<PAGE> 1
As filed with the Securities and Exchange Commission on July 7, 2000
Registration No. 333------------
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
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 of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
16090 SWINGLEY RIDGE ROAD, SUITE 500
CHESTERFIELD, MISSOURI 63017
(636) 537-5700
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
JOHN P. DENNEEN
EXECUTIVE VICE PRESIDENT,
CORPORATE DEVELOPMENT AND LEGAL AFFAIRS, AND SECRETARY
GABRIEL COMMUNICATIONS, INC.
16090 SWINGLEY RIDGE ROAD, SUITE 500
CHESTERFIELD, MISSOURI 63017
(636) 537-5700
(636) 757-0000 (FAX)
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
COPIES TO:
NICK H. VARSAM, ESQ. 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)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement is declared
effective and all other conditions to the proposed merger of State
Communications, Inc. with and into a subsidiary of the Registrant pursuant to
the Agreement and Plan of Merger described in the enclosed information
statement/prospectus have been satisfied or waived.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act registration statements number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BE REGISTERED (1) OFFERING PRICE PER AGGREGATE OFFERING PRICE REGISTRATION FEE
SECURITIES TO BE REGISTERED(1) UNIT
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<S> <C> <C> <C> <C>
Common Stock, par value $0.01 13,032,692(2) N/A (8) (8)
-----------------------------------------------------------------------------------------------------------------------------------
Series C-1 Convertible Preferred Stock, 5,337,554(3) N/A (8) (8)
par value $0.01
-----------------------------------------------------------------------------------------------------------------------------------
Series C-2 Convertible Preferred Stock, 15,678,247(4) N/A (8) (8)
par value $0.01
-----------------------------------------------------------------------------------------------------------------------------------
Series C-3 Convertible Preferred Stock, 17,613,847(5) N/A (8) (8)
par value $0.01
-----------------------------------------------------------------------------------------------------------------------------------
Warrants to purchase Common Stock 13,000,000(6) N/A (8) (8)
-----------------------------------------------------------------------------------------------------------------------------------
Options to purchase Common Stock 12,657,090(7) N/A (8) (8)
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SUBTOTAL $121,185(8) $32(8)
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Common Stock, par value $.01 13,000,000(9) N/A $99,250,000(9) $26,202(9)
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TOTAL $99,371,185 $26,234
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</TABLE>
(footnotes appear on following page)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<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 11,865,160 shares of State Communications common
stock, par value $0.001 per share, issued and outstanding as of June 9,
2000, the date of the merger agreement and the merger exchange ratio of
1.0984.
(3) Based upon the product of (i) the sum of (x) 4,711,672 shares of State
Communications Series A Convertible Preferred Stock, par value $0.01 per
share, issued and outstanding as of June 9, 2000 (y) 147,718 shares of
State Communications Series A Convertible Preferred stock to be issued to
holders of shares of State Communications preferred stock in lieu of cash
dividends, and (ii) the merger exchange ratio of 1.0984.
(4) Based upon the product of (i) the sum of (x) 13,866,663 shares of State
Communications Series B Convertible Preferred Stock, par value $0.01 per
share, issued and outstanding as of June 9, 2000 (y) 407,050 shares of
State Communications Series B Convertible Preferred stock to be issued to
holders of shares of State Communications preferred stock in lieu of cash
dividends, and (ii) the merger exchange ratio of 1.0984.
(5) Based upon the product of (i) the sum of (x) 15,776,471 shares of State
Communications Series C Convertible Preferred Stock, par value $0.01 per
share, issued and outstanding as of June 9, 2000 (y) 259,442 shares of
State Communications Series C Convertible Preferred stock to be issued to
holders of shares of State Communications preferred stock in lieu of cash
dividends, and (ii) the merger exchange ratio of 1.0984.
(6) In connection with the merger, Gabriel will issue to holders of shares of
State Communications preferred stock and to holders of shares of Gabriel
preferred stock warrants to purchase 13,000,000 shares of Gabriel common
stock.
(7) In connection with the merger, holders of options to purchase 11,523,206
shares of State Communications common stock will receive in exchange
therefor options to purchase 12,657,090 shares of Gabriel common stock.
(8) 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) $3,955,
one-third of the par value of 11,865,160 shares of State Communications
common stock outstanding as of June 9, 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.
(9) 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).
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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
____________, 2000
Dear State Communications, Inc. and Gabriel Communications, Inc. Stockholders:
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 merger will create a super-regional integrated
communications provider with strong investor support and an experienced
management team to realize its strategic objectives. It presents exciting
prospects for our security holders, employees and customers. The combined
company has 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 aggressive plans.
The construction of our networks is well underway as a result of the
pursuit of markets and deployment of networks by Gabriel in the midwest and
TriVergent in the contiguous southeastern region. We expect that the combined
company will have 40 networks operational by year-end 2001 with over 9 million
addressable business lines, more than 25 million total addressable lines and
approximately 400 collocations in service. Our current combined equity and debt
capitalization substantially funds the continued construction of these markets.
On a pro forma basis, the combined company currently has more than 900
employees and total invested and committed capital of over $800 million.
TriVergent and Gabriel are currently operational in a total of 16 markets and we
expect that the combined company will be in over 30 markets and will have
approximately 300 collocations in service by year-end 2000. The combination
permits us to accelerate significantly both companies' expansion into contiguous
markets without dilution in the focus of either management team's current
pursuits.
In the merger, TriVergent common stockholders will receive 1.0984 shares of
Gabriel common stock for each share of TriVergent common stock that they own.
TriVergent preferred stockholders will receive 1.0984 shares of Gabriel Series
C-1, C-2 and C-3 convertible preferred stock for each share of TriVergent Series
A, Series B and Series C convertible preferred stock, respectively, 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 of options 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 same exchange ratio used for the TriVergent common
and preferred stock. This agreed
<PAGE> 4
upon exchange ratio is subject to adjustment for stock changes and for issuances
of additional equity securities by either company prior to the effective time of
the merger so that the TriVergent and Gabriel security holders will hold 46% and
54%, respectively, of the fully diluted equity of the combined company.
Holders of shares of TriVergent preferred stock and holders of shares of
Gabriel preferred stock will receive one year warrants to purchase an aggregate
of 8,000,000 shares of Gabriel common stock at an exercise price of $6.00 per
share and two year warrants to purchase an aggregate of 5,000,000 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.
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 vote their shares to approve or consent to the merger. The holders of
more than two-thirds 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 to approve or consent to the amended and restated certificate of
incorporation of Gabriel provided for in the merger agreement. TriVergent has
recently changed the state of its incorporation from the State of South Carolina
to the State of Delaware. 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
other transactions contemplated by 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 the 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.
/s/ Charles S. Houser /s/ David L. Solomon
------------------------------------- -----------------------------------------
Charles S. Houser David L. Solomon
Chairman and Chief Executive Officer Vice Chairman and Chief Executive Officer
State Communications, Inc. Gabriel Communications, Inc.
WE ARE NOT ASKING YOU FOR A PROXY OR CONSENT AND YOU ARE REQUESTED NOT TO SEND
US ONE.
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 ____. 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 document is dated _______, 2000.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER............................................................................1
SUMMARY...........................................................................................................3
The Companies...............................................................................................3
Gabriel.....................................................................................................3
TriVergent..................................................................................................4
Proposed Merger.............................................................................................4
What TriVergent Stockholders Will Receive in the Merger.....................................................4
Adjustment of the Exchange Ratio Immediately Prior to the Effective Time of the Merger......................4
Issuance of TriVergent Preferred Stock in Lieu of Accrued Dividends.........................................4
Additional Gabriel Warrants.................................................................................4
Options and Warrants........................................................................................5
Voting and Other Agreements.................................................................................5
Ownership of Gabriel Following the Merger...................................................................5
Appraisal Rights............................................................................................5
Material U.S. Federal Income Tax Consequences of the Merger.................................................6
Board Approvals.............................................................................................6
Fairness Opinions of Financial Advisors.....................................................................7
Interests of TriVergent Directors and Executive Officers in the Merger......................................7
Consents; No Further Stockholder Approval Required..........................................................7
The Merger Agreement........................................................................................7
Representations and Warranties..............................................................................7
Conduct of Business Between Signing and Closing.............................................................7
Conditions to the Merger....................................................................................8
Termination of the Merger Agreement.........................................................................8
Regulatory Matters..........................................................................................8
Accounting Treatment........................................................................................9
Market Price and Dividend Information.......................................................................9
Comparison of Stockholder Rights............................................................................9
Forward-looking Statements May Prove Inaccurate.............................................................9
RISK FACTORS.....................................................................................................10
Risks Relating to the Merger...............................................................................10
Risks Relating to the Business and Operations of the Combined Company......................................10
Risks Relating to the Communications Industry..............................................................16
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA..................................................................19
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................................................................22
GABRIEL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................28
TRIVERGENT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................34
THE MERGER.......................................................................................................44
Background of the Merger...................................................................................44
The Boards' Reasons for the Merger.........................................................................45
Approval of Board and Stockholders.........................................................................46
Opinion of TriVergent's Financial Advisor..................................................................47
Opinion of Gabriel's Financial Advisor.....................................................................50
Interests of TriVergent Directors and Executive Officers in the Merger.....................................55
Accounting Treatment.......................................................................................57
Certain U.S. Federal Income Tax Consequences...............................................................57
Regulatory Matters.........................................................................................61
Appraisal Rights...........................................................................................61
Resale of Gabriel Common Stock and Gabriel Preferred Stock.................................................62
</TABLE>
i
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<TABLE>
<S> <C>
Ownership of Gabriel Following the Merger..................................................................62
Material Relationships Between Gabriel and TriVergent......................................................62
THE MERGER AGREEMENT.............................................................................................63
Structure of the Merger....................................................................................63
Effective Time of the Merger...............................................................................63
Issuance of TriVergent Stock in Lieu of Payment of Accrued and Unpaid Dividends
Immediately Prior To The Merger.......................................................................63
What Securityholders Will Receive in the Merger............................................................64
Amendment of Gabriel Charter...............................................................................66
Exchange of TriVergent Stock Certificates; Other Agreements................................................66
Voting and Consent Agreements..............................................................................67
Employees and Employee Benefit Plans.......................................................................68
Representations and Warranties.............................................................................68
Covenants..................................................................................................68
Conditions to Completion of the Merger.....................................................................69
Termination................................................................................................70
Waiver and Amendment.......................................................................................70
Expenses; Governing Law....................................................................................70
THE GABRIEL BUSINESS.............................................................................................71
Business Strategy..........................................................................................72
Gabriel's Network Architecture and Technology..............................................................75
How Gabriel Deploys Its Networks...........................................................................77
Gabriel's Products and Services............................................................................79
Gabriel's Current Markets..................................................................................81
Gabriel's Operations Support Systems.......................................................................82
Sales and Marketing........................................................................................84
Employees..................................................................................................85
Legal Proceedings..........................................................................................85
Facilities.................................................................................................85
THE TRIVERGENT BUSINESS..........................................................................................86
Business Strategy..........................................................................................87
Recent Acquisitions........................................................................................89
Products and Services......................................................................................89
Sales and Marketing........................................................................................91
Network Infrastructure.....................................................................................92
Information Systems........................................................................................92
Intellectual Property......................................................................................94
Employees..................................................................................................95
Legal Proceedings..........................................................................................95
Facilities.................................................................................................95
COMPETITION......................................................................................................97
REGULATION......................................................................................................100
Federal Regulation........................................................................................100
State Regulation..........................................................................................104
Local Regulation..........................................................................................104
MANAGEMENT OF GABRIEL FOLLOWING THE MERGER......................................................................105
Executive Officers........................................................................................105
Non-Management Directors..................................................................................107
Executive Compensation....................................................................................109
Gabriel Stock Plan........................................................................................112
TriVergent Stock Plan.....................................................................................114
Employment Agreements.....................................................................................114
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................................117
ACTION BY STOCKHOLDERS TO APPROVE THE MERGER....................................................................119
VOTING SECURITIES OF GABRIEL....................................................................................121
</TABLE>
ii
<PAGE> 7
<TABLE>
<S> <C>
VOTING SECURITIES OF TRIVERGENT.................................................................................124
DESCRIPTION OF GABRIEL CAPITAL STOCK............................................................................127
General...................................................................................................127
Amendments to Existing Provisions of Certificate of Incorporation.........................................127
Common Stock..............................................................................................128
Preferred Stock...........................................................................................128
Options and Warrants......................................................................................130
Amended and Restated Stockholders Agreement...............................................................131
Amended and Restated Registration Rights Agreement........................................................132
Employee Shareholders Agreement...........................................................................133
Classified Board of Directors and Other Anti-Takeover Considerations......................................134
COMPARISON OF RIGHTS OF STOCKHOLDERS............................................................................135
Capitalization............................................................................................135
Voting Rights.............................................................................................135
Number and Election of Directors..........................................................................135
Vacancies on the Board of Directors.......................................................................136
Removal of Directors......................................................................................136
Amendments to Charter.....................................................................................137
Amendments to Bylaws......................................................................................137
Shareholder Action........................................................................................138
Special Shareholder Meetings..............................................................................138
Limitation of Personal Liability of Directors.............................................................138
Indemnification of Directors..............................................................................139
Dividends.................................................................................................139
Appraisal Rights..........................................................................................140
Preemptive Rights.........................................................................................140
Conversion................................................................................................140
Preferred Stock...........................................................................................141
Shareholder Suits.........................................................................................141
Vote on Extraordinary Corporate Transactions..............................................................141
Business Combination Restrictions.........................................................................142
EXPERTS.........................................................................................................144
LEGAL MATTERS...................................................................................................144
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS...............................................................144
AVAILABLE INFORMATION...........................................................................................145
INDEX TO FINANCIAL STATEMENTS...................................................................................F-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
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[MAP DEPICTING NETWORKS OF GABRIEL AND TRIVERGENT IN OPERATION AND
UNDER CONSTRUCTION APPEARS ON THIS PAGE]
i
<PAGE> 9
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. The merger will create a combined company with plans to
construct networks in 40 markets in 16 contiguous midwestern and
southeastern states. These 40 networks with over 400 central office
collocations in service are expected to be operational by year-end 2001. On
a pro forma basis, the combined company has over 900 employees and total
invested and committed capital of over $800 million. TriVergent and Gabriel
are operational in a total of 17 markets and expect that the combined
company will be in over 30 markets and will have over 300 central office
collocations in service by year-end 2000. Both organizations are rolling
out operations as their switches are installed and as both organizations
complete the activation of central office collocations and the roll-out of
broadband access services in their respective markets. We believe the
merger will create a stronger company and will allow us to deliver our
data-centric products and services to our customers more quickly.
Q: WHAT WILL I BE ENTITLED TO RECEIVE IN CONNECTION WITH THE MERGER?
A: You will be entitled to receive a fixed number of 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. This exchange ratio was
set at 1.0984 in the merger agreement but may be adjusted at the effective
time of the merger to reflect additional stock, option and warrant
issuances by either Gabriel or TriVergent, as more fully described in this
information statement/prospectus, so that the TriVergent and Gabriel
security holders will hold 46% and 54%, respectively, of the fully diluted
equity 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: 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 expect the merger to 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: HOW WILL THE MERGER BE APPROVED?
A: 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 vote their shares to approve or consent to the merger.
The holders of more than two-thirds 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 adoption of 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
other transactions contemplated by the merger agreement. THEREFORE, WE ARE
NOT ASKING YOU FOR A PROXY
1
<PAGE> 10
OR CONSENT, AND YOU ARE REQUESTED NOT TO SEND US A PROXY OR CONSENT.
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: Only holders of TriVergent common stock or preferred stock have appraisal
rights in connection with the merger. 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 obtained all regulatory approvals necessary for the merger.
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
2
<PAGE> 11
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 (page ___)
GABRIEL
Gabriel Communications, Inc. is a rapidly growing, facilities-based,
integrated communications and applications services provider. Gabriel commenced
commercial operations in its first market, St. Louis, Missouri, in June 1999. As
of June 30, 2000, Gabriel had
o 16 markets in operation or under construction in nine midwestern
states,
o 152 collocation sites secured,
o 152 sales employees,
o 9,185 on-switch access lines installed, and
o 805 on-switch customers.
Gabriel offers its customers advanced, integrated communications products
and services, including
o local voice and data services,
o domestic and international long distance services,
o dedicated high speed Internet access, web page hosting and domain name
services,
o 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
o 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. Gabriel offers its customers the convenience of
meeting all of their communications needs through one provider, with a single
consolidated monthly bill.
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
TriVergent is a broadband telecommunications company offering automated web
site design and web hosting, high-speed data and voice services. TriVergent
commenced providing facilities-based services in the first quarter of 2000. As
of June 30, 2000, TriVergent had
o 16 markets in operation or under construction in six southeastern
states,
o 269 collocation sites secured,
o 135 sales employees,
o 1,500 on-switch access lines installed, and
o 250 on-switch customers.
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 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.
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PROPOSED MERGER (page ___)
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 ___)
COMMON STOCKHOLDERS. TriVergent common stockholders will be entitled to
receive 1.0984 shares, subject to adjustment, 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 such fraction multiplied
by $7.00.
PREFERRED STOCKHOLDERS. TriVergent preferred stockholders will be entitled
to receive (i) 1.0984 shares of Series C-1 Convertible Preferred Stock of
Gabriel for each share of Series A Convertible Preferred Stock of TriVergent,
(ii) 1.0984 shares of Series C-2 Convertible Preferred Stock of Gabriel for each
share of Series B Convertible Preferred Stock of TriVergent, and (iii) 1.0984
shares of Series C-3 Convertible Preferred Stock of Gabriel for each share of
Series C Convertible Preferred Stock of TriVergent, as such exchange ratios may
be adjusted, plus, in each case, cash for any fractional shares at the $7.00
price. The Series C-1, C-2 and C-3 Convertible 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, which liquidation preferences will include a preferred return of
8.0% per annum.
ADJUSTMENT OF THE EXCHANGE RATIO IMMEDIATELY PRIOR TO THE EFFECTIVE TIME OF THE
MERGER (page ___)
The agreed upon 1.0984 exchange ratio is subject to adjustment, utilizing
the treasury stock method, for stock changes and for issuances of additional
shares of capital stock, options, warrants or convertible securities by either
company occurring prior to the effective time of the merger. TriVergent and
Gabriel have agreed to adjust the exchange ratio so that Gabriel and TriVergent
security holders will hold 54% and 46%, respectively, of the fully diluted
equity value of the combined company at the effective time of the merger,
without regard to the additional Gabriel warrants, as described below.
ISSUANCE OF TRIVERGENT PREFERRED STOCK IN LIEU OF ACCRUED DIVIDENDS (page ___)
The merger agreement provides that immediately prior to the effective time
of the merger, TriVergent will issue additional shares of TriVergent Series A, B
and C preferred stock representing payment in full, at a value of $7.6888 per
share, of all accrued and unpaid dividends on each such series of TriVergent
preferred stock as of July 31, 2000 (or, if the effective time of the merger is
later than August 31, 2000, as of August 31, 2000). These shares will be deemed
outstanding for purposes of determining the exchange ratio in accordance with
the merger agreement.
ADDITIONAL GABRIEL WARRANTS (page ___)
The holders of TriVergent and Gabriel preferred stock will receive one-year
warrants to purchase an aggregate of 8,000,000 shares of Gabriel common stock at
an exercise price of $6.00 per share and two-year warrants to purchase an
aggregate of 5,000,000 shares of Gabriel common stock at an exercise price of
$10.25 per share. These warrants will be distributed to holders based upon each
holder's total invested capital.
OPTIONS AND WARRANTS (page ___)
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),
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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, 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 1.0984 exchange ratio, an option to purchase 10,984 shares of
Gabriel common stock at $2.19 per share.
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 holder'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) and these options will fully vest and be fully
exercisable in accordance with their terms if certain events occur within one
year following the effective time.
VOTING AND OTHER AGREEMENTS (page __)
Concurrently with the execution and delivery of the merger agreement,
certain holders of the TriVergent and Gabriel preferred stock and certain
holders of TriVergent and Gabriel common stock entered into voting agreements,
pursuant to which those stockholders agreed, among other things, 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 Amended and Restated Stockholders' Agreement, Amended and Restated
Registration Rights Agreement, and with respect to employee stockholders of
TriVergent, Gabriel's Amended Shareholders' Agreement. 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 ___)
Based on the capitalization of TriVergent on June 9, 2000 and the 1.0984
exchange ratio, holders of TriVergent common and preferred stock would receive
13,032,692 shares of Gabriel common stock and 38,541,773 shares of Gabriel
preferred stock and holders of TriVergent options and warrants would receive
Gabriel options and warrants exercisable for 12,657,090 shares of Gabriel common
stock in the merger. Based on those numbers, following the merger former holders
of TriVergent common and preferred stock, options and warrants would own
approximately 46% of the shares of Gabriel stock, on a fully diluted basis,
without regard to the additional Gabriel warrants described above. Upon
completion of the merger, the business of TriVergent will be operated through a
wholly owned subsidiary of Gabriel, to be named TriVergent Corporation.
APPRAISAL RIGHTS (page ___)
Under Delaware law, holders of shares of TriVergent common stock and
preferred stock are entitled to exercise appraisal rights if they (i) are
holders of issued and outstanding shares of common stock or preferred stock
immediately prior to the effective time of the merger, (ii) have not voted in
favor of the merger nor consented thereto in writing and (iii) 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 ___)
The merger is intended to qualify as a tax-free reorganization for U.S.
federal income tax purposes, so that holders of TriVergent common and preferred
stock would 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
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common and preferred stock. Gabriel preferred stockholders also will not
recognize any gain or loss on the receipt of Gabriel common stock warrants.
TAX MATTERS ARE VERY COMPLICATED AND 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 ___)
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 a variety of factors including
o the business, operations, prospects, access to capital and strategic
direction of TriVergent and Gabriel, and the significant additional
capital requirements for and risks inherent in, the successful
implementation of the long-range business plans of both companies,
o the belief that a merger of TriVergent with Gabriel could create
significant strategic advantages for the combined company and create a
stronger competitor in the changing telecommunications industry,
o the depth of experience of the Gabriel management team,
o the belief that the merger would create a super-regional integrated
communications provider offering a broad array of voice and data
products,
o the complementary network architecture and back office systems of
Gabriel,
o 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 Securities Corporation to the
effect 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 in the combined company, on a fully diluted
basis, to be received by TriVergent stockholders was fair to the
stockholders as a whole from a financial point of view,
o the terms and conditions of the merger agreement and the likelihood
that the conditions to the merger will be satisfied and
o 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
o the business, operations, prospects and strategic direction of Gabriel
and TriVergent, and the significant additional capital requirements for
and risks inherent in, the successful implementation of the long-range
business plans of both companies,
o the belief that a merger of Gabriel with TriVergent could create
significant synergies for the combined company and create a stronger
competitor in the changing telecommunications industry,
o the depth of experience of the TriVergent management team, o the
complementary network architecture and back office systems of
TriVergent,
o 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,
o 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 Inc. that as of the date of the merger agreement
the consideration to be paid in the merger was fair to Gabriel from a
financial point of view,
o the terms and conditions of the merger agreement and the likelihood
that the
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conditions to the merger will be satisfied and
o the willingness of Gabriel's management and institutional investors to
support the merger.
To review the background and reasons for the merger in greater detail, as
well as risks related to the merger, see pages ___ and ___.
FAIRNESS OPINIONS OF FINANCIAL ADVISORS (page ___)
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
___)
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 ___)
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, these approvals are sufficient to
approve the merger and the transactions contemplated by the merger agreement.
THE MERGER AGREEMENT (page ___)
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 ___)
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.
CONDUCT OF BUSINESS BETWEEN SIGNING AND CLOSING (page__)
TriVergent and Gabriel also have agreed not to take certain actions without
the prior written consent of the other during the interim between signing the
merger agreement and closing the merger, including, among other things:
o the conduct of their respective businesses outside the ordinary course of
business,
o the issuance of additional equity securities other than under specified
exceptions,
o 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
o the solicitation, initiation, encouragement or recommendation of any other
acquisition proposal.
In addition, Gabriel covenanted that it would make a capital call
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no later than the effective time of the merger and will make a second capital
call no later than November 30, 2000, each in accordance with the terms and
conditions of the purchase agreement for Gabriel Series B Preferred Stock so as
to cause the purchasers to satisfy their additional preferred stock subscription
obligations under the purchase agreement.
CONDITIONS TO THE MERGER (page ___)
Each party's obligation to effect the merger is subject to the satisfaction
or waiver of customary closing conditions, including the following:
o 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.
o The waiting period applicable to the merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 will have expired or earlier termination
will have been granted, and no action will have been instituted by either
the United States Department of Justice or the Federal Trade Commission to
prevent the consummation of the merger or to modify or amend such
transactions in any material manner.
o 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.
o TriVergent will have obtained required Federal Communications Commission
and state public utility commission approvals.
o 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 such holders' options.
o The accuracy of each company's representations and warranties at the
effective time.
TERMINATION OF THE MERGER AGREEMENT (page ___)
The merger agreement may be terminated, whether before or after approval by
the stockholders of TriVergent or of Gabriel:
o by mutual written consent or
o by either TriVergent or Gabriel if
o the merger is not completed on or before October 31, 2000 (or such
other date as may be agreed), or
o if the other party's closing conditions become incapable of
satisfaction prior to October 31, 2000, or
o 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 ___)
United States antitrust laws prohibit Gabriel and TriVergent from
completing the merger until after they have furnished information and materials
to the Antitrust Division of the Department of Justice and the Federal Trade
Commission and a required waiting period has ended. Gabriel and TriVergent each
filed the required notification and report forms with the Antitrust Division and
the Federal Trade Commission on June 15, 2000, and the waiting period expired on
_______________, 2000. In addition, certain stockholders of TriVergent are
required to furnish certain information to the Antitrust Division and the
Federal Trade Commission. These stockholders have each filed the required
notification and report forms with the Antitrust Division and the Federal Trade
Commission and the waiting period expired on __________, 2000.
TriVergent also must receive the approval of the Federal Communications
Commission and state
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public utility commissions and has filed applications to seek these approvals.
ACCOUNTING TREATMENT (page ___)
Gabriel and TriVergent intend to account for the merger using the purchase
method of accounting.
MARKET PRICE AND DIVIDEND INFORMATION (page __)
There is no established public trading market for either the Gabriel or the
TriVergent common or preferred stock. As of June 9, 2000, there were 5,934,200
shares of Gabriel common stock and 39,905,294 shares of Gabriel preferred stock
outstanding held of record by approximately 49 holders and 35 holders,
respectively. As of June 9, 2000, there were 11,865,160 shares of TriVergent
common stock and 34,354,806 shares of TriVergent preferred stock outstanding and
held of record by approximately 147 holders and 50 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 shares of TriVergent stock immediately prior to the merger.
Upon completion of the merger, holders of TriVergent preferred stock will
become holders of Gabriel preferred stock. The Gabriel preferred stock issuable
in the merger will be a new series of Gabriel preferred stock and will have
terms that are substantially identical to Gabriel's presently outstanding Series
A, A-1 and B preferred stock, except as to the respective conversion prices and
liquidation preferences for each series. The liquidation preferences for each
series 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.
COMPARISON OF STOCKHOLDER RIGHTS (page ___)
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
bylaws 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 Amended and Restated Stockholders' Agreement,
Gabriel's Amended and Restated Registration Rights Agreement and, in the case of
TriVergent's shareholders who will be employees of the combined company,
Gabriel's Shareholders' Agreement.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (page ___)
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 certain important factors, 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.
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RISK FACTORS
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, among other things, integration of the two companies' respective
o products and product development efforts,
o sales and marketing capabilities,
o back office and operations support systems,
o network architectures, and
o key personnel.
Neither company has been involved in a strategic merger 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. Management may not be able to
successfully accomplish this integration. 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.
RISKS RELATING TO THE BUSINESS AND OPERATIONS OF THE COMBINED COMPANY
GABRIEL AND TRIVERGENT HAVE RECENTLY COMMENCED FACILITIES-BASED OPERATIONS AND
THE COMBINED COMPANY ANTICIPATES INITIAL NEGATIVE CASH FLOWS AND OPERATING
LOSSES.
Gabriel commenced facilities-based operations in June 1999 and is
operational 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 facilities-based services
in February 1999 and is providing facilities-based services in seven markets. As
neither Gabriel nor TriVergent has been offering facilities based 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.
Both Gabriel and TriVergent expect the combined company to experience
increasing consolidated operating losses and negative 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
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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 have important consequences
to the future prospects of the combined company, including:
o limiting its ability to obtain any necessary financing in the future
for working capital, capital expenditures, debt service requirements
and other purposes,
o 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,
o limiting its flexibility in planning for, or reacting to changes in,
its business,
o making it more highly leveraged than some of its competitors, which
may place it at a competitive disadvantage, and
o increasing its vulnerability in the event of a downturn in its
business.
THE COMBINED COMPANY WILL REQUIRE SIGNIFICANT ADDITIONAL CAPITAL, WHICH IT MIGHT
NOT BE ABLE TO OBTAIN.
Expectations of the capital requirements are based on current estimates of
capital required to fund the combined company's initial 40 market plan. Actual
expenditures may be significantly higher or the combined company may not be able
to obtain required capital. The combined company will require significant
additional amounts of capital as it expands its business beyond its initial 40
market plan. The combined company will also require additional financing, or
require additional financing sooner than anticipated, if
o current development plans or projections change or prove to be
inaccurate,
o the combined company has underestimated its cost projections,
o the schedule or target markets of roll-out plans change,
o necessary to respond to changes in demand for its services, and
regulatory and technological developments,
o the combined company identifies attractive additional market
opportunities, or
o the combined company effects any additional acquisitions or joint
ventures.
If available, sources of additional financing may include vendor financing and
the private or public sale of additional equity or debt securities.
The capital that the combined company will require to fully implement its
development plans may not be available to it, and it may not be successful in
raising any additional capital on terms that it will consider acceptable.
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.
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
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o installing switching platforms and related equipment,
o obtaining needed collocations, interconnections, operations support
system interfaces, and unbundled network and customer access elements
and circuits from the incumbent local exchange carriers in its
markets,
o obtaining required governmental authorizations,
o implementing and integrating advanced, scalable operations support
systems and electronic interfaces to incumbent local exchange carriers
and other business partners, and
o 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.
IF THE COMBINED COMPANY IS UNABLE TO IDENTIFY, ACQUIRE AND ASSIMILATE ATTRACTIVE
TARGETS FOR FUTURE ACQUISITIONS AND JOINT VENTURES, IT MIGHT NOT ACHIEVE THE
GROWTH NECESSARY TO COMPETE OR REALIZE ITS STRATEGIC OBJECTIVES.
The combined company intends, as part of its business strategy, to continue
to expand through acquisitions. Acquisitions involve certain risks, including,
among others
o unanticipated costs of acquired operations,
o the difficulty in assimilating the acquired operations and personnel,
o the potential disruption of the combined company's ongoing business
and diversion of resources and management time,
o the possible inability of management to maintain uniform standards,
controls, procedures and policies,
o the risks of entering markets in which management has little or no
prior direct experience, and
o the potential impairment of relationships with employees, suppliers
and customers as a result of changes in management.
The management of 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.
The combined company may also enter into additional joint venture
transactions. These transactions present many of the same risks involved in
acquisitions, and many also involve the risk that the combined company will not
have control over the venture and that a joint venture partner may have
economic, business or legal interests or objectives that are inconsistent with
those of the combined company. Joint venture partners may also be unable to meet
their economic or other obligations, thereby forcing 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, among other things, the demand for these products and
services by its target customers
12
<PAGE> 21
and the ability of the combined company to hire, train and retain qualified
personnel and further enhance its products and services to adapt to
technological changes. In addition, the market for high-speed data transmission
via digital subscriber line and other technologies is relatively new and
evolving. 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 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. 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 SUCCESS OF THE COMBINED COMPANY'S NETWORK DEPLOYMENT STRATEGY IS DEPENDENT
UPON THE SUCCESSFUL MANAGEMENT OF ITS RELATIONSHIPS WITH THE INCUMBENT LOCAL
EXCHANGE CARRIERS.
The network deployment strategy of each of Gabriel and TriVergent requires
that it collocate and interconnect with and use the incumbent local exchange
carriers' networks in its markets to service its customers. As a result, the
combined company will depend upon the technology, cooperation and capabilities
of the incumbent local exchange carriers and must interface with their systems
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, on a timely basis and on
satisfactory terms, network and customer access and transmission facilities from
the incumbent local exchange carriers in its target markets.
The Telecommunications Act of 1996 requires the incumbent local exchange
carriers to permit the combined company to effect these collocations and
interconnections and to purchase only the origination and termination services
and network and customer access elements and circuits that it needs. These
legislative mandates are designed to allow the combined company to compete.
However, to date, Gabriel and TriVergent, like many other competitive providers,
have experienced difficulties in working with the incumbent local exchange
carriers 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. The incumbent local exchange carriers may not effect the
collocations and interconnections and supply the services, network elements and
customer access circuits that the combined company will need in a timely manner
or at rates, and on terms and conditions, that will permit it to offer
competitively priced services. 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 unbundled network
and customer access elements and circuits 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 local exchange carriers, customers may not
subscribe for its services and the cost of providing services may increase.
THE COMBINED COMPANY'S FAILURE TO EFFECTIVELY PROVIDE ADVANCED INTERNET SERVICES
TO ITS CUSTOMERS COULD HARM ITS BUSINESS.
