<PAGE> 1
As filed with the Securities and Exchange Commission on September 5, 2000
Registration No. 333-41040
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
AMENDMENT NO. 1 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 4813 43-1820855
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification Number)
or organization) Code 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)
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COPIES TO:
NICK H. VARSAM, ESQ. RILEY M. MURPHY, ESQ. THOMAS R. BROME, ESQ.
BRYAN CAVE LLP STATE COMMUNICATIONS, INC. CRAVATH, SWAINE & MOORE
ONE METROPOLITAN SQUARE 301 NORTH MAIN STREET WORLDWIDE PLAZA
211 NORTH BROADWAY, SUITE 2000 825 EIGHTH AVENUE
SUITE 3600 GREENVILLE, SOUTH CAROLINA NEW YORK, NEW YORK 10019
ST. LOUIS, MISSOURI 63102 29601 (212) 474-1000
(314) 259-2000 (864) 331-7318 (212) 474-3700 (FAX)
(314) 259-2020 (FAX) (864) 331-7146 (FAX)
</TABLE>
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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
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===================================================================================================================================
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER PROPOSED MAXIMUM REGISTRATION
SECURITIES TO BE REGISTERED(1) BE REGISTERED (1) UNIT AGGREGATE OFFERING PRICE FEE (10)
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Common stock, par value $0.01 13,247,978 (2) N/A (4) (4)
-----------------------------------------------------------------------------------------------------------------------------------
Series C-1 convertible preferred stock, 5,337,554 (3) N/A (4) (4)
par value $0.01
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Series C-2 convertible preferred stock, 15,678,247 (3) N/A (4) (4)
par value $0.01
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Series C-3 convertible preferred stock, 17,613,847 (3) N/A (4) (4)
par value $0.01
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Warrants to purchase common stock 13,000,000 (3) N/A (4) (4)
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Options to purchase common stock 11,624,996 (3) N/A (4) (4)
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SUBTOTAL $ 121,341(4) $ 33 (4)
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Common stock, par value $.01 13,000,000(5) N/A $99,250,000(5) $26,202(5)
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TOTAL $99,371,341 $26,235
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(footnotes appear on following page)
</TABLE>
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.
===============================================================================
<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 12,061,160 shares of State Communications common
stock, par value $0.001 per share, issued and outstanding as of August 15,
2000, the date of the merger agreement and the original merger exchange
ratio of 1.0984. Of such shares, 13,032,692 were included in the
calculation of the registration fee in the initial filing of this
Registration Statement.
(3) All of such shares were included in the calculation of the registration fee
in the initial filing of this Registration Statement. See footnotes
from initial filing of this Registration Statement.
(4) 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) $4,021,
one-third of the par value of 12,061,160 shares of State Communications
common stock outstanding as of August 15, 2000, (ii) $16,198, one-third of
the par value of 4,859,390 shares of State Communications Series A
convertible preferred stock, (iii) $47,579, one-third of the par value of
14,273,713 shares of State Communications Series B convertible preferred
stock, and (iv) $53,453, one-third of the par value of 16,035,913 shares of
State Communications Series C convertible preferred stock.
(5) Shares of Gabriel common stock issuable upon exercise of the warrants to be
issued in connection with the merger. The proposed maximum offering price
and registration fee have been computed in accordance with Rule 457(g)(1).
(6) Includes $26,234 previously paid with the initial filing of this
Registration Statement on July 10, 2000 and $1 being paid with this
Amendment No. 1.
<PAGE> 3
PRELIMINARY INFORMATION STATEMENT/PROSPECTUS, SUBJECT TO
COMPLETION, DATED ____________, 2000.
INFORMATION STATEMENT/PROSPECTUS
[TRIVERGENT LOGO] [GABRIEL LOGO]
301 North Main Street, Suite 2000 16090 Swingley Ridge Road, Suite 500
Greenville, South Carolina 29601 Chesterfield, Missouri 63017
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. The combined company plans
to construct data and voice networks in 40 markets in 16 contiguous midwestern
and southeastern states, and it has a management team with the experience and
ability to successfully execute these expansion plans.
In the merger, TriVergent stockholders will receive 1.0949 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 on the same terms and conditions, except as each holder may otherwise
agree with respect to vesting provisions, a number of shares of Gabriel common
stock at an exercise price per share based on the above exchange ratio. In the
event of changes in the outstanding equity securities of either company, during
the period from August 15, 2000 to the effective time of the merger, the
exchange ratio will be adjusted so that TriVergent and Gabriel security holders
will own securities representing 46% and 54%, respectively, of the fully diluted
equity value of the combined company at the effective time of the merger.
Holders of TriVergent preferred stock and holders of Gabriel preferred
stock will receive one year warrants to purchase an aggregate of 7,999,960
shares of Gabriel common stock at an exercise price of $6.00 per share and two
year warrants to purchase an aggregate of 4,999,947 shares of Gabriel common
stock at an exercise price of $10.25 per share. These warrants will be
distributed to holders based upon the amount of their respective invested
capital in TriVergent and Gabriel and will not be considered outstanding for
purposes of calculating the exchange ratio.
Holders of outstanding shares of TriVergent preferred stock and common
stock sufficient to approve the merger and the other transactions contemplated
by the merger agreement under Delaware law and TriVergent's charter have agreed
to vote their shares to approve or consent to the merger and the related
transactions. 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.
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/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 8. 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
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER............................................................................1
SUMMARY...........................................................................................................2
The Companies...............................................................................................2
Gabriel.....................................................................................................2
TriVergent..................................................................................................2
Proposed Merger.............................................................................................3
What TriVergent Stockholders Will Receive in the Merger.....................................................3
Adjustment of the Exchange Ratio Immediately Prior to the Effective Time of the Merger......................3
Issuance of TriVergent Preferred Stock in Lieu of Accrued Dividends.........................................4
Additional Gabriel Warrants.................................................................................4
Options and Warrants........................................................................................4
Voting and Other Agreements.................................................................................4
Ownership of Gabriel Following the Merger...................................................................4
Appraisal Rights............................................................................................5
Material U.S. Federal Income Tax Consequences of the Merger.................................................5
Board Approvals.............................................................................................5
Fairness Opinions of Financial Advisors.....................................................................5
Interests of TriVergent Directors and Executive Officers in the Merger......................................5
Consents; No Further Stockholder Approval Required..........................................................5
The Merger Agreement........................................................................................6
Representations and Warranties..............................................................................6
Conditions to Completion of the Merger......................................................................6
Termination of the Merger Agreement.........................................................................6
Regulatory Matters..........................................................................................6
Accounting Treatment........................................................................................6
Market Price and Dividend Information.......................................................................6
Comparison of Stockholder Rights............................................................................7
RISK FACTORS......................................................................................................8
Forward Looking Statements..................................................................................8
Risks Relating to the Merger................................................................................8
Risks Relating to the Business and Operations of the Combined Company.......................................9
Risks Relating to the Communications Industry..............................................................14
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA..................................................................16
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................................................................21
GABRIEL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF GABRIEL,
TRIVERGENT AND THE COMBINED COMPANY..............................................................................28
THE MERGER.......................................................................................................45
Background of the Merger...................................................................................45
The Boards' Reasons for the Merger.........................................................................46
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.......................................................................................60
U.S. Federal Income Tax Consequences.......................................................................61
Regulatory Matters.........................................................................................64
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......................................................66
THE MERGER AGREEMENT.............................................................................................67
Structure of the Merger....................................................................................67
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Effective Time of the Merger...............................................................................67
Issuance of TriVergent Stock in Lieu of Payment of Accrued and Unpaid Dividends Immediately Prior To The
Merger.................................................................................................67
What Securityholders Will Receive in the Merger............................................................68
Amendment of Gabriel Charter...............................................................................70
Exchange of TriVergent Stock Certificates; Other Agreements................................................70
Voting and Consent Agreements..............................................................................71
Employees and Employee Benefit Plans.......................................................................71
Representations and Warranties.............................................................................72
Covenants..................................................................................................72
Conditions to Completion of the Merger.....................................................................73
Termination................................................................................................74
Waiver and Amendment.......................................................................................74
Expenses; Governing Law....................................................................................74
