation expense amounted to $150,595, $1,155,063, and
$4,270,595 in 1998, 1999, and the six months ended June 30, 2000 respectively.
(3) ACQUISITIONS
In March 1999, the Company acquired the assets and liabilities of Carolina
Online, Inc., a South Carolina based internet service provider, for a total
purchase price of approximately $1.8 million which included cash and stock.
Common stock issued for the Carolina Online acquisition was 545,833 shares
valued at $2.40 per share. The Carolina Online acquisition has been accounted
for by the purchase method of accounting and, accordingly, the results of
operations of Carolina Online from the period after the acquisition are included
in the accompanying consolidated financial statements. The excess cost over the
estimated fair value of net assets acquired was allocated to goodwill. A total
of approximately $1.6 million was allocated to goodwill and is being amortized
on a straight-line basis over 10 years. The pro forma results for 1998 and 1999
as if Carolina Online were acquired at the beginning of each year would not be
significantly different than the actual results.
In July 1999, the Company acquired the assets and liabilities of DCS, Inc.
for a total purchase price of approximately $1.0 million in cash, stock and the
assumptions of debt. DCS is a telecommunications equipment dealer that provides
data integration products and services. The Company issued 262,959 shares of
common stock valued at $2.40 per share. The DCS acquisition has been accounted
for by the purchase method of accounting and, accordingly, the results of
operations of DCS from the period after the acquisition are included in the
accompanying consolidated financial statements. The excess of cost over the
estimated fair value of net assets acquired of approximately $812,000 was
allocated to goodwill and is being amortized on a straight-line basis over 10
years. The pro forma results for 1998 and 1999 as if DCS were acquired at the
beginning of each year would not be significantly different than the actual
results.
In addition, the Company acquired two companies in February 2000 and one
company in June 2000 as described in Note 15.
F-25
<PAGE> 184
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
(4) TERM LOAN
In May 1999, the Company entered into a term loan facility ("term loan")
with Nortel, a major equipment vendor. The term loan provides the Company with
maximum borrowings of $42.0 million at London interbank offered rate plus 4.75%
interest (10.75% at December 31, 1999). The term loan is due in May 2003. The
term loan is secured by all assets of the Company.
In conjunction with the term loan, the Company issued Nortel warrants to
purchase 508,089 shares of common stock at $2.00 per share, expiring on May 27,
2006. The fair value of the warrants was determined to be $1.67 per share. The
fair value of the warrants has been recorded as additional paid-in capital and
as debt discount. The total debt discount of $848,509 is being amortized over
the term of the loan as interest expense. As of December 31, 1999, the
unamortized discount amounted to $724,768.
In February 2000, the Company paid in full the balance of the term loan
resulting in an extraordinary loss of $724,768 from early extinguishment of debt
(unaudited). (See note 15).
(5) NOTES PAYABLE
The Company borrowed $90,000 on September 29, 1998 from a bank. The loan
had an outstanding balance of $83,382 and $57,396 as of December 31, 1998 and
1999, respectively. The loan bears interest at 8.75%, matures September 29,
2001, and is collateralized by furniture and fixtures. This loan was paid in
full in January 2000.
In March 1999, the Company issued $6,460,000 of Series 1999 notes with a
stated interest rate of 13% due January 3, 2000. As part of the agreement, the
Company issued warrants to purchase 232,560 shares of common stock at $2.00 per
share expiring three years from issuance. The fair value of the warrants was
determined to be $1.20 per share. The fair value of the warrants was recorded as
additional paid-in capital and as debt discount. The debt discount was being
amortized over the term of the loan as interest expense. Notes payable of
$6,250,000 were converted to Series B preferred stock in July 1999, resulting in
an extraordinary loss of $167,443 from early extinguishment of debt. The
remaining $210,000 was paid in full in October 1999.
In May 1999, the Company issued $4.0 million of Series 1999A notes to the
lender with detachable warrants. The notes had an original maturity of January
2000 and an interest rate of 13%. The warrants were issued to purchase 144,000
shares of common stock at $2.00 per share expiring on May 27, 2006. The fair
value of the warrants was determined to be $1.67 per share. The fair value of
the warrants was recorded as additional paid-in capital and as debt discount.
The debt discount was being amortized over the term of the loan as interest
expense. This loan was paid in full in October 1999, resulting in an
extraordinary loss of $50,194 from early extinguishment of debt.
(6) REDEEMABLE PREFERRED STOCK
SERIES A PREFERRED STOCK
During October 1998, the Company privately sold 4,711,672 shares of its
Series A 5.5% cumulative convertible preferred stock for $2.40 per share. Net
proceeds from the subscriptions from this stock of $7,029,603 were received in
1998. The balance of $4,208,002 was received by the Company in January 1999.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series A preferred stock would be entitled to receive, prior
and in preference to the holders of common stock, (i) an amount for each share
of Series A preferred stock held by them equal to the Series A original
F-26
<PAGE> 185
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
purchase price (as adjusted for stock dividends, splits, combinations, etc.)
plus (ii) any accrued and unpaid dividends.
Each holder of Series A preferred stock has the right to convert each share
into shares of common stock on a one-for-one basis subject to certain conversion
price adjustments. All shares of Series A preferred stock shall automatically be
converted into shares of common stock, (i) at the election of 75% of the holders
or (ii) in the event of a qualified public offering of the Company's common
stock as defined.