In addition to telephone and data service product offerings, 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.
13
<PAGE> 22
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 SWITCHING AND OTHER NETWORK
EQUIPMENT ON A TIMELY BASIS.
The suppliers of the combined company's switches and other network
equipment may not be able to meet its equipment requirements on a timely basis
and equipment may not perform as expected. Although management believes that
there are alternative sources of supply and that the combined company's
switching systems are compatible with alternative suppliers' equipment and
platforms, a number of factors could disrupt its 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, including any
o extended interruption in the supply of network equipment,
o material increase in prices,
o 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
o extended delay in transitioning to the products of an alternative
supplier, if necessary.
In its initial markets, Gabriel experienced problems with one of its
vendor's advanced asynchronous transfer mode-based customer premise equipment,
which did not perform as expected, causing delays in its sales and installation
efforts. Gabriel then installed alternative equipment utilizing a traditional
circuit-switched serving strategy, which lacks some of the capabilities that the
more advanced equipment was designed to provide. While Gabriel believes its
current serving strategy has resolved the problems experienced by its customers,
similar problems may arise in the future.
THE "NEXT GENERATION" EQUIPMENT THAT THE COMBINED COMPANY PLANS TO USE IN ITS
NETWORKS MAY NOT BECOME COMMERCIALLY AVAILABLE ON A TIMELY BASIS OR PERFORM AS
ANTICIPATED.
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 the current switching platforms
by fully integrating data and voice routing over a single switching platform.
This single-switch platform is designed to include asynchronous transfer mode
switching, full featured voice functionality, and signaling interfaces to the
public switched telephone network. The combined company must rely on third-party
equipment vendors to develop this advanced network equipment. While the industry
standards for this interfacing equipment have generally been developed and
equipment is expected to be available for beta testing during the second half of
2000, equipment with all of the required features and functionality may not
perform as expected or be made 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 the needed
voice functionality, features and interfaces with the public switched telephone
network.
14
<PAGE> 23
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 system 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 local exchange carriers 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. Robert A. Brooks, its Chairman, Mr. David L. Solomon, its Chief
Executive Officer, Mr. Charles S. Houser, its Vice Chairman, and Mr. G. Michael
Cassity, its President and Chief Operating Officer. 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, and the
long distance business has a high average churn rate, meaning customers
frequently change long distance providers in response to the offering of lower
rates or promotional incentives by competitors.
LACK OF SUFFICIENT PROTECTION FOR THE COMBINED COMPANY'S INTELLECTUAL PROPERTY
RIGHTS, OR INFRINGEMENTS OF THOSE RIGHTS, OR CLAIMS AGAINST THE COMBINED COMPANY
ALLEGING ITS INFRINGEMENT OF A THIRD PARTY'S INTELLECTUAL PROPERTY RIGHTS COULD
ADVERSELY AFFECT THE COMBINED COMPANY'S OPERATIONS AND RESULT IN SIGNIFICANT
LITIGATION EXPENSE.
The combined company will rely on a combination of filings, licenses,
confidentiality agreements and other measures to establish and protect its
intellectual property rights. Neither Gabriel nor TriVergent has any
15
<PAGE> 24
patents or patent applications pending. The steps Gabriel and TriVergent have
taken may be inadequate to protect the combined company's technology or other
intellectual property. TriVergent and Gabriel have applied for service marks on
terms and symbols that they believe are important for their respective
businesses. The combined company will also rely on unpatented trade secrets and
know-how to maintain its competitive position, which it will seek to protect, in
part, by confidentiality agreements with employees, consultants and others.
However, these agreements may be breached or terminated, and the combined
company may not have adequate remedies for any breach. In addition, the combined
company's competitors may otherwise learn or discover its trade secrets.
Furthermore, third parties may assert infringement claims against the
combined company and, in the event of an unfavorable ruling on any claim, the
combined company may be unable to obtain a license or similar agreement to use
intellectual property it relies upon to conduct its business. Any claims
alleging infringement and any litigation to protect the combined company's
intellectual property rights may divert management's attention away from the
business and may be costly to defend. Many of the management and other personnel
of Gabriel and TriVergent were previously employees of other telecommunications
companies. These employees could be subject to allegations of violations of
trade secrets, non-compete, non-solicitation or confidentiality agreements or
other similar claims which may prevent these employees from
rendering services to the combined company in addition to costly litigation
expenses.
RISKS RELATING TO THE COMMUNICATIONS INDUSTRY
INCUMBENT LOCAL EXCHANGE CARRIERS 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 local exchange carrier 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 local exchange carriers 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 local exchange carriers 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, which
allow Gabriel and TriVergent to collocate and interconnect with incumbent local
exchange carriers' facilities and to obtain unbundled network and customer
access elements and circuits from the incumbent local exchange carriers have
been accompanied by increased pricing flexibility for, and relaxation of
regulatory oversight of, the incumbent local exchange carriers. This may present
incumbent local exchange carriers 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 local exchange carriers to
offer competitive services at lower prices. If the incumbent local exchange
carriers 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 local exchange carriers 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 include
o large long distance carriers such as AT&T, WorldCom and Sprint, which
offer integrated local, long distance and data telecommunications
services,
16
<PAGE> 25
o the regional Bell operating companies, 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
o other competitive providers.
Many of these providers have financial, technical, marketing, personnel and
other resources, including brand name recognition, substantially greater than
the combined company's, as well as competitive advantages gained through the
recent consolidation in the industry. 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 fiber optic communications
networks that are based on data-switching, Internet protocol technologies. In
addition, Sprint and AT&T have announced that they intend to transition their
respective network infrastructures to Internet protocol platforms in order to
offer their customers integrated voice and data solutions. Teligent, Inc. and
Winstar Communications, Inc. are using wireless technologies to provide high
speed integrated local, long distance and data telecommunications services.
Other potential competitors in the combined company's markets include
electric utilities, cable television companies, resellers, and microwave,
satellite and other wireless telecommunications providers. Some electric
utilities can transmit Internet and data services over their power lines at
speeds comparable to those achievable by telephone companies with traditional
transmission technologies. With the recent acquisitions of TCI and Media One by
AT&T, the announced merger of Time Warner with America Online, and continuing
consolidation in the cable television industry, cable television companies have
emerged as a significant new threat to more traditional providers of
telecommunications services. Other new competitors are also utilizing
alternative transmission facilities, including satellite transmission, which can
be used to provide high capacity wireless local loop, local area network,
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 AND
FAILURE TO RECEIVE CERTAIN APPROVALS MAY IMPEDE ITS OPERATIONS.
Telecommunications services are subject to significant regulation at the
federal, state and local levels. Several factors may have an adverse effect on
the ability of the combined company to pursue its business objectives, including
o delays in receiving required regulatory approvals or onerous
conditions imposed on these approvals,
o difficulties in obtaining satisfactory interconnection agreements with
incumbent local exchange carriers,
o the enactment of new and adverse federal and state legislation and
regulatory requirements, and changes in existing legislation and
regulatory requirements, or
o delays in receiving local building permits for collocation build-out.
Recent federal legislation governing the U.S. telecommunications industry
remains subject to judicial review and additional FCC rule-making. Many
regulatory actions regarding important items that will impact the combined
company are underway or are being contemplated by federal and state authorities.
Changes in current or
17
<PAGE> 26
future regulations adopted by federal, state or local regulators, or other state
or federal legislative or judicial initiatives relating to the
telecommunications industry, could have a material adverse effect on the
business of the combined company.
Unlike some competitors of the combined company, particularly the incumbent
local exchange carriers, TriVergent and Gabriel are not currently subject to
some of the more burdensome requirements of federal regulations. The combined
company's ability to compete in the communications industry will depend upon a
continued favorable, pro-competitive regulatory environment, and could be
adversely affected by new regulations or legislation affording greater
flexibility and regulatory relief to the combined company's larger competitors.
The law in the United States relating to the liability of Internet service
providers for information carried on, disseminated through or hosted on their
systems is currently unsettled. Exposure to this liability could require the
combined company to expend substantial resources or discontinue some of its
product or service offerings. In addition, increased attention to liability
issues, as a result of lawsuits, legislation and legislative proposals, could
adversely affect the growth of Internet use and, in turn, the growth of the
combined company's business.
18
<PAGE> 27
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.
GABRIEL CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------ ----------------------------
1998(1) 1999 1999 2000
---------- -------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue................................... -- $452 -- $1,307
Costs and expenses:
Cost of communications services...... -- 496 -- 1,125
Selling, general and administrative.. $693 16,559 $1,570 7,490
Depreciation and amortization........ 6 1,955 9 1,832
---------- --------- ---------- ---------
Total costs and expenses 699 19,010 1,579 10,447
---------- --------- ---------- ---------
Loss from operations.... (699) (18,558) (1,579) (9,140)
Other income (expense):
Interest income...................... 132 1,477 295 674
Interest expense..................... -- (215) -- (750)
---------- --------- ---------- ---------
Total other income 132 1,262 295 (76)
(expense)...............
Minority interest....... -- -- -- (4)
---------- --------- ---------- ---------
Net loss................ $(567) $(17,296) $(1,284) $(9,220)
========== ========= ========== =========
Basic and diluted loss per share(2)..... $(0.16) $(3.25) $(0.25) $(1.60)
Weighted average common shares outstanding(2) 3,550,755 5,322,409 5,200,000 5,768,089
OTHER FINANCIAL DATA:
Capital expenditures.................... $153 $35,564 $2,227 $19,604
EBITDA(3)............................... (693) (16,602) (1,570) (7,308)
Cash flows from operating activities.... (425) (14,858) 251 (8,611)
Cash flows from investing activities.... (153) (37,564) (2,227) (19,604)
Cash flows from financing activities.... 29,261 86,819 (30) 284
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------ ------------------------------------
2000
1998 1999 1998 1999 As Adjusted (4)
---------- -------- ------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............... $28,682 $63,080 $26,676 $35,148 $104,474
Property and equipment, net............. 148 33,806 2,366 56,158 56,518
Total assets............................ 28,833 102,712 29,104 98,550 167,876
Long-term debt, less current maturities. -- 20,000 -- 20,000 20,000
Subscriptions receivable................ -- -- -- -- (135,071)
Stockholders' equity.................... 28,694 78,217 27,383 69,729 274,126
</TABLE>
----------------------
(1) Gabriel was organized on June 15, 1998.
(2) Basic and diluted loss per share 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 for diluted loss per share in periods
when such common stock options and warrants are not antidilutive.
(3) EBITDA consists of earnings (loss) before net interest, income taxes,
depreciation and amortization and non-cash compensation expense. EBITDA is
provided because we believe it is a measure commonly used in the
telecommunications industry in assessing companies' operating performance,
leverage and ability to incur and service debt. It is presented to enhance
an understanding of our operating results and is not intended to represent
cash flow or results of operations in accordance with generally accepted
accounting principles, or "GAAP." Gabriel's senior secured credit facility
contains covenants based on EBITDA that, among other things, may limit our
ability to incur additional indebtedness. EBITDA is not a measure of
financial performance under GAAP and should not be considered an
alternative to earnings (loss) from operations and net income (loss) as a
measure of performance or to cash flow as a measure of liquidity. EBITDA
is not necessarily comparable to similarly titled measures of other
companies. Gabriel's consolidated statements of cash flows used in and
provided by operating, investing and financing activities, as calculated
under GAAP, are included with Gabriel's consolidated financial statements
contained elsewhere in this information statement/prospectus.
(4) Adjusted to reflect the sale of $204.5 million of Series B preferred stock
in April 2000.
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<PAGE> 28
TRIVERGENT CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------- -----------------------------------
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 $6,522 $4,198
Cost of services................. - 3,802 17,704 4,621 3,734
Operating expenses:
Selling, general and 40 12,166 23,523 7,541 8,919
administrative..................
Provision for uncollectible - 1,976 7,285 3,276 157
accounts........................
Depreciation and amortization... - 150 1,318 135 1,684
--------- --------- ---------- ---------- ----------
Total operating expenses... 40 14,292 32,126 10,952 10,760
--------- --------- ---------- ---------- ----------
Operating loss................... (40) (12,833) (24,793) (9,051) (10,296)
Interest income.................. - 123 816 46 438
Interest expense................. - (13) (1,469) (33) (381)
--------- --------- ---------- ---------- ----------
Loss before extraordinary item... (40) (12,723) (25,446) (9,038) (10,239)
Extraordinary item - early
extinguishment of debt........... - - (218) - (725)
Net loss......................... (40) (12,723) (25,664) (9,038) (10,964)
Preferred stock accretion........ - (58) (2,603) (145) (3,777)
--------- --------- ---------- ---------- ----------
Net loss to common stockholders.. $(40) $(12,781) $(28,267) $(9,183) $(14,741)
========= ========= ========== ========== ==========
Basic and diluted loss
per share (2).................... $(.01) $(1.37) $(2.60) $(.89) $(1.28)
========= ========= ========== ========== ==========
Weighted average shares
outstanding (2).................. 6,390,476 9,308,771 10,868,729 10,348,389 11,485,044
OTHER FINANCIAL DATA:
Net cash used in operating
activities....................... $(56) $(11,072) $(19,956) $(9,245) $(9,424)
Net cash used in investing
activities....................... - (1,465) (38,764) (1,360) (22,850)
Net cash provided by financing
activities....................... 110 13,883 72,558 (10,113) 69,811
Capital expenditures............. - 1,465 34,966 1,007 22,974
EBITDA (3)....................... (40) (12,683) (23,475) (8,916) (8,612)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------- ----------------------
1998 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
investments...................... $1,399 $17,928 $ 907 $ 52,774
Net property and equipment....... 1,314 44,057 2,186 65,683
Total assets..................... 9,942 67,277 8,623 133,833
Long-term debt................... 83 18,200 5,988 25,945
Redeemable preferred stock....... 11,295 65,780 11,440 135,632
Stockholders' deficit............ (5,941) (31,158) (13,815) (42,539)
</TABLE>
--------------------------
(1) TriVergent was organized on October 29, 1997.
(2) Basic and diluted loss per share 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 for diluted loss per share in periods when such common
stock options and warrants are not antidilutive.
(3) EBITDA consists of earnings (loss) before net interest, income taxes,
depreciation and amortization and non-cash compensation expense. EBITDA is
provided because we believe it is a measure commonly used in the
telecommunications industry in assessing companies' operating performance,
leverage and ability to incur and service debt. It is presented to enhance
an understanding of our operating results and is not intended to represent
cash flow or results of operations in accordance with generally accepted
accounting principles, or "GAAP." TriVergent's senior secured credit
facility contains covenants based on EBITDA that, among other things, may
limit our ability to incur additional indebtedness. EBITDA is not a measure
of financial performance under GAAP and should not be considered an
alternative to earnings (loss) from operations and net income (loss) as a
measure of performance or to cash flow as a measure of liquidity. EBITDA is
not necessarily comparable to similarly titled measures of other companies.
TriVergent's consolidated statements of cash flows used in and provided by
operating, investing and financing activities, as calculated under GAAP,
are included with TriVergent's consolidated financial statements contained
elsewhere in this information statement/prospectus.
20
<PAGE> 29
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 of 1.0984 shares of Gabriel
common stock and giving effect to the proposed merger. The actual exchange ratio
may be adjusted as described in this document. 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>
TRIVERGENT
PRO FORMA
GABRIEL/ EQUIVALENT
TRIVERGENT (ASSUMING AN
GABRIEL TRIVERGENT PRO FORMA EXCHANGE RATIO
HISTORICAL HISTORICAL COMBINED OF 1.0984)
------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Book value per common share:
December 31, 1999.............................. $14.30 $(2.79) $23.54 $25.64
March 31, 2000................................. 11.77 (3.56) 25.42 27.93
Income (loss) per common share from
continuing operations (after
preferred dividend requirement):
Basic and diluted:
Year ended December 31, 1997 (1)............... -- $(0.01) -- --
Year ended December 31, 1998 (2)............... $(0.16) (1.37) $(2.58) $(2.83)
Year ended December 31, 1999................... (3.25) (2.58) (4.06) (4.46)
Three months ended March 31, 1999.............. (0.25) (0.89) (1.27) (1.40)
Three months ended March 31, 2000.............. (1.60) (1.22) (1.53) (1.68)
</TABLE>
--------------------------
(1) TriVergent was organized on October 29, 1997.
(2) Gabriel was organized on June 15, 1998.
21
<PAGE> 30
UNAUDITED PRO FORMA FINANCIAL INFORMATION
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 March 31, 2000, gives effect to the
merger as if it occurred on March 31, 2000. The unaudited pro forma condensed
combined statements of operations for the year ended December 31, 1999 and the
three months ended March 31, 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 estimated fair values and useful lives of assets acquired and
liabilities assumed are based upon a preliminary valuation and are subject to
final valuation adjustments.
22
<PAGE> 31
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 -- 40,082
Provision for uncollectible accounts -- 7,285 -- 7,285
Depreciation and amortization 1,955 1,318 22,107 4d 25,217
(163) 4e
----------- ------------ ------------ -----------
Total operating expenses 19,010 49,830 21,944 90,784
----------- ------------ ------------ -----------
Loss from operations (18,558) (24,793) (21,944) (65,295)
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) $ (21,944) (64,686)
=========== ============ ============ ===========
Adjustments for the determination of loss applicable
to common stockholders:
Preferred stock accretion -- (2,603) -- (2,603)
Preferred stock dividend -- -- (7,312) 4b (7,312)
----------- ------------ ------------ -----------
Loss applicable to common stockholders $ (17,296) $ (28,049) $ (29,256) $ (74,601)
=========== ============ ============ ===========
Loss per common share (basic and diluted) $ (3.25) $ (2.58) $ (4.06)
=========== ============ ===========
Shares used in computation of loss per common share 5,322,409 10,868,729 18,355,101
=========== ============ ===========
</TABLE>
23
<PAGE> 32
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 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 $ 1,307 $ 4,198 $ -- $ 5,505
Operating expenses:
Cost of communication services 1,125 3,734 -- 4,859
Selling, general and administrative 7,490 9,076 -- 16,566
Depreciation and amortization 1,832 1,684 5,527 4d 9,002
(41) 4e
----------- ------------ ------------ -----------
Total operating expenses 10,447 14,494 5,486 30,427
----------- ------------ ------------ -----------
Loss from operations (9,140) (10,296) (5,486) (24,922)
Other income (expense):
Interest income 674 438 -- 1,112
Interest expense (750) (381) -- (1,131)
----------- ------------ ------------ -----------
Loss before minority interest and extraordinary item (9,216) (10,239) (5,486) (24,941)
Minority Interest (4) -- -- (4)
----------- ------------ ------------ -----------
Loss before extraordinary item $ (9,220) $ (10,239) $ (5,486) $ (24,945)
=========== ============ ============ ===========
Adjustments for the determination of loss applicable
to common stockholders:
Preferred stock accretion $ -- $ (3,777) $ -- $ (3,777)
----------- ------------ ------------ -----------
Loss applicable to common stockholders $ (9,220) $ (14,016) $ (5,486) $ (28,722)
=========== ============ ============ ===========
Loss per common share (basic and diluted) $ (1.60) $ (1.22) $ (1.53)
=========== ============ ===========
Shares used in computation of loss per common share 5,768,089 11,485,044 18,800,781
=========== ============ ===========
</TABLE>
24
<PAGE> 33
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
ASSETS GABRIEL TRIVERGENT ADJUSTMENTS COMBINED
------- ---------- ----------- --------
(amounts in thousands)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 35,148 $ 52,774 $ (8,000) 2 $ 79,922
Accounts receivable, net 1,092 1,175 -- 2,267
Other current assets 679 1,127 -- 1,806
--------- --------- ---------- ---------
Total current assets 36,919 55,076 (8,000) 83,995
Property, plant and equipment, net 56,158 65,683 2,889 2 124,730
Other noncurrent assets:
Goodwill, net -- 7,263 (7,263) 4e 331,602
331,602 2
Other long-term assets, net 5,473 5,810 -- 11,283
--------- --------- ---------- ---------
Total assets $ 98,550 $ 133,832 $ 319,228 $ 551,610
========= ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,003 $ 9,801 $ -- $ 10,804
Accrued and other current liabilities 3,664 5,094 -- 8,758
--------- --------- ---------- ---------
Total current liabilities 4,667 14,895 -- 19,562
Term loan 20,000 25,000 -- 45,000
Long-term portion of capital lease obligation -- 945 -- 945
--------- --------- ---------- ---------
Total liabilities 24,667 40,840 -- 65,507
--------- --------- ---------- ---------
Minority Interest 4,154 -- -- 4,154
Redeemable preferred stock -- 135,532 (135,532) 4a --
Stockholders' equity:
Preferred stock 300 -- 385 3 685
Common stock 59 12 130 3 189
(12) 4a --
Additional paid-in capital 96,813 7,048 411,969 4c 515,830
Accumulated deficit (27,083) (49,391) 49,391 4a (34,395)
(7,312) 4b
Treasury Stock (360) (209) 209 4a (360)
--------- --------- ---------- ---------
Total stockholders' equity 69,729 (42,540) 454,760 481,949
--------- --------- ---------- ---------
Total liabilities and stockholders' equity $ 98,550 $ 133,832 $ 319,228 $ 551,610
========= ========= ========== =========
</TABLE>
25
<PAGE> 34
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined balance sheet as of March 31, 2000,
gives effect to the merger as if it had occurred on March 31, 2000. The
unaudited pro forma condensed combined statements of operations for the year
ended December 31, 1999 and for the three months ended March 31, 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 my 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, 1.0984, 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 my 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 holder'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)
and these options will fully vest and be 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 June 9, 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. Consideration for allocating the
intrinsic value of the unvested options will be effected at the time 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 June 9, 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 June 9, 2000...... 46,220
TriVergent preferred stock issued in lieu of accrued dividends......... 734
--------
46,954
Exchange ratio ........................................................ 1.0984
--------
Equivalent Gabriel stock exchanged..................................... 51,574
Gabriel market value per share......................................... $ 7.00
--------
Fair value of common and preferred stock issued........................ $361,018
Fair value of TriVergent options assumed............................... $41,627
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........................................... $420,220
========
</TABLE>
26
<PAGE> 35
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................................................................. $ 52,774
Property and equipment.................................................................... 68,572
Other assets.............................................................................. 8,112
Long term debt............................................................................ (25,000)
Other liabilities......................................................................... (15,840)
Goodwill.................................................................................. 331,602
---------
Aggregate purchase price................................................ $420,220
========
</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............................................................................... 13,032,692
Preferred stock............................................................................ 38,541,373
----------
Total shares issued...................................................... 51,574,065
==========
</TABLE>
Note 4. 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 March 31, 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):
<TABLE>
<S> <C>
Issuance of shares for acquisition..................................................... $360,503
Issuance of options and warrants for acquisition....................................... 51,202
Issuance of additional warrants to Gabriel preferred stockholders...................... 7,312
Elimination of TriVergent additional paid in capital................................... (7,048)
--------
$411,969
========
</TABLE>
d) The effect of allocating the aggregate purchase price to goodwill results in
additional amortization expense of $22.1 million and $5.5 million for the
year ended December 31, 1999 and the three months ended March 31, 2000,
respectively. For amortization purposes, goodwill has been assigned a 15
year life.
e) As a result of the merger, historical goodwill carried on the balance sheet
and associated amortization recorded on the statement of operations of
TriVergent are eliminated.
27
<PAGE> 36
GABRIEL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Gabriel is a rapidly-growing, facilities-based, integrated communications
and applications services provider. Gabriel offers businesses and other end
users advanced integrated communications products and services, including local
voice and data, domestic and international long distance, dedicated high-speed
Internet access, web page hosting, domain name services, and other advanced data
and voice services. Gabriel packages its "traditional" local and long distance
telephone services with dedicated high-speed Internet access and advanced data
services, such as unified voice, e-mail and fax messaging. Gabriel's network
platforms also allow it to offer comprehensive business solutions hosted on
servers in its data center.
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, working
on the design and development of local exchange telephone networks and
operations support systems, acquiring equipment and facilities, and negotiating
interconnection agreements.
Gabriel's principal competitors are incumbent local exchange carriers, such
as the regional Bell operating companies and GTE operating units, and other
competitive local exchange carriers and Internet service providers in its
markets.
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 in
each market and construct their own fiber optic transmission facilities to reach
customers, Gabriel installs its own voice and data switches but then leases
transmission facilities from the incumbent local exchange carriers and other
providers. Gabriel's strategy specifically involves
o leasing existing incumbent local exchange carriers connections
throughout a local market area, also called the "local loop," which
connect customers to the central offices or "hubs" of an incumbent
carrier's network, and
o leasing dedicated trunks or circuits from the incumbent local exchange
carriers or other providers to route customer traffic to its switches.
This enables Gabriel to reach its entire targeted customer base in its markets
without having to build from the incumbent local exchange carriers central
offices to its switches in order to establish network connections to each
customer.
Gabriel believes that its network deployment strategy offers a number of
competitive advantages over the traditional competitive local exchange carrier's
build-out strategy by allowing it to
o 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,
o reduce its initial capital expenditures in each market, allowing
Gabriel to focus its initial resources on the critical areas of
switching electronics, sales, marketing and operations support
systems, instead of constructing extensive fiber optic transmission
facilities to reach its customers,
o improve its return on capital by generating revenue with a smaller
capital investment,
o defer capital expenditures for network assets so that most of these
expenditures will be incurred when revenue generated by customer
demand is available to finance them, and
o address business customers throughout its target markets and not just
in those areas reachable by owned fiber transmission facilities.
Through its network deployment strategy, Gabriel believes it can
reduce its up-front capital expenditures to approximately 40% of the total
capital expenditures required under traditional competitive local
28
<PAGE> 37
exchange carrier build-out models. The level of up-front capital that Gabriel
requires to construct a network will vary depending on a number of factors.
These factors include
o the size and geography of the market,
o the cost of construction of the network in each market,
o the degree of penetration of the market, and
o Gabriel's ability to negotiate favorable prices for purchases of
equipment.
To reduce Gabriel's transmission costs and enable it to address smaller
business customers, Gabriel is building out approximately 200 collocation sites
within incumbent local exchange carrier central offices in its initial 16
markets. This build-out coincides with Gabriel's rollout 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 16 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 also plans to build out additional collocation sites as it expands into
additional markets. This will enable Gabriel to provide its voice and data
products and services over unbundled loops, DSL and other customer access
facilities, which Gabriel believes will be less costly than leased dedicated
transmission capacity.
Once traffic volume justifies further investment, Gabriel may lease unused
fiber to which it can connect its electronic transmission equipment. This unused
fiber is known as "dark fiber" because only the fiber is leased and then Gabriel
would be required to install its own electronic equipment to transmit traffic
over that fiber. Gabriel believes that dark fiber will be readily available in
most of its markets. Gabriel may also elect to construct its own fiber networks
if that should become cost justified.
Gabriel has rapidly deployed its networks since commencing service in St.
Louis in June 1999. Gabriel was operating in nine markets in six states as of
June 30, 2000, with seven additional markets in three states under construction.
Gabriel has had initial success in selling services to customers, with
approximately 12,280 on-switch access lines and trunks sold to approximately
1,108 customers as of June 30, 2000. As of June 30, 2000, Gabriel had installed
approximately 9,185 on-switch access lines and trunks for 805 on-switch
customers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Gabriel's operations for the quarter ended March 31, 2000 have generated
$1.3 million of revenue. As of March 31, 2000, approximately 76% of Gabriel's
customers had contracted to take the full package of local, long distance, and
Internet access. Approximately 88% and 89% of Gabriel's customers have
contracted for long distance and Internet services, respectively. During the
quarter, an additional 2,572 lines were installed for 193 new customers.
29
<PAGE> 38
Cost of communication services amounted to $1.1 million for the quarter
ended March 31, 2000. Cost of communications services includes recurring costs
associated with
o leasing the high capacity digital lines that connect its switching
equipment to the incumbent local exchange carrier central offices,
o leasing the local loop lines that connect its customers to its
networks,
o providing Internet access, and
o purchasing long distance services for resale to its customers.
Selling, general and administrative expenses increased by $5.9 million for
the quarter ended March 31, 2000 compared to the same period in 1999. Included
in this expense item are technical, sales and marketing and general
administrative expenses. Technical expenses for the quarter ended March 31, 2000
were $1.9 million compared with $250,000 for the quarter ended March 31, 1999.
Sales and marketing expenses for the quarter ended March 31, 2000 were $1.9
million compared with $286,000 for the quarter ended March 31, 1999. General
administrative expenses for the quarter ended March 31, 2000 were $3.7 million
compared to $1.0 million for the quarter ended March 31, 1999. The increase in
selling, general and administrative expenses are primarily due to the increase
of 220 employees, including an additional 74 sales employees, between March 31,
1999 and March 31, 2000 as Gabriel's first seven 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. Gabriel supplements
its direct sales force through the use of agents such as value-added resellers.
Additionally, Gabriel uses print and other media advertising campaigns to create
brand awareness. As Gabriel continues to grow, it expects that ongoing selling,
general and administrative expenses will increase.
Depreciation expense increased to $1.8 million at March 31, 2000 from
$9,000 for the same period in 1999, consistent with the completion of Gabriel's
networks and initiation of services in seven markets by March 31, 2000.
Interest expense for the quarter ended March 31, 2000 was $750,000. The
expense relates to borrowings and commitment fees under Gabriel's senior secured
credit facility. Interest income for the quarter ended March 31, 2000 was
$674,000 compared to $295,000 for the quarter ended March 31, 1999. Interest
income is earned on the short-term investment of available cash.
Many securities analysts use the measure of "EBITDA," as a way of
evaluating emerging telecommunications companies. EBITDA consists of earnings
(loss) before net interest, income taxes, depreciation and amortization. It is
presented to enhance an understanding of Gabriel's operating results and is not
intended to represent cash flow or results of operations in accordance with
GAAP. EBITDA is not a measure of financial performance under GAAP and should not
be considered an alternative to earnings (loss) from operations and net income
(loss) as a measure of performance or to cash flow as a measure of liquidity.
EBITDA is not necessarily comparable to similarly titled measures of other
companies. Gabriel's consolidated statements of cash flows used in and provided
by operating, investing and financing activities, as calculated under GAAP, are
included with Gabriel's consolidated financial statements contained elsewhere in
this information statement/prospectus.
Gabriel had negative EBITDA of $7.3 million for the quarter ended March 31,
2000 compared to $1.6 million for the quarter ended March 31, 1999. Gabriel
expects to continue to experience increasing operating losses and negative
EBITDA as a result of its development activities as it expands its operations.
Gabriel does not expect to achieve positive EBITDA in any market until after
approximately two and one half years of operation in that market.
Gabriel's net loss for the quarter ended March 31, 2000 was $9.2 million
compared to $1.3 million for the quarter ended March 31, 1999.
30
<PAGE> 39
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 have contracted for long distance and
Internet services. All of Gabriel's customers have signed contracts, 79% of
which have three-year terms.
Cost of communications services amounted to $496,000 for the year ended
December 31, 1999. Cost of communications services include recurring costs
associated with
o leasing the high capacity digital lines that connect its switching
equipment to the incumbent local exchange carrier central offices,
o leasing the local loop lines that connect its customers to its
networks,
o providing Internet access, and
o purchasing long distance services for resale to its customers.
The negative gross margin Gabriel experienced during its initial start-up
period is 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 each market.
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. Selling, general and administrative expenses include
salaries and related personnel costs, facilities costs, and professional and
consulting fees. 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.
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.
Depreciation expense increased from $5,600 in 1998 to $2.0 million for the
year ended December 31, 1999, consistent with the completion of Gabriel's
networks and initiation of services in five markets by December 31, 1999.
Gabriel had negative EBITDA of $16.6 million for the year ended December
31, 1999 compared to $693,000 for the period ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Gabriel's financing plan is predicated on the pre-funding of each market's
expansion to positive free cash flow. 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 secured commitments from a group of
bank lenders to provide an expanded $200 million senior secured credit facility
to provide the balance of its estimated funding requirements.
The actual amount and timing of Gabriel's future capital requirements may
differ materially from its estimates as a result of, among other things
31
<PAGE> 40
o the cost of the construction of its networks,
o 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
plan,
o the demand for its services,
o regulatory and technological developments, including additional market
construction and new opportunities in the telecommunications industry,
o an inability to access credit markets, and
o 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
o its ability to meet its roll-out schedules,
o the extent of price and service competition for telecommunications
services in its markets,
o its ability to develop, acquire and integrate the necessary operations
support systems,
o the number of customers and the services for which they subscribe and
the time required to provision those customers,
o the nature and penetration of new services that it may offer, and
o 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.
From its inception through March 31, 2000, Gabriel has made capital
expenditures totaling $55.3 million for network equipment, software, hardware
and other assets necessary for deploying the networks in its initial markets,
establishing its network operations control center and providing the operations
and other support systems necessary for its business. Gabriel has also used
capital to fund its operations and has used excess cash to purchase short-term
investments. Gabriel estimates that its capital expenditures during the second,
third and fourth quarters of 2000 will be $50.4 million, including $25.6 million
for collocation and other incremental expenditures for its existing networks,
$17.9 million for the additional networks it currently has under construction
and $6.9 million related to its operations support systems.