THE GABRIEL BUSINESS.............................................................................................75
Business Strategy..........................................................................................76
Gabriel's Network Architecture and Technology..............................................................79
How Gabriel Deploys Its Networks...........................................................................81
Gabriel's Products and Services............................................................................82
Gabriel's Current Markets..................................................................................84
Gabriel's Operations Support Systems.......................................................................85
Sales and Marketing........................................................................................87
Employees..................................................................................................87
Legal Proceedings..........................................................................................87
Facilities.................................................................................................87
THE TRIVERGENT BUSINESS..........................................................................................89
Business Strategy..........................................................................................90
Recent Acquisitions........................................................................................91
Products and Services......................................................................................92
Sales and Marketing........................................................................................93
TriVergent's Current Markets...............................................................................94
Network Infrastructure.....................................................................................94
Information Systems........................................................................................95
Intellectual Property......................................................................................97
Employees..................................................................................................97
Legal Proceedings..........................................................................................97
Facilities.................................................................................................98
COMPETITION......................................................................................................99
REGULATION......................................................................................................102
MANAGEMENT OF GABRIEL FOLLOWING THE MERGER......................................................................108
Executive Officers........................................................................................108
Non-Management Directors..................................................................................110
Executive Compensation....................................................................................111
Gabriel Stock Plan........................................................................................114
TriVergent Stock Plan.....................................................................................114
Employment Agreements.....................................................................................116
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................................119
ACTION BY STOCKHOLDERS TO APPROVE THE MERGER....................................................................122
VOTING SECURITIES OF GABRIEL....................................................................................124
VOTING SECURITIES OF TRIVERGENT.................................................................................127
VOTING SECURITIES OF THE COMBINED COMPANY.......................................................................130
DESCRIPTION OF GABRIEL CAPITAL STOCK............................................................................133
General...................................................................................................133
Amendments to Existing Provisions of Certificate of Incorporation.........................................133
Common Stock..............................................................................................134
Preferred Stock...........................................................................................134
</TABLE>
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Outstanding Options and Warrants..........................................................................136
Stockholders Agreement....................................................................................137
Registration Rights Agreement.............................................................................138
Employee Shareholders Agreement...........................................................................139
Classified Board of Directors and Other Anti-Takeover Considerations......................................140
COMPARISON OF RIGHTS OF STOCKHOLDERS OF GABRIEL AND TRIVERGENT..................................................140
Capitalization............................................................................................140
Voting Rights.............................................................................................141
Number and Election of Directors..........................................................................141
Vacancies on the Board of Directors.......................................................................141
Removal of Directors......................................................................................142
Amendments to Charter.....................................................................................142
Amendments to By-laws.....................................................................................143
Shareholder Action........................................................................................143
Special Stockholder Meetings..............................................................................143
Limitation of Personal Liability of Directors.............................................................143
Indemnification of Directors..............................................................................144
Dividends.................................................................................................145
Appraisal Rights..........................................................................................145
Preemptive Rights.........................................................................................146
Conversion................................................................................................146
Preferred Stock...........................................................................................146
Shareholder Suits.........................................................................................146
Vote on Extraordinary Corporate Transactions..............................................................147
Business Combination Restrictions.........................................................................147
EXPERTS.........................................................................................................149
LEGAL MATTERS...................................................................................................149
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS...............................................................149
AVAILABLE INFORMATION...........................................................................................151
INDEX TO FINANCIAL STATEMENTS.....................................................................................1
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
[MAP DEPICTING NETWORKS OF GABRIEL AND TRIVERGENT IN
OPERATION AND UNDER CONSTRUCTION CAPTIONED
"GABRIEL AND TRIVERGENT NETWORKS IN OPERATION AND UNDER
CONSTRUCTION (AS OF JULY 31, 2000)" APPEARS ON THIS PAGE]
i
<PAGE> 8
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE TRIVERGENT AND GABRIEL PROPOSING TO MERGE?
A: The boards of directors of each of TriVergent and Gabriel believe that the
merger is in the best interests of their respective companies and
stockholders. We believe the merger will create a stronger company and will
allow us to deliver our integrated communications products and services to
our customers more quickly.
Q: WHAT WILL I BE ENTITLED TO RECEIVE IN CONNECTION WITH THE MERGER?
A: Based on the capitalization of TriVergent and Gabriel as of August 15,
2000, you will be entitled to receive 1.0949 shares of Gabriel common stock
or a new series of Gabriel preferred stock in exchange for each share of
TriVergent common stock or TriVergent preferred stock, respectively, that
you own at the effective time of the merger. TriVergent and Gabriel
security holders will hold 46% and 54%, respectively, of the fully diluted
equity value of the combined company at the effective time of the merger.
If you are a holder of TriVergent preferred stock or Gabriel preferred
stock, you will also receive warrants to purchase Gabriel common stock
based on your total invested capital in the combined company.
Q: WILL I RECEIVE A DIVIDEND ON MY GABRIEL SHARES AFTER THE MERGER?
A: No. Gabriel does not currently pay cash dividends on its common stock or
preferred stock and does not anticipate paying dividends in the foreseeable
future.
Q: WILL I RECOGNIZE GAIN OR LOSS AS A RESULT OF THE MERGER?
A: No. We have received opinions from tax counsel stating that the merger will
qualify as tax-free reorganization for United States federal income tax
purposes. In general, TriVergent stockholders will not recognize any gain
or loss on the exchange of their common stock or preferred stock in the
merger, except to the extent they receive cash instead of fractional
shares. Gabriel preferred stockholders also will not recognize any gain or
loss on the receipt of Gabriel common stock warrants as provided for in the
merger agreement.
Q: SHOULD I SEND IN MY TRIVERGENT STOCK CERTIFICATES NOW?
A: No. After we complete the merger, you will receive written instructions for
exchanging your TriVergent stock certificates.
Q: IF I OPPOSE THE MERGER, AM I ENTITLED TO APPRAISAL RIGHTS?
A: Yes, if you are a holder of TriVergent common stock or preferred stock and
follow the appropriate procedures. Holders of Gabriel common stock and
preferred stock are not entitled to appraisal rights. We describe the
procedures to be followed by holders of TriVergent stock in exercising
appraisal rights in this information statement/prospectus and we have
attached as Annex E the provisions of Delaware law that govern appraisal
rights for TriVergent stockholders.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We are working to complete the merger as quickly as possible and expect to
complete the merger before the end of the third quarter of 2000, but only
after we have satisfied the remaining conditions to closing under the
merger agreement.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: 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
1
<PAGE> 9
SUMMARY
This summary, together with the preceding questions and answers
section, 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 75)
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 collocation sites secured at which it installs and connects,
or "collocates," 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 89)
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 collocation sites secured at which it collocates its own data
and voice telecommunications equipment with that of the incumbent
local telephone company, like BellSouth,
- 135 sales employees,
- 936 access lines installed on its networks, and
- 250 customers served by its networks.
2
<PAGE> 10
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.
PROPOSED MERGER (page 67)
Gabriel and TriVergent entered into an Agreement and Plan of Merger on June
9, 2000. Under the terms of the merger agreement, at the effective time of the
merger, TriVergent will merge with Triangle Acquisition, Inc., a Delaware
corporation and wholly owned subsidiary of Gabriel, and Triangle will survive
the merger as a wholly owned subsidiary of Gabriel and be named TriVergent
Corporation.
WHAT TRIVERGENT STOCKHOLDERS WILL RECEIVE IN THE MERGER (page 68)
COMMON STOCKHOLDERS. Based on the number of shares of common and preferred
stock, options and warrants of Gabriel and TriVergent outstanding as of August
15, 2000, TriVergent common stockholders will be entitled to receive 1.0949
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 August 15, 2000, TriVergent convertible preferred stockholders will be
entitled to receive
- 1.0949 shares of Series C-1 convertible preferred stock of Gabriel for
each share of Series A convertible preferred stock of TriVergent,
- 1.0949 shares of Series C-2 convertible preferred stock of Gabriel for
each share of Series B convertible preferred stock of TriVergent, and
- 1.0949 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.