Each holder of Series A preferred stock may cause the Company to redeem up
to one-third of the preferred stock originally issued to such holder on the
following dates: (i) February 1, 2005, (ii) February 1, 2006 and (iii) February
1, 2007. In the event that there is a change in control or reorganization or
liquidation or insolvency of the Company, the holders of the Series A preferred
would have the right to request that their shares be redeemed. Such redemptions
would be at a price equal to the greater of fair market value of the Series A
preferred stock on the day of redemption or the original Series A preferred
price (as adjusted for stock dividends, splits, combinations, etc.) plus accrued
and unpaid dividends.
Each share of Series A preferred stock is entitled to a single vote for
every share of common stock then issuable upon conversion. The holders of the
Series A preferred stock would vote with common stock on all matters except as
specifically provided herein or as otherwise required by law.
The holders of the Series A preferred stock would be entitled to receive
cumulative dividends in preference to any dividend on the common stock at the
rate of 5.5% of the original Series A purchase price when and as declared by the
Board of Directors. Any accrued unpaid dividends will be payable upon an initial
public offering, an acquisition or liquidation of the Company. Accrued unpaid
dividends at December 31, 1999 and June 30, 2000 amounted to $671,267 and
$1,594,789, respectively.
SERIES B PREFERRED STOCK
During July 1999, the Company privately sold 12,200,000 shares of its
Series B 5.5% cumulative convertible preferred stock for $3.75 per share. Gross
proceeds before expenses from the subscriptions for this stock of $45,750,000
were received during 1999. In addition, $6,250,000 notes payable, discussed in
note 5, were converted into 1,666,662 shares of Series B preferred stock. Total
consideration for the Series B issuance was $52.0 million.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series B preferred will be entitled to receive, prior and in
preference to the holders of Common Stock, (i) an amount for each share of
Series B preferred stock held by them equal to the Series B original purchase
price (as adjusted for stock dividends, splits, combinations, etc.) plus (ii)
any accrued and unpaid dividends.
Each holder of Series B preferred stock has the right to convert each share
into shares of common stock on a one-for-one basis subject to certain conversion
price adjustments. All shares of Series B preferred stock shall automatically be
converted into shares of common stock, (i) at the election of 50% of the holders
or (ii) in the event of a qualified public offering of the Company's common
stock as defined.
Each holder of Series B preferred stock may cause the Company to redeem up
to one-third of the preferred stock originally issued to such holder on the
following dates: (i) February 1, 2005, (ii) February 1, 2006 and (iii) February
1, 2007. In the event that there is a change in control or reorganization or
liquidation or insolvency of the Company, the holders of the Series B preferred
would have the right to request that their shares be redeemed. Such redemptions
would be at a price equal to the
F-27
<PAGE> 186
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
greater of fair market value of the Series B preferred stock on the day of
redemption or the original Series B preferred price (as adjusted for stock
dividends, splits, combinations, etc.) plus accrued and unpaid dividends.
Each share of Series B preferred stock is entitled to a single vote for
every share of common stock then issuable upon its conversion. The holders would
vote with common stock on all matters except as specifically provided or as
otherwise required by law.
The holders would be entitled to receive cumulative dividends in preference
to any dividend on the common stock at the rate of 5.5% of the original Series B
purchase price when and as declared by the Board of Directors. Any accrued but
unpaid dividends will be payable upon an initial public offering, an acquisition
or liquidation of the Company. Accrued unpaid dividends at December 31, 1999 and
June 30, 2000 amounted to $1,213,345 and $3,852,772, respectively.
PREFERRED STOCK ACCRETION
The Company periodically increases the carrying amount of its redeemable
preferred stock through accretion using the interest method so that the carrying
amount will equal the expected redemption amount at the expected redemption
dates. In addition, the Company increases the carrying amount of its preferred
stock by amounts representing cumulative dividends not currently declared or
paid, but will be due and payable upon redemption. The Company recorded no
accretion for 1997 and accretion of $57,863, $2,603,040, $299,877, and
$9,737,189 for the years ended December 31, 1998 and 1999, and for the six month
periods ended June 30, 1999 and June 30, 2000, respectively.