As of March 31, 2000, Gabriel had $35.1 million of cash and short-term
investments and $70.0 million ($180.0 million giving pro forma effect to the
$200 million commitment discussed above) of undrawn financing available under
its senior secured credit facility. In April 2000, Gabriel received
approximately $69.5 million from the private placement of its Series B preferred
stock, and Gabriel expects to receive by the end of 2000 approximately $135.0
million upon the issuance of additional Series B preferred stock to these
investors pursuant to their outstanding subscription obligations under the
Series B preferred stock purchase agreement.
Gabriel's operations resulted in a net loss for the quarter ended March 31,
2000 and for the quarter ended March 31, 1999 and accordingly, were insufficient
to cover expenses by $9.2 million and $1.3 million, respectively.
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Gabriel's operations resulted in a net loss for the year ended December 31,
1999 and for the period from inception in June 1998 through December 31, 1998
and accordingly, were insufficient to cover expenses by $17.3 million and
$567,000, respectively.
ANTICIPATED CAPITAL REQUIREMENTS OF THE COMBINED COMPANY
The combined company will have total invested and committed equity and debt
capital of over $800 million. The combined company's equity and debt capital,
together with an additional $100 million senior secured credit facility, $100
million in proceeds if the Gabriel warrants being issued as part of the merger
are exercised in full and an estimated $65 million in vendor financing that the
combined company intends to seek, would be sufficient to fully fund the combined
company's initial 40 market construction plan.
Gabriel and TriVergent are currently engaged in discussions with their
respective lenders with regard to obtaining either their consent to preserve the
existing TriVergent credit facilities in place following the merger or their
commitment or agreement to provide an expanded credit facility for the combined
company. However, these discussions are ongoing and neither Gabriel nor
TriVergent can be certain at this time of the amount of financing that will be
available to the combined company or the terms of any financing. Moreover, no
assurance can be given that the holders of the Gabriel warrants will exercise
these warrants in full or at all or that any vendor financing will be available
on satisfactory terms or at all. If the Gabriel warrants are not exercised or
vendor or other financing is not available, the combined company might be
required to modify, delay or abandon some of its planned development and
expenditures.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999 and March 31, 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% as of both dates. 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 quarter of 2000 would have been
increased by $8,000 and $50,000, respectively. The annualized effect on interest
expense would be $200,000.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Statement (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 its adoption of this bulletin will have a material impact
on its consolidated financial position or results of operations.
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TRIVERGENT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 March 31,
2000 reflect its financial and operating performance under its former business
strategy and do not reflect any revenues from the new business strategy of
deploying its own networks and data centers and focusing on marketing to small
and medium-sized businesses located in the southeastern United States.
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, website 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 six Nortel DMS 100/500 switch sites
and 18 asynchronous transfer mode switch sites to cover its initial 16 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:
o 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.
o purchasing necessary voice and data switching equipment. Switch costs
associated with each Nortel DMS 100/500 switch sites are approximately
$4.5 million and include approximately $3.5 million for the cost of a
Nortel DMS 100/500 switch and the related equipment. An asynchronous
transfer mode switch site costs approximately $1.5 million, which
includes $750,000 for the cost of the switch and related equipment.
o 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.
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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
interconnection agreements 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
for the purchase of transmission capacity to connect its switches with the
Global Crossing, 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 the new business strategy, TriVergent has acquired five data
communications and Internet companies in two of its target markets, of which
much of its customer base TriVergent hopes to migrate to its Broadband Bundle,
which are
o 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),
o 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),
o 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),
o 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
o 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 $2.46
million, consisting of $500,000 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 three months ended March 31, 2000, TriVergent expects
to have revenue in future periods from these businesses.
FACTORS AFFECTING RESULTS OF OPERATIONS
REVENUES
TriVergent's revenues through March 31, 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 no revenues in this period from the sale of TriVergent's
Broadband Bundle or data center services. Through March 31, 2000, TriVergent's
revenues were derived from
o resale of local and long distance telephone services to residential
customers,
o prepaid local telephone services,
o dial-up Internet access services from Carolina Online, and
o small amounts of cabling equipment revenues from the local area and
wide area network equipment business of DCS.
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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 facilities-based services to small and
medium-sized businesses. TriVergent expects the increasing portion of its
revenues will come from
o 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,
o long distance services in excess of the 100 minutes per month included
in the Broadband Bundle,
o rental of space for customer servers at the data centers,
o compensation for termination of calls of other providers' customers to
TriVergent's customers over its network, and
o 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
o the lease of transmission capacity and customer connections,
o the recurring costs of transmission capacity purchased from Global
Crossing,
o operating costs, such as rent and personnel costs, associated with the
collocation facilities, data centers and TriVergent's own switching
sites, and
o payments to other carriers to terminate TriVergent's customers' calls
on their networks.
TriVergent leases lines from the incumbent telephone company in each market
to connect its customers with its collocation and switching facilities.
TriVergent also leases transmission lines from other communications companies,
including incumbent telephone companies, to connect its switching and
collocation facilities.
TriVergent has an agreement with Global Crossing for the resale and
transmission of long distance services on a per minute basis which contains
minimum volume commitments. In the event it fails to meet these minimum volume
commitments, TriVergent may be obligated to pay under-utilization charges.
Similarly, in the event TriVergent underestimates its need for transmission
capacity, it may be required to obtain capacity through more expensive means.
Transmission capacity costs will increase as customers' long distance calling
volume increases, and TriVergent expects these costs to be a significant portion
of the cost of long distance services.
TriVergent expects switch site lease costs and collocation costs to be a
significant part of the ongoing cost of services. BellSouth and other incumbent
telephone companies typically charge both a start-up fee and a monthly recurring
fee for use of collocation sites in their central offices. The primary expense
associated with providing Internet access to TriVergent's customers is the cost
of interconnecting its network with a national Internet service provider.
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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
o its direct sales force, as well as commissions for its independent
sales agents,
o increased provisioning, customer care, information technology and
other personnel costs,
o the new network engineering department,
o outsourcing reciprocal compensation and access billings,
o increased general administrative overhead, and
o 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 the business. However, TriVergent expects these expenses to
decrease as a percentage of its revenue as it builds its customer base.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
TriVergent's provision for uncollectible accounts, particularly in 1999,
reflected the poor credit quality of its residential resale customers. The
direct mail solicitation, which offered local and long distance services at a
discount from BellSouth's rates, attracted a number of consumers who were poor
credit risks and about whom TriVergent had no credit information. In addition,
due to the lag time between the transfer of billing information
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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 three
months ended March 31, 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
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 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 $4.2
million for 2000 compared to $6.5 million for 1999, a decrease of $2.3 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 $3.7 million for 2000 compared to
$4.6 million for 1999, a 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 $8.9 million for 2000
compared to $7.5 million for 1999, an increase of $1.4 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 $0.2 million for 2000 compared to
$3.3 million for 1999, a decrease of $3.1 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 $1.7 million for
2000 compared to $0.1 million in 1999, an increase of $1.6 million. The increase
was primarily due to an increase in network equipment deployed in providing
broadband services to business customers.
INTEREST INCOME
Interest income was earned from the temporary investment of proceeds from
the sale of TriVergent preferred stock in investment grade securities.
INTEREST EXPENSE
Interest expense was $0.4 million for 2000 compared to $33,000 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 - Provision for Uncollectible Accounts."
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DEPRECIATION AND AMORTIZATION
TriVergent's depreciation and amortization expense was $1.3 million for
1999 compared to $0.2 million for 1998, an increase of $1.1 million. This
increase was primarily due to increased capital expenditures for leasehold
improvements and computers and other equipment related to increased personnel,
and to the amortization of goodwill related to two acquisitions during 1999 for
a portion that year, plus depreciation for a full 12 months for equipment
acquired in 1998.
INTEREST INCOME
Interest income was earned from the temporary investment of proceeds from
the sale of TriVergent preferred stock in investment grade securities.
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
o hiring management and other key personnel,
o raising capital,
o procuring governmental authorizations,
o acquiring equipment and facilities,
o developing, acquiring and integrating operations support and other
back office systems, and
o negotiating interconnection agreements.
This development stage continued through June of 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
o capital expenditures,
o the cash flow deficits generated by operating losses,
o working capital needs, and
o debt service.
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TriVergent's principal capital expenditure requirements will include the
purchase and installation of switches and the development and integration of
operations support systems. To fund TriVergent's business strategy, it expects
to use a combination of stock, debt and funds from operations.
EQUITY AND PREFERRED FINANCING
TriVergent's equity and preferred financing has consisted of approximately
$137 million provided by institutional investors and management. Of this amount,
approximately $130 million was for preferred stock, including $67 million
received in February and March 2000. The remainder was for common stock.
CREDIT FACILITIES
In January 2000, TriVergent entered into a senior credit facility with a
group of commercial banks which permits it to borrow up to $120 million, subject
to various conditions, through December 31, 2007. The senior credit facility is
comprised of an $80 million term loan facility and a $40 million revolving
credit facility. Any borrowings under the term loan facility must be completed
by December 31, 2000. [Under the revolving credit facility, $20 million will not
be available unless specified financial results are achieved for the third
quarter of 2000. As of March 31, 2000, $25 million is outstanding under the term
loan facility and no amount is outstanding under the revolving credit facility.]
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 March 31, 2000, no amount is
outstanding under the Nortel credit facility. Borrowings under this facility
will require the consents of the lenders under the senior secured 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 March 31, 2000, TriVergent had an accumulated deficit of $49.4 million. Net
cash used in operating activities was $9.4 million for the first quarter 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 1999. The net cash used for operating activities during 1999 and
the first quarter of 2000 was primarily due to net losses.
Net cash provided by financing activities was $69.8 million in the first
quarter of 2000. This included $66.3 million from issuances of preferred and
common stock and a net increase in the term loan of $8.0 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 $22.8 million in the first
quarter of 2000. Capital expenditures were $23.0 million and cash paid for
acquisition amounted to $2.6 million. 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 amounted to $1.1 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 March 31, 2000 and December 31, 1999, respectively, TriVergent had
purchased approximately $48 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.
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CAPITAL REQUIREMENTS
To expand and develop its business, TriVergent will need a significant
amount of additional financing. At March 31, 2000, TriVergent had cash and cash
equivalents of $52.8 million and available unused borrowing capacity under its
credit facilities of $100 million. TriVergent estimates that its current
business plan, including future capital expenditures, operating losses
associated with the roll out of its network in the initial target markets by
December 31, 2001 and working capital needs, will require approximately $436
million, to the point when 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 March 31, 2000, the carrying value of TriVergent's debt obligations was
$25.0 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 March 31, 2000 and December 31, 1999
was 11.1% 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 quarter of
2000 and 1999 TriVergent's interest expenses for that period would have been
increased by $55,000 and $136,000, 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
swap 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Statement 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
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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 MERGER
BACKGROUND OF THE MERGER
Mr. David L. Solomon, Vice Chairman and Chief Executive Officer of Gabriel,
contacted Mr. Charles S. Houser, Chairman and Chief Executive Officer of
TriVergent in early April 2000 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 of Gabriel 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
issues relating to a possible business combination with Gabriel and reviewed a
written analysis of Donaldson Lufkin & Jenrette Securities Corporation, which
TriVergent engaged to represent it in the proposed transaction, regarding the
possible financial and strategic benefits of the possible combination of the two
companies.
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 board composition,
management, headquarters location, name, strategy and implications to employees
under the 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 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.
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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, Executive Vice President - Corporate Development and Legal
Affairs and 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 ___. 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 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. Mr. Houser discussed reasons for 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 ___. 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 a variety of factors including
o the business, operations, prospects and strategic direction of
TriVergent and Gabriel, and the significant additional capital
requirements for and risks inherent in, the successful implementation
of the long-range business plans of both companies,
o the belief that a merger of TriVergent with Gabriel could create
significant strategic advantages for the combined company and create a
stronger competitor in the changing telecommunications industry,
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o the depth of experience of the Gabriel management team,
o the complementary network architecture and back office systems of
Gabriel,
o 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,
o the terms and conditions of the merger agreement and the likelihood
that the conditions to the merger will be satisfied, and
o 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
o the business, operations, prospects and strategic direction of Gabriel
and TriVergent, and the significant additional capital requirements
for and risks inherent in, the successful implementation of the
long-range business plans of both companies,
o the belief that a merger of Gabriel with TriVergent could create
significant synergies for the combined company and create a stronger
competitor in the changing telecommunications industry,
o the depth of experience of the TriVergent management team,
o the complementary network architecture and back office systems of
TriVergent,
o 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,
o 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,
o the terms and conditions of the merger agreement and the likelihood
that the conditions to the merger will be satisfied, and
o 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,
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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.
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)(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 opinions 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
o the prices at which Gabriel common stock and preferred stock would
actually trade in the future,
o the merits of the merger relative to other business strategies
considered by the TriVergent board,
o the decision of the TriVergent board to proceed with the merger, or
o 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.
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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
o drafts of the merger agreement and exhibits to the merger agreement,
o 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,
o certain financial projections for the years 2000 through 2009 of
TriVergent and Gabriel prepared by their managements,
o a comparison of various financial data of TriVergent and Gabriel with
other companies whose securities are traded in public markets, and
o 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 of 1986, 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
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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 ratio of these valuations would imply an exchange ratio of
0.6x.
Publicly Traded Comparable Competitive Local Exchange Carrier Analysis.
Donaldson, Lufkin & Jenrette analyzed selected historical and projected
operating information, stock market data and financial ratios for the following
publicly traded competitive local exchange carriers:
o Allegiance Telecom, Inc.,
o Choice One Communications, Inc.,
o CoreComm Ltd.,
o CTC Communications Corp.,
o Focal Communications Corp.,
o Mpower Communications Corp.,
o Net2000 Communications Inc.,
o Network Plus Corp.,
o Pac-West Telecomm Inc. and
o US LEC Corp.
Donaldson, Lufkin & Jenrette chose the comparable competitive local exchange
carriers 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. These ranged from a low of 2.2x to a high of 12.4x
with an average of 5.2x and a median of 3.6x. Based on the median of 3.6x,
Donaldson, Lufkin & Jenrette concluded that the appropriate range of ratios to
apply to TriVergent's and Gabriel's estimated 2001 revenues were 2.5x to 3.5x
and 3.0x to 4.0x, respectively. These ranges of enterprise value to 2001 revenue
ratios implied an equity value per share ranging from $5.93 to $8.13 per share
for TriVergent and $6.03 to $6.86 per share for Gabriel. 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. The following
assumptions were used in calculating discounted cash flow values:
o Discounted cash flow projection period from July 1, 2000 through
December 31, 2009
o Discount rate of 13.0% to 15.0% for each of TriVergent and Gabriel
o Terminal value based on EBITDA multiple of 10.0x to 12.0x for
TriVergent and 9.5x to 11.5x for Gabriel
These assumptions implied values ranging from approximately $16 to $19 per
share for TriVergent common stock and approximately $17 to $20 per share for
Gabriel common stock. 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
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combined entity's revenues, which, when adjusted for Gabriel's net cash,
implied an exchange ratio range of 0.9 to 1.4 compared to the then proposed
exchange ratio of 1.1005.
This summary is not a complete description of Donaldson, Lufkin &
Jenrette's analyses. Instead, it summarizes the material elements of the
presentation made by Donaldson, Lufkin & Jenrette to the TriVergent board on
June 8, 2000. The preparation of Donaldson, Lufkin & Jenrette's opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances. Therefore, Donaldson, Lufkin & Jenrette's opinion is not readily
susceptible to summary description.
Each of Donaldson, Lufkin & Jenrette's analyses was carried out in order to
provide a different perspective on the transaction and add to the total mix of
information available. Donaldson, Lufkin & Jenrette did not form a conclusion as
to whether any individual analysis, considered by itself, supported or failed to
support an opinion as to fairness from a financial point of view. Rather, in
reaching its conclusion, Donaldson, Lufkin & Jenrette considered the results of
the analyses in light of each other and ultimately reached its opinion based on
the results of all analyses taken as a whole. Donaldson, Lufkin & Jenrette did
not place particular reliance or weight on any individual analysis, but instead
concluded that its analyses, taken as a whole, supported its determination.
Furthermore, different professionals within Donaldson, Lufkin & Jenrette
involved in the delivery of the opinion may have given different weight to
different analyses. For this reason, Donaldson, Lufkin & Jenrette believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all analyses and
factors, could create an incomplete view of the evaluation process underlying
its opinion. The 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 certain
customary fees for its services rendered in connection with 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 document 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. This summary of Salomon
Smith Barney's opinion set forth below is qualified in its entirety by the full
text of the
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opinion. 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:
o a draft of the merger agreement,
o publicly available business and financial information concerning
TriVergent, and
o internal information, including financial forecasts and other
information and data regarding Gabriel and TriVergent, provided to or
otherwise discussed with Salomon Smith Barney by the managements of
Gabriel and TriVergent.
Salomon Smith Barney reviewed the financial terms of the merger in relation
to, among other things, the historical and projected earnings and other
operating data of Gabriel and TriVergent and the historical and projected
capitalization and financial condition of Gabriel and TriVergent. Salomon Smith
Barney also evaluated the pro forma financial impact of the merger on Gabriel.
Salomon Smith Barney also conducted other analyses and examinations and
considered other information and financial, economic and market criteria as it
deemed appropriate.
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
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.
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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. Certain information used by
Salomon Smith Barney with respect to TriVergent was on a pro forma basis to
reflect pending and recently completed transactions involving TriVergent. In
performing this analysis, Salomon Smith Barney did not take into account any
anticipated cost savings, revenue enhancements or other similar potential
effects of the merger.
Based on this information, 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. 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 compared this data with the 46% and 54% pro forma
fully diluted equity interest in the combined company of the current common and
preferred stockholders of TriVergent and Gabriel, respectively.
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<PAGE> 61
Comparable Company Analysis. Salomon Smith Barney reviewed publicly
available financial and operating information for nine competitive local
exchange carriers: Allegiance Telecom, Inc., Choice One Communications Inc., CTC
Communications Group, Inc., Focal Communications Corporation, Mpower Holding
Corporation, Net2000 Communications, Inc., Network Plus Corp., Pac-West
Telecomm, Inc. and US LEC Corp. Salomon Smith Barney considered the business
segments in which these companies operate to be reasonably similar to certain of
the business segments in which TriVergent and Gabriel operate, but noted that
none of these companies has the same management, makeup, size or combination of
businesses as TriVergent or Gabriel.
In performing these analyses, Salomon Smith Barney derived the adjusted
firm value of each of the comparable competitive local exchange carriers.
Adjusted firm value was calculated as the sum of the value of:
o 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
o non-convertible indebtedness, plus
o non-convertible preferred stock, plus
o minority interests, plus
o out-of-the-money convertible securities, minus
o certain assets not related to the company's core businesses, minus
o investments in unconsolidated affiliates and cash.
For each of the comparable competitive local exchange carriers, Salomon
Smith Barney derived the ratio of adjusted firm value to each of:
o revenue for 2000, based on an annualization of revenue for the latest
quarter for which results were available ("LQA Revenue"),
o estimated revenue for 2000,
o estimated revenue for 2001,
o estimated revenue for 2002,
o estimated growth-adjusted revenue for 2000,
o estimated growth-adjusted revenue for 2001,
o estimated growth-adjusted revenue for 2002,
o net property, plant and equipment ("net PP&E"), and
o 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 exchange
carriers, 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>
LQA Revenue 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 PP&E 6.3x - 18.5x 10.5x 9.3x
Access Lines $3,701 - $35,576 $14,728 $12,839
</TABLE>
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<PAGE> 62
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 implied equity value for TriVergent and
Gabriel as set forth in the following table:
<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>
Discounted Cash Flow Analysis. Salomon Smith Barney used a discounted cash
flow methodology to derive ranges of firm value for each of TriVergent and
Gabriel. 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 (1) projected free cash flows
for the ten fiscal years from 2000 through 2009, plus (2) 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 ("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.
In deriving ranges of firm 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 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
EBITDA margins than were reflected in Gabriel's management projections.
Based upon this analysis, Salomon Smith Barney derived the following ranges
of firm value for TriVergent and Gabriel:
<TABLE>
<CAPTION>
TRIVERGENT GABRIEL
----------------------------------- -----------------------------------
MANAGEMENT CASE ADJUSTED CASE MANAGEMENT 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
</TABLE>
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, but it does not purport to be a
complete description of all the analyses performed by Salomon Smith Barney. 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
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<PAGE> 63
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 certain customary fees for its services rendered in
connection with the merger. 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 certain 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 certain 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
certain 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
</TABLE>
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<PAGE> 64
<TABLE>
<S> <C>
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:
o 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;
o 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
o 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 agreement and that the merger shall not
be treated as an event resulting in acceleration of exercise rights under their
options granted under the TriVergent employee incentive plan. In exchange for
this agreement, such 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 shall fully vest and be fully exercisable in accordance
with their terms in the event of (i) 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), (ii) a relocation
of fifty (50) miles or more of such employee's work location or (iii) a
termination of the employment of such employee without cause, in each case of
clauses (i), (ii) and (iii), which occurs within one year following the
effective time of the merger.
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, certain offices 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 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:
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<PAGE> 65
o 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) shall be waived with respect to
such participants and their eligible dependents;
o 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;
o Gabriel has agreed to honor the employment agreements of TriVergent's
current executive officers and employees; and
o 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.
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 purchase price (i.e., the
aggregate merger consideration) will be allocated based on the fair values of
the assets acquired and the liabilities assumed. Any excess of cost over fair
value of the net tangible assets of TriVergent acquired will be recorded first
as identifiable intangible assets and then, to the extent unallocated, as an
unidentified intangible asset or "goodwill." A final determination of the
intangible asset lives and required purchase accounting adjustments, including
the allocation of the purchase price to the assets acquired and liabilities
assumed based on their respective fair values, has not yet been made. See "Pro
Forma Condensed Combined Financial Statements" on page ___.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following discussion summarizes 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 the one year warrants and the two year warrants to purchase Gabriel common
stock to holders of shares of TriVergent preferred stock and Gabriel preferred
stock.
The discussion is based upon current law and is subject to the
qualifications contained therein. The discussion assumes that the holders hold
their TriVergent stock, options or warrants or Gabriel preferred stock as
capital assets within the meaning of Section 1221 the Code.
This summary does not purport to discuss 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 discussion
also does not describe tax consequences arising out of the tax laws of any
state, local or foreign jurisdiction.
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<PAGE> 66
Further, this summary does not purport to discuss 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
o the merger will qualify as a "reorganization" within the meaning of
Section 368(a) of the Code,
o Gabriel, TriVergent and Triangle Acquisition, Inc. will each be a
"party to a reorganization" within the meaning of Section 368(b) of
the Code, and
o no income, gain or loss will be recognized by Gabriel, TriVergent or
Triangle Acquisition, Inc. as a result of the merger.
These opinions are subject to qualifications set forth herein and assume
that the merger is consummated in accordance with the terms of the merger
agreement and as described in this information statement/prospectus. These
opinions also assume that the representations and assumptions set forth in
certain 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 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.
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<PAGE> 67
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 convertible into 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, but the tax basis would be allocated back to the Gabriel preferred
stock.
Distribution of Additional Shares of TriVergent Preferred Stock or
TriVergent Common Stock As Payment of Preferred Holders' Accrued and Unpaid
Dividends. The distribution by TriVergent prior to the effective time of the
merger of shares of TriVergent preferred stock or TriVergent common stock to
holders of TriVergent preferred stock as payment of accrued and unpaid
dividends may be a taxable dividend to the extent of TriVergent's or Gabriel's
current or accumulated earnings and profits. It is expected that neither
TriVergent nor Gabriel will have earnings and profits at the time of the
distribution or for the taxable year.
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. Holders of
TriVergent common stock or TriVergent preferred stock who receive cash (i) in
lieu of a fractional share of Gabriel common or Gabriel preferred stock or (ii)
as a result of the exercise of the right to dissent from the merger (assuming
thereafter that, directly or indirectly, such 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
therefor. 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
o 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 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,
o provides a certification of foreign status on Form W-8 (or successor
form), or
o is otherwise exempt from backup withholding.
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<PAGE> 68
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 a recapitalization reorganization. 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 a plan to periodically increase a shareholder's
proportionate interest in the assets or earnings and profits of Gabriel. Each
holder's aggregate tax basis should be allocated between the Gabriel preferred
stock and the Gabriel warrants in proportion to the respective fair market
values of the preferred stock and warrants. The holding period of the Gabriel
warrants will include the holding period of the Gabriel preferred stock on which
such warrants are distributed. If the warrants lapse unexercised, the holder
will recognize capital loss with respect to the warrants to the extent of the
tax basis allocated thereto.
It is possible (assuming the fair market value of the Gabriel warrants
distributed is less than 15% of the fair market value of the Gabriel preferred
stock) that no basis would be allocated to the Gabriel warrants unless the
holder files an election to so allocate under applicable regulations. If this
election were made, each 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, but the 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, but only to the
extent of the current or accumulated earnings and profits of Gabriel at the time
of the distribution or for the taxable year. 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 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.
BECAUSE OF THE COMPLEXITY OF THE TAX LAWS, AND BECAUSE 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, EACH HOLDER OF
TRIVERGENT STOCK, OPTIONS AND WARRANTS AND GABRIEL PREFERRED STOCK IS URGED TO
CONSULT HIS OR HER PERSONAL TAX ADVISOR CONCERNING THE APPLICABILITY TO HIM OR
HER OF THE FOREGOING DISCUSSION, AS WELL AS OF ANY OTHER TAX CONSEQUENCES OF THE
MERGER.
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REGULATORY MATTERS
UNITED STATES ANTITRUST. Under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 and related rules, certain transactions, including the merger, may
not be completed unless certain 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 Federal
Trade Commission. If the Antitrust Division does not issue a request for
additional information, the required waiting period under the Hart-Scott-Rodino
Act will expire on July 15, 2000. However, at any time before or after the
effective time of the merger, the Antitrust Division, the Federal Trade
Commission or others could take action under the antitrust laws, including
seeking to prevent the merger, to rescind the merger or to conditionally approve
the merger upon the divestiture of substantial assets of Gabriel or TriVergent.
There can be no assurance that a challenge to the merger on antitrust grounds
will not be made or, if such a challenge is made, that it would not be
successful.
FEDERAL COMMUNICATIONS COMMISSION. 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
o Gabriel or TriVergent will be able to satisfy or comply with such
conditions,
o compliance or non-compliance will not have adverse consequences for
Gabriel or TriVergent after completion of the merger, or
o 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 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 (i) are
holders of issued and outstanding shares of common stock or preferred stock
immediately prior to the effective time of the merger, (ii) have not voted in
favor of the merger nor consented thereto in writing and (iii) 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.
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Also within 120 days of the effective date of the merger and upon written
request, any TriVergent stockholder demanding appraisal rights may request a
statement from the combined company setting forth the aggregate number of shares
not voted in favor of or consenting to the merger and with respect to which
demands for appraisal have been received and the aggregate numbers of holders of
these shares. This statement will be mailed within 10 days of the combined
company's receipt of the request for the statement or within 10 days after
expiration of the period for delivery of demands, whichever is later.
Within 60 days of the effective date of the merger, any TriVergent
stockholder may withdraw his or her demand for appraisal and accept the merger
consideration and other terms of the merger by providing written notice to the
combined company.
RESALE OF GABRIEL COMMON STOCK AND GABRIEL PREFERRED STOCK
This information statement/prospectus does not cover resales of Gabriel
common stock or preferred stock received by any person upon completion of the
merger or upon conversion of Gabriel preferred stock or exercise of any Gabriel
warrants or options issued in connection with the merger. No person is
authorized to make any use of this information statement/prospectus in
connection with any such resale.
OWNERSHIP OF GABRIEL FOLLOWING THE MERGER
Based on the exchange ratio of 1.0984, TriVergent common and preferred
stockholders will receive 13,032,692 shares of Gabriel common stock and
38,541,373 shares of Gabriel preferred stock, respectively. On an undiluted
basis, this will represent 68.7% and 21.9% of all of the outstanding common
stock and preferred stock, respectively, of Gabriel. Holders of TriVergent
options and warrants will receive Gabriel options and warrants exercisable for
12,657,090 shares of Gabriel common stock in the merger at the exchange ratio of
1.0984. Based on those numbers, following the merger, former holders of
TriVergent common and preferred stock, options and warrants would own
approximately 46% of the shares of Gabriel stock, on a fully diluted basis
without regard to the Gabriel $6.00 warrants and $10.25 warrants. Upon
completion of the merger, the business of TriVergent will be operated through a
wholly owned subsidiary of Gabriel, to be renamed TriVergent Corporation at the
effective time of the merger.
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 certain financial institutions are lenders to both TriVergent
and Gabriel.
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THE MERGER AGREEMENT
This section is a summary of the material terms of the merger agreement, a
copy of which is attached as Annex A to this information statement/prospectus.
The following description does not purport to be complete and is qualified in
its entirety by reference to the merger agreement. You should refer to the full
text of the 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 summary,
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 ___ 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 such 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
o all required regulatory approvals have been obtained or taken, and
o 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 additional shares of TriVergent Series A
preferred stock, TriVergent Series B preferred stock and TriVergent Series C
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 July 31, 2000 (or, if the effective time of the
merger is later than August 31, 2000, 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
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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 July 31, 2000 or August 31, 2000, as the
case may be.
WHAT SECURITYHOLDERS WILL RECEIVE IN THE MERGER
COMMON STOCK. TriVergent common stockholders will be entitled to receive
1.0984 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 certain stock changes and
issuances.
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
o 1.0984 shares of Gabriel Series C-1 preferred stock for each share of
TriVergent Series A preferred stock,
o 1.0984 shares of Gabriel Series C-2 preferred stock for each share of
TriVergent Series B preferred stock, and
o 1.0984 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 (including those converted) and each of the holders of Gabriel
preferred stock will receive warrants to purchase Gabriel common stock as
follows. A particular holder of such preferred stock will receive
o warrants to purchase a certain number of shares of 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
o warrants to purchase a certain number of shares of 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 each investor's total invested capital as follows:
o the number 8,000,000 will be multiplied by a fraction
o 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
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which were invested in shares of TriVergent stock immediately
prior to the effective time of the merger as provided in the
merger agreement, and
o 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).
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.
After the effective time of the merger and at the time that each 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,
the holder will receive additional Gabriel warrants allocated to the additional
dollar amount invested as determined in accordance with the formula described
above.
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 (i.e., 1.0984, subject to adjustment). 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 1.0984 exchange ratio, an option to
purchase 10,984 shares of Gabriel common stock at $2.19 per share.
The merger agreement provides certain additional terms relating to the
conversion of options including:
o 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 acceleration of the exercise rights of such
holder'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 such employees' options will fully vest
and be fully exercisable in accordance with their terms, subject to a
notification requirement, if one of three events occurs within one
year of the merger, subject to a right to cure
o 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,
o a relocation of 50 miles or more of such employee's work
location, or
o a termination of the employment of such employee without cause;
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o 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
o Gabriel and TriVergent will deliver, to those who should receive
such items, this information statement/prospectus and a form of
agreement providing for the acknowledgment by such 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 such 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 Amended and Restated Stockholders' Agreement and Amended and Restated
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 Amended Shareholders
Agreement by and among Gabriel and its employee stockholders. These agreements
are described in "Description of Gabriel Capital Stock" beginning on page ___
below.
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Upon the surrender of a TriVergent common or preferred stock certificate
together with a duly executed letter of transmittal and the other documents that
may be reasonably required, the holder of such certificate will be entitled to
receive a certificate representing the number of whole shares of Gabriel common
stock, or preferred stock, and warrants as the case may be. Moreover, after such
surrender and exchange, such record holder of the Gabriel securities will be
entitled to receive any dividends or other distributions declared on such
securities following the effective time of the merger, without interest.
VOTING AND CONSENT AGREEMENTS
On June 9, 2000, concurrently with the execution and delivery of the merger
agreement, certain 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
o 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.,
o holders of a majority of the outstanding shares of TriVergent Series B
preferred stock, and
o 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
o 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
o at least two-thirds of each series of Gabriel preferred stock, voting
as separate classes.
Approval of the acquisition of TriVergent by Gabriel pursuant to the merger
agreement requires the affirmative vote or consent of the holders of at least a
majority of the outstanding shares of Gabriel common and preferred stock, voting
together as a class.
Holders of a sufficient number of shares of each class of Gabriel stock
have agreed to vote in favor of or consent to the adoption of the Gabriel
charter amendment and the acquisition of TriVergent by Gabriel pursuant to the
merger agreement.
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EMPLOYEES AND EMPLOYEE BENEFIT PLANS
Gabriel has agreed that, after the effective time of the merger, it will
o 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) shall be waived with respect to
such participants and their eligible dependents,
o reorganize 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 such service was
recognized under the benefit plans of TriVergent
o honor the employment agreements of TriVergent's current executive
officers and employees, and
o 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 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.
COVENANTS
TriVergent and Gabriel also have agreed not to take certain actions without
the prior written consent of the other during the interim between signing the
merger agreement and closing the merger, including, among other things
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o the conduct of their respective businesses outside the ordinary course
of business,
o the issuance of additional equity securities other than under
specified exceptions,
o 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
o the solicitation, initiation, encouragement or recommendation of any
other acquisition proposal.
In addition, Gabriel covenanted that it would make a capital call (as such term
is defined in the purchase agreement for Gabriel Series B Preferred Stock) no
later than the effective time of the merger and will make a second capital call
no later than November 30, 2000, each in accordance with the terms and
conditions of the purchase agreement for Gabriel Series B Preferred Stock so as
to cause the purchasers to satisfy their additional preferred stock subscription
obligations under the purchase agreement.