ADJUSTMENT OF THE EXCHANGE RATIO IMMEDIATELY PRIOR TO THE EFFECTIVE TIME OF THE
MERGER (page 45)
In the event of changes in the outstanding equity securities of either
company during the period from August 15, 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
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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.
ISSUANCE OF TRIVERGENT PREFERRED STOCK IN LIEU OF ACCRUED DIVIDENDS (page 67)
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 $7.6888 per share, of all accrued and unpaid
dividends on each of these series of TriVergent preferred stock as of August 31,
2000. These shares has been deemed outstanding for purposes of determining the
exchange ratio in accordance with the merger agreement, as described above.
ADDITIONAL GABRIEL WARRANTS (page 68)
The holders of TriVergent and Gabriel preferred stock will receive one-year
warrants to purchase an aggregate of 7,999,960 shares of Gabriel common stock at
an exercise price of $6.00 per share and two-year warrants to purchase an
aggregate of 4,999,947 shares of Gabriel common stock at an exercise price of
$10.25 per share. An aggregate of 3,957,927 and 9,039,980 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 69)
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 1.0949 exchange ratio, an option to purchase 10,949 shares of
Gabriel common stock at $2.19 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 on August 15, 2000 and the 1.0949
exchange ratio, holders of TriVergent common and preferred stock would receive
an aggregate of 13,205,764 shares of Gabriel common stock and 38,506,555 shares
of Gabriel preferred stock and holders of TriVergent options and warrants would
receive Gabriel options and warrants exercisable for 11,624,996 shares of
Gabriel common stock in the merger. Based on those numbers, following the
merger, at the effective time of the merger former holders of TriVergent common
and preferred stock, options and warrants would own approximately 47.2% of the
shares of Gabriel stock, on a fully diluted basis, without regard to the
additional Gabriel warrants described above. Assuming those warrants are
exercised in full, TriVergent stock and option and warrant holders would own
approximately 45.7% of the shares of Gabriel stock, on a fully diluted basis.
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APPRAISAL RIGHTS (page 65)
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,
- 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 46)
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 and 8.
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 71)
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. Under Delaware law and the terms of TriVergent's and Gabriel's
respective certificates of incorporation,
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these approvals are sufficient to approve the merger and the transactions
contemplated by the merger agreement.
THE MERGER AGREEMENT (page 67)
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.
REPRESENTATIONS AND WARRANTIES (page 72)
The merger agreement contains customary 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.
CONDITIONS TO COMPLETION OF THE MERGER (page 73)
Each party's obligation to effect the merger is subject to the satisfaction
or waiver of customary closing conditions, including the following:
- TriVergent and Gabriel will have obtained stockholder approval for the
merger and the amended and restated certificate of incorporation of Gabriel
attached as Annex B hereto will have been approved and adopted by the
stockholders of Gabriel in accordance with Delaware law.
- No action will have been instituted by either the United States Department
of Justice or the FTC to prevent the consummation of the merger or to
modify or amend the merger or the related transactions in any material
manner.
- Gabriel's registration statement on Form S-4, of which this information
statement/prospectus is a part, will remain effective and Gabriel will have
received all state securities law authorizations necessary for the merger.
- TriVergent will have delivered, or cause to be delivered, to Gabriel, the
agreements of holders of TriVergent options (in addition to those held by
the officers executing these agreements concurrently with the execution and
delivery 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, acknowledging and agreeing
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.
TERMINATION OF THE MERGER AGREEMENT (page 74)
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 64)
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 and TriVergent each filed the required
notification and report forms with the Antitrust Division and the FTC on June
15, 2000, and the waiting period 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 are 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 the waiting period expired on August 25, 2000.
TriVergent has also received the required approvals of the FCC and state
public utility commissions.
ACCOUNTING TREATMENT (page 60)
Gabriel and TriVergent intend to account for the merger using the purchase
method of accounting.
MARKET PRICE AND DIVIDEND INFORMATION
There is no established public trading market for either the Gabriel or the
TriVergent common or
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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 system
in connection with the merger. As of August 15, 2000, there were 6,058,700
shares of Gabriel common stock and 39,905,294 shares of Gabriel preferred stock
outstanding held of record by approximately 52 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
August 15, 2000, there were 12,061,160 shares of TriVergent common stock and
34,354,806 shares of TriVergent preferred stock outstanding and held of record
by approximately 167 holders and 51 holders, respectively. Neither company has
ever paid any dividends on its common stock. TriVergent Series A, B and C
preferred stock, however, 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.
COMPARISON OF STOCKHOLDER RIGHTS (page 140)
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.
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RISK FACTORS
FORWARD LOOKING STATEMENTS
Gabriel and TriVergent have made forward-looking statements in this
document that are subject to risks and uncertainties. Forward-looking statements
are statements that are not historical facts. Forward-looking statements include
statements concerning possible or assumed future results of operations of
Gabriel and TriVergent as well as statements preceded by, followed by or that
include the words "believes," "expects," "anticipates," "intends" or similar
expressions. You should understand that the factors discussed below, in addition
to those discussed elsewhere in this document, could affect the future results
of Gabriel and TriVergent and could cause those results to differ materially
from those expressed in these forward-looking statements.
RISKS RELATING TO THE MERGER
GABRIEL AND TRIVERGENT MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THEIR
BUSINESSES.
A successful combination of the businesses of Gabriel and TriVergent
will require integration of the two companies' respective
- products and services and related product development efforts,
- sales and marketing capabilities,
- back office and operations support systems,
- network architectures, and
- key personnel.
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 and procedures will be especially important over the long term to
achieve the benefits of the merger. Moreover, the integration of the operations
following the merger will require the dedication of management and other
personnel, which may distract their attention from the day-to-day business of
the combined companies, the development of new products and services and the
pursuit of other business acquisitions. Failure to successfully accomplish the
integration of the two companies' operations and technologies, or a prolonged
delay in accomplishing a reasonable measure of integration, may have a material
adverse effect on the business of the combined company.
THE GABRIEL SECURITIES TO BE ISSUED IN THE MERGER WILL NOT BE FREELY TRADABLE
AND 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. See "Description of Gabriel Capital Stock"
for a description of the agreements restricting the transferability of the
Gabriel securities issuable in the merger. Accordingly, your investment in the
combined company will be illiquid for an indeterminate period of time.
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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.
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
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- 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 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 collocations, interconnections, transmission
capacity, access facilities 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
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- 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.
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 collocate and
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
collocations, 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.
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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 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 "next generation" equipment
in its networks when it becomes commercially available. This equipment should
provide more capabilities and efficiencies than its current network platforms by
fully integrating data and voice routing using a single switch instead of
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
12
<PAGE> 20
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.
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.
13
<PAGE> 21
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 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
14
<PAGE> 22
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.
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. Neither 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 DECEMBER 31, SIX MONTHS 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
<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 $39,590 $ 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
--------------------------------------
(1) Gabriel was organized on June 15, 1998.
</TABLE>
17
<PAGE> 25
TRIVERGENT CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS 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
</TABLE>
18
<PAGE> 26
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- --------------------------------
1997 (1) 1998 1999 1999 2000
------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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)
<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.
19
<PAGE> 27
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 August 15, 2000, of
1.0949 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) $ 5.90
June 30, 2000.................................. 2.79 (1.36) 5.09
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) $(2.42)
Year ended December 31, 1999 (4).......... (3.25) (2.58) (4.46)
Six months ended June 30, 1999............ (0.81) (1.54) (2.42)
Six months ended June 30, 2000 (4)........ (3.54) (3.06) (3.75)
</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.
20
<PAGE> 28
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. Gabriel management does not believe the purchase price allocation and
the related amortization will be materially different than the allocation
presented herein.