(7) LEASES
The Company leases office space and other equipment. Rent expense for the
years ended December 31, 1998 and 1999 totaled $106,717 and $807,011,
respectively. Future minimum lease payments under capital and noncancelable
operating leases for the years subsequent to December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
---------- -----------
<S> <C> <C>
2000........................................................ $ 392,086 $ 2,169,464
2001........................................................ 481,745 2,295,039
2002........................................................ 481,745 2,162,030
2003........................................................ 459,946 1,994,011
2004........................................................ -- 1,851,443
Thereafter.................................................. -- 8,818,908
---------- -----------
Total minimum lease payments......................... 1,815,522 $19,290,895
===========
Less amount representing interest (12.5%)................... 380,804
----------
Present value of minimum lease payments..................... 1,434,718
Less current portion of capital lease obligation............ 392,086
----------
Long-term portion of capital lease obligation............... $1,042,632
==========
</TABLE>
F-28
<PAGE> 187
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
(8) INCOME TAXES
The income tax benefit for 1997, 1998 and 1999 and the six months ended
June 30, 2000 differed from the amounts computed by applying the Federal income
tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999 2000
-------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computed "expected" tax benefit.............. $(14,000) $(4,326,000) $(8,726,000) $(9,191,000)
Increase (decrease) in income taxes resulting
from:
State and local income taxes, net of Federal
income tax effect.......................... (1,000) (420,000) (841,000) (892,000)
Change in the valuation allowance for
deferred tax assets allocated to income tax
expense.................................... 15,000 4,742,000 9,506,000 9,981,000
Other, net................................... -- 4,000 61,000 102,000
-------- ----------- ----------- -----------
Actual tax benefit........................... $ -- $ -- $ -- $ --
======== =========== =========== ===========
</TABLE>
The tax effect of temporary differences and carryforwards which give rise
to deferred tax assets and liabilities as of December 31, 1998 and 1999 and June
30, 2000 are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1998 1999 2000
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Accrued liabilities and allowances................ $ 740,000 $ 72,000 $ 158,000
Capitalized start-up costs........................ 436,000 337,000 287,000
Net operating loss carryforwards.................. 3,669,000 13,986,000 24,304,000
----------- ------------ ------------
Total gross deferred tax assets................ 4,845,000 14,395,000 24,749,000
Less valuation allowance............................ (4,757,000) (14,263,000) (24,244,000)
----------- ------------ ------------
Net deferred tax assets............................. 88,000 132,000 505,000
----------- ------------ ------------
Deferred tax liabilities:
Prepaid expenses.................................. -- (18,000) (18,000)
Property and equipment, principally due to
differences in depreciation.................... (88,000) (114,000) (487,000)
----------- ------------ ------------
Total gross deferred tax liabilities........... (88,000) (132,000) (505,000)
----------- ------------ ------------
Net deferred tax asset (liability).................. $ -- $ -- $ --
=========== ============ ============
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998,
1999 and June 30, 2000 was $4,757,000, $14,263,000 and $24,244,000,
respectively. The net change in the total valuation allowance for the periods
ended December 31, 1998, 1999 and June 30, 2000 was an increase of $4,742,000,
$9,506,000 and $9,981,000, respectively.
At December 31, 1999, the Company has a net operating loss carryforward for
Federal and state income tax purposes of approximately $37,495,000 which is
available to offset future taxable income, if any, through the year 2019.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of
F-29
<PAGE> 188
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. In
order to fully realize the deferred tax asset, the Company will need to generate
future taxable income prior to the expiration of the net operating loss
carryforward. Management considered the scheduled reversal of deferred tax
liabilities in making this assessment. Based upon the level of taxable losses
incurred during the start-up phase and projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it has established an appropriate valuation allowance at December 31,
1998 and 1999 and June 30, 2000.
(9) RELATED PARTY TRANSACTIONS
The Company purchased investing advice and other services from Seruus
Ventures, Inc., an entity in which two executive officers of the Company have an
ownership interest. Payments to Seruus totaled $13,788 and $61,448 for the years
ended December 31, 1998 and 1999, respectively.
As discussed in note 5, of the $6,460,000 Series 1999 notes payable,
$250,000 were issued to an executive officer of the Company. In July of 1999,
these notes were converted to preferred stock. During 1999, the Company
recognized interest expense of $12,187 related to these notes.
During 1999, the Company acquired 69,540 shares of its own stock for
$208,620 in satisfaction of a note receivable from an employee. The Company
recognized interest income of $14,346.
(10) COMMITMENTS
The Company has a long-distance capacity agreement with a long haul
telecommunications provider. Under the agreement, the Company is liable for a
yearly minimum usage charge according to the schedule below:
<TABLE>
<S> <C>
2000........................................................ $30,000,000
2001........................................................ 7,000,000
2002........................................................ 5,000,000
2003........................................................ 4,000,000
2004........................................................ 4,000,000
</TABLE>
In the event such yearly commitments are not met, the Company is required
to remit 100% of the difference between the yearly commitment and actual usage.
Such amount, if necessary, would be recorded as cost of services in the period
incurred. The agreement extends through October 2004.
(11) NET LOSS PER COMMON SHARE
Basic and diluted loss per share amounts are presented below in accordance
with the requirements of SFAS No. 128, "Earnings Per Share." Basic net loss per
share is computed by dividing net loss applicable to common stockholders by the
weighted average number of shares of the Company's common stock outstanding
during the period. Diluted net loss per share is determined in the same manner
as basic net loss per share except that the number of shares is increased
assuming exercise of dilutive stock options and warrants using the treasury
stock method and conversion of the Company's convertible preferred stock.