CONDITIONS TO COMPLETION OF THE MERGER
Each party's obligations to effect the merger is subject to the
satisfaction or waiver of various conditions which include, in addition to other
customary closing conditions, the following:
o Stockholder Approval. The requisite stockholder approvals necessary to
effect the merger and the amendment to the Gabriel charter, shall have
been obtained.
o No Injunction or Action. No legal action shall have been taken (and
remained effective) by any court or other governmental authority,
which prohibits or prevents the consummation of the merger.
o Consent of Certain Third Parties and Governmental Approvals. All
consents as set forth on certain schedules to the merger agreement of
any governmental authority required for the consummation of the merger
and the transactions contemplated by the merger agreement shall have
been obtained. In addition, each of Gabriel and TriVergent shall have
received consents for the consummation of transactions contemplated by
the merger agreement from certain third parties pursuant to certain
contracts.
o Hart-Scott-Rodino Act. The waiting period applicable to the merger
under the Hart Scott Rodino Antitrust Improvements Act of 1976 shall
have expired or earlier termination thereof shall have been granted
without any material legal action (that remained effective) by
applicable governmental authorities.
o Securities laws. The registration statement on Form S-4, of which this
document is part, shall have been declared effective, no stop order or
proceeding suspending the effectiveness of the registration statement
shall have been issued (or threatened), and Gabriel shall have
received all state securities law authorizations necessary to
consummate the transactions contemplated by the merger agreement.
o Representations, Warranties and Performance. There shall 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 shall 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.
o Tax Opinions. Each party shall have received an opinion of counsel,
based on customary representations contained in certificates, to the
effect that, if conducted as indicated in the merger agreement, the
merger will qualify as a reorganization within the meaning of Section
368 of the Internal Revenue Code.
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o Gabriel Option Agreements. TriVergent shall have delivered, or cause
to be delivered, to Gabriel, agreements, which have been duly executed
and delivered in accordance with the merger agreement, and such
supporting documentation as may be reasonably requested by Gabriel,
evidencing 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 certain holders listed on a
schedule to the merger agreement.
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,
o by mutual written consent of TriVergent and Gabriel, duly authorized
by the board of directors of each,
o by either TriVergent or Gabriel if
o the merger shall not have been consummated on or before October
31, 2000 (or such other date as may be agreed to by TriVergent
and Gabriel); provided, that, no party may terminate the merger
agreement for this reason if such party's breach of this
agreement has caused or resulted in the failure of the merger to
occur on or before such date,
o 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
o 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 certain cure
periods.
In the event the merger agreement is terminated, the merger will be deemed
abandoned and the termination will be without liability of any party thereto,
except for liability for breach of the merger agreement and except for any
provisions relating to confidentiality, fees and expenses and termination which
shall survive.
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, facilities-based,
integrated communications and applications services provider. Gabriel offers
advanced, integrated communications products and services, including
o local voice and data services,
o domestic and international long distance services,
o dedicated, high speed Internet access, web page hosting and domain
name services, and
o 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 local
exchange carrier.
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-centric 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
o deploying a comprehensive suite of integrated voice, data, DSL,
Internet and browser-based products, services and applications,
o providing timely customer service initiation and changes, customized,
accurate billing and 24/7 network surveillance through its advanced,
integrated operations support systems, and
o providing 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 Robert A.
Brooks, a founder of several successful telecommunications companies, including,
most recently, Brooks Fiber Properties and CenCom Cable. Gabriel's Vice 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. Gabriel's management team collectively, has more than 200 years
of telecommunications industry experience, including significant entrepreneurial
experience in emerging telecommunications companies.
Since its inception in June 1998, Gabriel's principal activities have
consisted of
o developing its business plans,
o hiring management and other key personnel,
o designing its network architecture, operations support systems and
other back office systems,
o raising capital,
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o acquiring equipment and facilities and deploying its network
operations control center,
o negotiating interconnection agreements,
o securing regulatory authorizations,
o commencing operations in its initial markets, and
o 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 Iwide 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 local exchange carriers and 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 considers
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. 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 generally underserved by the incumbent local exchange carriers. While
competition from other facilities-based competitive local exchange carriers
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-centric networks helps distinguish Gabriel
from many of the other competitive local exchange carriers 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 DATA-CENTRIC, PACKET-SWITCHED NETWORKS. Gabriel's networks
currently utilize both asynchronous transfer mode packet-switching and
traditional Class 5 circuit-switching platforms at their core. Asynchronous
transfer mode, or "ATM," is a switching and transmission technology that is
one of a general class of packet technologies that relays traffic by way of
an address contained within the first five bits of a standard 53 bit-long
packet or cell. ATM switching was specifically developed to allow switching
and transmission of mixed voice, data and video, which is sometimes
referred to as "multimedia" information, at varying rates of transmission.
Because Gabriel owns and controls its own voice and data switches, it can
efficiently use transmission access elements and provide integrated voice
and data services over a single network platform.
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While Gabriel has initially deployed Class 5 voice switches to support
full-featured voice services and the necessary interfaces to the public
switched telephone network, it has been working closely with equipment
vendors to support their efforts to develop "next-generation" equipment
that will allow Gabriel to offer full-featured voice functionality with the
necessary interfaces without the need for circuit switches. Gabriel's
data-centric network architecture, with packet-switching technology at its
core, allows it to efficiently accommodate the increasing demands placed on
telecommunications networks by Internet and other data-oriented
applications without the congestion and bottlenecking that the incumbent
local exchange carriers are experiencing on their circuit-switched
networks. Gabriel's data-centric, 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 UBIQUITOUS ACCESS TO TARGET BUSINESS CUSTOMERS. Initially,
Gabriel has leased unbundled network and customer access elements and
various dedicated circuits from the incumbent local exchange carrier in
each of its markets to provide access to its customers. This has allowed
Gabriel to
o avoid the time-consuming and costly process of overbuilding the
incumbent local exchange carrier's network,
o reduce time to market, and
o 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 200
collocation sites within incumbent local exchange carrier central offices in its
initial 16 markets and plans to build out additional collocation sites as it
expands into additional markets. The equipment in Gabriel's collocation sites
will enable Gabriel to provide its voice and data products and services over
unbundled loops, DSL and other customer access facilities, which it believes
will be less costly than leased dedicated transmission capacity.
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 local exchange
carrier 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 Indiana and Ohio and
with Cincinnati Bell in Ohio and Kentucky and with GTE and BellSouth in
Kentucky. Gabriel is currently negotiating additional interconnection agreements
with Ameritech in Illinois, BellSouth in Tennessee and GTE in Oklahoma. Gabriel
is certified as a competitive local exchange carrier in Missouri, Kansas,
Arkansas, Oklahoma, Illinois, Indiana, Ohio, and Kentucky, and has applied for
certification in Tennessee and Texas.
AGGRESSIVELY 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 is aggressively pursuing relationships with
potential strategic business partners. Gabriel is exploring a variety of
opportunities to acquire other businesses and to enter into joint ventures that
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 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 will
help it in various ways, including expanding the product and geographic
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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 local exchange carriers in smaller
markets, where the incumbent local exchange carriers 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.
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, and 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 LOCAL EXCHANGE CARRIERS IN
EACH MARKET. To improve the efficiency of its customer service initiation
processes, Gabriel is aggressively pursuing electronic bonding with the
incumbent local exchange carriers 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 an incumbent local exchange 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 local exchange carriers, the service initiation process must be
accomplished via fax and e-mail to the incumbent local exchange carriers. 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 has established electronic bonding with
Southwestern Bell and Ameritech and with NeuStar's local number portability
database during the first half of 2000 and expects to commence electronic
bonding with additional incumbent local exchange carriers and other trading
partners during the second half of 2000.
AGGRESSIVELY IMPLEMENT NEW PRODUCTS AND SERVICES. Gabriel leverages the
flexible capabilities of its networks to deliver to its customers a wide range
of innovative products and services that provide comprehensive business
solutions that complement their communications requirements. Gabriel currently
provides a comprehensive bundled suite of local voice and data services,
domestic and international long distance services, dedicated, high-speed
Internet access, web page hosting, domain name services, unified voice, e-mail
and fax messaging, and other advanced data services. During 2000, Gabriel is
rolling out a variety of new products and services, including digital subscriber
line, or "DSL," Internet access, web design, remote access, e-commerce solutions
and voice conferencing. Gabriel also offers other business applications services
which may be hosted on servers in its data center to complement its product and
service offerings, including a variety of browser-based
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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. Collectively, Gabriel's senior management team has over
200 years of telecommunications industry experience. Gabriel's Chairman, Robert
A. Brooks, has over 40 years' experience in founding, developing, and managing
successful high growth communications businesses, including CenCom Cable and
Brooks Fiber. David L. Solomon, Gabriel's Chief Executive Officer and Vice
Chairman, 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
local exchange carriers 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 digitization and integration of telecommunications services
place significant pressure on traditional circuit-switched infrastructures and
the incumbent local exchange carriers' regulated pricing plans. This environment
creates significant business opportunities for competitive providers who deploy
data-centric networks which can accommodate the increasing demand for high speed
data transmission services, make more efficient use of their network capacity,
and 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 local exchange carrier
tandem switch and long distance carriers points of presence through leased fiber
trunks to provide voice services. 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 local exchange
carriers and competitive local exchange carriers 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 local
exchange carrier central offices to allow it to deliver its services over
unbundled loops, DSL and other customer access facilities.
At its customer sites, Gabriel connects its leased transmission facilities
to a customer premise device that Gabriel owns, which allows for added features
and functionality and the efficient use of its leased facilities for the
transmission of voice and data traffic. This customer premise equipment is
purchased as needed to provision individual customers who have contracted for
its services.
The diagram on the following page represents Gabriel's current network
layout, including equipment in incumbent local exchange carrier central offices
and at customer premises.
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[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, "CURRENT 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, including asynchronous transfer mode switching, full featured voice
functionality and signaling interfaces to 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
o a single switch that combines transmission, switching, routing and
signaling technologies into the same network platform,
o 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,
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o enhanced feature servers that support web-based access to services not
currently available from traditional circuit-switched telephone
companies, and
o integrated access devices that combine multiple service connections
(e.g., voice, local area network, wide area network) into a single
data stream connected to the packet-switched network hub elements.
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.
The diagram below illustrates Gabriel's planned "next-generation" network
architecture.
[DIAGRAM OF GABRIEL'S PLANNED NETWORK LAYOUT, INCLUDING EQUIPMENT IN INCUMBENT
LOCAL EXCHANGE CARRIER CENTRAL OFFICES AND AT CUSTOMER PREMISES, APPEARS ON
MIDDLE OF THIS PAGE WITH CAPTION, "NEXT GENERATION 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 local exchange carriers or other providers. This
strategy specifically involves
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o leasing existing incumbent local exchange carrier connections
throughout a local market area, also called the "local loop," which
connect customers to the central offices or "hubs" of an incumbent
local exchange carrier network, and
o leasing dedicated trunks or circuits from the incumbent local exchange
carriers or other fiber-based competitive local exchange carriers.
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 local exchange
carrier 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 200
collocation sites within the incumbent local exchange carrier central offices in
its initial 16 markets. 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 16 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 will be 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, since it will incorporate certain of the features and
functions of the customer premise equipment Gabriel is currently using.
Once traffic volume justifies further investment, Gabriel may lease unused
fiber to which it can connect its electronic transmission equipment or construct
its own fiber networks. This unused fiber is known as "dark fiber" because it is
leased without the electronic equipment required to transmit traffic over the
fiber. Gabriel believes that dark fiber will be readily available in most of its
markets.
Gabriel believes that its smart-build approach offers a number of
competitive advantages over the traditional competitive local exchange carrier
build-out strategy by allowing it to
o 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,
o 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,
o improve its return on capital by generating revenue with a smaller
capital investment,
o defer capital expenditures for certain network assets until the time
when revenue generated by customer demand justifies such expenditures,
and
o address business customers throughout its target markets and not just
in those areas reachable by owned fiber transmission facilities.
The level of up-front capital that Gabriel requires to construct a network
varies depending on a number of factors. These factors include: the size and
geography of the market, the cost of construction of its network in
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each market, the degree of penetration of the market, and its ability to
negotiate favorable prices for purchases of equipment. The cost to build also is
affected by the number of central office collocations and potentially may be
reduced through the deployment of "next generation" switching technology.
The table below compares the capital cost required for a traditional
competitive local exchange carrier to construct a network with the cost to
Gabriel to construct a comparable market. As markets widely vary 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 connected "on net" by the traditional competitive local exchange
carrier and 3,000 voice lines in service.
CAPITAL EXPENDITURE COMPARISON - INITIAL START-UP COSTS
<TABLE>
<CAPTION>
TRADITIONAL COMPETITIVE
LOCAL
EXCHANGE CARRIER 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 competitive local
exchange carrier incurs recurring operating costs for rights-of-way and
franchise fees. Gabriel incurs recurring operating costs for its leased
transmission capacity.
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:
Type of Service What Gabriel Provides
Local Switch 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 local exchange
carrier.
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<TABLE>
<CAPTION>
TYPE OF SERVICE WHAT GABRIEL PROVIDES
--------------- ---------------------
<S> <C>
ADVANCED LOCAL FEATURES The advanced software and equipment on its
networks also allows Gabriel to offer advanced
local features to supplement its local
switched services, including
o three-way calling,
o speed dialing,
o call waiting,
o call forwarding,
o caller ID,
o last number redial,
o caller call-back,
o priority call,
o local and long distance account codes,
o 900 number blocking,
o hunting,
o calling number delivery (automatic number
identification and dialed number identification
service),
o direct inward dialing,
o voice conferencing
o remote network access, and
o web-based account access.
LONG DISTANCE Gabriel provides a full range of domestic,
international and toll-free long distance
services, including
o "one-plus" outbound calling,
o inbound toll free,
o directory assistance,
o calling cards, and
o 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.
</TABLE>
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<TABLE>
<CAPTION>
TYPE OF SERVICE WHAT GABRIEL PROVIDES
--------------- ---------------------
<S> <C>
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 full service
e-business solutions provider. 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:
o employee time and expense reporting,
o contact and sales channel management,
o employee database management,
o internal and external corporate communications,
o project tracking, and
o 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 16
markets:
<TABLE>
<CAPTION>
SWITCH AND ADDRESSABLE
NETWORK BUSINESS APPROXIMATE INCUMBENT LOCAL
MSA(1) OPERATIONAL(2) LINES(3) POPULATION(4) EXCHANGE CARRIER
--------------------------- -------------- -------- ------------- ----------------------
<S> <C> <C> <C>
St. Louis, MO 2Q99 554,315 2,548,238 Southwestern Bell
Springfield, MO 3Q99 57,000 296,345 Southwestern Bell
Kansas City, MO 3Q99 295,069 1,800,000 Southwestern Bell
</TABLE>
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<TABLE>
<CAPTION>
SWITCH AND ADDRESSABLE
NETWORK BUSINESS APPROXIMATE INCUMBENT LOCAL
MSA(1) OPERATIONAL(2) LINES(3) POPULATION(4) EXCHANGE CARRIER
--------------------------- -------------- -------- ------------- ----------------------
<S> <C> <C> <C> <C>
Wichita, KS 3Q99 85,053 512,965 Southwestern Bell
Little Rock, AR 4Q99 89,376 548,352 Southwestern Bell
Tulsa, OK 1Q00 120,268 756,493 Southwestern Bell
Oklahoma City, OK 1Q00 168,865 1,026,657 Southwestern Bell
Indianapolis, IN 2Q00 373,128 1,492,297 Ameritech
Akron, OH 2Q00 164,271 680,142 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(5) 4Q00 186,091 1,117,178 BellSouth
Memphis, TN 1Q01 180,269 1,078,151 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 Gabriel's estimates based upon business line
information obtained annually from PNR 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 growth
rate is based on historical growth rate information available from the
Federal Communications Commission.
(4) Populations are based on 1996 U.S. Census Data.
(5) Market also targeted by TriVergent.
In total, these markets have approximately 3.2 million business access
lines which will be addressable from Gabriel's initial 16 networks. As of June
30, 2000, Gabriel was serving a total of approximately 805 customers with a
total of approximately 9,185 on-switch access lines. Gabriel expects to
construct additional markets in its existing or contiguous states during 2001.
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
o are scalable,
o may be employed either centrally or in more than one location, and
o 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 local exchange carriers 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 local telephone companies and wholesale long distance
providers. Gabriel is aggressively pursuing "electronic
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bonding," the online and real-time connection of its operations support systems
with those of the incumbent local exchange carriers, with the incumbent local
exchange carriers 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 local exchange
carriers and other trading partners during the second half of 2000.
The diagram below identifies the various elements of the operations support
systems Gabriel is implementing:
[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 REMAINDER OF THIS PAGE.]
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Gabriel's operations support system platforms are designed to integrate all
of its essential business applications, covering such functions as
o entering, scheduling, provisioning and tracking of customer service
orders,
o real-time trouble-shooting, 24/7 network surveillance and network
inventory,
o accurate, customized billing,
o customer "self-service" capabilities, including web-based bill payment
and customer service,
o electronic bonding with incumbent local exchange carriers and other
business partners,
o sales force management applications,
o customer relationship management,
o credit verification, electronic funds transfer, and credit and debit
card processing, and
o financial and operational reporting.
To date, Gabriel has implemented its billing, customer relationship
management, sales, network surveillance, service tracking, maintenance, trouble
ticketing, financial and operational reporting systems. Gabriel expects to
complete implementation and integration of all of the principal elements of its
operations support systems by the end of the fourth quarter of 2000.
Gabriel's operations support system platforms allow it to issue a single
billing statement for all of its local, long distance and Internet services.
Gabriel's customized, "user friendly" billing statement provides its customers
with more enhanced billing detail and is easier to read and understand.
Gabriel's billing system has the ability to handle multiple hierarchies for
commercial accounts and accommodate a variety of output media, including paper,
electronic datafile, web site access and diskette. Gabriel's operations support
system platforms also allow it to access customer usage statistics on a
real-time basis, and to make such usage data available to its customers through
its web site.
SALES AND MARKETING
To support its strategy of gaining early entry into its markets, Gabriel
establishes a local sales force in each market. Gabriel believes that rapidly
establishing a broad, local market presence and brand name recognition across
its customer base is critical to its success in its markets. Gabriel has
assembled an experienced direct sales force to market and sell its services
through face-to-face interaction with its targeted customers. Gabriel believes
this approach provides it with a competitive advantage over the incumbent local
exchange carriers in smaller markets, where the incumbent local exchange
carriers 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.
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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 officers 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
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
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, update e-mail addresses
and maintain catalogues of their products and services 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 third 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 16 markets in operation or under
construction with 1.6 million addressable business lines throughout nine
southeastern states. 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
o secured 269 central office collocation sites,
o installed voice and data equipment in 32 of these collocation sites,
with 144 others under construction, and
o 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. TriVergent currently has 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 in the future migrating to a soft switch platform, which is designed
to be compatible with its current network. TriVergent's collocation facilities
are connected using redundant routes 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
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o effectively switch voice and data traffic on its asynchronous transfer
mode network,
o extend its network to reach additional customers, and
o lower transmission costs.
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 various other states. 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
o 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,
o president and chief executive officer of Tel/Man, Inc., a switch-based
long distance carrier that was acquired by SouthernNet in 1998,
o chief operating officer of SouthernNet, Inc., a facilities-based long
distance carrier that was acquired by MCI in 1989, and
o 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, Teleco and was
chairman of the Telecommunications Resellers Association and 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
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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.
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 third 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.
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 one of 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.
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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:
o 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.
o In July 1999, TriVergent acquired DCS, Inc., a data integrator and
equipment provider headquartered in Greenville, South Carolina.
o In February 2000, TriVergent 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.
o 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.
o 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 or inserting new product offerings.
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 their web site.
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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
local 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.
TriVergent offers its services on a bundled basis where its customers pay a
fixed price, based on the number of access lines and desired access speed, for
all of its services whether the customer takes one or all of the services
offered.
OTHER SERVICES
Network Equipment -- TriVergent also provides voice and data networking
design, equipment sales and installation, including routers and hubs from Cisco
Systems, BayStack, NetGear and 3Com. This equipment allows customers to
integrate digital subscriber line service with current or new local area
networks.
Cabling Services -- TriVergent also provides inside wiring services to
customers on a custom basis, including cable drops, telephone drops and other
wire-based installation services.
PLANNED SERVICES
TriVergent plans to release new versions of its software that will permit
greater utilization of the Internet. These services will revolve around customer
content, delivered over its high-speed platforms, as well as scalable e-commerce
initiatives for product transactions through TriVergent's web site design
software.
Web Hosting Services -- TriVergent plans to offer a full range of web and
managed server web hosting services in geographically dispersed and
environmentally and technologically controlled carrier grade data facilities
with both redundant power and Internet access. TriVergent's web hosting includes
vertical rack space, cabinet units, security cage on NT and UNIX platforms with
guaranteed bandwidth.
Web Page e-commerce -- TriVergent expects to release an update to its web
architecture software in the third quarter of 2000 that will incorporate with
its catalogue feature a new e-commerce initiative that includes credit card
processing and shopping cart functions.
Broadband Internet Portal -- TriVergent plans to release 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.
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. 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
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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 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.
CURRENT MARKETS
The following tables list TriVergent's current operational and planned
markets, the number of secured collocation sites, and the estimated number of
addressable business lines:
OPERATIONAL MARKETS -- Markets in which TriVergent currently offers the
Broadband Bundle:
<TABLE>
<CAPTION>
ESTIMATED DATA CENTERS
ADDRESSABLE COLLOCATION INITIAL -------------------------
BUSINESS SITES SERVICE ESTIMATED OPENING
MARKET LINES(1) SECURED DATE SQ. FEET DATE
------------------ ----------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Greenville, SC 108,408 7 1st Qtr. 00 1,500 3rd Qtr. 00
Spartanburg, SC 35,263 2 1st Qtr. 00 -- --
Atlanta, GA 824,065 18 1st Qtr. 00 1,000 3rd Qtr. 00
Greensboro, NC 116,685 5 1st Qtr. 00 1,500 3rd Qtr. 00
Burlington, NC 22,710 2 1st Qtr. 00 -- --
Winston-Salem, NC 90,621 4 1st Qtr. 00 -- --
Wilmington, NC 437,427 3 2nd Qtr. 00 1,500 3rd Qtr. 00
</TABLE>
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MARKETS UNDER CONSTRUCTION -- Markets in which TriVergent is currently
constructing facilities to offer the Broadband Bundle:
<TABLE>
<CAPTION>
ESTIMATED DATA CENTERS
ADDRESSABLE COLLOCATION INITIAL -------------------------
BUSINESS SITES SERVICE ESTIMATED OPENING
MARKET LINES(1) SECURED DATE SQ. FEET DATE
------------------ ----------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Miami/Ft. Lauderdale, 724,849 36 3rd Qtr. 00 1,500 3rd Qtr. 00
FL
Charlotte, NC 278,152 11 3rd Qtr. 00 1,500 3rd Qtr. 00
Raleigh, NC 233,186 7 3rd Qtr. 00 2,500 3rd Qtr. 00
Nashville, TN 186,091 13 3rd Qtr. 00 2,500 3rd Qtr. 00
Columbia, SC 84,282 5 4th Qtr. 00 2,500
Knoxville, TN 110,734 5 4th Qtr. 00 2,500
Charleston, SC 82,805 7 4th Qtr. 00 2,500 4th Qtr. 00
Jackson, MS 63,870 10 4th Qtr. 00 2,500 4th Qtr. 00
Jacksonville, FL(1) 190,406 16 3rd Qtr. 00 2,500 3rd Qtr. 00
</TABLE>
(1) The addressable business lines referenced in the above tables are
TriVergent's estimates based upon business line information obtained annually
from PNR 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 growth rate is based on historical growth rate
information available from the Federal Communications Commission
(2) Market also targeted by Gabriel.
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 TriVergent's planned
markets throughout the southeastern United States. TriVergent is also deploying
asynchronous transfer mode switch sites in most of its markets. TriVergent plans
to connect these switch sites with multiple redundant routes from various long
haul providers. The final step in TriVergent's unified network is to connect its
unified collocation facilities with the small asynchronous transfer mode switch
sites. This will be accomplished through the lease of redundant DS-1, DS-3 or
OC-3 routes from BellSouth or alternative fiber optic network providers.
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
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customer orders will be entered a single time, with the information then shared
between the various components of TriVergent's information systems. TriVergent
expects to have its operations support systems and other back office systems
fully integrated by the third quarter of 2000.
TriVergent believes that its planned single entry system will be superior
to many existing systems, which generally require multiple entries of customer
information. Multiple information entry can result in billing problems, service
interruptions and delays in installation. TriVergent's single entry process
should be less labor intensive and reduce the margin for error. In addition, the
sales to billing interval should be significantly shortened.
ORDER ENTRY AND PROVISIONING
Order entry involves the initial loading of customer data into TriVergent's
information systems. TriVergent utilizes the Metasolv Total Business Solutions
provisioning system software for this purpose. TriVergent's sales executives are
able to take orders and upload them via the web to credit and provisioning
representatives who enter the initial customer information into the Total
Business Solutions system. When the Total Business Solutions system is fully
integrated with the capabilities of the DSET electronic bonding gateways, orders
can be submitted to business partners electronically, thereby minimizing
implementation time, coordination complexities and installation costs.
In addition to cost benefits associated with electronic installation of
access lines and inventory management system, the Metasolv system should improve
TriVergent's internal processes in various other ways through its "workflow"
management capabilities. The system routes tasks to the appropriate employee
groups, tracks order progress and is capable of alerting operations personnel of
any "jeopardy" situations. The system is designed to allow sales executives or
customer care coordinators to maintain installation schedules and notify
customers of any potential delays. Once an order has been completed, the
Metasolv system electronically updates its billing system to initiate billing of
installed services.
ELECTRONIC BONDING
TriVergent is implementing integrated interfaces with some BellSouth
systems for the electronic exchange of order information utilizing the DSET
gateway software. While it is currently necessary to submit local service
requests for a customer by sending the incumbent telephone company a fax or
e-mail or by remote data entry, the electronic interfaces which TriVergent is in
the process of implementing will link its operations support systems directly to
BellSouth's system, so that it will be able to process these requests on an
automated basis. Once fully installed and implemented, TriVergent will be able
to confirm receipt of service requests and the availability of facilities
on-line and in real-time. Due to issues relating to BellSouth's internal
operations support systems, TriVergent expects to experience some difficulties
with the electronic interfaces which may require some manual intervention. Other
incumbent telephone companies in TriVergent's region are just beginning to
develop automated interfaces on a limited basis. TriVergent anticipates
establishing similar connections with other incumbent telephone companies.
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BILLING SYSTEM
For billing, TriVergent utilizes the Daleen BillPlex system, which provides
its customers with a consolidated invoice for all of its services. Customer
telecommunications usage generates billing records that are automatically
transmitted from the switch to the billing systems. These records are then
processed by the billing software that calculates usage costs, integrates fixed
monthly charges and assembles bills. For those customers who request electronic
billing, TriVergent can provide the invoice and call detail records in
electronic form over the web. The Daleen system allows TriVergent to add
advanced features such as discounts based on call volume or number of lines or
amount of bandwidth ordered. It will also allow TriVergent to calculate complex
local, state and federal taxation and discrete billing options by type of
service ordered.
CUSTOMER CARE AND TROUBLE MANAGEMENT
TriVergent has entered into a service agreement with Nortel to assist it in
the continuous monitoring and operation of TriVergent's switch network. In the
third quarter of 2000, TriVergent expects to begin performance of all of the
network management functions in-house upon completion of its new network
operations center. TriVergent's back office system and trouble management system
will allow customer care representatives to call a customer while simultaneously
accessing that customer's service profile. It will also enable TriVergent's
customer care personnel to track customer problems proactively, assign repair
work to the appropriate technical teams and provide employees and management
access to comprehensive reports on the status of service activity. The network
management system is also designed to identify failures and intervene before
significant service interruptions or service degradations occur.
INTELLECTUAL PROPERTY
TriVergent regards its products, services and technology as proprietary and
attempts to protect them with copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. TriVergent also generally enters
into confidentiality or license agreements with its employees and consultants,
and generally controls access to and distribution of its documentation and other
proprietary information. Despite its precautions, TriVergent may not be able to
prevent misappropriation or infringement of its proprietary information,
products, services and technology.
TriVergent's logo and some titles and logos of its services mentioned in
this information statement/prospectus are either its service marks or service
marks that have been licensed to it. Each trademark, trade name or service mark
of any other company appearing in this information statement/prospectus belongs
to its holder.
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EMPLOYEES
At June 30, 2000, TriVergent had approximately 540 full-time employees,
including approximately 135 sales and sales support personnel. TriVergent also
hires temporary employees and independent contractors as needed. In connection
with its growth strategy, TriVergent anticipates hiring a significant number of
additional personnel in sales and other areas of its operations by the end of
2000. TriVergent's employees are not unionized, and it believes its relations
with its employees are good. TriVergent's success will significantly depend on
its ability to continue to attract and retain qualified employees.
LEGAL PROCEEDINGS
From time to time TriVergent becomes engaged in legal proceedings that
occur in the normal course of business. There are no pending legal proceedings
that TriVergent believes would individually or in the aggregate, have a material
adverse effect on its business or financial condition.
FACILITIES
TriVergent is headquartered in Greenville, South Carolina and leases
offices and space in a number of locations, primarily for sales offices and
network equipment installations. The table below lists its leased facilities,
other than collocation facilities, as of June 30, 2000:
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<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 4,854
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
Jackson, MS Sales office August 2005 4,782
Switch site September 2010 6,607
</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 in the data and Internet services
markets, 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 LOCAL EXCHANGE CARRIERS. In each of the markets in which the
combined company will operate, the incumbent local exchange carriers will be its
principal competitor. Incumbent local exchange carriers currently dominate the
combined company's targeted markets with an approximate 95% market share.
Incumbent local exchange carriers 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 local exchange carriers have existing fiber
optic networks and switches. Management of the combined company believes it can
compete with incumbent local exchange carriers 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 local exchange carriers.
Each of TriVergent and Gabriel believes that the incumbent local exchange
carrier 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 local exchange carrier, 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 carrier 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 __ for a discussion of the regulatory requirements that apply
to the incumbent local exchange carriers' 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 exchange 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.
INTEREXCHANGE CARRIERS. AT&T, WorldCom and Sprint are among the
interexchange carriers that are now offering bundled local and long distance
services to their existing and prospective customers. Certain 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,
Inc. and Brooks Fiber. 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
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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, integrated product and service
offerings and local sales presence will position it to distinguish itself from
the interexchange carriers in its targeted markets.
COMPETITIVE LOCAL EXCHANGE CARRIERS. The combined company will face
significant competition from facilities-based competitive local exchange
carriers in markets in which it offers and plans to offer its products and
services.
The principal facilities-based competitive local exchange carrier
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 local exchange carriers, long distance
carriers and competitive local exchange carriers, the combined company will
face potential competition from other recent and potential entrants in local
service markets. These non-traditional providers include
o cable television operators,
o electric utilities,
o fixed and mobile wireless and PCS operators, and
o Internet service providers.
CABLE TV OPERATORS. Management of the combined company expects cable
television operators will attempt to leverage the broadband nature of their
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 local exchange carrier.
ELECTRIC UTILITIES. Electric utilities have a large customer base and many
have fiber networks that could be used to provide telecommunications services.
Many electric utilities have increased their installation of fiber optic cable
to augment their current core services. Unlike cable television operators,
electric utilities have extensive networks covering both business and
residential customers. Electric utilities also have the advantage of having
existing customer relations, access to rights of way, building access and, in
most cases, regional political influence. Disadvantages include inexperience in
telecommunications, a generally poor record in diversification investments,
little experience in competitive markets, and stringent regulatory and capital
market limitations on the use of rate base capital.
WIRELESS OPERATORS. Cellular and PCS operators may also be a source of
competitive local telephone service, using available bandwidth on their networks
to provide access in traditional landline applications. With the significant
capital outlays made by wireless operators for license fees as well as equipment
purchases to build their network infrastructures, management of the combined
company expects that, in the near term, these companies will continue to focus
their marketing and operational efforts on the wireless mobile market. However,
management of the combined company believes that these wireless operators will
largely be users of competitive local exchange carrier services to transmit
their calls among radio/transmitter sites and generally avoid the traditional
local services market.
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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 base. 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
exchange carriers. 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 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 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 exchange carriers to permit interconnection to their networks and imposing
on incumbent local exchange carriers or, in some areas, all local exchange
carriers other obligations, including:
o INTERCONNECTION. All local exchange carriers must permit their
competitors to interconnect with their facilities. Incumbent local
exchange carriers 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 exchange carrier must offer to collocate the
requesting carrier's equipment in the incumbent local exchange
carrier's premises, except where the incumbent local exchange carrier
can demonstrate space limitations or other technical impediments to
collocation.
o RECIPROCAL COMPENSATION. All local exchange carriers are required to
complete calls originated by competing local exchange carriers under
reciprocal arrangements at prices based on tariffs or negotiated
prices.
o RESALE. All local exchange carriers must permit resale of their
telecommunications services without unreasonable restrictions or
conditions. In addition, incumbent local exchange carriers 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 exchange carrier in the
wholesale offering.
o UNBUNDLED ACCESS. All incumbent local exchange carriers are required
to provide nondiscriminatory access to unbundled network elements
including, 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.
o NUMBER PORTABILITY. All local exchange carriers must permit users of
telecommunications services to retain existing telephone numbers
without impairment of quality, reliability or convenience when
switching from one telecommunications carrier to another.