21
<PAGE> 29
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) (5f) 297,228
297,228 (2)
Other long-term assets, net................ 4,559 7,380 -- 11,939
--------- -------- --------- ---------
Total assets........................ $ 163,408 $119,980 $ 286,227 $ 569,615
========= ======== ========= =========
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 (141,460) (5a) --
Stockholders' equity:
Preferred stock............................ 592 -- 385 (3) 977
Common stock............................... 60 12 132 (3) 192
(12) (5a)
Additional paid-in capital................. 301,128 2,340 394,221 (5c) 697,689
Accumulated deficit........................ (38,395) (65,460) 65,460 (5a) (45,707)
(7,312) (5b)
Unearned compensation...................... -- -- (25,396) (2) (25,396)
Treasury stock............................. (400) (209) 209 (5a) (400)
--------- -------- --------- ---------
Preferred stock
subscriptions receivable......... (135,024) -- -- (135,024)
--------- -------- --------- ---------
Total stockholders' equity.......... 127,961 (63,317) 426,203 627,355
Total liabilities and stockholders' equity...... $ 163,408 $119,980 $ 284,743 $ 569,615
========= ======== ========= =========
</TABLE>
22
<PAGE> 30
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 10,333 (5d) 50,415
Provision for uncollectible accounts....... -- 7,285 -- 7,285
Depreciation and amortization.............. 1,955 1,318 19,815 (5e) 22,925
(163)(5f)
---------- ----------- -------- -----------
Total operating expenses............ 19,010 49,830 (29,985) 98,825
---------- ----------- -------- -----------
Loss from operations................ (18,558) (24,793) (29,985) (73,336)
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) $ (29,985) $ (72,727)
========== =========== ========= ===========
Adjustments for the determination of loss
applicable to common stockholders:
Preferred stock accretion....................... -- (2,603) -- (2,603)
Preferred stock dividend... .................... -- -- (7,312) (5b) (7,312)
Loss applicable to common stockholders.......... $ (17,296) $ (28,049) $(37,297) $ (82,642)
========== =========== ======== ===========
Loss per common share (basic and diluted)(4).... $ (3.25) $ (2.58) $ (4.46)
========== =========== ===========
Shares used in computation of loss per
common share................................ 5,322,409 10,868,729 18,528,173
========== =========== ===========
</TABLE>
23
<PAGE> 31
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO 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 5,153 (5d) 43,083
Depreciation and amortization................ 4,476 4,725 9,908 (5e) 18,654
(455) (5f)
---------- ----------- -------- -----------
Total operating expenses............. 24,448 34,048 14,606 73,102
---------- ----------- -------- -----------
Loss from operations ................ (21,180) (25,421) (14,606) (61,207)
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) (14,606) (61,674)
Minority Interest (229) -- -- (229)
---------- ----------- -------- -----------
Loss before extraordinary item....... $ (20,531) $ (26,308) $(14,606) $ (61,345)
========== =========== ======== ===========
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) $(14,606) $ (71,188)
========== =========== ======== ===========
Loss per common share (basic and diluted) (5)... $ (3.54) $ (3.06) $ (3.75)
========== =========== ===========
Shares used in computation of loss
per common share................................ 5,800,670 11,773,102 19,006,434
========== =========== ===========
</TABLE>
24
<PAGE> 32
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, 1.0949, 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 August 15, 2000. Gabriel's market value per share used to
calculate the exchange ratio, and the calculation of the number of shares of
TriVergent common and preferred stock to be exchanged for Gabriel stock, was
$7.00 per share.
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 August 15, 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 August 15, 2000.
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 August 15, 2000............ 46,416
TriVergent preferred stock issued in lieu of accrued dividends.................. 814
-------
47,230
Exchange ratio.................................................................. 1.0949
-------
Equivalent Gabriel stock exchanged.............................................. 51,712
Gabriel market value per share.................................................. $ 7.00
-------
</TABLE>
25
<PAGE> 33
<TABLE>
<S> <C>
Fair value of common and preferred stock issued................................. $361,984
Fair value of TriVergent options assumed........................................ 43,605
Intrinsic value of unvested options............................................. (25,396)
Fair value of TriVergent warrants assumed....................................... 6,601
Fair value of additional Gabriel warrants issued to
TriVergent preferred stockholders.......................................... 2,974
Estimated transaction costs..................................................... 8,000
--------
Total consideration........................................... $397,768
========
</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.......................................................... 95,083
Other assets.................................................................... 9,603
Long term debt.................................................................. (32,832)
Other liabilities............................................................... (9,005)
Unearned compensation........................................................... 25,396
Goodwill........................................................................ 297,228
--------
Aggregate purchase price...................................... $397,768
========
</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.................................................................... 13,205,764
Preferred stock................................................................. 38,502,892
----------
Total shares issued........................................... 51,708,656
</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.
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) To record the effect of the distribution of additional warrants to Gabriel
preferred stockholders as a deemed dividend, as set forth below.
c) The pro forma adjustments record the net effect of the following
adjustments on capital in excess of par value (in thousands):
26
<PAGE> 34
<TABLE>
<S> <C>
Issuance of shares for acquisition......................................... $361,465
Issuance of options and warrants for acquisition........................... 27,784
Issuance of additional warrants to Gabriel preferred stockholders.......... 7,312
Elimination of TriVergent additional paid in capital....................... (2,340)
--------
$394,221
========
</TABLE>
d) The intrinsic value of unvested options results in the amortization of
unearned compensation of $10.3 million and $5.2 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.
e) The effect of allocating the aggregate purchase price to goodwill results
in additional amortization expense of $19.8 million and $9.9 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.
f) 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.
27
<PAGE> 35
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 and also collocates its access equipment
in incumbent telephone companies' central offices. This 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 "next
generation" switching equipment becomes available.
The table below compares Gabriel's estimate of the initial capital cost
required for a fiber-based competitive local telephone company to construct a
network with Gabriel's typical initial capital cost to construct a network in a
comparable market. As markets vary widely due to size and geographic dispersion,
these estimates assume a market with an average of 16 central office
collocations, 25 route miles of fiber construction and 20 to 40 buildings
physically connected to the competitive provider's network and 3,000 voice lines
in service.
28
<PAGE> 36
CAPITAL EXPENDITURE COMPARISON - INITIAL START-UP COSTS
<TABLE>
TRADITIONAL COMPETITIVE
LOCAL FIBER-BASED
TELEPHONE COMPANY GABRIEL
----------------------- -------
<S> <C> <C>
Hub electronics $6.0 million $3.6 million
Collocation space and equipment $4.8 million $3.2 million
Fiber network $3.1 million --
SONET electronics $2.4 million --
Building entrances $0.8 to $1.6 million --
Engineering $1.5 million --
Customer premise equipment $0.3 million $0.7 million
TOTAL $18.9 TO $19.7 MILLION $7.5 MILLION
ESTIMATED SAVINGS $11.4 TO $12.2 MILLION
SAVINGS PERCENTAGE APPROXIMATELY 60%
</TABLE>
In addition to these capital expenditures, the traditional fiber-based
competitive local telephone company incurs recurring operating costs for
rights-of-way and franchise fees. Gabriel incurs recurring operating costs for
its leased transmission capacity.
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.
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 the incumbent telephone company central
offices,
- leasing the local loop lines that connect its customers to its
networks,
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<PAGE> 37
- leasing space used to collocate its customer access equipment
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.
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,
30
<PAGE> 38
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
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 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.
31
<PAGE> 39
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 of this facility, see
"-Anticipated Capital Requirements of the Combined Company" on page 43.
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,
32
<PAGE> 40
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,
- 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.
Gabriel expects to receive by the end of 2000 approximately $135 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'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.
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.
33
<PAGE> 41
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
34
<PAGE> 42
switch site costs approximately $1.5 million, which includes
$750,000 for the cost of the switch and related equipment.
- 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,
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- prepaid local telephone services,
- dial-up Internet access services from Carolina Online, and
- 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.
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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.
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
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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.
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.
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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.
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
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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.
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.
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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 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 investment. 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,
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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 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 to experience significant operating losses
and negative cash flow 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 $690 million, consisting of
- equity capital of approximately $167.2 million invested by
Gabriel stockholders,
- equity capital of approximately $141.8 million invested by
TriVergent stockholders,
- committed equity capital of approximately $135.0 million, which
holders of Gabriel Series B preferred stock are contractually
obligated to invest in additional shares of Series B preferred
stock, upon notice from Gabriel, no later than December 31, 2000,
and
- debt capital of up to $245 million under Gabriel's expanded bank
credit facility, of which approximately $170 million is expected
to be available at the effective time of 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 markets.