Potential common stock (stock options and warrants) have been excluded from the
calculation of diluted loss per share, as they are antidilutive. The Series A,
Series B and Series C convertible preferred stock that are convertible into
shares of common stock also are excluded from the calculation of diluted loss
per
F-30
<PAGE> 189
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
share as they are antidilutive. The following table presents the calculation of
basic and diluted loss per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1998 1999 1999 2000
--------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Loss before extraordinary
item...................... $ (39,851) $(12,723,047) $(25,446,208) $(16,104,954) $(26,308,359)
Preferred stock accretion... -- (57,863) (2,603,040) (299,877) (9,737,189)
--------- ------------ ------------ ------------ ------------
Loss to common stockholders
before extraordinary
item...................... (39,851) (12,780,910) (28,049,248) (16,404,831) (36,045,548)
Extraordinary item.......... -- -- (217,637) -- (724,768)
--------- ------------ ------------ ------------ ------------
Net loss to common
stockholders.............. $ (39,851) $(12,780,910) $(28,266,885) $(16,404,831) $(36,770,316)
========= ============ ============ ============ ============
Weighted average common
shares outstanding, basic
and diluted............... 6,390,476 9,308,771 10,868,729 10,645,897 11,773,102
Basic and dilutive loss per
share:
Before extraordinary
item................... $ (.01) $ (1.37) $ (2.58) $ (1.54) $ (3.06)
Extraordinary item........ -- -- (.02) -- (.06)
--------- ------------ ------------ ------------ ------------
Net loss.................... $ (.01) $ (1.37) $ (2.60) $ (1.54) $ (3.12)
========= ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1999 2000
---------- -----------
(UNAUDITED)
<S> <C> <C>
Shares of common stock issuable upon conversion of:
Series A convertible preferred stock...................... 4,711,672 4,711,672
Series B convertible preferred stock...................... 13,866,662 13,866,662
Series C convertible preferred stock...................... -- 15,776,471
Options for common stock issued to employees.............. 5,276,707 9,411,403
Warrants for common stock issued to non-employees......... 1,084,649 1,084,649
</TABLE>
(12) EMPLOYEE INCENTIVE PLAN
On January 12, 1998, the Company established an employee incentive plan
under which options, bonus stock awards and restricted stock awards may be
issued at the discretion of the Board of Directors of the Company. Options and
awards for no more than 10,000,000 shares of the Company's common stock may be
granted pursuant to this plan. The options vest at the rate of 20% per year for
five years and are exercisable for 10 years from date of grant.
The Company applies APB Opinion No. 25 in accounting for options granted
under its employee incentive plan. No compensation cost has been recognized for
option grants in the financial statements. Had the Company accounted for
compensation cost based on the fair value at the grant date for stock
F-31
<PAGE> 190
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
options in the plan under SFAS No. 123, net loss and net loss per common share
would have been reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1998 1999 1999 2000
-------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss:
As reported............... $(39,851) $(12,723,047) $(25,663,845) $(16,104,954) $(27,033,127)
Pro forma................. (39,851) (13,093,427) (26,598,856) (16,526,945) (28,981,135)
Net loss per common share,
basic and diluted:
As reported............... $ (.01) $ (1.37) $ (2.60) $ (1.54) $ (3.12)
Pro forma................. (.01) (1.41) (2.69) (1.58) (3.29)
</TABLE>
For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model and the minimum value method permitted by SFAS No. 123 for
entities not publicly traded with the following weighted-average assumptions
used for grants in 1998, 1999 and 2000:
<TABLE>
<S> <C>
Dividend yield.............................................. 0 percent
Risk-free interest rate..................................... 5.00 percent
Expected life............................................... 7 years
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1998 and 1999 was $.62 and $.96 respectively.
The following is a summary of the activity in the Company's Plan during the
years ended December 31, 1998 and 1999 and the period ended June 30, 2000:
<TABLE>
<CAPTION>
1998 1999 2000
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
period.......................... -- $ -- 2,997,104 $2.11 5,276,707 $2.68
Options granted................... 2,997,104 2.11 2,655,371 3.25 4,211,647 6.46
Options exercised................. -- -- (14,666) 1.53 (200) 3.00
Options canceled.................. -- -- (361,102) 2.21 (76,751) 3.48
--------- ----- --------- ----- --------- -----
Options outstanding, end of
period.......................... 2,997,104 $2.11 5,276,707 $2.68 9,411,403 $4.36
========= ===== ========= ===== ========= =====
</TABLE>
The weighted-average remaining contractual life of options outstanding was
8.9 years, with exercise prices ranging from $1.50 to $3.75, as of December 31,
1999. Options exercisable at December 31, 1999 were 548,530 shares at a weighted
average exercise price of $2.12. The weighted average remaining contractual life
of options outstanding was 9.1 years, with exercise prices ranging from $1.50 to
$2.40, as of December 31, 1998. None of the options granted were exercisable at
December 31, 1998.
F-32
<PAGE> 191
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
Options outstanding as of December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
WEIGHTED
RANGE WEIGHTED AVERAGE
OF AVERAGE REMAINING
EXERCISE EXERCISE CONTRACTUAL
PRICE SHARES PRICE LIFE
-------- --------- -------- -----------
<C> <S> <C> <C> <C>
$1.50 ......................................................... 818,000 $1.50 8.1
2.25 ......................................................... 236,200 2.25 8.5
2.40 ......................................................... 2,494,129 2.40 8.5
3.00 ......................................................... 134,311 3.00 9.3
3.75 ......................................................... 1,594,067 3.75 9.9
---------
5,276,707
=========
</TABLE>
(13) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan for all eligible employees
of the Company under the provisions of the Internal Revenue Code Section 401(k).