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o DIALING PARITY. All local exchange carriers must provide "1+" 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.
o ACCESS TO RIGHTS-OF-WAY. All local exchange carriers are required to
permit competing carriers access to poles, ducts, conduits and
rights-of-way at regulated prices.
Incumbent local exchange carriers are required to negotiate in good faith
with carriers requesting any or all of the above arrangements. If the
negotiating carriers cannot reach agreement within a 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
exchange carriers remain subject to interconnection obligations established by
the FCC and state telecommunication regulatory commissions.
In August 1996, the FCC established rules implementing the incumbent local
exchange carrier interconnection obligations described above. On July 18, 1997,
the Eighth Circuit vacated certain 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 exchange carriers
must provide to competitors on an unbundled basis.
On September 15, 1999, the FCC issued a ruling that detailed three
significant changes affecting the incumbent local exchange carriers' obligations
to provide unbundled network elements to competitors. First, the FCC indicated
that the incumbent local exchange carriers no longer were required to provide
access to operator and directory assistance services. However, the FCC added two
new elements that the incumbent local exchange carriers are now required to
provide on an unbundled basis: portions of local loops (or "subloops") and dark
fiber optic loops and transport. The FCC also ruled that the incumbent local
exchange carriers 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.
Fifteen of the networks in operation or under construction by Gabriel or
TriVergent are in the top 50 Metropolitan Statistical Areas. Accordingly, this
aspect of the FCC's ruling may limit the combined company's ability to use
unbundled network elements as part of its business strategy in these markets or
to serve such markets profitably. On November 5, 1999, the FCC issued revised
rules that largely reaffirmed, and in some respects expanded, the duty of
incumbent carriers to offer unbundled network elements. These 1999 rulings may
be subject to court appeals, and neither Gabriel, TriVergent nor the combined
company can predict the outcome of such proceedings.
On December 9, 1999, the FCC released an order requiring the incumbent
carriers to offer "line sharing" arrangements that will permit competitors like
us 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 may also be
challenged in court. 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.
In March 2000, the United States Court of Appeals for the District of
Columbia vacated portions of the FCC's March 1999 collocation ruling, concluding
that the FCC's definitions of "necessary" and "physical collocation" under such
ruling are impermissibly broad. The FCC's collocation ruling provided that the
incumbent local exchange carriers were required to allow competitors to
collocate equipment that is "used or useful" for either interconnection or
access to unbundled network elements. 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
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for requiring incumbent local exchange carriers, under its collocation rules, to
give competitors the option of collocating equipment in any unused space within
the incumbent local exchange carrier's premises, to the extent technically
feasible, and prohibiting incumbent local exchange carriers from requiring
competitors to collocate in isolated space separate from the incumbent local
exchange carrier's own equipment. While the appeals court did preserve certain
portions of the FCC's collocation rules, including "cageless" collocation and
collocation cost allocation provisions, incumbent local exchange carriers may
view this court decision as an opportunity to restrict the scope of their
collocation obligations until the FCC reconsiders the vacated portions of its
March 1999 ruling. This could delay the implementation, or otherwise limit the
scope, of the functionality and equipment that the combined company and other
competitive local exchange carriers plan to collocate in incumbent local
exchange carrier premises. However, neither Gabriel nor TriVergent has
experienced any significant problems in obtaining and building out any
collocation sites.
While these court and FCC proceedings were pending, Gabriel and TriVergent
have entered into interconnection agreements with a number of incumbent local
exchange carriers through negotiations or adoption of another competitive local
exchange carrier'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.
The Telecommunications Act codifies the incumbent local exchange carriers'
equal access and nondiscrimination obligations and preempts inconsistent state
regulations. The Telecommunications Act also contains special provisions that
replace prior antitrust restrictions that prohibited the regional Bell operating
companies from providing long distance services and engaging in
telecommunications equipment manufacturing. The Telecommunications Act permitted
the regional Bell operating companies to enter the out-of-region long distance
market immediately upon its enactment. Further, provisions of the
Telecommunications Act permit a regional Bell operating company to enter the
long distance market in its in-region states if it satisfies several procedural
and substantive requirements, including
o obtaining FCC approval upon 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,
o the interconnection agreements must satisfy a 14-point "checklist" of
competitive requirements, and
o the FCC must be satisfied that the regional Bell operating company's
entry into long distance markets is in the public interest.
Bell Atlantic and SBC Communications recently received permission from the
FCC to begin providing in-region long distance services in New York and Texas,
respectively. It is likely that the regional Bell operating companies will
petition and receive approval to offer long distance services in additional
states, including the states in which the combined company will have operations.
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 exchange 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 them a marketing advantage that the combined company would no
longer enjoy if the incumbent local exchange carriers in its markets are
permitted to offer in-region long distance services.
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 exchange telephone services provided to low-income
consumers. Providers of interstate telecommunications service, such as us, 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
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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.
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 December 24th order, the FCC removed restrictions on incumbent local
exchange carriers' 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.
The May 16th order substantially increased the costs that incumbent local
exchange carriers subject to the FCC's price cap rules may recover through
monthly, non-traffic sensitive access charges and substantially decreased the
costs that these carriers may recover through traffic sensitive access charges.
In the May 16th order, the FCC also announced its plan to bring interstate
access rate levels more in line with costs. The plan will include rules that may
grant these carriers increased pricing flexibility upon demonstrations of
increased competition or potential competition in relevant markets. The manner
in which the FCC implements this approach to lowering access charge levels could
have a material effect on the combined company's ability to compete in providing
interstate access services. Several parties appealed the May 16th order. On
August 19,1998, the May 16th order was affirmed by the Eighth Circuit U.S. Court
of Appeals.
In the May 31 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 exchange carriers
referenced to as "CALLS." These and related actions will result in significant
changes to access charge rate structures and rate levels. As access rates are
reduced, all access charge-related revenues could be reduced significantly. The
impact of these new changes will not be known until they are fully implemented.
A number of incumbent local exchange carriers 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, commonly known
as Internet service providers or "ISPs." The incumbent local exchange carriers
claim that this traffic is interstate in nature and therefore should be exempt
from reciprocal compensation arrangements applicable to local, intrastate calls.
Competitive local exchange carriers have contended that the interconnection
agreements provide no exception for local calls to ISPs and reciprocal
compensation is therefore applicable. In response to carriers' requests for
clarification, on February 25, 1999 the FCC declared that, while Internet
traffic is jurisdictionally mixed, it is largely interstate in nature. However,
the FCC's decision preserved the rule that exempts the Internet and other
information services from interstate access charges. The FCC's jurisdictional
decision 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. However, 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 ruling. The FCC currently is seeking comment on its ruling and then may
either clarify its former decision or adopt a new one. Until then, incumbent
local exchange carriers might rely on the appeals court's decision to challenge
reciprocal compensation payments with state regulators.
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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<PAGE> 112
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 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
interexchange 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.
In June 1997, the FCC allowed non-dominant local services providers to
withdraw their tariffs for interstate access services provided to long distance
carriers. The FCC also has initiated proceedings to consider whether such local
service providers should be required to withdraw their interstate access
services tariffs. The FCC continues to require that services providers obtain
authority to provide services between the United States and foreign points and
file tariffs for international services.
In August 1999, the FCC asked for comment on claims by certain
interexchange carriers that competitive local exchange carriers were charging
those carriers excessively high rates for access to competitive local exchange
carrier customers. Specifically, the Commission asked whether it should regulate
competitive local exchange carrier access charges to ensure that these charges
are not unreasonable. More recently two associations of competitive local
exchange carriers asked the FCC to prevent AT&T from withdrawing its
interexchange services from certain competitive local exchange carrier customers
of those competitive local exchange carriers. These FCC proceedings are pending.
A decision by the FCC to regulate the level of competitive local exchange
carrier access charges could result in lower competitive local exchange carrier
access charges and decrease the revenues some competitive carriers receive from
providing this service.
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 similar issues. Although the specific
requirements vary from state to state, they tend to be more detailed than the
FCC's regulations because of the strong public interest in the quality of basic
local exchange 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 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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<PAGE> 113
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 40 Chief Executive Officer, Vice Chairman and Director
G. Michael Cassity 50 President and Chief Operating Officer
Gerard J. Howe 44 President - Strategic Initiatives
John P. Denneen 59 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
Riley M. Murphy 44 Senior Vice President and General Counsel
NON-MANAGEMENT DIRECTORS
Robert A. Brooks 67 Chairman of the Board and Director
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. Hamrick and Laverack will expire in 2001,
the terms of Messrs. Brooks, Trott and Tyrrell will expire in 2002 and the terms
of Messrs. Hannon, Houser and Solomon will expire in 2003. There is one vacancy
in the Class of 2001 which will be filled by a TriVergent designee post-filing.
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, Vice Chairman and Director, 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,
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.
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<PAGE> 114
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
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 of Gabriel and
President - Strategic Initiatives and a co-founder of Gabriel, 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 eighteen 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, financial
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.
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<PAGE> 115
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.
RILEY M. MURPHY, Senior Vice President and General Counsel of the combined
company, became TriVergent's Senior Vice President of Law, General Counsel and
Secretary in March 2000. From 1994 until joining TriVergent, she was Executive
Vice President of Legal and Regulatory Affairs, General Counsel and Secretary of
e.spire Communications, Inc., an integrated services provider where her
responsibilities included, responsible for documentation of over $1 billion in
debt and equity financing and negotiation of e.spire's initial interconnection
agreements after passage of the Telecommunications Act of 1996. Prior to joining
e.spire, Ms. Murphy was in private practice of telecommunications regulatory law
for 12 years, representing interexchange carriers, cellular and paging companies
and local providers. She serves on the boards of the Association for Local
Telecommunications Services (ALTS) and Commercial Internet Exchange (CIX), and
served on CompTel's board from 1998-1999.
NON-MANAGEMENT DIRECTORS
ROBERT A. BROOKS, Chairman of the Board, director and a co-founder of
Gabriel, has over 40 years' experience in developing and managing emerging
communications ventures. In 1981 Mr. Brooks founded CenCom Cable Associates with
an initial capitalization of approximately $300,000. At the time of its 1991
purchase by Crown Media in a transaction valued at over $1 billion, CenCom Cable
Associates was one of the largest cable operators in the United States. In 1993,
Mr. Brooks founded Brooks Fiber Properties, Inc. with 21 employees and $41
million in venture capital. By January 1998, Brooks Fiber had grown to over
2,000 employees when purchased by WorldCom in a transaction valued at
approximately $3 billion. Mr. Brooks has also served as a founding Director for
a number of corporations, including most recently, OneComm, Inc. and ChemDesign
Corporation.
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
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<PAGE> 116
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 our board by First Union Capital Partners, which is entitled to
nominate one member of our board under our 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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<PAGE> 117
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid
during fiscal 1999 to or by (i) TriVergent and Gabriel's Chief Executive
Officers and (ii) the persons who would constitute the four most highly
compensated executive officers of the combined company based upon compensation
earned or paid during fiscal 1999 other than the Chief Executive Officers, to
whom we refer to collectively 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($)(3) WARRANTS(#)(4) ($)
------------------------ --------- --------- ----------- -------------- ------------
<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 and is currently Chairman of the Board of Gabriel. 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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<PAGE> 118
The following table sets forth information regarding option grants with
respect to common stock made by TriVergent and Gabriel to the named executive
officers during the fiscal year ended December 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT OF STOCK
OF THAT COMPANY TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION/WARRANT
OPTIONS/WARRANTS EMPLOYEES OF EXERCISE TERM(3)
GRANTED THAT COMPANY BASE PRICE EXPIRATION --------------------
NAME (#) IN 1999 ($/SH)(1) DATE(2) 5% 10%
------------------- ---------------- -------------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
GABRIEL
Robert A. Brooks 150,000(4) 5.50% 2.40 12/13/09 226,402 573,747
David L. Solomon 1,000,000(4) 36.66% 2.40 12/13/09 1,509,347 3,824,982
550,000(5) 20.16% 3.00 12/13/09 1,037,676 2,629,675
Gerard J. Howe 125,000(4) 4.58% 2.40 12/13/09 113,201 286,874
Marguerite A. 50,000(4) 1.83% 2.40 12/13/09 75,467 191,249
Forrest
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 provides 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 -- -- 150,000 -- --
Gerard J. Howe -- -- 1,000,000 -- --
Marguerite A. -- -- 125,000 -- --
Forrest
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
board of directors, minus the per share exercise price, multiplied by the
number of shares underlying the option.
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<PAGE> 120
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
o incentive and nonqualified stock options,
o stock appreciation rights,
o restricted stock and restricted stock units,
o performance stock and performance units,
o phantom stock, and
o stock acquired through a stock purchase program or granted under merit
awards.
As of June 9, 2000, options to purchase a total of 4,622,350 shares at
exercise prices ranging from $2.40 to $5.60 per share were outstanding, of which
options to purchase a total of 72,200 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
certain changes in control certain of the outstanding awards 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, and are subject to the provisions of the Internal Revenue Code
that applicable to such options, including specific rules regarding the exercise
price of such 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 certain 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
award based on the value of the underlying shares, solely on earnings or
appreciation, or both.
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<PAGE> 121
TRIVERGENT STOCK PLAN
The TriVergent Corporation Amended and Restated Employee Incentive Plan was
most recently amended and restated on June 21, 2000. Under the plan, TriVergent
may issue stock options, bonus stock awards and restricted stock awards to its
employees and certain other associated persons. 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. At June 30, 2000, TriVergent had granted options to purchase
9,397,230 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 and non-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 June 30, 2000,
5,423,547 were qualified options and 3,973,688 were non-qualified 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.
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 336,239 options granted on or after June 9, 2000. Therefore, these
transactions do not result 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 (1) the remaining term of the
option and (2) nine months after the employee's death. Except where employment
is terminated for
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reasons other than the death of the employee, qualified options are exercisable
after the employee ceases to be a TriVergent employee, for a period that does
not exceed the lesser of the remaining term of the qualified option and 90 days
following employee's termination.
Options are generally exercisable only by the employee to whom it is
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 David L. Solomon, its
Chief Executive Officer and Vice Chairman of its board of directors, Gerard J.
Howe, its President and Chief Operating Officer, John P. Denneen, its Executive
Vice President - Corporate Development and Legal Affairs, Marguerite A Forrest,
its Senior Vice President - Human Resources and Administration, and Michael E.
Gibson, its Senior Vice President - Finance and Corporate Development, with
terms that will expire on December 31, 2002, with respect to Mr. Solomon, and on
varying dates ranging from _____________ to ________________ 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 (100% for Mr.
Solomon and ranging from ____% to ____% 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 our 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.
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 certain 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 Gabriel's
termination of the employment of any of the above-named employees, he or she
will be eligible, depending on the reason for termination, for a payment of an
amount equal to his or her annual base salary for the remainder of the year in
which the termination occurs plus certain lump sum payments. If his or her
employment is terminated by death or incapacitation, the employee will receive
an amount equal to his or her then current annual base salary and up to the
maximum bonus for which he or she was eligible in the year in which the
termination occurs. If the employee is terminated without "good cause" (as
defined in the agreements), he or she will receive an amount equal to two times,
in the case of Mr. Solomon and ranging from ________ to _______ 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 and ranging from ________ to _______ 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 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.
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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, with Shaler P. Houser as
Senior Vice President of Corporate Development on July 20, 1999, and with Riley
M. Murphy as General Counsel on March 14, 2000. 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 certain 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 and Ms. Murphy'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 or she is entitled to
severance payments of 24 months, in the case of Messrs. C. Houser and S. Houser,
or 12 months, in the case of Ms. Murphy, immediate vesting of his or her
options, and other benefits. The employee is entitled to have his or her
severance payments grossed up for tax purposes if his or her termination occurs
after a "change in control."
Mr. Cassity's employment agreement will remain in effect until terminated
by
o death,
o disability,
o termination for cause, in which case TriVergent may terminate the
agreement immediately,
o resignation for "good reason," as defined in the agreement, or
o termination without cause or resignation without good reason, in
either case, between 180 and 90 days prior to the third anniversary of
the agreement and each subsequent anniversary.
If the agreement is terminated due to Mr. Cassity's death or disability, he (or
his estate), is entitled to compensatory payments for one year. If Mr. Cassity
resigns for good reason before a change in control, he will receive compensatory
payments for the greater of one year or two years after the effective date. If
Mr. Cassity resigns for good reason after a change in control, he will receive
compensatory payments for the greater of one year or three years after the
effective date. In either case, he will be entitled to immediate vesting of his
options and other benefits. Mr. Cassity's employment agreement does not provide
for any tax "gross up" of severance payments if his employment is terminated
after a change in control.
Each of Messrs. C. Houser, S. Houser and Cassity has agreed that the merger
will not be treated as a "change in control" for purposes of his employment
agreement.
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 provide 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
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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 under certain circumstances, and contains
standard confidentiality provisions with respect to proprietary and confidential
information. The agreement also contains certain provisions that treat as its
property all property, including intellectual property, created by the officer
during his or her employment that relates to its business.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GABRIEL
Since Gabriel's inception, certain 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 an Amended and Restated Stockholders' Agreement and Amended and
Restated 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 ___ below.
In August 1998, Gerard J. Howe, Brooks Investments, L.P., Goldman Sachs
Group LP and Marguerite A. Forrest purchased 450,000, 2,000,000, 840,000
and 300,000 shares of Gabriel's common stock, respectively, for $.50 per share.
Brooks Investment, L.P. is a St. Louis, Missouri-based venture capital firm of
which Robert A. Brooks is a principal. Goldman Sachs Group LP is affiliated
with Goldman, Sachs & Co., of which Byron D. Trott is a Managing Director.
In November 1998, Robert A. Brooks purchased 150,000 shares of Gabriel
common stock for $.50 per share. In September 1999, John P. Denneen purchased
30,000 shares of common stock of Gabriel for $.50 per share. In October 1999,
John P. Denneen purchased 100,000 shares of Gabriel common stock for $2.40 per
share. In January 2000, David L. Solomon purchased 425,000 shares of Gabriel
common stock for $2.40 per share. In May 2000, Michael E. Gibson purchased
100,000 shares of Gabriel common stock for $3.20 per share. Each of these
individuals will serve as either a director and/or an executive officer of the
combined company.
In November 1998, December 1998, June 1999 and October 1999, Gabriel sold
to Stone Street Fund 1998 L.P., GS Capital Partners III, L.P., GS Capital
Partners III Offshore, L.P., Goldman, Sachs & Co. Verwaltungs GmbH and Bridge
Street Fund 1998, L.P. an aggregate of 512,113, 4,541,748, 1,248,579, 78,628 and
154,553 shares of Series A Convertible Preferred Stock, respectively, at $3.00
per share. Each of these entities is an affiliate of Goldman Sachs & Co., of
which Byron D. Trott, a director of the combined company, is a Managing
Director. Also on these dates, Gabriel sold to Brooks Investments, L.P., RAB
Partnership L.P., J.H. Whitney III, L.P., Whitney Strategic Partners III, L.P.
and Chase Venture Capital Associates, L.P. an aggregate of 1,333,333, 333,333,
4,882,353, 117,647 and 1,666,667 shares of Series A Convertible Preferred Stock,
respectively, at $3.00 per share. Robert A. Brooks, who will be chairman of the
board of directors of the combined company is a principal of Brooks Investments,
L.P. and RAB Partnership L.P. William Laverack, Jr., a director of the combined
company, is a General Partner of Whitney & Co., with which both J.H. Whitney
III, L.P. and Whitney Strategic Partners III, L.P. are affiliated. Michael R.
Hannon, a director of the combined company, is a General Partner of Chase
Capital Partners, with which Chase Venture Capital Associates is affiliated.
In December 1999, Gabriel sold to Meritage Private Equity Fund, L.P.,
Meritage Private Equity Parallel Fund, L.P. and Meritage Entrepreneurs Fund,
L.P. 2,740,000, 335,000 and 50,000 shares of Series A-1 Convertible Preferred
Stock, respectively, at $4.00 per share. David L. Solomon, a director and
executive officer of the combined company, is a principal of these affiliated
entities.
In April 2000, Gabriel sold to Chase Venture Capital Associates 1,285,714
shares of Series B Convertible Preferred Stock at $7.00 per share. Also on that
date, Gabriel sold to Stone Street Fund 2000 L.P., GS Capital Partners III,
L.P., GS Capital Partners III Offshore, L.P., Goldman, Sachs & Co. Verwaltungs
GmbH and Bridge Street Special Opportunities Fund 2000, L.P. (each affiliates of
Goldman Sachs & Co.) an aggregate of 150,000, 1,703,155, 468,217, 78,628 and
100,000 shares of Series B Convertible Preferred Stock, respectively at $7.00
per share. In addition, on that date Gabriel sold to Brooks Investments, L.P.,
RAB Partnership L.P., J.H. Whitney IV, L.P. (affiliate of Whitney & Co.),
Meritage Private Equity Fund, L.P., Meritage Private Equity Parallel Fund, L.P.
and Meritage Entrepreneurs Fund, L.P. 761,905, 71,429, 2,035,714, 1,002,057,
122,514 and 18,286 shares of Series B Convertible Preferred Stock, respectively,
at $7.00 per share. Certain directors or executive officers of the combined
company also purchased Series B Convertible Preferred Stock on this date. Robert
A. Brooks, David L. Solomon, Gerard J. Howe, John P. Denneen and Marguerite A.
Forrest purchased 30,101, 25,000, 25,000, 25,000 and 68,505 shares of Series B
Convertible Preferred Stock, respectively, for $7.00 per share.
In November 1998, Gabriel issued founders warrants to certain individuals
who will be executive officers or directors of the combined company. Robert A.
Brooks, Gerard J. Howe and Marguerite A. Forrest received warrants for 70,000,
70,000 and 30,000 shares, respectively, at an exercise price of $3.00 per share.
In addition, in connection with their investment in Gabriel common stock, John
P. Denneen, David L. Solomon and Michael E. Gibson received warrants to purchase
70,000, 550,000 and 50,000 shares of Gabriel common stock, respectively, at an
exercise price of $3.00 per share.
RELATED PARTY TRANSACTIONS
During fiscal 1999, Gabriel made payments totaling $153,778 to Brooks
International Aviation, L.L.C., an entity controlled by Mr. Brooks, for the use
of its aircraft. Gabriel believes that the above transaction was on terms no
less favorable to Gabriel than those it could have obtained in comparable
transactions with an independent third party.
TRIVERGENT
STOCK PURCHASES
Since TriVergent's inception, certain 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
Convertible 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 Convertible 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.
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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., John R. Tyrrell (an affiliate of Richland Ventures II, L.P. and
Richland Ventures III, L.P.), 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 Convertible 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 Convertible Preferred Stock, respectively,
for $4.25 per share.
In March 2000, TriVergent sold John R. Tyrrell, G. Michael Cassity and
Riley M. Murphy 51,765, 212,940 and 35,000 shares of its Series C Convertible
Preferred Stock, respectively, for $4.25 per share. Mr. Cassity and Ms. Murphy
will serve as President and Chief Operating Officer and as Senior Vice President
and General Counsel of the combined company, respectively.
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:
- 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 Riley M. Murphy's employment, TriVergent loaned Ms.
Murphy $148,750 at an interest rate of 10% per year, with the principal on such
loan being due and payable on March 15, 2003. Interest payments are payable on
each anniversary of the note until maturity. The proceeds of this loan were used
to purchase TriVergent's preferred stock.
In connection with G. Michael Cassity's employment, TriVergent loaned
Mr. Cassity $749,998 at an interest rate of 8.12% per year, with the principal
on such loan being due and payable on the earlier of March 6, 2003 and sixty
days after the termination of Mr. Cassity's employment with TriVergent.
TriVergent, in its sole discretion, may extend the maturity date of the note one
or more times by a period of one year. Interest is payable annually in arrears.
The proceeds of this loan were used to purchase TriVergent's preferred stock.
In June, 2000 TriVergent engaged First Union Securities, Inc., an affiliate
of First Union Capital Partners, to provide financial advice in connection with
the merger. In connection therewith, TriVergent paid First Union Securities,
Inc. a fee of $400,000.
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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 June 9, 2000, there were 11,865,160 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
o 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.,
o holders of a majority of the outstanding shares of TriVergent Series B
preferred stock, and
o 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 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 June 9, 2000, there were 5,924,200 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
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o 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
o at least two-thirds of each series of Gabriel preferred stock, voting
as separate classes.
Each share of Gabriel common stock and Gabriel preferred stock is entitled
to one vote per share, and holders of Gabriel common stock and each series of
Gabriel preferred stock vote together as one class. Holders of Gabriel stock at
the time Gabriel circulates consents (or receives the requisite consents) will
be entitled to consent to the merger.
Holders of a sufficient number of shares of each class of Gabriel stock
have agreed to consent to the adoption of the Gabriel charter amendment and to
the acquisition of TriVergent by Gabriel pursuant to the merger agreement. Under
Delaware law and the provisions of Gabriel's amended and restated certificate of
incorporation, these consents are sufficient to approve and adopt the Gabriel
charter amendment and to approve the acquisition of TriVergent by Gabriel
pursuant to the merger agreement. ACCORDINGLY, YOU ARE NOT BEING ASKED TO
PROVIDE A PROXY OR CONSENT AT THIS TIME AND YOUR VOTE IS NOT NEEDED TO APPROVE
THE CHARTER AMENDMENT OR THE MERGER.
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VOTING SECURITIES OF GABRIEL
The following table sets forth certain information regarding the beneficial
ownership of Gabriel's voting securities as of June 9, 2000 by (i) each of
Gabriel's directors who will serve as a director of the combined company, (ii)
each of the named executive officers of the combined company who are Gabriel
stockholders, (iii) each person or entity who is known by Gabriel to
beneficially own 5% or more of Gabriel's voting securities, and (iv) 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 (a)
5,924,200 shares of common stock, (b) 26,850,000 shares of Series A preferred
stock, (c) 3,125,000 shares of Series A-1 preferred stock, (d) 9,930,294 shares
of Series B preferred stock, all outstanding as of June 9, 2000 and (e) treating
shares issuable pursuant to options or warrants that are exercisable currently
or within 60 days of June 9, 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>
BENEFICIAL OWNER PERCENTAGE OF VOTING
(INCLUDES RELATED ENTITIES) VOTING SECURITIES(1) SECURITIES(1)
-------------------------------------- --------------------- ----------------------
<S> <C> <C>
Goldman, Sachs & Co. affiliates (2) 10,006,667 21.83%
Whitney & Co. (3) 7,035,714 15.35%
Robert A. Brooks (4) 4,675,101 10.19%
The Centennial Funds (5) 3,433,333 7.49%
Telecom Partners II, L.P.(6) 3,571,428 7.79%
Meritage Private Equity Fund L.P.(7) 4,257,857 9.29%
Chase Venture Capital Associates, 2,952,381 6.44%
L.P. (8)
David L. Solomon (9) 1,000,000 2.16%
Gerard J. Howe (10) 545,000 1.19%
Marguerite A. Forrest (11) 398,505 *
William Laverack, Jr. (12) 7,035,714 15.35%
Byron D. Trott - -
Michael R. Hannon 2,952,381 6.44%
Directors and executive officers,
as a group(14) 17,186,109 36.79%
</TABLE>
---------------
*less than 1%
(1) Includes shares of common stock and shares of preferred stock, which, as of
the date of this information statement/prospectus, are convertible on a
one-for-one basis into shares of common stock.
(2) Includes (i) 572,260 shares of common stock, 4,541,748 shares of series A
preferred stock and 1,703,155 shares of series B preferred stock
beneficially owned by GS Capital Partners III, L.P., (ii) 157,321 shares of
common stock, 1,248,579 shares of series A preferred stock and 468,217
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,
121
<PAGE> 130
LP. Goldman, Sachs & Co. maintains a mailing address at 85 Broad Street,
New York, NY 10004 and Mr. Trott maintains a mailing address at Goldman,
Sachs' Chicago office at 4900 Sears Tower, Chicago, IL 60606.
(3) 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. Whitney & Co. and Mr.
Laverack maintain a mailing address at 177 Broad Street, Stamford, CT
06901.
(4) 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., an entity controlled by Mr. Brooks, (ii)
145,000 shares of common stock beneficially owned by Mr. Brooks, of which
70,000 are issuable upon exercise of currently exercisable warrants, and
30,101 shares of series B preferred stock beneficially owned by Mr. Brooks,
(iii) 333,333 shares of series A preferred stock and 71,429 shares of
series B preferred stock beneficially owned by RAB Partnership, L.P., an
entity controlled by Mr. Brooks. Mr. Brooks and his affiliates maintain a
mailing address at 16650 Chesterfield Grove Road, S110, Chesterfield, MO
63005.
(5) 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.
The Centennial Funds maintains a mailing address at 1428 Fifteenth Street,
Denver, Colorado 80202.
(6) 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.
(7) 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.
(8) Includes (i) 1,666,667 shares of series A preferred stock and (ii)
1,285,714 shares of series B preferred stock. Chase Venture Capital
Associates, L.P. and Mr. Hannon maintain a mailing address at 380 Madison
Avenue, 12th floor, New York, NY 10017.
(9) 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.
(10) 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.
(11) 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.
(12) Includes all shares attributable to Whitney & Co on the basis that Mr.
Laverack is a General Partner of Whitney & Co. See footnote 3. Mr. Laverack
disclaims beneficial ownership of those shares.
(13) Includes all shares attributable to Chase Venture Capital Associates, L.P.
on the basis that Mr. Hannon is a General Parnter of Chase Capital
Partners. See footnote 8. Mr. Hannon disclaims beneficial ownership of
those shares.
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<PAGE> 131
(14) Includes (i) 49,999 shares of common stock issuable upon exercise of
currently exercisable options, (ii) 840,000 shares of common stock issuable
upon exercise of currently exercisable warrants, (iii) 3,625,000 shares of
common stock, (iv) 8,333,333 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) 4,337,777 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.).
123
<PAGE> 132
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 June 9, 2000, by (i) each of TriVergent's directors who
will serve as a director of the combined company, (ii) each of the named
executive officers of the combined company who are TriVergent stockholders,
(iii) each person or entity who is known by TriVergent to beneficially own 5% or
more of TriVergent's voting securities, and (iv) 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 (a)
11,865,160 shares of common stock, (b) 4,711,672 shares of series A preferred
stock, (c) 13,866,663 shares of series B preferred stock, (d) 15,776,471 shares
of series C preferred stock, all outstanding on June 9, 2000 and (e) treating
shares issuable pursuant to options or warrants that are exercisable currently
or within 60 days of June 9, 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 1,149,349 (1) 2.48%
G. Michael Cassity 294,118 *
Shaler P. Houser 2,170,669 (2) 4.66%
Jack Tyrrell 7,062,510 (3) 15.27%
Watts Hamrick 4,744,472 (4) 10.26%
ALL DIRECTORS & EXECUTIVE OFFICERS AS
A GROUP (17 PEOPLE) 15,421,118 33.03%
5% OWNERS (NOT INCLUDED ABOVE)
Houser Group 7,499,280 (5) 16.22%
Moore Group 7,686,276 (6) 16.65%
Richland Group 7,062,510 (7) 15.27%
First Union Capital Partners, Inc. 4,744,472 (8) 10.26%
Boston Millennia Group 2,760,785 (9) 5.97%
Toronto Dominion Capital (USA), Inc. 2,352,941 5.09%
</TABLE>
----------------------------------------
* Denotes less than one percent.
(1) Includes only shares directly owned by Charles S. Houser and 109,000 shares
issuable upon the exercise of options and warrants exercisable within 60
days of June 9, 2000. See note 5 for a description of other shares that
might be construed as beneficially owned by Mr. Houser.
(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 June 9, 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 8 below). Mr. Tyrrell disclaims beneficial ownership of all of these
shares.
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<PAGE> 133
(4) Includes 4,744,472 shares beneficially owned by First Union Capital
Partners, Inc. (see note 8 below). Mr. Hamrick disclaims beneficial
ownership of all of these shares.
(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 1,149,349
Shaler P. Houser Charles S. Houser's son 2,170,669
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. 150,000
Houser are principals
Jennifer L. Houser Charles S. Houser's daughter 92,000
Houser Charitable Remainder Charles S. and Janie P. Houser 161,777(11)
Unitrust are trustees
Irrevocable Trust FBO Jennifer Trust for Charles S. Houser's
L. Houser daughter 50,000
Charles Schwab & Co., Inc. FBO Trust for Charles S. Houser 44,446
Charles S. Houser
Mr. & Mrs. Robert L. Sims Charles L. Houser's 35,000
parents-in-law
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 6,000
Charles Davis Houser Shaler P. Houser's minor son 6,831
Charles Davis Houser Trust Trust for Shaler P. Houser's 4,000
son
David R. Houser Charles S. Houser's brother 1,000
John R. Houser Charles S. Houser's brother 1,000
Morton Houser Charles S. Houser's brother 1,000
Sue M. Houser Charles S. Houser's mother 1,000
---------
Total 7,499,280
=========
</TABLE>
------------------------
* Denotes less than one percent.