Gabriel is currently negotiating the terms of its definitive agreements
for the expanded $245 million secured credit facility referred to above with the
group of lenders that have committed to provide this facility. Gabriel and
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TriVergent intend that the $245 million secured credit facility be in place at
or prior to the effective time of the merger. One of the conditions to closing
the merger is that each company's bank lenders and Nortel consent to 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. However, these negotiations are
ongoing, and Gabriel cannot be certain at this time of the actual amount of
financing that will be available to the combined company or the terms of any
financing.
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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 geographic footprint. 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.
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 and footprint, 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
of the combined company on a fully diluted basis and TriVergent's security
holders holding 46% of the equity 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.
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
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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. 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.
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,
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<PAGE> 54
- the significant additional capital requirements of the successful
implementation of the long range business goals of each company, the
enhanced access to capital a merger with Gabriel provided and 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 depth of experience of the Gabriel management team in the
telecommunications industry,
- 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 geographic footprints and network
architectures,
- 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,
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<PAGE> 55
- the significant additional capital required for the successful
implementation of the long-range business plans of both companies,
including the risks of obtaining the capital required for
TriVergent's largely unfunded long-range plan,
- 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 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.
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<PAGE> 56
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.
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:
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<PAGE> 58
- 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:
<TABLE>
<CAPTION>
RATIO OF ENTERPRISE
VALUE TO: RANGE MEAN MEDIAN
----------------------------------------------------------------------------
<S> <C> <C> <C>
2001 Estimated 2.2x - 12.4x 5.2x 3.6x
Revenue
</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
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,
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- 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 58.5% 41.5% 43.1% 56.9% 0.9766
Revenue
2001 Estimated 67.4% 32.6% 51.5% 48.5% 1.3731
Revenue
2002 Estimated 67.0% 33.0% 51.1% 48.9% 1.3507
Revenue
2003 Estimated 60.7% 39.3% 45.1% 54.9% 1.0605
Revenue
2004 Estimated 55.7% 44.3% 40.7% 59.3% 0.8870
Revenue
</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,
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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
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
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<PAGE> 61
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.
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 AND OPINION WERE PROVIDED FOR
THE INFORMATION OF 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.
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.
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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
CONTRIBUTION CONTRIBUTION IMPLIED 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
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has the same management, makeup, size or combination of businesses as 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.
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.
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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> <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.
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:
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<TABLE>
<CAPTION>
TRIVERGENT GABRIEL
---------- -------
MANAGEMENT MANAGEMENT
CASE ADJUSTED CASE CASE ADJUSTED 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 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.
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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;
- 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
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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;
- 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
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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 21.
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, 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
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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 material 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 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
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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.
ADDITIONAL CONSEQUENCES TO HOLDERS OF TRIVERGENT STOCK. This section
sets forth additional U.S. federal income tax consequences of the merger to
holders of TriVergent stock.
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.
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.
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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 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.
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.
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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 filed applications seeking these 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,
- 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
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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.
OWNERSHIP OF GABRIEL FOLLOWING THE MERGER
Based on the exchange ratio of 1.0949, TriVergent common and preferred
stockholders will receive 13,205,764 shares of Gabriel common stock and
38,506,555 shares of Gabriel preferred stock, respectively. This will represent
44.2% of all of the outstanding shares of common and preferred stock of the
combined company. Holders of TriVergent options and warrants will receive
Gabriel options and warrants exercisable for 11,624,996 shares of Gabriel common
stock in the merger at the exchange ratio of 1.0949. Based on those numbers,
following the merger, former holders of TriVergent common and preferred stock,
options and warrants would own approximately 47.2% of the shares of Gabriel
stock, on a fully diluted basis without regard to the Gabriel $6.00 warrants and
$10.25 warrants. Assuming those warrants are exercised in full, TriVergent stock
and option and warrant holders would own approximately 45.7% of the shares of
Gabriel stock, on a fully diluted basis.
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 140 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
$7.6888 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 1.0949 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.
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
- 1.0949 shares of Gabriel Series C-1 preferred stock for each share
of TriVergent Series A preferred stock,
- 1.0949 shares of Gabriel Series C-2 preferred stock for each share
of TriVergent Series B preferred stock, and
- 1.0949 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
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of the merger as provided in the "Gabriel Series B Purchase
Agreement," as defined in the merger agreement.
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 1.0949 exchange ratio, an option to purchase 10,949 shares of
Gabriel common stock at $2.20 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
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- 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.
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 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 133 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.
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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.
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,
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- 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.
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
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- 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, Gabriel agreed that, no later than the effective time of the
merger, it would request 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. 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.
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. The waiting period expired
on July 10, 2000.
- 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 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
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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,
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- negotiating interconnection agreements,
- securing regulatory authorizations,
- commencing operations in its initial markets and
- 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
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transmission of more information through a given communications
channel. Asynchronous transfer mode, or "ATM," is a
packet-switching technology that was 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 "next-generation" 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 business
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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 "next generation"
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. 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 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
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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 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.
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The following diagram represents Gabriel's current network layout,
including equipment in incumbent telephone company central offices and at
customer premises.
GABRIEL NETWORK ARCHITECTURE
[DIAGRAM OF GABRIEL'S CURRENT NETWORK LAYOUT, INCLUDING EQUIPMENT IN
INCUMBENT LOCAL EXCHANGE CARRIER CENTRAL OFFICES AND AT CUSTOMER PREMISES,
APPEARS ON TOP PORTION OF THIS PAGE WITH CAPTION, "NETWORK ARCHITECTURE."]
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. Gabriel has
installed nine ATM data switches and seven voice switches in its nine
operational networks and is deploying seven additional ATM switches and two
additional voice switches to support the six additional networks currently under
construction.
Gabriel expects that, by the end of 2000, 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 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 "next-generation"
networks will include
- a single switch installed in its hub site that combines
transmission, switching, routing and signaling technologies into
the same network platform,
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- 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
"next-generation" 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 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"
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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.
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,
</TABLE>
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<TABLE>
<CAPTION>
TYPE OF SERVICE WHAT GABRIEL PROVIDES
<S> <C>
- 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.
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,
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- 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 3,529 2,548,238 Southwestern Bell
Springfield, MO 3Q99 57,000 1,395 296,345 Southwestern Bell
Kansas City, MO 3Q99 295,069 1,825 1,800,000 Southwestern Bell
Wichita, KS 3Q99 85,053 1,088 512,965 Southwestern Bell
Little Rock, AR 4Q99 89,376 850 548,352 Southwestern Bell
Tulsa, OK 1Q00 120,268 726 756,493 Southwestern Bell
Oklahoma City, OK 1Q00 168,865 410 1,026,657 Southwestern Bell
Indianapolis, IN 2Q00 373,128 4 1,492,297 Ameritech
Akron, OH 2Q00 164,271 30 680,142 Ameritech
Cincinnati, OH 3Q00 308,236 -- 1,597,352 Cincinnati Bell; Sprint/United
Columbus, OH 3Q00 315,990 -- 1,447,646 Ameritech
Dayton, OH 3Q00 147,087 -- 950,661 Ameritech
Louisville, KY 3Q00 156,504 -- 991,765 BellSouth
Lexington, KY 3Q00 77,209 -- 441,073 GTE
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 July 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.
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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 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.
The diagram on the following page identifies the various elements of
the operations support systems Gabriel is implementing:
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[DIAGRAM SETTING FORTH OPERATIONS SUPPORT SYSTEM APPLICATIONS AND ASSOCIATED
VENDORS FOR BUSINESS, SERVICE, NETWORK AND ELEMENT MANAGEMENT FUNCTIONS,
WITH SHADING OF APPLICATIONS "IN PROCESS," APPEARS ON THIS PAGE.]
[] IN PROCESS
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.
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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 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 NUMBER OF COLLOCATION
LOCATION PURPOSE LEASE EXPIRATION SQUARE 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
</TABLE>
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<PAGE> 95
<TABLE>
<S> <C> <C> <C> <C>
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
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 plans to
offer industrial-grade or high end computer monitoring centers or carrier-grade
data centers, for dedicated web hosting and bandwidth connectivity, in many of
its target markets by the end of 2001. 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 footprints 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.