The TriVergent Communications, Inc. 401(k) Plan allows employees to contribute
up to 15% of compensation and, upon annual approval of the Board of Directors,
the Company matches 50% of employee contributions up to 6% of total compensation
subject to certain adjustments and limitations. No contribution was made in
1997. A total of $24,332 and $100,086 was charged to operations for the
Company's matching contributions in 1998 and 1999, respectively.
(14) ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Changes in the allowance for uncollectible accounts for the years and
period ended December 31 and June 30 were as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999 2000
---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of year or period........... $ -- $ -- $1,976,000 $186,000
Provision for uncollectible accounts......... -- 1,976,000 7,285,528 382,095
Allowance of acquired company................ -- -- -- 11,381
Charge-offs.................................. -- -- 9,075,528 156,044
---------- ---------- ---------- --------
Balance, end of year or period................. $ -- $1,976,000 $ 186,000 $423,432
========== ========== ========== ========
</TABLE>
(15) SUBSEQUENT EVENTS (UNAUDITED)
In January 2000, the Company entered into a $40,000,000 senior secured
eight-year revolving credit facility and an $80,000,000 senior secured
eight-year delayed drawdown term loan facility ("credit facility"). The interest
rate is a sliding scale based on financial performance and covenants. The
interest rate starts at LIBOR plus 4.50% or Prime plus 3.50%. The agreement
establishes milestones where the Company must borrow set dollar amounts during
the year. The proceeds will be used to fund capital expenditures for the
Company's communications facilities and the associated interest expense. The
facility provides for certain restrictive financial and operating covenants. The
senior secured credit facility is guaranteed by the Company and is secured by
all of the assets of TriVergent Communications, Inc. and its subsidiaries.
F-33
<PAGE> 192
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
Commencing March 31, 2003 and at the end of each calendar quarter
thereafter, the principal amount of the credit facility shall be reduced by an
amount equal to the following annual percentages: March 31, 2003 through and
including December 31, 2003 -- 12.5%, March 31, 2004 through and including
December 31, 2004 -- 17.5%, March 31, 2005 through and including December 31,
2005 -- 20%, March 31, 2006 through and including December 31, 2006 -- 25%,
March 31, 2007 through and including December 31, 2007 -- 25%. As of June 30,
2000 the Company has drawn $25,000,000 on the revolving credit facility.
During February 2000, the Company privately sold 11,561,768 shares of
Series C 5.5% redeemable cumulative convertible preferred stock for $4.25 per
share for total proceeds of approximately $49,138,000. Each share of Series C
preferred is convertible into one share of common stock. A portion of the
proceeds were used to repay the Nortel term loan as discussed in note 4.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series C preferred would be entitled to receive, prior and in
preference to the holders of Common Stock, (i) an amount for each share of
Series C preferred stock held by them equal to the Series C original purchase
price (as adjusted for stock dividends, splits, combinations, etc.) plus (ii)
any accrued and unpaid dividends.
Each holder of Series C preferred stock has the right to convert each share
into shares of common stock on a one-for-one basis subject to certain conversion
price adjustments. All shares of Series C preferred stock shall automatically be
converted into shares of common stock, (i) at the election of 67% of the holders
or (ii) in the event of a qualified public offering of the Company's common
stock as defined.
Each holder of Series C preferred stock may cause the Company to redeem up
to one-third of the preferred stock originally issued to such holder on the
following dates: (i) February 1, 2005, (ii) February 1, 2006 and (iii) February
1, 2007. In the event that there is a change in control or reorganization or
liquidation or insolvency of the Company or the Company breaches a term of the
related financing documents, the holders of the Series C preferred would have
the right to request that their shares be redeemed. Such redemptions would be at
a price equal to the greater of fair market value of the Series C preferred
stock on the day of redemption or the original Series C preferred price (as
adjusted for stock dividends, splits, combinations, etc.) plus accrued and
unpaid dividends.
Each share of Series C preferred stock shall be entitled to a single vote
for every share of common stock then issuable upon its conversion. The holders
shall vote with common stock on all matters except as specifically provided or
as otherwise required by law.
The holders of the Series C preferred stock would be entitled to receive
cumulative dividends in preference to any dividend on the common stock at the
rate of 5.5% of the original Series C purchase price when and as declared by the
Board of Directors. Any accrued but unpaid dividends will be payable upon an
initial public offering, an acquisition or liquidation of the Company. Accrued
unpaid dividends at June 30, 2000 amounted to $1,437,239.
In February 2000, the Company purchased the assets and liabilities of two
companies. The Company purchased Ester Communications for a total purchase price
of $4.5 million. Ester Communications, provides local exchange, long distance
and integrated voice and data products. Cash of approximately $2.0 million and
587,755 shares of common stock valued at $4.25 per share were exchanged for the
company. The Company also purchased Information Services and Advertising
Corporation, an internet service provider, for a total purchase price of
$800,000. Cash of $300,000 and 117,647 shares valued at $4.25 per share of
common stock were exchanged for the company. The acquisitions were accounted for
using the purchase method of accounting.
F-34
<PAGE> 193
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
In March 2000, the Company granted 750,000 common stock options to an
executive of the Company. The options vest over five years and have an exercise
price of $3.00, however the fair market value of the options at date of grant
was $4.25. As a result, the Company will record compensation expense over the
vesting period and has recorded $62,500 of compensation expense for the six
months ended June 30, 2000.