Each person listed above disclaims beneficial ownership of all shares not
shown on the table as being directly owned by that person. The number of
shares shown as beneficially owned by the Houser Charitable Remainder
Unitrust includes 9,000 shares issuable upon exercise or warrants. The
numbers of shares shown as beneficially owned by Charles S. Houser, Shaler
P. Houser and Charles L. Houser include 109,000, 320,000, and 80,000
shares, respectively, issuable upon exercise of options which are
exercisable within 60 days of June 9, 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.
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<PAGE> 134
(8) Includes 18,000 shares issuable upon exercise of warrants held by First
Union Capital Partners, Inc.
(9) Includes 2,723,337 shares owned by Boston Millennia Partners and 37,448
shares owned by Boston Millennia Associates I Partnership.
(10) Includes 9,000 shares issuable upon exercise of warrants held by Houser
Charitable Remainder Unitrust.
126
<PAGE> 135
DESCRIPTION OF GABRIEL CAPITAL STOCK
The following is a summary 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 summarizes 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,
o 26,850,000 shares will be designated as Series A Convertible Preferred
Stock, which we refer to as Series A preferred stock,
o 3,125,000 shares will be designated as Series A-1 Convertible
Preferred Stock, which we refer to as Series A-1 preferred stock,
o 32,500,000 shares will be designated as Series B Convertible Preferred
Stock, which we refer to as Series B preferred stock,
o 6,000,000 shares will be designated as Series C-1 Convertible
Preferred Stock, which we refer to as Series C-1 preferred stock,
o 16,500,000 shares will be designated as Series C-2 Convertible
Preferred Stock, which we refer to as Series C-2 preferred stock, and
o 18,500,000 shares will be designated as Series C-3 Convertible
Preferred Stock, which we refer to as Series C-3 preferred stock.
As of June 9, 2000, there were 5,934,200 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 of 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
o 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,
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<PAGE> 136
o 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
o change the per share offering price triggering the automatic
conversion provisions of the Series A, Series A-1 and Series B
preferred stock into common stock in the event of firm commitment,
underwritten public offering of common stock from $20.00 per share to
$12.00 per share, in each case with aggregate proceeds of at least $50
million, as more fully described below.
COMMON STOCK
VOTING RIGHTS. Each holder of common stock is entitled to cast one vote for
each share held of record on all matters submitted to a vote of stockholders.
The holders of the shares of common stock, along with 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 amended and
restated 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
o the designation and number of shares up to the maximum authorized by
the amended and restated certificate of incorporation, and
o dividend rates and preferences,
o voting rights,
o conversion and exchange rights,
o terms of redemption, including redemption prices,
o sinking fund provisions,
o liquidation rights and preferences, and
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<PAGE> 137
o any other relative powers, preferences and rights.
Any of these terms could have an adverse effect on the availability of earnings
for distribution to the holders of Gabriel stock or for other corporate
purposes. The voting rights of holders of any preferred shares could adversely
affect the voting power of Gabriel's other stockholders and could have the
effect of delaying, deferring or impeding a change of control of Gabriel.
VOTING RIGHTS. On all matters submitted to a vote of stockholders, each
holder of Series A, Series A-1, Series B, Series C-1, Series C-2 and Series C-3
preferred stock will be entitled to cast one vote per share of common stock into
which the shares of Series A, Series A-1, Series B, Series C-1, Series C-2 and
Series C-3 preferred stock held by the holder are then convertible. The holders
of the Series A, Series A-1, Series B, Series C-1, Series C-2 and Series C-3
preferred stock and common stock will vote together as a single class, unless
otherwise required by Delaware law.
DIVIDENDS. No cash dividends may be declared or paid upon the Series A,
Series A-1, Series B, Series C-1, Series C-2 or Series C-3 preferred stock.
CONVERSION RIGHTS. Each outstanding share of the Series A, Series A-1,
Series B, Series C-1, Series C-2 and Series C-3 preferred stock will be
convertible at any time at the option of the holder into 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
o $3.00, with respect to the Series A preferred stock,
o $4.00 with respect to the Series A-1 preferred stock,
o $7.00, with respect to the Series B preferred stock,
o $2.19 with respect to the Series C-1 preferred stock,
o $3.41 with respect to the Series C-2 preferred stock and
o $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 the event of certain dilutive events 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 certain limited exceptions and to the following conditions:
o 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
o 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 adjustment 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
o upon conversion of shares of Series A, Series A-1, Series B, Series
C-1, Series C-2 or Series C-3 preferred stock,
o 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,
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<PAGE> 138
o 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
o in connection with board-approved acquisitions.
REDEMPTION PROVISIONS. Gabriel may not redeem the Series A, Series A-1,
Series B, Series C-1, Series C-2 or Series C-3 preferred stock at any time,
except pursuant to the terms of an agreement between Gabriel and the holder or
holders of such stock.
LIQUIDATION RIGHTS. In the event of the liquidation, dissolution or winding
up of the business of Gabriel, the holders of Series A, Series A-1, Series B,
Series C-1, Series C-2 or Series C-3 preferred stock will be entitled to
receive, prior to and in preference to any distribution to the holders of Common
Stock, a liquidation preference for each share in an amount equal to $3.00,
$4.00, $7.00, $2.19, $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
o an amount equal to a preferred return, for each share of such series
of preferred stock, on the respective initial liquidation preference
amount of eight percent (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
o 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.
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 9,000,000 shares of common stock in the form of
o incentive and nonqualified stock options,
o stock appreciation rights,
o restricted stock and restricted stock units,
o performance stock and performance units,
o phantom stock, and
o stock acquired through a stock purchase program or granted under merit
awards.
As of June 9, 2000, options to purchase a total of 4,622,350 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 72,200 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 June 9, 2000, eight of our 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.
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<PAGE> 139
CAPITAL STOCK, 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.
o one-year warrants to purchase a certain number of 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
o two-warrants to purchase a certain number of 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:
o The number 8,000,000 will be multiplied by a fraction
o 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
o 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. All outstanding TriVergent options will be assumed by Gabriel as part
of the merger.
AMENDED AND RESTATED 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, the
Amended and Restated Stockholders' Agreement by and among Gabriel and its
stockholders. The stockholders' agreement provides the holders certain rights
and sets forth certain restrictions on their shares until consummation of an
initial public offering pursuant to which all shares of Gabriel's preferred
stock are automatically converted into shares of Gabriel common stock pursuant
to the terms of Gabriel's Amended and Restated Certificate of Incorporation. The
following description of the stockholders' agreement is qualified by reference
to the agreement, a copy of which 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 certain preemptive
rights to the holders of Gabriel's common stock and preferred stock. Subject to
certain 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 eighty percent (80%)
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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 "capital
transaction" (as each such term 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.
AMENDED AND RESTATED 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, the
Amended and Restated Registration Rights Agreement by and among Gabriel and its
stockholders. Pursuant to the amended and restated registration rights
agreement, holders of common and preferred stock are entitled to certain rights
to register under the Securities Act the common stock they own or which are
issuable upon conversion of their shares of preferred stock. The following
description of the registration rights agreement is qualified by reference to
the agreement, a copy of which 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
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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.
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 certain 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, the Shareholders Agreement, as amended, 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. The following description of
the shareholders agreement is qualified by reference to the agreement, a copy of
which 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 certain 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 (i) the
fair market value, (ii) the latest price per share at which the shares were
traded in an arm's-length transaction, or (iii) 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:
o for the shareholder's or shareholder's estate's option to sell, the
greater of (i) the fair market value as determined by the board of
directors or (ii) the latest price per share at which the shares were
traded in an arm's-length transaction, and
o for Gabriel's option to purchase, the appraised value of Gabriel
divided by the number of issued and outstanding shares owned by the
parties to the agreement.
Upon the termination of an employee shareholder's employment for any reason
other than death or permanent disability, Gabriel will have the option to
purchase all of the shareholder's shares. The purchase price of for the shares
will be
o upon termination for cause, the lesser of (i) the fair market value as
determined by the board of directors or (ii) the book value per share
of Gabriel as determined as of the end of the prior fiscal year, and
o upon any other termination of employment, the greater of (i) the fair
market value as determined by the board of directors or (ii) the
latest price per share at which the shares were traded in an
arm's-length transaction.
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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
exchange communications services. In addition, no shareholder may solicit for
employment any Gabriel employee during the period which such shareholder owns
any Gabriel stock.
CLASSIFIED BOARD OF DIRECTORS AND OTHER ANTI-TAKEOVER CONSIDERATIONS
Gabriel's bylaws provide for a classified board of directors. One-third of
the directors will be elected at each annual meeting of stockholders to serve
for three-year terms. As a result, at least two annual meetings of shareholders
may be required for the shareholders to change a majority of Gabriel's board of
directors. Because the stockholders never elect a majority of the board members
at one time, the classified board could delay or prevent the change in control
or make removal of Gabriel's management more difficult. In addition, Gabriel's
amended and restated certificate of incorporation allows its board to issue,
without stockholder approval, preferred stock with terms set by the board. The
preferred stock could be issued quickly with terms that delay or prevent the
change in control or make removal of Gabriel's management more difficult.
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COMPARISON OF RIGHTS OF STOCKHOLDERS
OF GABRIEL AND TRIVERGENT
Upon completion of the merger, TriVergent stockholders will become holders
of Gabriel stock and their rights will be governed by the General Corporation
Law of the State of Delaware which we refer to as Delaware law, 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 bylaws.
The following is a summary of the material differences between the rights
of shareholders of Gabriel and TriVergent, but does not purport to be a complete
statement of all such differences. 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 bylaws.
CAPITALIZATION
GABRIEL
Gabriel's authorized capital stock is described above under "Description of
Gabriel Capital Stock," beginning on page ___.
TRIVERGENT
The total number of authorized shares of capital stock of TriVergent
consists of 100,000,000 shares of common stock, par value $0.001 per share, and
50,000,000 shares of preferred stock, par value $0.01 per share, of which
4,791,668 shares have been designated as Series A Convertible Preferred Stock,
14,133,329 shares have been designated as Series B Convertible Preferred Stock
and 15,776,471 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
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 certain 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.
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GABRIEL
Under the Gabriel 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 the TriVergent certificate of incorporation, the number of members of
the board of directors of TriVergent is initially fixed at nine but may be
increased or decreased by a resolution adopted by a majority of the board,
provided that there must not be more than 24 nor less than three. Directors are
elected by a plurality of all votes voting as a single class at each annual
meeting of stockholders. TriVergent's certificate of incorporation does not
provide for cumulative voting.
VACANCIES ON THE BOARD OF DIRECTORS
Under Delaware law, unless the certificate of incorporation or by-laws
provide otherwise, vacancies on the board of directors may be filled by the
stockholders or the directors.
GABRIEL
Gabriel's certificate of incorporation and by-laws provide that vacancies
and newly created directorships resulting from an increase in the authorized
number of directors will be filled by the holders of the majority of stock
entitled to vote for the election of directors or by the affirmative vote of a
majority of the remaining directors then in office, even if less than a quorum,
or by a sole remaining director so elected, except as may be required by law. A
director elected to fill a vacancy or newly created directorship will serve
until the next annual meeting of stockholders and until such director's
successor has been elected and qualified.
TRIVERGENT
TriVergent's certificate of incorporation provides that, except as
otherwise provided by law, newly created directorships resulting from an
increase in the authorized number of directors or vacancies on the board may be
filled only with a majority of the directors then in office, though less than a
quorum or by the sole remaining director.
REMOVAL OF DIRECTORS
Under Delaware law, any director may be removed with or without cause by
the affirmative vote of the holders of a majority of stock. But, if the board is
classified and the certificate of incorporation does not otherwise provide,
shareholders may remove directors only for cause. In addition, if the
corporation has cumulative voting and less than the entire board is to be
removed, no director may be removed without cause if the votes against the
director's removal would be enough to elect him if then cumulatively voted at an
election of the board.
GABRIEL
Gabriel's by-laws provide that any director may be removed from office with
or without cause by the affirmative vote of the holders of a majority of the
stock of Gabriel entitled to vote in the election of directors, voting together
as a single class.
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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
o increase or decrease the aggregate number of authorized shares of such
class,
o increase or decrease the par value of the shares of such class, or
o alter or change the powers, preferences or special rights of the
shares of such class, so as to affect them adversely.
If any proposed amendment would alter or change the powers, preferences or
special rights of one or more series of any class so as to affect them
adversely, but would not so affect the entire class, then only the shares of the
series so affected by the amendment will be considered a separate class.
GABRIEL
Under Gabriel's certificate of incorporation, the affirmative vote of
66 2/3% of outstanding shares entitled to vote, voting together as a single
class, is required for any amendment of provisions of the certificate of
incorporation relating to the terms of the common and preferred stock which is
inconsistent with the current terms. In addition, Gabriel's certificate of
incorporation provides that the number of authorized shares of common stock may
be increased or decreased by the affirmative vote of the holders of a majority
of the outstanding shares entitled to vote, voting together as a single class.
TRIVERGENT
Under TriVergent's certificate of incorporation, the affirmative vote of
66 2/3% of outstanding shares entitled to vote, voting together as a single
class, is required to amend or repeal any provision of the certificate of
incorporation relating to the terms of the common and preferred stock which are
inconsistent with the current terms. Holders of common stock are not entitled
to vote on any amendment to the certificate of incorporation that relates solely
to the terms of the preferred stock.
AMENDMENTS TO BYLAWS
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 the adopt by-laws and to amend or repeal by-laws made by the board
of directors.
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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, and a majority of the directors, is required to amend or repeal the
bylaws, subject to the rights of the stockholders to adopt bylaws and to amend
or repeal bylaws 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 SHAREHOLDER MEETINGS
Under Delaware law, a special meeting of 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
stockholders of TriVergent may be called only by the board of directors pursuant
to a resolution approved by a majority of the total number of directors which
TriVergent would have if there were no vacancies.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
Delaware law provides that a certificate of incorporation may contain a
provision eliminating or limiting the personal liability of directors to the
corporation or its stockholders for monetary damages for breach of a fiduciary
duty as a director, except no provision in the certificate of incorporation can
eliminate or limit the liability of a director
o for any breach of a director's duty of loyalty to the corporation or
its stockholders,
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o statutory liability for unlawful payment of dividends or unlawful
stock purchase or redemption, or
o for any transaction from which the director derived an improper
personal benefit.
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.
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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
o the director acted in good faith and in a manner the director
reasonably believed to be in the best interests of the corporation,
and
o 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
o by a majority vote of the directors who are not parties to such
action, suit or proceeding, even though less than a quorum, or
o if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or
o by the stockholders.
Under Delaware law, a corporation may advance expenses before the final
disposition of a proceeding and the director undertakes to repay the amount if
it is ultimately determined that the director is not entitled to
indemnification. These expenses incurred by former directors may be paid upon
the terms and conditions, if any, as the corporation deems appropriate.
Under Delaware law, to the extent that a present or former director of a
corporation has been successful on the merits or otherwise in defense of the
proceeding, that person must be indemnified against expenses actually and
reasonably incurred in connection with any claim.
Delaware law gives a corporation the power to purchase and maintain
insurance on behalf of any director against any liability asserted against, and
incurred in his or her capacity as a director, whether or not the corporation
would have the power to indemnify the director against this liability under
Delaware law.
Gabriel'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 and 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.
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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
o shares of a surviving corporation and if a vote of the stockholders of
that corporation is not necessary to authorize the merger or
consolidation,
o 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
o 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
o shares of stock of the corporation surviving or resulting from the
merger or consolidation,
o 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,
o cash instead of fractional shares of the corporations described above,
or
o 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.
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 have no rights to convert
their shares into any other securities.
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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 ___.
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 __.
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 certain 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:
o 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,
o the merger agreement does not amend in any respect the survivor's
certificate of incorporation,
o 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
o stockholder approval is not required by the survivor's certificate of
incorporation; and
o for either corporation where one corporation owns 90% of each class of
outstanding stock of the other corporation.
141
<PAGE> 150
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:
o before that time, the board of directors approved either the business
combination or the transaction in which the interested stockholder
became an interested stockholder; or
o 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
o 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:
o the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by the antitakeover
provisions in Delaware law;
o 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 would 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
o the corporation does not have a class of voting stock that is (a)
listed on a national securities exchange, (b) authorized for quotation
on The Nasdaq National Market, or (c) owned by more than 2,000
stockholders.
The anti-takeover provisions do not apply to a business combination that:
(1) is proposed after the public announcement of, and before the consummation or
abandonment of
o a merger or consolidation of the corporation,
o 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
o a tender or exchange offer for 50% or more of the outstanding shares
of the corporation; and
(2) 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 (3) 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.
142
<PAGE> 151
The term "business combination" includes the following transactions with an
interested stockholder
o a merger or consolidation of the corporation with an interested
stockholder,
o 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,
o any transaction which results in the issuance or transfer by the
corporation or its subsidiaries of stock of the corporation or such
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 certain other transactions which do not increase the
interested stockholder's proportionate share of any class or series of
the corporation's stock,
o 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
o 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.
143
<PAGE> 152
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 TriVergent and subsidiaries 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 within the meaning of the Private Securities Litigation
Reform Act of 1995 with respect to
o their financial condition,
o their results of operations,
o their business plans,
o their business strategies, operating efficiencies or synergies,
competitive positions and growth opportunities for existing products,
o the financial and regulatory environment in which they operate,
o Gabriel's estimated costs to complete or possible future revenues from
in-process research and development programs,
144
<PAGE> 153
- the likelihood of completion of those programs,
- the plans and objectives of their management, and
- other matters.
We consider any statements that are not historical facts as
"forward-looking statements" as defined in the safe harbor provided by Section
21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act
of 1933. 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. Neither Gabriel nor TriVergent
undertakes any obligation to publicly update or release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this document or to reflect the occurrence of unanticipated events.
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.
AVAILABLE INFORMATION
This information statement/prospectus constitutes a part of a registration
statement on From 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 certain 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 not necessarily 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. Each such statement is qualified in its entirety by
such reference. For further information, reference is hereby made to the
registration statement.
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, such 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.
145
<PAGE> 154
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 March 31, 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 three months ended March 31, 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 three months ended
March 31, 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 three months ended March 31, 1999 and 2000 .... F-6
Notes to Consolidated Financial Statements .............................................................. F-7
STATE COMMUNICATIONS, INC. (TRIVERGENT):
Report of Independent Auditors .......................................................................... F-18
Consolidated Balance Sheets as of December 31, 1998 and 1999 and as of March 31, 2000 ................... F-19
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 three
months ended March 31, 1999 and 2000 ........................................................... F-20
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 three
months ended March 31, 1999 and 2000 ........................................................... F-21
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 three
months ended March 31, 1999 and 2000 ........................................................... F-22
Notes to Consolidated Financial Statements .............................................................. F-23
</TABLE>
F-1
<PAGE> 155
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gabriel Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Gabriel
Communications, Inc. (a Delaware corporation) and subsidiaries (Gabriel) as
of December 31, 1998 and 1999 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the period
from June 15, 1998 (inception) to December 31, 1998 and for the year ended
December 31, 1999. These consolidated financial statements are the
responsibility of Gabriel's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gabriel Communications,
Inc. and subsidiaries as of December 31, 1998 and 1999 and the results of
their operations and their cash flows for the period from June 15, 1998
(inception) to December 31, 1998 and for the year ended December 31, 1999
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
February 4, 2000
F-2
<PAGE> 156
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
ASSETS 1998 1999 2000
------------ ------------- ------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 28,682,294 $ 63,080,026 $ 35,148,454
Accounts receivable, net of allowance for doubtful accounts
of $15,602 and $31,727 in 1999 and 2000, respectively -- 405,354 1,092,305
Prepaid expenses and other current assets 3,463 762,861 1,523,945
------------ ------------- ------------
Total current assets 28,685,757 64,248,241 37,764,704
------------ ------------- ------------
Property and equipment, net 147,697 33,805,919 56,157,819
Other noncurrent assets:
Investments -- 2,000,000 2,000,000
Other assets, net -- 2,657,859 2,627,872
------------ ------------- ------------
Total other noncurrent assets -- 4,657,859 4,627,872
------------ ------------- ------------
Total assets $ 28,833,454 $ 102,712,019 $ 98,550,395
============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 139,597 $ 1,306,127 $ 1,003,412
Accrued liabilities and other current liabilities -- 3,188,697 3,663,900
------------ ------------- ------------
Total current liabilities 139,597 4,494,824 4,667,312
Long-term debt -- 20,000,000 20,000,000
------------ ------------- ------------
Total liabilities 139,597 24,494,824 24,667,312
------------ ------------- ------------
Minority interest -- -- 4,153,833
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; -- 31,250 31,250
3,125,000 issued and outstanding in 1999 and 2000
Common stock, $.01 par value, 60,000,000 shares authorized; 5,200,000 52,000 54,692 59,242
5,469,200 and 5,924,200 issued and outstanding in 1998, 1999 and 2000, 82,819,552 95,726,049 96,813,499
respectively Additional paid-in capital Treasury stock at cost, -- -- (360,000)
90,000 shares at March 31, 2000 Accumulated deficit (567,199) (17,863,296) (27,083,241
------------ ------------- ------------
82,393,853 78,217,195 69,729,250
Preferred stock subscriptions receivable
(53,699,996) -- --
------------ ------------- ------------
Total stockholders' equity 28,693,857 78,217,195 69,729,250
------------ ------------- ------------
Total liabilities and stockholders' equity $ 28,833,454 $ 102,712,019 $ 98,550,395
============ ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 157
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998 THREE MONTHS ENDED MARCH 31,
(INCEPTION) TO YEAR ENDED ---------------------------------
DECEMBER 31, DECEMBER 31,
1998 1999 1999 2000
-------------- --------------- ------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue $ -- $ 452,597 $ -- $ 1,307,325
Operating expenses:
Cost of communication services -- 495,808 -- 1,124,648
Selling, general and administrative 693,382 16,559,283 1,569,878 7,490,482
Depreciation and amortization 5,624 1,955,366 8,916 1,831,691
------------ --------------- -------------- -------------
Total operating expenses 699,006 19,010,457 1,578,794 10,446,821
------------ --------------- -------------- -------------
Loss from operations (699,006) (18,557,860) (1,578,794) (9,139,496)
------------ --------------- -------------- -------------
Other income (expense):
Interest income 131,807 1,476,940 294,722 673,818
Interest expense -- (215,177) -- (750,434)
------------ --------------- -------------- -------------
Total other income (expense) 131,807 1,261,763 294,722 (76,616)
------------ --------------- -------------- -------------
Net loss before minority interest (567,199) (17,296,097) (1,284,072) (9,216,112)
Minority interest -- -- -- 3,833
------------ --------------- -------------- -------------
Net loss after minority interest $ (567,199) $ (17,296,097) $ (1,284,072) $ (9,219,945)
============ =============== ============== =============
Basic and diluted loss per share $ (0.16) $ (3.25) $ (0.25) $ (1.60)
============ =============== ============== =============
Weighted average common shares outstanding 3,550,755 5,322,409 5,200,000 5,768,089
============ =============== ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 158
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Preferred stock - Preferred stock -
Series A Series A-1
---------------------------------- -------------------------------
Shares Amount Shares Amount
----------------- -------------- ---------------- ------------
<S> <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, 1999 -- -- -- --
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 three months
ended March 31, 2000 (unaudited) -- -- -- --
Issuance of stock (unaudited) -- -- -- --
Purchase of treasury stock, at cost (unaudited) -- -- -- --
----------------- -------------- ---------------- ------------
Balance, March 31, 2000 (unaudited) 26,850,000 $ 268,500 3,125,000 $ 31,250
================= ============== ================ ============
</TABLE>
<TABLE>
<CAPTION>
Common stock Additional
------------------------------- paid-in Treasury
Shares Amount capital stock
---------------- ------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Balance, June 15, 1998
(inception) -- $ -- $ -- $ --
Net loss for the period
ended December 31, 1998 -- -- -- --
Issuance of stock 5,200,000 52,000 82,819,552 --
---------------- ------------ ------------------ ------------------
Balance, December 31, 1998 5,200,000 52,000 82,819,552 --
Net loss for the year
ended December 31, 1999 -- -- -- --
Issuance of stock 269,200 2,692 12,906,497 --
---------------- ------------ ------------------ ------------------
Balance, December 31, 1999 5,469,200 54,692 95,726,049 --
Net loss for the three months
ended March 31, 2000 (unaudited) -- -- -- --
Issuance of stock (unaudited) 455,000 4,550 1,087,450 --
Purchase of treasury stock, at cost (unaudited) -- -- -- (360,000)
---------------- ------------ ------------------ ------------------
Balance, March 31, 2000 (unaudited) 5,924,200 $ 59,242 $ 96,813,499 $ (360,000)
================ ============ ================== ==================
</TABLE>
<TABLE>
<CAPTION>
Preferred
stock Total
Accumulated subscriptions stockholders'
deficit receivable equity
------------------ ----------------- -------------------
<S> <C> <C> <C>
Balance, June 15, 1998
(inception) $ -- $ -- $ --
Net loss for the period
ended December 31, 1998 (567,199) -- (567,199)
Issuance of stock -- (53,699,996) 29,261,056
------------------ ----------------- -------------------
Balance, December 31, 1998 (567,199) (53,699,996) 28,693,857
Net loss for the year
ended December 31, 1999 (17,296,097) -- (17,296,097)
Issuance of stock -- 53,699,996 66,819,435
------------------ ----------------- -------------------
Balance, December 31, 1999 (17,863,296) -- 78,217,195
Net loss for the three months
ended March 31, 2000 (unaudited) (9,219,945) -- (9,219,945)
Issuance of stock (unaudited) -- -- 1,092,000
Purchase of treasury stock, at cost (unaudited) -- -- (360,000)
------------------ ----------------- -------------------
Balance, March 31, 2000 (unaudited) $ (27,083,241) $ -- $ 69,729,250
================== ================= ===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 159
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------ -------------------
1998 1999
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss after minority interest $ (567,199) $ (17,296,097)
Adjustments to reconcile net loss after minority interest to
net cash (used in)/provided by operating activities:
Depreciation and amortization 5,624 1,955,366
Minority interest -- --
Provision for doubtful accounts -- 15,602
Changes in assets and liabilities:
Increase in accounts receivable -- (420,955)
Increase in prepaid expenses and other assets (3,463) (3,467,002)
Increase (decrease) in accounts payable 139,597 1,166,530
Increase in accrued liabilities and other current liabilities -- 3,188,697
------------ ---------------
Net cash provided by (used in) operating activities (425,441) (14,857,859)
------------ ---------------
Cash flows from investing activities:
Purchases of property and equipment (153,321) (35,563,844)
Purchase of investments -- (2,000,000)
------------ ---------------
Net cash used in investing activities (153,321) (37,563,844)
------------ ---------------
Cash flows from financing activities:
Distributions to minority interest -- --
Proceeds from long-term debt -- 20,000,000
Proceeds from issuance of stock 29,261,056 66,819,435
------------ ---------------
Net cash provided by (used in) financing activities 29,261,056 86,819,435
------------ ---------------
Net increase (decrease) in cash 28,682,294 34,397,732
Cash, beginning of period -- 28,682,294
------------ ---------------
Cash, end of period $ 28,682,294 $ 63,080,026
============ ===============
Supplemental disclosures of cash flow information -
Cash paid during the period for interest $ -- $ 141,944
Non-cash contributed assets $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 2000
---------------- -----------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss after minority interest $ (1,284,072) $ (9,219,945)
Adjustments to reconcile net loss after minority interest to
net cash (used in)/provided by operating activities:
Depreciation and amortization 8,916 1,831,691
Minority interest -- 3,833
Provision for doubtful accounts -- 16,125
Changes in assets and liabilities:
Increase in accounts receivable -- (635,684)
Increase in prepaid expenses and other assets (55,212) (779,996)
Increase (decrease) in accounts payable 1,260,411 (302,715)
Increase in accrued liabilities and other current liabilities 321,049 475,024
-------------- --------------
Net cash provided by (used in) operating activities 251,092 (8,611,667)
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (2,227,174) (19,604,227)
Purchase of investments -- --
-------------- --------------
Net cash used in investing activities (2,227,174) (19,604,227)
-------------- --------------
Cash flows from financing activities:
Distributions to minority interest -- (350,000)
Proceeds from long-term debt -- --
Proceeds from issuance of stock (30,468) 634,322
-------------- --------------
Net cash provided by (used in) financing activities (30,468) 284,322
-------------- --------------
Net increase (decrease) in cash (2,006,550) (27,931,572)
Cash, beginning of period 28,682,294 63,080,026
-------------- --------------
Cash, end of period $ 26,675,744 $ 35,148,454
============== ==============
Supplemental disclosures of cash flow information -
Cash paid during the period for interest $ -- $ 713,844
Non-cash contributed assets $ -- $ 4,500,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 160
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and March 31, 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 March 31, 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 March 31, 2000 and for the
three months ended March 31, 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 three months ended March 31,
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 March 31, 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 controlling interest 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
F-7
<PAGE> 161
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
liquid investments with a maturity of three months or less when
purchased to be cash equivalents. The cost of these investments
approximates fair value.
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 and certain identifiable intangibles 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
F-8
<PAGE> 162
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
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 March 31, 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.
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 and common stock
options and warrants for diluted loss per share in periods when such
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
F-9
<PAGE> 163
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
"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 second fiscal quarter of
2000. Gabriel does not believe adoption will have a material impact on
its consolidated financial position or results of operations.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999 2000
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Network equipment $ -- $ 12,259,144 $ 17,507,345
Leasehold improvements -- 3,949,354 3,948,463
Computer hardware 100,574 3,561,316 4,671,580
Computer software 34,033 4,371,879 5,729,256
Furniture and office equipment 18,714 1,551,241 1,825,182
Vehicles -- 192,552 521,150
Other -- 30,450 30,450
----------- -------------- -------------
Property and equipment, in service 153,321 25,915,936 34,233,426
Less accumulated depreciation and amortization 5,624 1,909,495 3,661,822
----------- -------------- -------------
Property and equipment, in service, net 147,697 24,006,441 30,571,604
Construction-in-progress -- 9,799,478 25,586,215
----------- -------------- -------------
Property and equipment, net $ 147,697 $ 33,805,919 $ 56,157,819
=========== ============== =============
</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.
F-10
<PAGE> 164
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
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 three months ended March 31, 2000,
Gabriel incurred expenses totaling $25,780, $207,277 and $14,809,
respectively. Gabriel had $15,808 in accounts payable at December 31,
1998 no accounts payable at December 31, 1999 and $30,796 in accounts
payable at March 31, 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 March 31, 2000, the Borrower had borrowed
$20,000,000 under the term loan facility at an interest rate of 10.12%.
The Borrower incurred $215,177 in interest expense during 1999 and
$750,434 in interest expense for the three months ended March 31, 2000.
The carrying amount of the long-term debt approximates fair value.
F-11
<PAGE> 165
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
(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 $142,000 in 1998,
1999 and 2000, respectively. The fair value of options and warrants
granted in 1998, 1999 and 2000 is estimated on the date of grant using
the Black-Scholes option-pricing model (excluding a volatility
assumption) with the following weighted average assumptions: risk-free
interest rate of 5.0%, expected life equal to the term of the
respective option or warrant, and no expected dividend yield.
The options issued under the 1998 Stock Incentive Plan have an exercise
price of $2.40 or $3.20 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 9,000,000 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 THREE MONTHS
(INCEPTION) TO YEAR ENDED ENDING
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1999 2000
--------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C>
Options and warrants outstanding at
beginning of period -- 78,000 2,765,500
Granted 78,000 2,697,950 830,200
Cancelled -- (10,450) (100,934)
Exercised -- -- (13,333)
------------- --------------- --------------
Options and warrants outstanding at end of
period 78,000 2,765,500 3,481,433
============= =============== ==============
Options and warrants exercisable at end of
period -- 905,500 985,628
============= =============== ==============
</TABLE>
F-12
<PAGE> 166
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
Gabriel's Stock Purchase Program is intended as an aid to hire
management personnel. Only management is eligible to participate in
this program. Gabriel issued 269,200 and 435,000 shares of common stock
at $2.40 per share under this program during 1999 and the first quarter
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 50,000,000
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, 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
and 3,125,000 shares of Series A-1 Convertible Preferred Stock which
were issued and outstanding as of December 31, 1999. 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.
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
F-13
<PAGE> 167
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
federal statutory rate of 34% to the loss before income taxes for the
period from June 15, 1998 (inception) to December 31, 1998 and for the
year ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
--------------------- ---------------------
<S> <C> <C>
Expected federal income tax benefit $ 192,848 $ 5,880,673
State income tax benefit 17,016 518,521
Valuation allowance (209,864) (6,399,194)
----------------- ---------------------
Income tax benefit $ -- $ --
================= =====================
</TABLE>
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1998 1999
--------------- ----------------
<S> <C> <C>
Deferred tax assets:
Start-up costs and other assets $ 125,000 $ 771,633
Net operating loss carryforward 84,864 6,806,777
--------------- ----------------
Gross deferred tax assets 209,864 7,578,410
Less valuation allowance (209,864) (6,609,058)
--------------- ----------------
Total deferred tax assets -- 969,352
--------------- ----------------
Deferred tax liabilities:
Depreciation and amortization -- 874,081
Accrued liabilities -- 95,271
--------------- ----------------
Total deferred tax liabilities -- 969,352
--------------- ----------------
Net deferred tax asset $ -- $ --
================ =================
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of 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
F-14
<PAGE> 168
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
over the periods which the deferred tax assets are deductible,
management does not believe it is more likely than not Gabriel will
realize the benefits of these deductible differences. Accordingly, a
valuation allowance has been established for the excess of the deferred
tax assets over deferred tax liabilities.