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.
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- 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
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.
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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 capabilites 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 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
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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 currently in operation
and under construction 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:
OPERATIONAL MARKETS -- Markets in which TriVergent currently offers the
Broadband Bundle:
<TABLE>
<CAPTION>
ESTIMATED DATA CENTERS
INITIAL ADDRESSABLE COLLOCATION -----------------------
SERVICE BUSINESS BUSINESS LINES SITES ESTIMATED OPENING
MARKET DATE LINES(1) IN SERVICE(2) SECURED SQ. FEET DATE
------------------ ---- -------- ------------- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Greenville/
Spartanburg, SC 1Q00 143,671 1,190 9 1,500 3Q00
Atlanta, GA 1Q00 824,065 88 18 1,000 3Q00
Greensboro, NC 1Q00 116,685 70 5 1,500 3Q00
Burlington, NC 1Q00 22,710 13 2 -- --
Winston-Salem, NC 1Q00 90,621 19 4 -- --
Wilmington, NC 2Q00 437,427 18 3 1,500 3Q00
</TABLE>
MARKETS UNDER CONSTRUCTION -- Markets in which TriVergent is currently
constructing facilities to offer the Broadband Bundle:
<TABLE>
<CAPTION>
ESTIMATED DATA CENTERS
INITIAL ADDRESSABLE COLLOCATION ----------------------
SERVICE BUSINESS SITES ESTIMATED OPENING
MARKET DATE LINES (1) SECURED SQ. FEET DATE
------------------ ---- --------- -------- -------- ----
<S> <C> <C> <C> <C> <C>
Miami/Ft. Lauderdale, FL 3Q00 724,849 36 1,500 3Q00
Charlotte, NC 3Q00 278,152 11 1,500 3Q00
Raleigh, NC 3Q00 233,186 7 2,500 3Q00
Nashville, TN(3) 3Q00 186,091 13 2,500 3Q00
Columbia, SC 4Q00 84,282 5 2,500 (4)
Jacksonville, FL 3Q00 190,406 16 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 July 31, 2000.
(3) Market also targeted by Gabriel.
(4) Not yet determined.
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
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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.
The diagram on the following page identifies the various elements of
the operations support systems TriVergent is implementing:
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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" 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
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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.
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.
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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 February 2003 9,000
warehouse
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
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 102
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
footprints, 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 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,
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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 footprint 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.
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,
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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
local 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
local telephone companies to permit interconnection to their networks and
imposing on incumbent local 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 local 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 local
telephone company must offer to collocate the requesting
carrier's equipment in the incumbent local telephone company's
premises, except where the incumbent local telephone company
can demonstrate space limitations or other technical
impediments to collocation.
- UNBUNDLED ACCESS. All incumbent local 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 local
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 local telephone company in the wholesale
offering.
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- 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.
- 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 local 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 local
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
local 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 local 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 local telephone companies' obligations to provide unbundled network
elements to competitors. First, the FCC indicated that the incumbent local
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 local
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 local 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 local 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. Although it is not clear to what extent, or how quickly, this
decision will be reflected in state commission-approved interconnection
agreements, the pricing standard required by the court 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 local 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
local 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 local telephone companies, under its collocation
rules, to give competitors the option of collocating equipment in any unused
space within the incumbent local telephone company's premises, to the extent
technically feasible, and prohibiting incumbent local telephone companies from
requiring competitors to collocate in isolated space separate from the incumbent
local 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 local 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 local 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 local 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.
INCUMBENT TELEPHONE COMPANIES' PROVISION OF LONG DISTANCE SERVICES
The Telecommunications Act codifies the incumbent local 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
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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 local 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 local 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 local 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 local 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 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
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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 local telephone company tariffed
rate levels. Since TriVergent currently charges switched access rates which
exceed the access rates charged by incumbent local 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 local 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 local 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. Until then, we expect that incumbent local
telephone companies will continue to 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.
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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.
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 44 President - Strategic Initiatives
John P. Denneen 60 Executive Vice President - Corporate Development and Legal
Affairs, and Secretary
Marguerite A. Forrest 45 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 56 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 becoming an officer at BellSouth, Mr. Cassity
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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 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.
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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
-----------------
NUMBER OF POTENTIAL REALIZABLE
SECURITIES PERCENT OF VALUE AT ASSUMED
OF THAT COMPANY TOTAL OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION
OPTIONS/WARRANTS EMPLOYEES OF EXERCISE FOR OPTION/WARRANT
GRANTED THAT COMPANY BASE TERM(3)
PRICE EXPIRATION ---------------
NAME (#) IN 1999 ($/SH)(1) DATE 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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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 VALUE OF
UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED ON OPTIONS AT OPTIONS AT
NAME EXERCISE (#) DECEMBER 31, 1999 DECEMBER 31, 1999
------------------- ------------ ------------------------------ ------------------------
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.
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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 August 15, 2000, options to purchase a total of 4,800,700 shares
at exercise prices ranging from $2.40 to $5.60 per share were outstanding, of
which options to purchase a total of 144,387 shares at $2.40 per share are
exercisable within the next 60 days. Options to purchase 1,380,000 shares at
$5.60 per share were granted on June 8, 2000 subject to the merger becoming
effective. 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 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
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<PAGE> 122
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 August 23, 2000, TriVergent had granted options to
purchase 9,532,756 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% 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
August 15, 2000, 5,485,260 were qualified options and 4,047,496 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.
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<PAGE> 123
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
- 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
occured,
- 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
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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.
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.
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<PAGE> 125
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 each 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> 126
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 133 below
The executive officers of Gabriel have made the following investments
in Gabriel:
o 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;
o 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;
o 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;
o 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
o 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:
o 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;
o 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 March 2000 securities purchase agreement; and
o 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 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.
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<PAGE> 127
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.
In connection with the purchase of its Series 1999 notes, TriVergent
issued the following warrants:
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- 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.
121
<PAGE> 129
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 August 15, 2000, there were 12,061,160 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 August 15, 2000, there were 6,058,200 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.
Approval and adoption of the Gabriel charter amendment and the merger
agreement requires the affirmative vote or consent of the holders of
122
<PAGE> 130
- 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.
123
<PAGE> 131
VOTING SECURITIES OF GABRIEL
The following table sets forth information regarding the beneficial
ownership of Gabriel's voting securities as of August 15, 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
- 6,058,200 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
August 15, 2000 and
- treating shares issuable pursuant to options or warrants that are
exercisable currently or within 60 days of August 15, 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 SECURITIES VOTING SECURITIES
(INCLUDES RELATED ENTITIES)
---------------------------------------------- ------------------- -------------------
<S> <C> <C>
Goldman, Sachs & Co. affiliates (1) 10,006,667 21.77%
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 9.26%
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) 545,000 1.18%
Marguerite A. Forrest (10) 398,505 *
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) 13,341,008 28.46%
</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
124
<PAGE> 132
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 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; and (iii) 450,000 shares of common stock of which 410,000
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.
125
<PAGE> 133
(10) Includes shares owned by the MAF Revocable Trust and includes 30,000
shares issuable upon exercise of currently exercisable warrants 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) 56,666 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..
126
<PAGE> 134
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 August 15, 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
- 12,061,160 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
August 15, 2000 and
- treating shares issuable pursuant to options or warrants that are
exercisable currently or within 60 days of August 15, 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 7,519,280 (1) 16.21%
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) 21,771,049 46.90%
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, 117,000 shares
issuable upon the exercise of options and warrants exercisable within 60
days of August 15, 2000, and shares that might be construed as beneficially
127
<PAGE> 135
owned by Mr. Houser. See note 5 for a description of the latter of these
shares. Mr. Houser disclaims beneficial ownership of such shares.