In March 2000, the Company entered into a multiple-advance term loan
facility with Nortel. The term loan provides the Company with maximum borrowings
of $45.0 million at LIBOR plus 4.75% or Prime plus 3.75% interest. The term loan
has a due date of March 2004. The term loan is secured by all assets of
TriVergent Communications South, Inc., and provides for certain restrictive
financial and operating covenants. This subsidiary will own the assets acquired
with the proceeds of the loan. In March 2000, the Company also entered into an
agreement to purchase $100 million of Nortel switching equipment and services.
At June 30, 2000 the Company had drawn down $7,831,615 of the term loan to
purchase equipment from Nortel.
In March 2000, the Company privately sold 4,214,703 shares of Series C 5.5%
redeemable cumulative convertible preferred stock for $4.25 per share for gross
proceeds before expenses of $17,912,487.
In March 2000, the Company paid $14.0 million to a long haul
telecommunications provider for an indefeasible right to use fiber lines for
twenty years to connect switching equipment.
On March 6, 2000, the Company entered into a $750,000 note receivable
("note") agreement with an executive officer of the Company. This note arose
whereby the Company loaned the executive officer money to purchase shares of the
Company's Series C preferred stock at the then fair market value. The note bears
interest at 8.12%, matures on the third anniversary of the note or sixty days
after the effective date of the termination of the executive officer's
employment with the Company, and is collateralized by shares of the Company's
Series C preferred stock. The receivable is shown on the balance sheet as a
reduction of total redeemable preferred stock.
On March 14, 2000, the Company entered into a $148,750 note receivable
("note") agreement with an executive officer of the Company. This note arose
whereby the Company loaned the executive officer money to purchase shares of the
Company's Series C preferred stock at the then fair market value. The note bears
interest at 10%, matures on the third anniversary of the note or sixty days
after the effective date of the termination of the executive officer's
employment with the Company, and is collateralized by shares of the Company's
Series C preferred stock. The receivable is shown on the balance sheet as a
reduction of total redeemable preferred stock.
On March 15, 2000, the Company entered into an interest rate hedge
agreement ("agreement") with a $60 million notional amount related to its
borrowings under the credit facility. The purpose of the agreement is to reduce
its exposure to risks associated with interest rate fluctuations and are
required by the credit facility.
On April 14, 2000, the Company filed a registration statement with the
Securities and Exchange Commission in anticipation of a possible public offering
of equity securities. On June 9, 2000, the Company and Gabriel Communications,
Inc. entered into an Agreement and Plan of Merger to combine the two companies
to form a regional, facilities-based integrated communications provider. The
merger has been unanimously approved by the Boards of Directors of both
companies and stockholders holding more than two-thirds of the voting stock of
both companies have agreed to vote their shares to approve the merger. Further
action regarding the registration statement is pending the contemplated merger
with Gabriel Communications, Inc.
F-35
<PAGE> 194
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
On June 30, 2000, the Company acquired the assets and liabilities of
InterNetMCR, Inc. for a total purchase price of approximately $1,665,400 in cash
and stock. InterNetMCR is an internet and network integration company
headquartered in Greensboro, NC. The Company issued 196,000 shares of common
stock valued at $6.15 per share. The InterNetMCR acquisition has been accounted
for by the purchase method of accounting and, accordingly, the results of
operations of InterNetMCR from the period after the acquisition are included in
the accompanying consolidated financial statements. The excess of cost over the
estimated fair value of net assets acquired of approximately $1,665,400 was
allocated to goodwill and is being amortized on a straight-line basis over 10
years. The pro forma results for 1998 and 1999 as if InterNetMCR were acquired
at the beginning of each year would not be significantly different than the
actual results.
On August 31, 2000, the Company reincorporated in the State of Delaware. As
a result, the authorized common stock is now 100,000,000 shares at a par value
of $.0001 per share. Likewise, the authorized preferred stock is now 50,000,000
shares at a par value of $.0001, of which 5,500,000 shares have been designated
as Series A cumulative convertible preferred stock, 15,000,000 shares have been
designated as Series B cumulative convertible preferred stock and 16,500,000
shares have been designated as Series C cumulative convertible preferred stock.
F-36
<PAGE> 195
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware provides for, among
other things:
a. permissive indemnification for expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by designated
persons, including directors and officers of a corporation, in the event
such persons are parties to litigation other than stockholder derivative
actions if certain conditions are met;
b. permissive indemnification for expenses actually and reasonably
incurred by designated persons, including directors and officers of a
corporation, in the event such persons are parties to stockholder
derivative actions if certain conditions are met;
c. mandatory indemnification for expenses actually and reasonably
incurred by designated persons, including directors and officers of a
corporation, in the event such persons are successful on the merits or
otherwise in litigation covered by a. and b. above; and
d. that the indemnification provided for by Section 145 shall not be
deemed exclusive of any other rights which may be provided under any
by-law, agreement, stockholder or disinterested director vote, or
otherwise.
Gabriel's amended and restated certificate of incorporation provides that a
director shall not be personally liable to Gabriel or its stockholders for
monetary damages for breach of fiduciary duty as a director except for liability
(i) for any breach of the director's duty of loyalty to Gabriel or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for paying a
dividend or approving a stock repurchase in violation of Section 174 of the
General Corporation Law of Delaware or (iv) for any transaction from which the
director derived an improper personal benefit.