At December 31, 1999, Gabriel had net operating loss carryforwards for
federal income tax purposes of $18,396,694, which are available to
offset future federal taxable income, if any, through 2019.
(10) EARNINGS PER SHARE
A reconciliation of the number of shares used in the calculation of
basic and diluted earnings per share and the calculated amounts of
earnings per share follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998 THREE MONTHS
(INCEPTION) TO YEAR ENDED ENDING
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1999 2000
-------------------- ------------------- -----------------
<S> <C> <C> <C>
Shares outstanding -- beginning of
period -- 5,200,000 5,469,200
Weighted average number of
common shares issued 3,550,755 122,409 298,889
-------------------- ------------------- -----------------
Weighted average number of
common shares outstanding --
end of period 3,550,755 5,332,409 5,768,089
Dilutive effect of employee stock
options -- -- --
-------------------- ------------------- -----------------
Diluted shares outstanding 3,550,755 5,332,409 5,768,089
==================== =================== =================
Net loss (in thousands) $ (567) $ (17,296) $ (9,220)
==================== =================== =================
Basic and diluted earnings per $ (0.16) $ (3.25) $ (1.60)
common share ==================== =================== =================
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
F-15
<PAGE> 169
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
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:
<TABLE>
<S> <C> <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 three months ended March 31, 2000, Gabriel entered into
additional noncancelable operating leases. The future minimum rental
payments under all leases as of March 31,2000 are as follows:
<TABLE>
<S> <C> <C>
2000 $ 1,928,677
2001 2,214,729
2002 1,471,401
2003 1,187,163
2004 1,180,649
Thereafter 6,096,609
----------------
Total $ 14,079,228
================
</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
F-16
<PAGE> 170
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
Effective April 19, 2000, Gabriel closed a $204.5 million private
placement of 29,219,454 shares of Series B Convertible Preferred Stock
at $7.00 per share with a par value of $0.01. The proceeds will be
received proportionately pursuant to three capital calls. The first
call occurred on April 19, 2000. The two remaining capital calls will
be made on or before November 30, 2000.
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.
F-17
<PAGE> 171
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-18
<PAGE> 172
STATE COMMUNICATIONS, INC.
Consolidated Balance Sheets
December 31, 1998 and 1999 and March 31, 2000 (unaudited)
Assets
<TABLE>
<CAPTION>
MARCH 31,
1998 1999 2000
-------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,399,204 $ 15,236,706 52,774,226
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 $315,000 at
March 31, 2000 2,603,643 1,316,695 1,174,704
Stock subscriptions receivable 4,208,002 -- --
Prepaid expenses and other current assets 222,933 694,829 1,127,281
-------------- ------------- --------------
Total current assets 8,433,782 19,939,607 55,076,211
Property and equipment 1,464,939 45,362,889 68,572,079
Less accumulated depreciation (150,595) (1,305,658) (2,889,347)
-------------- ------------- --------------
Net property and equipment 1,314,344 44,057,231 65,682,732
Goodwill, net of accumulated amortization of $163,214 in 1999
and $263,380 in 2000 -- 2,283,087 7,263,460
Deferred financing costs and other assets 194,275 996,739 5,810,176
-------------- ------------- --------------
Total assets $ 9,942,401 $ 67,276,664 133,832,579
============== ============= ==============
Liabilities, Redeemable Preferred Stock, and Stockholders' Deficit
------------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,820,561 $ 10,564,550 $ 9,800,838
Accrued expenses 2,684,205 3,498,294 4,604,207
Current portion of capital lease obligation -- 392,086 490,107
-------------- ------------- --------------
Total current liabilities 4,504,766 14,454,930 14,895,152
Term loans -- 17,099,889 25,000,000
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 40,839,763
-------------- ------------- --------------
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 $20,793,069 in 1998, 1999 and March 31, 2000) 11,295,468 12,685,163 13,766,638
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 $60,859,699 in 1999 and March 31, 2000) -- 53,094,446 55,272,048
Series C 5.5% cumulative convertible preferred stock $.01 par value;
15,776,471 shares authorized; 15,776,471 shares issued and outstanding
at March 31, 2000; (redemption value of $67,567,829 at
March 31, 2000) -- -- 67,392,143
Notes receivable from officers -- -- (898,750)
-------------- ------------- --------------
Total redeemable preferred stock 11,295,468 65,779,609 135,532,079
-------------- ------------- --------------
Stockholders' deficit:
Common stock, $.001 par value, 50,000,000 shares authorized in 1998 and
100,000,000 in 1999 and at March 31, 2000; 10,324,462, 11,147,920 and
11,934,700 shares issued in 1998,
1999 and March 31, 2000, respectively 10,324 11,148 11,935
Additional paid-in-capital 6,811,359 7,466,423 7,047,925
Accumulated deficit (12,762,898) (38,426,743) (49,390,503)
Treasury stock, 69,540 common shares in 1999 and March 31,
2000, at cost -- (208,620) (208,620)
-------------- ------------- --------------
Total stockholders' deficit (5,941,215) (31,157,792) (42,539,263)
-------------- ------------- --------------
Total liabilities, redeemable preferred stock, and
stockholders' deficit $ 9,942,401 $ 67,276,664 $ 133,832,579
============== ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 173
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
and three months ended March 31, 1999 and 2000 (unaudited)
<TABLE>
<CAPTION>
INCEPTION
THROUGH YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999 1999 2000
------------- ------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ 5,261,146 $ 25,037,450 $ 6,522,384 $ 4,197,612
Cost of services -- 3,802,036 17,703,754 4,621,416 3,733,846
------------- ------------- ------------- ------------- -------------
Gross profit -- 1,459,110 7,333,696 1,900,968 463,766
------------- ------------- ------------- ------------- -------------
Operating expenses:
Selling, general and administrative expenses (39,851) (12,165,893) (23,523,165) (7,541,168) (8,918,826)
Provision for uncollectible accounts -- (1,976,000) (7,285,528) (3,276,152) (156,655)
Depreciation and amortization -- (150,595) (1,318,277) (135,444) (1,683,855)
------------- ------------- ------------- ------------- -------------
Total operating expenses (39,851) (14,292,488) (32,126,970) (10,952,764) (10,759,336)
------------- ------------- ------------- ------------- -------------
Operating loss (39,851) (12,833,378) (24,793,274) (9,051,796) (10,295,570)
------------- ------------- ------------- ------------- -------------
Interest income (expense):
Interest income -- 123,233 816,057 46,401 437,525
Interest expense -- (12,902) (1,468,991) (33,189) (380,947)
------------- ------------- ------------- ------------- -------------
Interest income (expense), net -- 110,331 (652,934) 13,212 56,578
------------- ------------- ------------- ------------- -------------
Loss before extraordinary item (39,851) (12,723,047) (25,446,208) (9,038,584) (10,238,992)
Extraordinary item - early extinguishment of debt -- -- (217,637) -- (724,768)
------------- ------------- ------------- ------------- -------------
Net loss (39,851) (12,723,047) (25,663,845) (9,038,584) (10,963,760)
Preferred stock accretion -- (57,863) (2,603,040) (144,818) (3,776,902)
------------- ------------- ------------- ------------- -------------
Net loss to common stockholders $ (39,851) $ (12,780,910) $ (28,266,885) $ (9,183,402) $ (14,740,662)
============= ============= ============= ============= =============
Net loss per common share, basic
and dilutive $ (.01) $ (1.37) $ (2.60) $ (.89) $ (1.28)
============= ============= ============= ============= =============
Weighted average common shares
outstanding, basic and dilutive 6,390,476 9,308,771 10,868,729 10,348,389 11,485,044
============= ============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 174
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 three months ended March 31, 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
Compensation expense for stock based awards
(unaudited) -- 15,625 -- -- 15,625
Net loss (unaudited) -- -- (10,963,760) -- (10,963,760)
Accretion of preferred stock (unaudited) -- (3,776,902) -- -- (3,776,902)
---------- ------------ ------------ ----------- ----------------
Balance at March 31, 2000 (unaudited) $ 11,935 7,047,925 (49,390,503) (208,620) (42,539,263)
========== ============ ============ =========== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 175
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 three months ended March 31, 1999 and 2000 (unaudited)
<TABLE>
<CAPTION>
INCEPTION
THROUGH
DECEMBER 31,
1997 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (39,851) $ (12,723,047)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for uncollectible accounts -- 1,976,000
Depreciation and amortization -- 150,595
Other amortization -- --
Amortization of debt discount -- --
Extraordinary item - early extinguishment of debt -- --
Compensation expense -- --
Changes in operating assets and liabilities:
Accounts receivable -- (4,579,643)
Other assets -- (194,275)
Prepaid expenses and other current assets (16,607) (206,326)
Accounts payable -- 1,820,561
Accrued expenses -- 2,684,205
-------------- --------------
Net cash used in operating activities (56,458) (11,071,930)
-------------- --------------
Cash flows from investing activities:
Investments held to maturity -- --
Purchases of property and equipment -- (1,464,939)
Purchase of indefeasible right to use fiber lines -- --
Cash paid for acquisition, net of cash acquired -- --
-------------- --------------
Net cash used in investing activities -- (1,464,939)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of note payable to bank -- 90,000
Principal payments on note payable to bank -- (6,618)
Proceeds from Series 1999 notes payable and warrants -- --
Payment of Series 1999 notes payable -- --
Purchase of treasury stock -- --
Proceeds from exercise of stock options -- --
Proceeds from issuance of preferred stock -- 7,029,603
Proceeds from issuance of common stock 109,500 6,770,046
Deferred financing costs -- --
Proceeds from term loan and warrants -- --
Payment on term loan -- --
Other -- --
-------------- --------------
Net cash provided by financing activities 109,500 13,883,031
-------------- --------------
Net increase (decrease) in cash and cash equivalents 53,042 1,346,162
Cash and cash equivalents at beginning of period -- 53,042
-------------- --------------
Cash and cash equivalents at end of period $ 53,042 $ 1,399,204
============== ==============
Supplemental disclosures:
Interest paid $ -- $ 1,952
============== ==============
Stock subscriptions receivable $ 595,500 $ 4,208,002
============== ==============
Notes payable exchanged for preferred stock $ -- $ --
============== ==============
Accounts payable incurred for property and equipment $ -- $ --
============== ==============
Notes receivable from officers exchanged for preferred stock $ -- $ --
============== ==============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1999 2000
------------- ---------------------------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (25,663,845) $ (9,038,584) $ (10,963,760)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for uncollectible accounts 7,285,528 3,276,152 156,655
Depreciation and amortization 1,318,277 135,444 1,683,855
Other amortization 145,833 -- --
Amortization of debt discount 339,727 -- --
Extraordinary item - early extinguishment of debt 217,637 -- 724,768
Compensation expense -- -- 15,625
Changes in operating assets and liabilities:
Accounts receivable (5,568,734) (3,537,640) 191,403
Other assets 194,275 -- (1,185,468)
Prepaid expenses and other current assets (229,100) (246,906) (341,669)
Accounts payable 1,196,743 419,366 (800,077)
Accrued expenses 807,198 (252,476) 1,094,721
------------- ------------- -------------
Net cash used in operating activities (19,956,461) (9,244,644) (9,423,947)
------------- ------------- -------------
Cash flows from investing activities:
Investments held to maturity (2,691,377) -- 2,691,377
Purchases of property and equipment (34,965,980) (1,007,009) (8,971,680)
Purchase of indefeasible right to use fiber lines -- -- (14,002,592)
Cash paid for acquisition, net of cash acquired (1,106,630) (352,579) (2,566,791)
------------- ------------- -------------
Net cash used in investing activities (38,763,987) (1,359,588) (22,849,686)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of note payable to bank -- -- --
Principal payments on note payable to bank (25,986) -- (57,396)
Proceeds from Series 1999 notes payable and warrants 10,460,000 3,870,107 --
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 49,839,121 4,208,002 65,975,568
Proceeds from issuance of common stock -- -- 345,007
Deferred financing costs (1,142,572) -- (3,627,969)
Proceeds from term loan and warrants 17,834,394 2,034,402 25,000,000
Payment on term loan -- -- (17,824,657)
Other (10,886) -- --
------------- ------------- -------------
Net cash provided by financing activities 72,557,950 10,112,511 69,811,153
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 13,837,502 (491,721) 37,537,520
Cash and cash equivalents at beginning of period 1,399,204 1,399,204 15,236,706
------------- ------------- -------------
Cash and cash equivalents at end of period $ 15,236,706 $ 907,483 $ 52,774,226
============= ============= =============
Supplemental disclosures:
Interest paid $ 939,381 $ 20,689 $ 1,149,765
============= ============= =============
Stock subscriptions receivable $ -- $ -- $ --
============= ============= =============
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-22
<PAGE> 176
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 March 31, 2000 and for the
three months ended March 31, 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 three months ended March 31,
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-23
<PAGE> 177
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.
(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.
F-24
<PAGE> 178
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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.
(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.
F-25
<PAGE> 179
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
Compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise
price. SFAS No. 123 permits entities to recognize expense over the
vesting period the fair value of the stock options on the date of
grant.
(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," on a prospective basis for interim periods and
fiscal years beginning January 1, 2001. The Company does not
anticipate that adoption of SFAS No. 133 will have a material
effect on its financial statements.
In December 1999, the Securities and Exchange Commission staff
released Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition." SAB 101 provides interpretive guidance on the
recognition, presentation and disclosure of revenue in financial
statements. SAB 101 must be applied to financial statements no
later than the fourth fiscal quarter of 2000. The Company does not
believe adoption will have a material impact on its consolidated
financial position or results of operations.
(r) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company considers the recorded value of its current assets and
liabilities, consisting primarily of cash and cash equivalents,
investments, accounts receivable, other current assets, accounts
payable, and accrued expenses to approximate fair value because of
the short term maturity of the instruments. The fair value of
long-term debt, including the current portion, is estimated based
on quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same
maturities. Due to the fact that the Company's long-term debt has a
variable interest rate, the carrying value approximates fair value.
F-26
<PAGE> 180
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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>
March 31,
1998 1999 2000
-------------------- ------------------- -------------------
(unaudited)
<S> <C> <C> <C>
Switch equipment $ -- $ 34,920,377 $ 41,323,661
Indefeasible right to use fiber lines -- -- 14,002,592
Computer equipment and software 1,338,688 9,090,448 10,540,145
Furniture, fixtures and other equipment 126,251 986,645 2,117,430
Leasehold improvements -- 365,419 588,251
-------------------- ------------------- -------------------
1,464,939 45,362,889 68,572,079
Less accumulated depreciation (150,595) (1,305,658) (2,889,347)
-------------------- ------------------- -------------------
$ 1,314,344 $ 44,057,231 $ 68,682,732
==================== =================== ===================
</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 $1,583,689 in 1998, 1999 and the three months ended March
31, 2000, respectively.
(3) ACQUISITIONS
In March 1999, the Company acquired the assets and liabilities of
Carolina Online, Inc., a South Carolina based internet service provider,
for a total purchase price of approximately $1.8 million which included
cash and stock. Common stock issued for the Carolina Online acquisition
was 545,833 shares valued at $2.40 per share. The Carolina Online
acquisition has been accounted for by the purchase method of accounting
and, accordingly, the results of operations of Carolina Online from the
period after the acquisition are included in the accompanying
consolidated financial statements. The excess cost over the estimated
fair value of net assets acquired was allocated to goodwill. A total of
approximately $1.6 million was allocated to goodwill and is being
amortized on a straight-line basis over 10 years. The pro forma results
for 1998 and 1999 as if Carolina Online were acquired at the beginning of
each year would not be significantly different than the actual results.
F-27
<PAGE> 181
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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 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).
(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.
F-28
<PAGE> 182
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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.
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 March 31,
2000 amounted to $671,267 and $1,439,730, respectively.
F-29
<PAGE> 183
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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.
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 March 31, 2000 amounted
to $1,213,345 and $3,139,731, 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, $144,818 and $3,776,902 for the years ended December 31, 1998
and 1999 and for the three month periods ended March 31, 1999 and March
31, 2000, respectively.
F-30
<PAGE> 184
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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>
(8) INCOME TAXES
The income tax benefit for 1997, 1998 and 1999 and the three months ended
March 31, 2000 differed from the amounts computed by applying the Federal
income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
MARCH 31,
1997 1998 1999 2000
------------ ------------- -------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Computed "expected" tax benefit $ (14,000) $(4,326,000) $ (8,726,000) $ (3,728,000)
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net of
Federal income tax effect (1,000) (420,000) (841,000) (362,000)
Change in the valuation allowance
for deferred tax assets allocated
to income tax expense 15,000 4,742,000 9,506,000 4,037,000
Other, net -- 4,000 61,000 53,000
------------- ------------ ------------ -------------
Actual tax benefit $ -- $ -- $ -- $ --
============= ============ ============ =============
</TABLE>
F-31
<PAGE> 185
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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
March 31, 2000 are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1998 1999 2000
------------------- ------------------ -------------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued liabilities and allowances $ 740,000 $ 72,000 $ 118,000
Capitalized start-up costs 436,000 337,000 312,000
Net operating loss carryforwards 3,669,000 13,986,000 18,028,000
------------------- ------------------ -------------------
Total gross deferred tax assets 4,845,000 14,395,000 18,458,000
Less valuation allowance (4,757,000) (14,263,000) (18,300,000)
------------------- ------------------ -------------------
Net deferred tax assets 88,000 132,000 158,000
------------------- ------------------ -------------------
Deferred tax liabilities:
Prepaid expenses -- (18,000) (18,000)
Property and equipment, principally due to
differences in depreciation (88,000) (114,000) (140,000)
------------------- ------------------ -------------------
Total gross deferred tax liabilities (88,000) (132,000) (158,000)
------------------- ------------------ -------------------
Net deferred tax asset (liability) $ -- $ -- $ --
=================== ================== ===================
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998,
1999 and March 31, 2000 was $4,757,000, $14,263,000 and $18,300,000,
respectively. The net change in the total valuation allowance for the
periods ended December 31, 1998, 1999 and March 31, 2000 was an increase of
$4,742,000, $9,506,000 and $4,037,000, respectively.
At December 31, 1999, the Company has a net operating loss carryforward for
Federal and state income tax purposes of approximately $37,495,000 which is
available to offset future taxable income, if any, through the year 2019.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of 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 March 31, 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.
F-32
<PAGE> 186
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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-33
<PAGE> 187
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>
MARCH 31,
1997 1998 1999 1999 2000
----------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Loss before extraordinary item $ (39,851) $ (12,723,047) $ (25,446,208) (9,038,584) (10,238,992)
Preferred stock accretion -- (57,863) (2,603,040) (144,818) (3,776,902)
----------- -------------- -------------- -------------- --------------
Loss to common stockholders
before extraordinary item (39,851) (12,780,910) (28,049,248) (9,183,402) (14,015,894)
Extraordinary item -- -- (217,637) -- (724,768)
----------- -------------- -------------- -------------- --------------
Net loss to common stockholders
$ (39,851) $ (12,780,910) $ (28,266,885) (9,183,402) (14,740,662)
=========== ============== ============== ============== ==============
Weighted average common shares
outstanding, basic and
diluted 6,390,476 9,308,771 10,868,729 10,348,389 11,485,044
Basic and dilutive loss per share:
Before extraordinary item $ (.01) $ (1.37) $ (2.58) (.89) (1.22)
Extraordinary item -- -- (.02) -- (.06)
----------- -------------- -------------- -------------- --------------
Net loss $ (.01) $ (1.37) $ (2.60) (.89) (1.28)
=========== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
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 8,684,200
Warrants for common stock issued to non-employees 1,084,649 1,084,649
</TABLE>
F-34
<PAGE> 188
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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>
MARCH 31,
------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss:
As reported $ (39,851) $ (12,723,047) $ (25,663,845) $ (9,038,584) $ (10,963,760)
Pro forma (39,851) (13,093,427) (26,598,856) (9,272,337) (11,941,736)
Net loss per common share,
basic and diluted:
As reported $ (.01) $ (1.37) $ (2.60) $ (.89) $ (1.28)
Pro forma (.01) (1.41) (2.69) (.90) (1.37)
</TABLE>
For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the
Black-Scholes option pricing model and the minimum value method permitted
by SFAS No. 123 for entities not publicly traded with the following
weighted-average assumptions used for grants in 1998, 1999 and 2000:
Dividend yield 0 percent
Risk-free interest rate 5.00 percent
Expected life 7 years
The weighted average fair value of options granted during the years ended
December 31, 1998 and 1999 was $.62 and $.96 respectively.
F-35
<PAGE> 189
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
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 March 31,
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 3,435,173 6.81
Options exercised -- -- (14,666) 1.53 (200) 3.00
Options canceled -- -- (361,102) 2.21 (27,480) 2.86
----------- ----------- ----------- ------------ ----------- ------------
Options outstanding,
end of period 2,997,104 $ 2.11 5,276,707 $ 2.68 8,684,200 $ 4.31
=========== =========== =========== ============ =========== ============
</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.
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> <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>
F-36
<PAGE> 190
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
(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 employee's
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 ended
December 31 and March 31 were as follows:
<TABLE>
<CAPTION>
MARCH 31,
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 7,285,528 156,655
Charge-offs -- -- 9,075,528 27,655
---------- ------------ -------------- ---------------
Balance, end of year or period $ -- $ 1,976,000 $ 186,000 $ 315,000
========== ============ ============== ===============
</TABLE>
(15) SUBSEQUENT EVENTS (UNAUDITED)
In January 2000, the Company entered into a $40,000,000 senior secured
eight-year revolving credit facility and an $80,000,000 senior secured
eight-year delayed drawdown term loan facility ("credit facility"). The
interest rate is a sliding scale based on financial performance and
covenants. The interest rate starts at LIBOR plus 4.50% or Prime plus
3.50%. The agreement establishes milestones where the Company must borrow
set dollar amounts during the year. The proceeds will be used to fund
capital expenditures for the Company's communications facilities and the
associated interest expense. The facility provides for certain
restrictive financial and operating covenants. The senior secured credit
facility is guaranteed by the Company and is secured by all of the assets
of TriVergent Communications, Inc. and its subsidiaries.
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 March 31, 2000 the Company has drawn $25,000,000 on
the revolving credit facility.
F-37
<PAGE> 191
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
During February 2000, the Company privately sold 11,561,768 shares of
Series C 5.5% redeemable cumulative convertible preferred stock for $4.25
per share for total proceeds of approximately $49,138,000. Each share of
Series C preferred is convertible into one share of common stock. A
portion of the proceeds were used to repay the Nortel term loan as
discussed in note 4.
In the event of any liquidation, dissolution or winding up of the
Company, the holders of the Series C preferred would be entitled to
receive, prior and in preference to the holders of Common Stock, (i) an
amount for each share of Series C preferred stock held by them equal to
the Series C original purchase price (as adjusted for stock dividends,
splits, combinations, etc.) plus (ii) any accrued and unpaid dividends.
Each holder of Series C preferred stock has the right to convert each
share into shares of common stock on a one-for-one basis subject to
certain conversion price adjustments. All shares of Series C preferred
stock shall automatically be converted into shares of common stock, (i)
at the election of 67% of the holders or (ii) in the event of a qualified
public offering of the Company's common stock as defined.
Each holder of Series C preferred stock may cause the Company to redeem
up to one-third of the preferred stock originally issued to such holder
on the following dates: (i) February 1, 2005, (ii) February 1, 2006 and
(iii) February 1, 2007. In the event that there is a change in control or
reorganization or liquidation or insolvency of the Company or the Company
breaches a term of the related financing documents, the holders of the
Series C preferred would have the right to request that their shares be
redeemed. Such redemptions would be at a price equal to the greater of
fair market value of the Series C preferred stock on the day of
redemption or the original Series C preferred price (as adjusted for
stock dividends, splits, combinations, etc.) plus accrued and unpaid
dividends.
Each share of Series C preferred stock shall be entitled to a single vote
for every share of common stock then issuable upon its conversion. The
holders shall vote with common stock on all matters except as
specifically provided or as otherwise required by law.
The holders of the Series C preferred stock would be entitled to receive
cumulative dividends in preference to any dividend on the common stock at
the rate of 5.5% of the original Series C purchase price when and as
declared by the Board of Directors. Any accrued but unpaid dividends will
be payable upon an initial public offering, an acquisition or liquidation
of the Company. Accrued unpaid dividends at March 31, 2000 amounted to
$517,827.
In February 2000, the Company purchased the assets and liabilities of two
companies. The Company purchased Ester Communications for a total
purchase price of $4.5 million. Ester Communications, provides local
exchange, long distance and integrated voice and data products. Cash of
approximately $2.0 million and 587,755 shares of common stock valued at
$4.25 per share were exchanged for the company. The Company also
purchased Information Services and Advertising Corporation, an internet
service provider, for a total purchase price of $800,000. Cash of
$300,000 and 117,647 shares valued at $4.25 per share of common stock
were exchanged for the company. The acquisitions were accounted for using
the purchase method of accounting.
F-38
<PAGE> 192
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
In March 2000, the Company granted 750,000 common stock options to an
executive of the Company. The options vest over five years and have an
exercise price of $3.00, however the fair market value of the options at
date of grant was $4.25. As a result, the Company will record corporation
expense over the vesting period and has recorded $15,625 of compensation
expense for the three months ended March 31, 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. No amount were
outstanding under this term loan facility at March 31, 2000.
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 $749,998 note receivable
("note") agreement with an executive officer of the Company. This note
arose whereby the Company loaned the executive officer money to purchase
shares of the Company's Series C preferred stock at the then fair market
value. The note bears interest at 8.12%, matures on the third anniversary
of the note or sixty days after the effective date of the termination of
the executive officer's employment with the Company, and is
collateralized by shares of the Company's Series C preferred stock. The
receivable is shown on the balance sheet as a reduction of total
redeemable preferred stock.
On March 14, 2000, the Company entered into a $148,750 note receivable
("note") agreement with an executive officer of the Company. This note
arose whereby the Company loaned the executive officer money to purchase
shares of the Company's Series C preferred stock at the then fair market
value. The note bears interest at 10%, matures on the third anniversary
of the note or sixty days after the effective date of the termination of
the executive officer's employment with the Company, and is
collateralized by shares of the Company's Series C preferred stock. The
receivable is shown on the balance sheet as a reduction of total
redeemable preferred stock.
On March 15, 2000, the Company entered into an interest rate hedge
agreement ("agreement") with a $60 million notional amount related to its
borrowings under the credit facility. The purpose of the agreement is to
reduce its exposure to risks associated with interest rate fluctuations
and are required by the credit facility.
F-39
<PAGE> 193
STATE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(all information subsequent to December 31, 1999 is unaudited)
On April 14, 2000, the Company filed a registration statement with the
Securities and Exchange Commission in anticipation of a possible public
offering of equity securities. On June 9, 2000, the Company and Gabriel
Communications, Inc. entered into an Agreement and Plan of Merger to
combine the two companies to form a regional, facilities-based integrated
communications provider. The merger has been unanimously approved by the
Boards of Directors of both companies and stockholders holding more than
two-thirds of the voting stock of both companies have agreed to vote
their shares to approve the merger. Further action regarding the
registration statement is pending the contemplated merger with Gabriel
Communications, Inc.
F-40
<PAGE> 194
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") 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 bylaw,
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 DGCL
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 DGCL , 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 DGCL 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. Such 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
bylaw's indemnification provision.
II-1
<PAGE> 195
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 three months
ended March 31, 2000
Allowance for doubtful
accounts $ 15,602 $ 16,125 $ -- $ -- $ 31,727
--------------- --------------- ---------------- --------------- ----------------
Total valuation and
qualifying accounts $ 15,602 $ 16,125 $ -- $ -- $ 31,727
--------------- --------------- ---------------- --------------- ----------------
</TABLE>
ITEM 22. UNDERTAKINGS.
(A) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
II-2
<PAGE> 196
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> 197
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Chesterfield, State of Missouri, on the 7th day of July, 2000.
GABRIEL COMMUNICATIONS, INC.
By: /s/ John P. Denneen
-----------------------------------------
John P. Denneen
Executive Vice President - Corporate
Development and Legal Affairs
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
David L. Solomon and John P. Denneen, and each of them (with full power to each
of them to act alone), his or her true and lawful attorneys in fact and agents
for him or her and on his or her behalf and in his or her name, place and stead,
in any and all capacities to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with exhibits and any and all other documents filed with respect thereto, with
the Securities and Exchange Commission (or any other governmental or regulatory
authority), granting unto said attorneys, and each of them, full power and
authority to do and to perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as he or she might or could do if
personally present, hereby ratifying and confirming all that said attorneys in
fact and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
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 July 7, 2000
------------------------------ and Vice Chairman of the Board -----------------------
David L. Solomon Date
/s/ Robert A. Brooks Director and Chairman of July 7, 2000
------------------------------ the Board -----------------------
Robert A. Brooks Date
/s/ Gerard J. Howe President and Chief Operating July 7, 2000
------------------------------ Officer and Director -----------------------
Gerard J. Howe Date
/s/ Thomas P. Erickson Senior Vice President and Chief June 30, 2000
------------------------------ Financial Officer (Chief Accounting -----------------------
Thomas P. Erickson Officer) Date
/s/ John P. Denneen Executive Vice President - Corporate July 7, 2000
------------------------------ Development and Legal Affairs, -----------------------
John P. Denneen Secretary and Director Date
</TABLE>
II-4
<PAGE> 198
<TABLE>
<S> <C> <C>
/s/ Michael R. Hannon Director June 30, 2000
------------------------------ -----------------------
Michael R. Hannon Date
/s/ William Laverack, Jr. Director July 7, 2000
------------------------------ -----------------------
William Laverack, Jr. Date
/s/ Byron D. Trott Director July 7, 2000
------------------------------ -----------------------
Byron D. Trott Date
</TABLE>
II-5
<PAGE> 199
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 as 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 Bylaws 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 Amended and Restated Stockholders' Agreement dated as of March 31, 2000
among Gabriel and the stockholders of Gabriel.
4.5 Amended and Restated 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* Opinion of Bryan Cave LLP regarding tax matters.
8.2* 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 5-K, item 601(b)(2). The
registrant hereby undertakes to furnish such schedules to the Commission
supplementally upon request.
* To be filed by amendment.
<PAGE> 200
<TABLE>
<S> <C>
10.5 Amended and Restated State Communications Employee Incentive
Plan.
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
___________, 2000.
10.11* Employment Agreement between Gabriel and John P. Denneen dated
___________, 2000.
10.12* Employment Agreement between Gabriel and Marguerite A. Forrest
dated ___________, 2000.
10.13* Employment Agreement between Gabriel and Michael E. Gibson
dated ___________, 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.
</TABLE>
--------------------
* To be filed by amendment.
<PAGE> 201
<TABLE>
<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.
</TABLE>
<PAGE> 202
ANNEX A
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
GABRIEL COMMUNICATIONS, INC.,
TRIANGLE ACQUISITION, INC.