(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 August 15, 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 1,157,349
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 360,000
Shaler P. Houser, general partner
Melissa Houser Charles L. Houser's wife 240,000
Seruus Ventures, LLC Charles S. and Shaler P. Houser 150,000
are principals
Jennifer L. Houser Charles S. Houser's daughter 92,000
Houser Charitable Remainder Charles S. and Janie P. Houser are 161,777(10)
Unitrust trustees
Irrevocable Trust FBO Jennifer L. Trust for Charles S. Houser's
Houser daughter 50,000
Investment Co. of Florida, FBO Trust for Charles S. Houser 44,446
Charles S. Houser
Mr. & Mrs. Robert L. Sims Charles L. Houser's parents-in-law 35,000
Charles S. Houser Family Trust Estate Planning Trust 13,333.33
Agreement I
Charles S. Houser Family Trust Estate Planning Trust 13,333.33
Agreement II
Charles S. Houser Family Trust Estate Planning Trust 13,333.33
Agreement III
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.
128
<PAGE> 136
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 Charles L. Houser include 117,000, 320,000, and 80,000
shares, respectively, issuable upon exercise of options which are
exercisable within 60 days of August 15, 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.
129
<PAGE> 137
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 August 15, 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
- 19,263,964 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,
- 5,320,416 shares of Series C-1 preferred stock,
- 15,628,288 shares of Series C-2 preferred stock,
- 17,557,721 shares of Series C-3 preferred stock,
The foregoing numbers of shares reflect
- the shares of Gabriel common and preferred stock outstanding as of
August 15, 2000,
- the shares of TriVergent common and preferred stock outstanding as of
August 15, 2000 multiplied by the exchange ratio of 1.0949,
- 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 "additional shares of preferred stock,"
and
- shares issuable pursuant to options or warrants, including the
one-year and two-year warrants issuable pursuant to the merger
agreement, that are exercisable currently or within 60 days of August
15, 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-to-one basis.
<TABLE>
<CAPTION>
BENEFICIAL OWNER PERCENTAGE OF
(INCLUDES RELATED ENTITIES) VOTING SECURITIES VOTING SECURITIES
------------------------------------------ ----------------------- ---------------------
<S> <C> <C>
Goldman, Sachs & Co. affiliates (1) 12,209,048 12.22%
Whitney & Co. (2) 8,790,028 8.84%
Richland Ventures III, L.P. (3) 8,686,869 8.82%
Houser Group (4) 8,275,986 8.42%
Brooks Investments, L.P. (5) 5,183,498 5.27%
Meritage Private Equity Fund L.P. (15) 5,245,133 5.32%
Moore Group (16) 9,540,811 9.68%
</TABLE>
130
<PAGE> 138
<TABLE>
<S> <C> <C>
First Union Group (17) 5,805,412 5.91%
Charles S. Houser (6) 8,275,986 8.42%
Watts Hamrick (7) 5,805,412 5.91%
Michael R. Hannon (8) 3,924,468 4.02%
William Laverack, Jr. (9) 8,790,028 9.00%
Byron D. Trott - -
Jack Tyrell (10) 8,686,869 8.82%
David L. Solomon (11) 1,015,947 1.03%
Gerard J. Howe (12) 560,947 *
Shaler P. Houser (13) 2,354,767 2.42%
Marguerite A. Forrest (14) 442,206 *
G. Michael Cassity (18) 353,355 *
Directors and executive officers,
as a group (19) 40,634,265 39.25%
</TABLE>
---------------
*less than 1%
(1) See note 1 on page 124. Also includes 2,202,381 warrants issuable
pursuant to the merger agreement.
(2) See note 2 on page 125. Also includes 1,754,314 warrants issuable
pursuant to the merger agreement.
(3) See note 7 on page 125. Also includes 743,485 warrants and 210,642
shares of additional preferred stock issuable pursuant to the merger
agreement.
(4) See note 5 on page 125. Also includes 32,652 warrants and 10,714 shares
of additional preferred stock issuable pursuant to the
merger agreement.
(5) See note 3 on page 125. Also includes 683,498 warrants issuable
pursuant to the merger agreement.
(6) See note 1 on page 124. Also includes 32,632 warrants and 10,474
shares of additional preferred stock issuable pursuant to the merger
agreement.
(7) See note 4 on page 125. Also includes 470,853 warrants and 139,836
additional shares of preferred stock issuable pursuant to the
merger agreement.
(8) See note 12 on page 126. Also includes 972,087 warrants issuable
pursuant to the merger agreement.
(9) See note 11 on page 126. Also includes 1,754,314 warrants issuable
pursuant to the merger agreement.
(10) See note 3 on page 125. Also includes 743,485 warrants and 210,642
shares of additional preferred stock issuable pursuant to the merger
agreement.
(11) See note 8 on page 125. Also includes 15,947 warrants issuable
pursuant to the merger agreement.
(12) See note 9 on page 125. Also includes 15,947 warrants issuable
pursuant to the merger agreement.
(13) See note 2 on page 125.
(14) See note 10 on page 126. Also includes 43,701 warrants issuable
pursuant to the merger agreement.
(15) See note 6 on page 125. Also includes 987,276 warrants issuable
pursuant to the merger agreement.
(16) See note 6 on page 125. Also includes 911,326 warrants and 213,781
shares of additional preferred stock issuable pursuant to the merger
agreement.
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(17) See note 8 on page 125. Also includes 470,853 warrants and 139,836
additional shares of preferred stock issuable pursuant to the merger
agreement.
(18) Also includes 3,834 additional shares of preferred stock issuable
pursuant to the merger agreement.
(19) See note 13 on page 126 and TriVergent directors and executive officers
as a group on page 127. Also includes 3,610,941 warrants and 364,787
additional shares of preferred stock issuable pursuant to the merger
agreement.
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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 August 15, 2000, there were 6,058,200 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.
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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 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
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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 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,
- $2.19 with respect to the Series C-1 preferred stock,
- $3.41 with respect to the Series C-2 preferred stock and
- $3.87 with respect to the Series C-1 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
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each share in an amount equal to $3.00, $4.00, $7.00, $2.19, $3.41 and $3.87 per
share, respectively. These liquidation preference amounts will be adjusted 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 August 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 August 15, 2000, options to purchase a total of 4,800,700 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 144,387 shares at $2.40 per
share were exercisable within the next 60 days. Options to purchase 1,380,000
shares at $5.60 per share were granted on June 8, 2000 subject to the proposed
merger becoming effective.
As of August 15, 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.
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
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- 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, 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 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
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"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, 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 $12.00 per share and the proposed
aggregate proceeds to the stockholders and Gabriel must be at least $50,000,000.
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.
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.
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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 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.
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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.
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 133.
TRIVERGENT
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
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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
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
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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.
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.
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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 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
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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.
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.
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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.
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 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,
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- 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 133.
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.
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.
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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;
- 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:
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- 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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains a number of forward-looking statements relating
to Gabriel and TriVergent with respect to
- their financial condition,
- their results of operations,
- their business plans,
- their business strategies, operating efficiencies or synergies,
competitive positions and growth opportunities for existing products,
- the financial and regulatory environment in which they operate,
- Gabriel's estimated costs to complete or possible future revenues
from in-process research and development programs,
- the likelihood of completion of those programs,
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- the plans and objectives of their management, 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,
among others
- the impact of technological change on the combined company's
businesses, new entrants and alternative technologies in their
respective businesses and their dependence on the availability of
transmission facilities,
- the ability to integrate the operations of the combined company and
its acquired businesses, including their respective product lines,
- regulatory risks, including the impact of the Telecommunications Act
of 1996,
- contingent liabilities,
- the impact of competitive services and pricing in the combined
company's markets,
- risks associated with debt service requirements and interest rate
fluctuations,
- the combined company's degree of financial leverage, and
- other risks referenced from time to time in the combined company's
filings with the Securities and Exchange Commission.
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.
Gabriel has supplied all information contained in this information
statement/prospectus relating to Gabriel, and TriVergent has supplied all
information contained in this information statement/prospectus relating to
TriVergent.