The by-laws also provide that each person who was or is made a party to, or
is involved in, any action, suit or proceeding by reason of the fact that he or
she is or was a director, officer of Gabriel shall be, and employees and agents
may be, indemnified and held harmless by Gabriel, to the fullest extent
authorized by the General Corporation Law of Delaware, as in effect (or, to the
extent indemnification is broadened, as it may be amended) against all expense,
liability or loss reasonably incurred by such person in connection therewith.
The by-laws further provide that such rights to indemnification are contract
rights and shall include the right to be paid by Gabriel the expenses incurred
in defending the proceedings specified above, in advance of their final
disposition, provided that, if the General Corporation Law so requires, such
payment shall only be made upon delivery to Gabriel by the indemnified party of
an undertaking to repay all amounts so advanced if it shall ultimately be
determined that the person receiving such payment is not entitled to be
indemnified. Gabriel must advance the expenses incurred by the director or
officer in defending any proceeding, within 60 days of receipt of the request
for indemnification. These expenses, including attorneys' fees, may be paid with
respect to indemnified employees and agents, as the board of directors deems
appropriate. The by-laws provide that the right to indemnification and to the
advance payment of expenses shall not be exclusive of any other right which any
person may have or acquire under any statute, provision of Gabriel's by-laws,
amended restated certificate of incorporation, or otherwise. The by-laws also
provide that, subject to the approval of a majority of the board of directors
regarding the terms of availability of the insurance, Gabriel must maintain
insurance, at its expense, to protect any of its directors and officers against
any liability arising out of his or her status as a director or officer, whether
or not Gabriel would have the power to indemnify the director or officer against
such liability under the restated by-law's indemnification provision.
II-1
<PAGE> 196
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
See exhibit index.
(B) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO ADDITIONS
BEGINNING OF COSTS AND CHARGED TO OTHER BALANCE AT END
YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
------------ ---------- ---------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
For the period from June 15, 1998
(inception) to December 31, 1998
Allowance for doubtful accounts.... $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------ -------
Total valuation and qualifying
accounts......................... $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------ -------
For the year ended December 31,
1999
Allowance for doubtful accounts.... $ -- $15,602 $ -- $ -- $15,602
------- ------- ------- ------ -------
Total valuation and qualifying
accounts......................... $ -- $15,602 $ -- $ -- $15,602
------- ------- ------- ------ -------
For the six months ended June 30,
2000 (unaudited)
Allowance for doubtful accounts.... $15,602 $64,617 $ -- $5,961 $74,258
------- ------- ------- ------ -------
Total valuation and qualifying
accounts......................... $15,602 $64,617 $ -- $5,961 $74,258
------- ------- ------- ------ -------
</TABLE>
ITEM 22. UNDERTAKINGS.
(A) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(B) The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, 13 of this
Form S-4, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the Registration Statement through the date of
responding to the request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
II-2
<PAGE> 197
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Chesterfield, State of Missouri, on the 28th day of September 2000.
Gabriel Communications, Inc.
By: /s/ JOHN P. DENNEEN
------------------------------------
John P. Denneen
Executive Vice
President -- Corporate
Development and Legal Affairs
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ---------------------------------- ------------------
<C> <S> <C>
/s/ DAVID L. SOLOMON* Director, Chief Executive Officer September 28, 2000
--------------------------------------------- and Chairman of the Board
David L. Solomon
/s/ GERARD J. HOWE* President and Chief Operating September 28, 2000
--------------------------------------------- Officer and Director
Gerard J. Howe
/s/ THOMAS P. ERICKSON* Senior Vice President and September 28, 2000
--------------------------------------------- Chief Financial Officer
Thomas P. Erickson (Chief Accounting Officer)
/s/ JOHN P. DENNEEN Executive Vice September 28, 2000
--------------------------------------------- President -- Corporate Development
John P. Denneen and Legal Affairs, Secretary and
Director
/s/ MICHAEL R. HANNON* Director September 28, 2000
---------------------------------------------
Michael R. Hannon
/s/ WILLIAM LAVERACK, JR.* Director September 28, 2000
---------------------------------------------
William Laverack, Jr.
/s/ BYRON D. TROTT* Director September 28, 2000
---------------------------------------------
Byron D. Trott
*By /s/ JOHN P. DENNEEN
----------------------------------------
Attorney-in-Fact
</TABLE>
II-3
<PAGE> 198
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1* Agreement and Plan of Merger, dated as of June 9, 2000, by
and among Gabriel Communications, Inc., Triangle
Acquisition, Inc. and State Communications, Inc. (included
an Annex A to the information statement/prospectus included
in this Registration Statement.)(+)
3.1* Amended and Restated Certificate of Incorporation of Gabriel
as of April 14, 2000.
3.2* By-laws of Gabriel as amended as of March 21, 2000.
4.1* Form of $6.00 Warrant Agreement between Gabriel and the
holders of Gabriel Preferred Stock.
4.2* Form of $10.25 Warrant Agreement between Gabriel and the
holders of Gabriel Preferred Stock.