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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-17
Consolidated Balance Sheets as of December 31, 1998 and 1999 and as of June 30, 2000...........................F-18
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-19
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-20
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-21
Notes to Consolidated Financial Statements.....................................................................F-22
</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
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GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------- ---------------
ASSETS 1998 1999 2000
--------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
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, 52,000 54,692 60,082
respectively
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) TO YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------------------
1998 1999 1999 2000
--------------- --------------- --------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue $ -- $ 452,597 $ 4,007 $ 3,267,599
Operating expenses:
Cost of communication services -- 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 (567,199) (17,296,097) (4,238,024) (20,759,884)
interest
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
----------------------------- ----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- ------------- ------------- -------------
<S> <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 -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Balance,
December 31,
1998 8,950,000 89,500 -- -- -- --
Net loss for
the year ended
December 31, -- -- -- -- -- --
Issuance of
stock 17,900,000 179,000 3,125,000 31,250 -- --
------------- ------------- ------------- ------------- ------------- -------------
Balance,
December 31,
1999 26,850,000 268,500 3,125,000 31,250 -- --
Net loss for
the six months
ended June 30,
2000 -- -- -- -- -- --
(unaudited)
Issuance of stock
(unaudited) -- -- -- -- 29,219,454 292,194
Purchase of
treasury
stock, at cost -- -- -- -- -- --
(unaudited)
------------- ------------- ------------- ------------- ------------- -------------
Balance,
June 30, 2000 26,850,000 $ 268,500 3,125,000 $ 31,250 29,219,454 $ 292,194
(unaudited)
============= ============= ============= ============= ============= =============
<CAPTION>
PREFERRED
COMMON STOCK Additional STOCK TOTAL
----------------------------- PAID-IN TREASURY ACCUMULATED SUBSCRIPTIONS STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK DEFICIT RECEIVABLE EQUITY
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <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 5,200,000 52,000 82,819,552 -- -- (53,699,996) 29,261,056
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance,
December 31,
1998 5,200,000 52,000 82,819,552 -- (567,199) (53,699,996) 28,693,857
Net loss for
the year ended
December 31, -- -- -- -- (17,296,097) -- (17,296,097)
1999
Issuance of
stock 269,200 2,692 12,906,497 -- -- 53,699,996 66,819,435
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance,
December 31,
1999 5,469,200 54,692 95,726,049 -- (17,863,296) -- 78,217,195
Net loss for
the six months
ended June 30,
2000 -- -- -- -- (20,531,220) -- (20,531,220)
(unaudited)
Issuance of stock
(unaudited) 539,000 5,390 205,401,564 -- -- (135,024,115) 70,675,033
Purchase of
treasury
stock, at cost -- -- -- (400,000) -- -- (400,000)
(unaudited)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance,
June 30, 2000 6,008,200 $ 60,082 $ 301,127,613 $ (400,000) $ (38,394,516) $(135,024,115) $ 127,961,008
(unaudited)
============= ============= ============= ============= ============= ============= =============
</TABLE>
F-5
<PAGE> 164
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15,
1998
(INCEPTION)
TO DECEMBER YEAR ENDED
31, DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------- -------------- --------------------------------
1998 1999 1999 2000
-------------- -------------- -------------- --------------
(unaudited) (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 (3,463) (3,467,002) (142,952) (1,315,521)
assets
Increase in accounts payable 139,597 1,166,530 866,818 1,681,136
Increase in accrued liabilities and other -- 3,188,697 396,607 5,320,112
current liabilities
-------------- -------------- -------------- --------------
Net cash provided by used in operating (425,441) (14,857,859) (3,008,936) (11,873,780)
activities
-------------- -------------- -------------- --------------
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 29,261,056 86,819,435 27,193,435 69,955,033
activities
-------------- -------------- -------------- --------------
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
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
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.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
F-9
<PAGE> 168
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
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
F-10
<PAGE> 169
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and June 30, 2000 (unaudited)
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.
(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.
F-11
<PAGE> 170
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and June 30, 2000 (unaudited)
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.
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.
F-12
<PAGE> 171
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and June 30, 2000 (unaudited)
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.
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>
F-13
<PAGE> 172
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and June 30, 2000 (unaudited)
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 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.
F-14
<PAGE> 173
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and June 30, 2000 (unaudited)
(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,
1999 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Shares outstanding-- beginning of period
-- 5,200,000 5,469,200
Weighted average number of common shares 3,550,755 122,409 331,470
issued
-------------- -------------- --------------
Weighted average number of common shares
outstanding-- 3,550,755 5,332,409 5,800,670
end of period
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 $ (0.16) $ (3.25) $ (3.54)
share
============== ============== ==============
</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 59,194,459, 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 under the noncancelable operating leases and the software
maintenance contracts at December 31, 1999 are as follows:
F-15
<PAGE> 174
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and June 30, 2000 (unaudited)
<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-16
<PAGE> 175
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-17
<PAGE> 176
STATE COMMUNICATIONS, INC.
Consolidated Balance Sheets
December 31, 1998 and 1999 and June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
JUNE 30,
1998 1999 2000
--------------- --------------- ---------------
Assets (UNAUDITED)
<S> <C> <C> <C>
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-18
<PAGE> 177
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
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 (39,851) (12,165,893) (23,523,165) (13,440,656) (20,210,473)
expenses
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-19
<PAGE> 178
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)
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 6,600 698,400 -- -- 705,000
price of $.11 per share
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-20
<PAGE> 179
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
THROUGH SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
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 -- -- 217,637 -- 724,768
of debt
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 -- -- -- -- (14,002,592)
lines
Cash paid for acquisition, net of cash -- -- (1,106,630) (494,004) (3,026,791)
acquired
------------ ------------ ------------ ------------ ------------
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 -- -- 10,460,000 10,574,809 --
warrants
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 109,500 13,883,031 72,557,950 16,791,017 76,852,670
activities
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash 53,042 1,346,162 13,837,502 (1,147,791) (2,942,153)
equivalents
Cash and cash equivalents at beginning of -- 53,042 1,399,204 1,399,204 15,236,706
period
------------ ------------ ------------ ------------ ------------
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-21
<PAGE> 180
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.
F-22
<PAGE> 181
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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) 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.
F-23
<PAGE> 182
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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 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.
F-24
<PAGE> 183
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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 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.
F-25
<PAGE> 184
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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.
(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.
F-26
<PAGE> 185
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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.
(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).
F-27
<PAGE> 186
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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 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.
F-28
<PAGE> 187
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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
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.
F-29
<PAGE> 188
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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-30
<PAGE> 189
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
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.
F-31
<PAGE> 190
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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
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.
F-32
<PAGE> 191
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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 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>
F-33
<PAGE> 192
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
<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
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>
F-34
<PAGE> 193
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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 $ 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-35
<PAGE> 194
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
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
------------------------------------- -------------- -------------- ------------------
<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>
F-36
<PAGE> 195
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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.
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.
F-37
<PAGE> 196
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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.
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.
F-38
<PAGE> 197
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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.
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.
F-39
<PAGE> 198
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> 199
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
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>
II-2
<PAGE> 200
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-3
<PAGE> 201
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 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 1st 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
---- ----- ----
<S> <C> <C>
/s/ David L. Solomon* Director, Chief Executive Officer September 1, 2000
----------------------------------------- and Chairman of the Board
David L. Solomon
/s/Gerard J. Howe* President and Chief Operating September 1, 2000
----------------------------------------- Officer and Director
Gerard J. Howe
/s/ Thomas P. Erickson* Senior Vice President and Chief September 1, 2000
----------------------------------------- Financial Officer (Chief Accounting
Thomas P. Erickson Officer)
/s/ John P. Denneen Executive Vice President - Corporate September 1, 2000
----------------------------------------- Development and Legal Affairs,
John P. Denneen Secretary and Director
/s/ Michael R. Hannon* Director September 1, 2000
-----------------------------------------
Michael R. Hannon
/s/ William Laverack, Jr.* Director September 1, 2000
-----------------------------------------
William Laverack, Jr.
/s/ Byron D. Trott* Director September 1, 2000
-----------------------------------------
Byron D. Trott
*By /s/ John P. Denneen
--------------------------------------
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 202
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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.
</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.
<PAGE> 203
<TABLE>
<S> <C>
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.
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.
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* Filed previously.
<PAGE> 204
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<S> <C>
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.
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