4.3* Shareholders Agreement dated August 14, 1998, as amended as
of November 18, 1998 and December 13, 1999 by and among
Gabriel and its employee stockholders.
4.4* Stockholders' Agreement dated as of March 31, 2000 among
Gabriel and the stockholders of Gabriel.
4.5* Registration Rights Agreement dated as of March 31, 2000
among Gabriel and the stockholders of Gabriel.
5.1* Legal opinion of Bryan Cave LLP.
8.1 Form of Opinion of Bryan Cave LLP regarding tax matters.
8.2 Form of Opinion of Cravath, Swaine & Moore regarding tax
matters.
10.1* Securities Purchase Agreement, dated as of November 18,
1998, as amended by agreement dated as of December 14, 1998
by and among Gabriel and purchasers of Gabriel Series A
Preferred Stock.
10.2* Securities Purchase Agreement, dated as of December 13,
1999, by and among Gabriel, Meritage Private Equity Fund,
L.P. Meritage Private Equity Parallel Fund, L.P. Meritage
Entrepreneurs Fund, L.P. for the purchase of Gabriel Series
A-1 Preferred Stock.
10.3* Securities Purchase Agreement, dated as of March 31, 2000,
by and among Gabriel and purchasers of Gabriel Series B
Preferred Stock.
10.4* Gabriel Communications, Inc. 1998 Stock Incentive Plan, as
amended.
10.5* Amended and Restated State Communications Employee Incentive
Plan dated as of June 21, 2000.
10.6* Employment Agreement dated as of December 13, 1999 between
Gabriel and David L. Solomon.
10.7* Form of Employment Agreement of Charles S. Houser and Shaler
P. Houser dated October 28, 1998, and schedule of material
details for each such person, incorporated herein by
reference to Exhibit 10.9.1 to State Communications, Inc.'s
Registration Statement on Form S-1 (File No. 333-34834) (the
"Form S-1").
10.8* Employment Agreement between G. Michael Cassity and State
Communications, Inc. dated March 10, 2000, incorporated
herein by reference to Exhibit 10.9.2 to the Form S-1.
10.9* Employment Agreement between Riley Murphy and State
Communications, Inc. dated March 15, 2000, incorporated
herein by reference to Exhibit 10.9.3 to the Form S-1.
10.10* Employment Agreement between Gabriel and Gerard J. Howe
dated August 15, 2000.
10.11* Employment Agreement between Gabriel and John P. Denneen
dated August 15, 2000.
10.12* Employment Agreement between Gabriel and Marguerite A.
Forrest dated August 15, 2000.
10.13* Employment Agreement between Gabriel and Michael E. Gibson
dated August 15, 2000.
</TABLE>
<PAGE> 199
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.14* Credit Agreement dated as of October 28, 1999 relating to
the $90 million secured debt facility among Gabriel, Gabriel
Communications Finance Company, Canadian Imperial Bank of
Commerce, as administrative agent, and the several lenders
parties thereto.
10.15* Loan Agreement dated February 1, 2000 (the "TD Facility"),
by and among TriVergent Communications, Inc., the financial
institutions whose names appear as lenders on the signature
pages thereof, TD Securities (USA), Inc. and Capital
Syndication Corporation, as affiliate of The CIT Group,
Inc., as co-lead arrangers and co-book runners, Newcourt
Commercial Finance Corporation, as affiliate of The CIT
Group, Inc., as documentation agent, First Union National
Bank, as syndication agent, and Toronto Dominion (Texas),
Inc., as administrative agent for the lenders and Assignment
and Assumption Agreements dated March 9 and March 30, 2000
adding additional lenders, incorporated herein by reference
to Exhibit 10.2.1 to the Form S-1.
10.16* Parent Guaranty of TriVergent of the TD Facility dated
February 1, 2000, incorporated by reference to Exhibit
10.2.2 to the Form S-1.
10.17* Parent Pledge Agreement dated February 1, 2000, by and among
TriVergent and Toronto Dominion (Texas), Inc., as
administrative agent for the lenders incorporated by
reference to Exhibit 10.2.3 to the Form S-1.
10.18* Credit Agreement dated as of March 7, 2000, by and among
TriVergent Communications South, Inc., as Borrower, and
Nortel Networks Inc., as administrative agent, and the
lenders named therein incorporated by reference to Exhibit
10.3.1 to the Form S-1.
10.19* Parent Pledge Agreement dated March 7, 2000, by and between
TriVergent and Nortel Networks Inc. incorporated by
reference to Exhibit 10.3.2 to the Form S-1.
11.1* Statement regarding computation of per share earnings.
21.1* Subsidiaries of Registrant.
23.1 Consent of KPMG LLP.
23.2 Consent of KPMG LLP.
23.3* Consent of Charles S. Houser to being named as a director in
the information statement/prospectus.
23.4* Consent of Watts Hamrick to being named as a director in the
information statement/prospectus.
23.5* Consent of Jack Tyrrell to being named as a director in the
information statement/prospectus.
24.1* Power of attorney (included on signature page).
27.1* Financial data schedule.
</TABLE>
-------------------------
+ Schedules omitted pursuant to Regulation S-K, Item 601(b)(2). The registrant
hereby undertakes to furnish such schedules to the Commission supplementally
upon request.
* Filed previously.