AND
STATE COMMUNICATIONS, INC.,
DATED AS OF
JUNE 9, 2000
================================================================================
<PAGE> 203
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I. TERMS OF THE MERGER....................................................................................1
1.1. The Merger...............................................................................1
1.2. Effective Time; Closing..................................................................2
1.3. Merger Consideration.....................................................................2
1.4. Stockholders' Rights upon Merger.........................................................5
1.5. Surrender and Exchange of Shares.........................................................5
1.6. Options and Warrants.....................................................................6
1.7. Certificate of Incorporation and Bylaws of Surviving Corporation.........................8
1.8. Certificate of Incorporation and Bylaws of Gabriel.......................................8
1.9. Other Effects of Merger..................................................................8
1.10. Directors and Officers of Gabriel and the Surviving Corporation.........................8
1.11. Registration Statement..................................................................8
1.12. Reorganization.........................................................................10
1.13. Additional Actions.....................................................................10
1.14. Reincorporation of TriVergent in Delaware..............................................10
ARTICLE II. REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS OF TRIVERGENT......................................10
2.1. Organization and Good Standing..........................................................10
2.2. Capitalization..........................................................................11
2.3. Subsidiaries............................................................................12
2.4. Authorization; Binding Agreement........................................................13
2.5. Governmental Approvals..................................................................13
2.6. No Violations...........................................................................14
2.7. Securities Filings; Litigation..........................................................14
2.8. TriVergent Financial Statements.........................................................15
2.9. Absence of Certain Changes or Events....................................................15
2.10. Compliance with Laws...................................................................16
2.11. Permits................................................................................16
2.12. Finders and Investment Bankers.........................................................16
2.13. Material Contracts.....................................................................16
2.14. TriVergent Employee Benefit Plans......................................................18
2.15. Taxes and Returns......................................................................19
2.16. No Undisclosed Liabilities.............................................................22
2.17. Environmental Matters..................................................................22
2.18. Intellectual Property..................................................................22
2.19. Real Estate............................................................................23
2.20. Corporate Records......................................................................23
2.21. Title to and Condition of Personal Property............................................24
2.22. No Adverse Actions.....................................................................24
2.23. Labor Matters..........................................................................24
</TABLE>
i
<PAGE> 204
<TABLE>
<S> <C>
2.24. Indebtedness to and from Officers, Directors and Others................................25
2.25. Insurance..............................................................................25
2.26. Takeover Statutes......................................................................25
2.27. Investment Company.....................................................................25
2.28. Fairness Opinion.......................................................................25
ARTICLE III. REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS OF GABRIEL........................................26
3.1. Organization and Good Standing..........................................................26
3.2. Capitalization..........................................................................26
3.3. Subsidiaries............................................................................27
3.4. Authorization; Binding Agreement........................................................27
3.5. Governmental Approvals..................................................................28
3.6. No Violations...........................................................................28
3.7. Litigation..............................................................................29
3.8. Gabriel Financial Statements............................................................29
3.9. Absence of Certain Changes or Events....................................................29
3.10. Compliance with Laws...................................................................30
3.11. Permits................................................................................30
3.12. Finders and Investment Bankers.........................................................30
3.13. Material Contracts.....................................................................30
3.14. Gabriel Employee Benefit Plans.........................................................32
3.15. Taxes and Returns......................................................................33
3.16. No Undisclosed Liabilities.............................................................35
3.17. Environmental Matters..................................................................35
3.18. Intellectual Property..................................................................35
3.19. Real Estate............................................................................36
3.20. Corporate Records......................................................................36
3.21. Title to and Condition of Personal Property............................................37
3.22. No Adverse Actions.....................................................................37
3.23. Labor Matters..........................................................................38
3.24. Indebtedness to and from Officers, Directors and Others................................38
3.25. Insurance..............................................................................38
3.26. Investment Company.....................................................................38
3.27. Fairness Opinion.......................................................................38
ARTICLE IV. ADDITIONAL COVENANTS OF TRIVERGENT...................................................................39
4.1. Conduct of Business of TriVergent and the TriVergent Subsidiaries.......................39
4.2. Notification of Certain Matters.........................................................42
4.3. Access and Information..................................................................42
4.4. Stockholder Approval....................................................................43
4.5. Reasonable Best Efforts.................................................................43
4.6. Public Announcements....................................................................43
4.7. Intentionally Omitted...................................................................43
4.8. Tax Treatment...........................................................................43
4.9. TriVergent Benefit Plans................................................................44
</TABLE>
ii
<PAGE> 205
<TABLE>
<S> <C>
4.10. No Solicitation of Acquisition Proposal................................................44
4.11. Securities and Stockholder Materials; Withdrawal of Form S 1...........................45
4.12. Takeover Statutes......................................................................45
4.13. Comfort Letters........................................................................46
ARTICLE V. ADDITIONAL COVENANTS OF GABRIEL.......................................................................46
5.1. Conduct of Business of Gabriel and the Gabriel Subsidiaries.............................46
5.2. Notification of Certain Matters.........................................................49
5.3. Access and Information..................................................................49
5.4. Stockholder Approval....................................................................50
5.5. Reasonable Best Efforts.................................................................50
5.6. Public Announcements....................................................................50
5.7. Intentionally Omitted...................................................................50
5.8. Tax Treatment...........................................................................50
5.9. Indemnification.........................................................................50
5.10. Employee Benefit Plans.................................................................51
5.11. Offers of Employment...................................................................52
5.12. No Solicitation of Acquisition Proposal................................................52
5.13. Gabriel Charter Amendment..............................................................53
5.14. Comfort Letters........................................................................53
5.15. Gabriel Series B Preferred Capital Calls...............................................53
ARTICLE VI. CONDITIONS...........................................................................................53
6.1. Conditions to Each Party's Obligations..................................................53
6.1.1. Stockholder Approvals...........................................................53
6.1.2. No Injunction or Action.........................................................53
6.1.3. Governmental Approvals..........................................................54
6.1.4. HSR Act.........................................................................54
6.1.5. Registration Statement..........................................................54
6.1.6. Blue Sky........................................................................54
6.1.7. Consents of Certain Third Parties...............................................54
6.2. Conditions to Obligations of TriVergent.................................................54
6.2.1. Gabriel Representations and Warranties..........................................54
6.2.2. Performance by Gabriel..........................................................55
6.2.3. Certificates and Other Deliveries...............................................55
6.2.4. Opinions of Gabriel Counsel.....................................................55
6.2.5. Tax Opinion.....................................................................55
6.2.6. Required Third Party Consents...................................................55
6.3. Conditions to Obligations of Gabriel and Acquisition Subsidiary.........................55
6.3.1. TriVergent Representations and Warranties.......................................55
6.3.2. Performance by TriVergent.......................................................56
6.3.3. Certificates and Other Deliveries...............................................56
6.3.4. Opinions of TriVergent Counsel..................................................56
6.3.5. Tax Opinion.....................................................................56
6.3.6. Required Third Party Consents...................................................56
6.3.7. Gabriel Option Agreements.......................................................56
</TABLE>
iii
<PAGE> 206
<TABLE>
<S> <C>
ARTICLE VII. TERMINATION AND ABANDONMENT.........................................................................57
7.1. Termination....................................................................................57
7.2. Procedure Upon Termination.....................................................................58
ARTICLE VIII. MISCELLANEOUS......................................................................................58
8.1. Confidentiality................................................................................58
8.2. Amendment and Modification.....................................................................59
8.3. Waiver of Compliance; Consents.................................................................59
8.4. Survival of Representations and Warranties.....................................................59
8.5. Notices........................................................................................59
8.6. Binding Effect; Assignment.....................................................................60
8.7. Expenses.......................................................................................60
8.8. Governing Law..................................................................................60
8.9. Counterparts...................................................................................60
8.10. Interpretation................................................................................60
8.11. Entire Agreement..............................................................................61
8.12. Severability..................................................................................61
8.13. Specific Performance..........................................................................61
8.14. Third Parties.................................................................................61
8.15. Schedules.....................................................................................61
</TABLE>
List of Exhibits:
A. Form of TriVergent Voting Agreement
B. Form of Gabriel Voting Agreement
iv
<PAGE> 207
LIST OF SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
-------- -----------
<S> <C>
1.1 Forms of Certificate of Merger and Articles of Merger
1.3(a) Exchange Ratio Calculation
1.3(b)(ii) Form of Gabriel $6.00 Warrants
1.3(b)(iii) Form of Gabriel $10.25 Warrants
1.3(d) Accrued and Unpaid Dividends
1.5(a) Letter of Transmittal
1.5(b) TriVergent Employee Stockholders
1.6(a) Forms of Gabriel Options
1.6(d) Option Agreement
1.8(a) Gabriel Charter Amendment
1.8(b) Gabriel Bylaws
1.10 Directors and Officers of Gabriel and the Surviving Corporation
2.1(b) Foreign Qualifications of TriVergent and TriVergent Subsidiaries
2.2(b) Rights to Purchase TriVergent Stock; List of TriVergent Options
2.2(d) TriVergent Voting Agreements
2.2(c) TriVergent Stock Transfer Ledger
2.3(a) TriVergent Subsidiaries
2.5 Governmental Authority Consents
2.6 TriVergent Required Consents
2.7 TriVergent Litigation
2.8 TriVergent Financial Statements
2.9 TriVergent Subsequent Events
2.13 TriVergent Material Contracts
2.14 TriVergent Employee Benefit Plans
2.15 TriVergent Tax Matters
2.17 TriVergent Environmental Matters
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
-------- -----------
<S> <C>
2.18 TriVergent Intellectual Property
2.19(a) TriVergent Owned Real Property
2.19(b) TriVergent Leased Real Property
2.20 TriVergent Records Off Premises
2.22 TriVergent Adverse Actions
2.23 TriVergent Labor Matters
2.24 TriVergent Indebtedness to and from Officers, Directors and Others
2.25 TriVergent Insurance
3.1(a) States of Incorporation and Foreign Qualifications of Gabriel and Gabriel Subsidiaries
3.2(b) Rights to Purchase Gabriel Stock
3.2(c) Gabriel Voting Agreements
3.3(a) Gabriel Subsidiaries
3.5 Governmental Authority Consents
3.6 Gabriel Required Consents
3.7 Gabriel Litigation
3.8 Gabriel Financial Statements
3.9 Gabriel Subsequent Events
3.13 Gabriel Material Contracts
3.14 Gabriel Employee Benefit Plans
3.15 Gabriel Tax Matters
3.17 Gabriel Environmental Matters
3.18 Gabriel Intellectual Property
3.19(a) Gabriel Owned Real Property
3.19(b) Gabriel Leased Real Property
3.20 Gabriel Records Off Premises
3.22 Gabriel Adverse Actions
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
-------- -----------
<S> <C>
3.23 Gabriel Labor Matters
3.24 Gabriel Indebtedness to and from Officers, Directors and Others
3.25 Gabriel Insurance
4.1 Actions by TriVergent Not Requiring Consent
5.1 Actions by Gabriel Not Requiring Consent
5.1(vii) Employment Agreements with Gabriel Executive Officers
5.10(b) TriVergent Change in Control Plans and Agreements
5.10(d) Contracts and Commitments to TriVergent Employees and Directors
6.2.4 Forms of Opinions of Counsel to Gabriel
6.2.6 TriVergent Closing Condition Consents
6.3.4 Forms of Opinions of Counsel to TriVergent
6.3.6 Gabriel Closing Condition Consents
</TABLE>
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GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
Section Where
Term Defined
---- ---------
<S> <C>
Acquisition Subsidiary...................................................................................Recitals
Affiliate....................................................................................................8.10
Agreement................................................................................................Recitals
Articles of Merger............................................................................................1.1
Benefit Plan..............................................................................................2.14(a)
Certificate of Merger.........................................................................................1.1
Certificates...............................................................................................1.4(a)
Claim Notice.................................................................................................2.18
Closing.......................................................................................................1.2
Closing Date..................................................................................................1.2
Code.....................................................................................................Recitals
Consent.......................................................................................................2.5
Delaware Code.................................................................................................1.1
Dissenting Shares..........................................................................................1.4(b)
Effective Time................................................................................................1.2
Enforceability Exceptions.....................................................................................2.4
Environmental Laws...........................................................................................2.17
Environmental Permits........................................................................................2.17
ERISA.....................................................................................................2.14(a)
Event......................................................................................................2.9(a)
Exchange Ratio.............................................................................................1.3(a)
Gabriel..................................................................................................Recitals
Gabriel $6.00 Warrants.................................................................................1.3(b)(ii)
Gabriel $10.25 Warrants...............................................................................1.3(b)(iii)
Gabriel Acquisition Agreement.............................................................................5.12(b)
Gabriel Acquisition Proposal..............................................................................5.12(a)
Gabriel Balance Sheet Date..............................................................................3.8(a)(i)
Gabriel Business Plan.....................................................................................5.1(iv)
Gabriel Charter Amendment..................................................................................1.8(a)
Gabriel Common Stock.......................................................................................1.3(a)
Gabriel Credit Agreement.................................................................................5.1(xvi)
Gabriel Financial Statements...........................................................................3.8(a)(ii)
Gabriel Material Adverse Effect............................................................................3.1(b)
Gabriel Material Contract....................................................................................3.13
Gabriel Minority Entity.......................................................................................3.3
Gabriel Options............................................................................................1.6(a)
Gabriel Permits..............................................................................................3.11
Gabriel Preferred Stock....................................................................................3.2(a)
Gabriel Real Property Leases..............................................................................3.19(b)
Gabriel Registration Rights Agreement......................................................................1.5(b)
Gabriel Securities........................................................................................1.11(a)
Gabriel Series A Preferred Stock...........................................................................3.2(a)
Gabriel Series A-1 Preferred Stock.........................................................................3.2(a)
</TABLE>
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<TABLE>
<S> <C>
Gabriel Series B Preferred Stock...........................................................................1.3(c)
Gabriel Series B Purchase Agreement........................................................................1.3(c)
Gabriel Series C Preferred Stock........................................................................1.3(b)(i)
Gabriel Series C-1 Preferred Stock......................................................................1.3(b)(i)
Gabriel Series C-2 Preferred Stock......................................................................1.3(b)(i)
Gabriel Series C-3 Preferred Stock......................................................................1.3(b)(i)
Gabriel Shareholders Agreement.............................................................................1.5(b)
Gabriel Stockholder Approval..................................................................................5.4
Gabriel Stockholders' Agreement............................................................................1.5(b)
Gabriel Subsidiaries......................................................................................1.11(c)
Gabriel Voting Agreement.................................................................................Recitals
Governmental Authority........................................................................................2.5
HSR Act.......................................................................................................2.5
Intellectual Property........................................................................................2.18
IRS.......................................................................................................2.14(b)
Law...........................................................................................................2.6
Letter of Transmittal......................................................................................1.5(a)
Litigation.................................................................................................2.7(b)
Merger...................................................................................................Recitals
Merger Consideration.......................................................................................1.3(b)
Multi-Employer Plan.......................................................................................2.14(a)
Option Agreement...........................................................................................1.6(d)
Person.......................................................................................................8.10
Prospectus/Information Statement..........................................................................1.11(a)
Registration Statement....................................................................................1.11(a)
SEC.......................................................................................................1.11(a)
Securities Act............................................................................................1.11(a)
South Carolina Code...........................................................................................1.1
State Communications Plan..................................................................................1.6(b)
Subsidiary...................................................................................................8.10
Surviving Corporation.........................................................................................1.1
Surviving Corporation Common Stock.........................................................................1.3(h)
Surviving Corporation Material Adverse Effect.................................................................2.6
Takeover Statute.............................................................................................2.26
Tax.......................................................................................................2.15(a)
Tax Return................................................................................................2.15(a)
Total Committed Capital....................................................................................1.3(c)
Total Invested Capital.....................................................................................1.3(c)
TriVergent...............................................................................................Recitals
TriVergent Acquisition Agreement..........................................................................4.10(b)
TriVergent Acquisition Proposal...........................................................................4.10(a)
TriVergent Balance Sheet Date...........................................................................2.8(a)(i)
TriVergent Business Plan..................................................................................4.1(iv)
TriVergent Change in Control Plans and Agreements.........................................................5.10(b)
TriVergent Common Stock....................................................................................1.3(a)
TriVergent Credit Agreements................................................................................6.1.7
TriVergent Financial Statements........................................................................2.8(a)(ii)
</TABLE>
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<TABLE>
<S> <C>
TriVergent Form S-1........................................................................................2.7(a)
TriVergent Material Adverse Effect.........................................................................2.1(b)
TriVergent Material Contract.................................................................................2.13
TriVergent Minority Entity....................................................................................2.3
TriVergent Options.........................................................................................1.6(a)
TriVergent Permits...........................................................................................2.11
TriVergent Plan............................................................................................1.6(b)
TriVergent Preferred Stock.................................................................................1.3(b)
TriVergent Real Property Leases...........................................................................2.19(b)
TriVergent Series A Preferred Stock........................................................................1.3(b)
TriVergent Series B Preferred Stock........................................................................1.3(b)
TriVergent Series C Preferred Stock........................................................................1.3(b)
TriVergent Shares..........................................................................................1.3(b)
TriVergent Stockholder Approval...............................................................................4.4
TriVergent Subsidiaries...................................................................................1.11(b)
TriVergent Voting Agreement..............................................................................Recitals
</TABLE>
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement") is made and entered
into as of June 9, 2000, by and among Gabriel Communications, Inc., a Delaware
corporation ("Gabriel"), Triangle Acquisition, Inc., a Delaware corporation and
wholly owned direct subsidiary of Gabriel ("Acquisition Subsidiary"), and State
Communications, Inc., a South Carolina corporation ("TriVergent").
Recitals
A. The respective Boards of Directors of TriVergent, Gabriel and
Acquisition Subsidiary have approved the merger (the "Merger") of TriVergent
with and into Acquisition Subsidiary in accordance with the terms and conditions
of this Agreement.
B. TriVergent, Acquisition Subsidiary and Gabriel desire to make
certain representations, warranties and agreements in connection with, and
establish various conditions precedent to, the Merger.
C. As a condition and inducement to Gabriel and Acquisition
Subsidiary entering into this Agreement, concurrently with the execution and
delivery of this Agreement, certain stockholders of TriVergent have entered into
a Voting Agreement dated as of the date hereof and attached hereto as Exhibit A
(the "TriVergent Voting Agreement"), pursuant to which such stockholders have
agreed, among other things, to vote their shares of common stock and preferred
stock of TriVergent in favor of the Merger.
D. As a condition and inducement to TriVergent entering into this
Agreement, concurrently with the execution and delivery of this Agreement,
certain stockholders of Gabriel have entered into a Voting Agreement dated as of
the date hereof and attached hereto as Exhibit B (the "Gabriel Voting
Agreement"), pursuant to which such stockholders have agreed, among other
things, to vote their shares of common stock and preferred stock of Gabriel in
favor of the acquisition by Gabriel of TriVergent by means of the Merger and in
favor of the Gabriel Charter Amendment.
E. The parties hereto intend that, for federal income tax
purposes, the Merger be treated as a reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "Code").
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements hereinafter set forth, the
parties hereto agree as follows:
ARTICLE I.
TERMS OF THE MERGER
1.1. THE MERGER. Upon the terms and subject to the conditions of
this Agreement, the Merger shall be consummated in accordance with the General
Corporation Law of the State of
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Delaware (the "Delaware Code") and the South Carolina Business Corporation Act
of 1988 (the "South Carolina Code"). At the Effective Time (as defined in
Section 1.2, below), upon the terms and subject to the conditions of this
Agreement, TriVergent shall be merged with and into Acquisition Subsidiary in
accordance with the Delaware Code and the South Carolina Code, and the separate
existence of TriVergent shall thereupon cease, and Acquisition Subsidiary, as
the surviving corporation in the Merger (the "Surviving Corporation"), shall
continue its corporate existence under the Laws of the State of Delaware as a
subsidiary of Gabriel under the corporate name of TriVergent Corporation. The
parties shall prepare and execute a certificate of merger (the "Certificate of
Merger") and articles of merger (the "Articles of Merger") in substantially the
forms attached hereto as Schedule 1.1 in order to comply in all respects with
the requirements of the Delaware Code and the South Carolina Code and with the
provisions of this Agreement.
1.2. EFFECTIVE TIME; CLOSING. The Merger shall become effective at
the time of the later of the filing of the Certificate of Merger with the
Secretary of State of Delaware in accordance with the applicable provisions of
the Delaware Code or the filing of the Articles of Merger with the Secretary of
State of South Carolina in accordance with the applicable provisions of the
South Carolina Code, or at such later time as may be specified in the
Certificate of Merger and Articles of Merger (the time the Merger becomes
effective, the "Effective Time"). The Certificate of Merger and the Articles of
Merger shall be filed on the Closing Date or as soon as practicable thereafter.
The Merger (the "Closing") shall take place at the offices of Bryan Cave LLP,
St. Louis, Missouri, at 10:00 a.m. on the second business day following the
satisfaction (or, to the extent permitted by Law, waiver by all parties) of the
conditions set forth in Section 6.1 or, if on such day any condition set forth
in Section 6.2 or 6.3 has not been satisfied (or, to the extent permitted by
Law, waived by the party or parties entitled to the benefits thereof), as soon
as practicable after all the conditions set forth in Article VI have been
satisfied (or, to the extent permitted by Law, waived by the parties entitled to
the benefits thereof), or at such other place, time and date as shall be agreed
in writing between Gabriel and TriVergent, and the date on which the Closing
shall occur is herein referred to as the "Closing Date."
1.3. MERGER CONSIDERATION. (a) Subject to Section 1.3(e), Section
1.3(f) and Section 1.4(b) and any applicable backup or other withholding
requirements, each of the issued and outstanding shares of common stock, par
value $0.001 per share, of TriVergent ("TriVergent Common Stock") as of the
Effective Time shall be converted into and become the right to receive, and
there shall be paid and issued as hereinafter provided, in exchange for such
share of TriVergent Common Stock, 1.0984 (the "Exchange Ratio") shares of the
common stock of Gabriel, par value $0.01 per share ("Gabriel Common Stock").
Schedule 1.3(a) attached hereto describes the assumptions underlying the
computation of the Exchange Ratio and illustrates how it was computed.
(b) Subject to Section 1.3(f) and Section 1.4(b), each of the
issued and outstanding shares of Series A Convertible Preferred Stock, par value
$0.01 per share, of TriVergent ("TriVergent Series A Preferred Stock"), Series B
Convertible Preferred Stock, par value $0.01 per share, of TriVergent
("TriVergent Series B Preferred Stock"), and Series C Convertible Preferred
Stock, par value $0.01 per share, of TriVergent ("TriVergent Series C Preferred
Stock" and, together with the TriVergent Series A Preferred Stock and the
TriVergent Series B Preferred Stock, the "TriVergent Preferred Stock") as of the
Effective Time, including shares issued
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pursuant to Section 1.3(d), below, shall be converted into and become the right
to receive, and there shall be paid and issued as hereinafter provided, in
exchange for such shares of TriVergent Preferred Stock,
(i) that number of shares of the Series C-1 Preferred Stock
of Gabriel, par value $0.01 per share ("Gabriel Series C-1 Preferred Stock"),
the Series C-2 Preferred Stock of Gabriel, par value $0.01 per share ("Gabriel
Series C-2 Preferred Stock"), and the Series C-3 Preferred Stock of Gabriel, par
value $0.01 per share ("Gabriel Series C-3 Preferred Stock" and, together with
the Gabriel Series C-1 Preferred Stock and the Gabriel Series C-2 Preferred
Stock, the "Gabriel Series C Preferred Stock"), respectively, as shall be
determined at the Exchange Ratio, the terms of which shall be as set forth in
the Gabriel Charter Amendment attached as Schedule 1.8(a) hereto.
(ii) warrants to purchase that number of shares of Gabriel
Common Stock at an exercise price of $6.00 per share, substantially in the form
set forth as Schedule 1.3(b)(ii) (the "Gabriel $6.00 Warrants") as shall be
determined in accordance with Section 1.3(c) below; and
(iii) warrants to purchase that number of shares of Gabriel
Common Stock at an exercise price of $10.25 per share, substantially in the form
set forth as Schedule 1.3(b)(iii) (the "Gabriel $10.25 Warrants"), as shall be
determined in accordance with Section 1.3(c) below.
Such shares of Gabriel Series C Preferred Stock, the Gabriel $6.00 Warrants and
the Gabriel $10.25 Warrants, together with the shares of Gabriel Common Stock
referred to in Section 1.3(a), are referred to herein as the "Merger
Consideration." The shares of TriVergent Common Stock and TriVergent Preferred
Stock entitled to be converted into the Merger Consideration are referred to
herein as the "TriVergent Shares."
(c) At the Effective Time, each holder of TriVergent Preferred
Stock and each holder of Gabriel Preferred Stock shall receive (A) Gabriel $6.00
Warrants to purchase that number of shares of Gabriel Common Stock as shall be
determined by multiplying 8,000,000 by a fraction, the numerator of which shall
equal the Total Invested Capital (as defined below) of such holder immediately
prior to the Effective Time and the denominator of which shall equal the sum of
the Total Invested Capital of all such holders at such time and the Total
Committed Capital (as defined below) of all holders of shares of the Series B
Preferred Stock of Gabriel, par value $0.01 per share ("Gabriel Series B
Preferred Stock") at such time (with the resulting number of shares being
rounded down to the nearest whole share), and (B) Gabriel $10.25 Warrants to
purchase that number of shares of Gabriel Common Stock as shall be determined by
multiplying 5,000,000 by a fraction, the numerator of which shall equal the
Total Invested Capital of such holder immediately prior to the Effective Time
and the denominator of which shall equal the sum of the Total Invested Capital
of all such holders at such time and the Total Committed Capital of all holders
of Gabriel Series B Preferred Stock at such time (with the resulting number of
shares being rounded down to the nearest whole share). As used herein, "Total
Invested Capital" shall mean the total dollar amount invested as of the
Effective Time in shares of TriVergent Preferred Stock or Gabriel Preferred
Stock, as the case may be, as shown on the books and records of TriVergent or
Gabriel, as the case may be, not including the accrued and unpaid dividends
invested in shares of TriVergent Preferred Stock pursuant to Section 1.3(d),
below. "Total
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Committed Capital" shall mean the total dollar amount committed as of the
Effective Time to be invested in shares of Gabriel Series B Preferred Stock
pursuant to the Securities Purchase Agreement dated as of March 31, 2000 by and
among Gabriel and purchasers of Gabriel Series B Preferred Stock (as amended
from time to time, the "Gabriel Series B Purchase Agreement"). After the
Effective Time and at such time as all or any portion of the Total Committed
Capital of each such holder of Gabriel Series B Preferred Stock is invested in
additional shares of Gabriel Series B Preferred Stock, such holder shall receive
additional Gabriel $6.00 Warrants and additional Gabriel $10.25 Warrants
allocated to such additional dollar amount invested as determined in accordance
with the formulas set forth in clauses (A) and (B) above, provided that Total
Invested Capital and Total Committed Capital shall be revised only to reflect
such additional investments by such holders.
(d) TriVergent shall issue, immediately prior to the Effective
Time, additional shares of TriVergent Series A Preferred Stock, TriVergent
Series B Preferred Stock and TriVergent Series C Preferred Stock or, to the
extent there are not sufficient authorized shares of TriVergent Preferred Stock,
TriVergent Common Stock representing payment in full of all accrued and unpaid
dividends on each such series of TriVergent Preferred Stock as of July 31, 2000
(or, if the Effective Time is later than August 31, 2000, as of August 31, 2000)
as set forth on Schedule 1.3(d), which shares shall be deemed outstanding for
purposes of determining the portion of the Merger Consideration payable in
accordance with Section 1.3(b) above. Notwithstanding any provision to the
contrary in the Articles of Incorporation of TriVergent or any other agreement
with respect to the issuance or otherwise affecting the rights of the holders of
the TriVergent Preferred Stock, holders of TriVergent Preferred Stock shall not
be entitled to any dividends, and no dividends on any such series of TriVergent
Preferred Stock shall be deemed to have accrued during or been payable for any
period of time after July 31, 2000 or August 31, 2000, as the case may be.
(e) The Exchange Ratio shall be subject to appropriate adjustment
in the event of
(i) a stock split, stock dividend or recapitalization
after the date of this Agreement applicable to shares of the Gabriel Common
Stock or the TriVergent Common Stock, or
(ii) the issuance of additional shares of capital stock,
options, warrants or other securities convertible into or exchangeable for
shares of capital stock of TriVergent or Gabriel occurring prior to the
Effective Time in accordance with Section 4.1(ii) hereof (except for issuances
of shares permitted under clauses (a) and (b) of such Section) or Section
5.1(ii) hereof (except for issuances of shares permitted under clause (a) of
such Section), including any shares of Gabriel Series B Preferred Stock which,
prior to the Effective Time, are issued or committed to be issued pursuant to
the Gabriel Series B Purchase Agreement to any "Additional Purchasers" (as
defined in the Gabriel Series B Purchase Agreement),
in each case on the same basis as set forth on Schedule 1.3(a) revised only to
reflect the change requiring the adjustment.
(f) No fractional shares of Gabriel Common Stock and Gabriel
Preferred Stock shall be issuable as part of the Merger Consideration in the
Merger nor will any fractional share interest
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involved entitle the holder thereof to vote, to receive dividends or to exercise
any other rights of a stockholder of Gabriel. In lieu thereof, any Person who
would otherwise be entitled to a fractional share of Gabriel Common Stock or
Gabriel Series C Preferred Stock, as the case may be, pursuant to Section 1.3(a)
or Section 1.3(b) shall receive an amount of cash equal to the product of such
fraction multiplied by $7.00.
(g) Each share of TriVergent Common Stock and TriVergent Preferred
Stock held in the treasury of TriVergent or by a wholly owned subsidiary of
TriVergent shall be canceled as of the Effective Time, and no Merger
Consideration shall be payable with respect thereto. From and after the
Effective Time, there shall be no further transfers on the stock transfer books
of TriVergent of any of the TriVergent Common Stock or TriVergent Preferred
Stock outstanding at the Effective Time.
(h) At the Effective Time, the shares of Acquisition Subsidiary
common stock outstanding immediately prior to the Merger shall constitute all of
the issued and outstanding capital stock of the Surviving Corporation (the
"Surviving Corporation Common Stock").
1.4. STOCKHOLDERS' RIGHTS UPON MERGER. (a) Upon consummation of the
Merger, certificates that immediately prior to the Effective Time represented
outstanding shares of TriVergent Common Stock or TriVergent Preferred Stock (the
"Certificates") shall cease to represent any rights with respect thereto, and,
subject to applicable Law (as hereinafter defined) and this Agreement, the
Certificates shall only represent the right to receive the Merger Consideration.
(b) To the extent that appraisal rights are available under
Section 33-13-102 of the South Carolina Code, shares of TriVergent Common Stock
and TriVergent Preferred Stock that are issued and outstanding immediately prior
to the Effective Time and that have not been voted for adoption of this
Agreement and with respect to which appraisal rights have been properly demanded
in accordance with Section 33-13-210 of the South Carolina Code (the "Dissenting
Shares") shall not be converted into the right to receive the Merger
Consideration at or after the Effective Time unless and until the holder of such
shares becomes ineligible for such appraisal. If a holder of Dissenting Shares
becomes ineligible for such appraisal, then, as of the Effective Time or the
occurrence of such event, whichever later occurs, such holder's Dissenting
Shares shall cease to be Dissenting Shares and shall be converted into and
represent the right to receive the Merger Consideration upon surrender of the
Certificates representing such Dissenting Shares in accordance with Section 1.5.
TriVergent shall give Gabriel prompt notice of any demand received by TriVergent
for appraisal of shares of TriVergent Common Stock and TriVergent Preferred
Stock. Except with the prior written consent of Gabriel or as may otherwise be
required under applicable Law, TriVergent shall not make any payment with
respect to, or settle or offer to settle, any such demands.
1.5. SURRENDER AND EXCHANGE OF SHARES. (a) As soon as practicable
after the Effective Time, Gabriel shall mail to each holder of record of a
Certificate(s) whose TriVergent Shares were converted into the right to receive
the Merger Consideration, as applicable, pursuant to Section 1.3 (i) a letter of
transmittal substantially in the form attached hereto as Schedule 1.5(a) (the
"Letter of Transmittal") and (ii) instructions for use in surrendering the
Certificates in
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exchange for the Merger Consideration. Upon such surrender and delivery of
Certificates for cancellation together with the Letter of Transmittal duly
executed, the holder shall receive a certificate representing the number of
whole shares of Gabriel Common Stock or Gabriel Series C Preferred Stock, the
Gabriel $6.00 Warrants and the Gabriel $10.25 Warrants, as the case may be, into
which such holder's TriVergent Shares have been converted pursuant to this
Agreement. Until so surrendered and exchanged, each outstanding Certificate
after the Effective Time shall be deemed for all purposes to evidence the right
to receive that number of whole shares of Gabriel Common Stock and Gabriel
Series C Preferred Stock and the Gabriel $6.00 Warrants and the Gabriel $10.25
Warrants into which the TriVergent Shares have been converted pursuant to this
Agreement; provided, however, that no dividends or other distributions, if any,
in respect of the shares of Gabriel Common Stock and Gabriel Series C Preferred
Stock, declared after the Effective Time and payable to holders of record after
the Effective Time, shall be paid to the holders of any unsurrendered
Certificates until such Certificates and Letters of Transmittal are surrendered
and delivered as provided herein. Subject to applicable Law, after the surrender
and exchange of Certificates, the record holders thereof will be entitled to
receive any such dividends or other distributions without interest thereon,
which theretofore have become payable with respect to the number of shares of
Gabriel Common Stock and Gabriel Series C Preferred Stock for which such
Certificates were exchangeable. Holders of any unsurrendered Certificates shall
not be entitled to vote Gabriel Common Stock or Gabriel Series C Preferred Stock
until such Certificates are exchanged pursuant to this Agreement.
(b) By execution and delivery of the Letter of Transmittal
pursuant to Section 1.5(a) hereof, each holder of a Certificate surrendered and
exchanged for the Merger Consideration shall agree, as a condition to the
issuance of the Merger Consideration, to acquire the Gabriel Securities (as
hereinafter defined) subject to the restrictions contained in, and to become a
party to, the Amended and Restated Stockholders' Agreement dated as of March 31,
2000 by and among Gabriel and its stockholders (the "Gabriel Stockholders'
Agreement"), the Amended and Restated Registration Rights Agreement dated as of
March 31, 2000 by and among Gabriel and its stockholders (the "Gabriel
Registration Rights Agreement"), and, with respect to each such holder
identified on Schedule 1.5(b) hereto, each of whom TriVergent represents and
warrants to Gabriel is an employee of TriVergent, the 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 (the "Gabriel Shareholders
Agreement").
1.6. OPTIONS AND WARRANTS. (a) At the Effective Time, each
then-outstanding and unexercised warrant or option exercisable for shares of
TriVergent Common Stock ("TriVergent Options") shall, by virtue of the Merger,
cease to be a warrant or option, as the case may be, to acquire shares of
TriVergent Common Stock and, upon surrender thereof, each holder of a TriVergent
Option shall be entitled to receive a warrant or option, respectively, in the
forms set forth in Schedule 1.6(a) attached hereto (the "Gabriel Options"), to
acquire on the same terms and conditions as the TriVergent Options (including
such terms and conditions as may be incorporated by reference into the
agreements evidencing TriVergent Options pursuant to the plans under which such
TriVergent Options were granted and taking into account the provisions of this
Section 1.6), the number of shares of Gabriel Common Stock (rounded down to the
nearest whole share) determined by multiplying the number of shares of
TriVergent Common Stock subject to such TriVergent Option by the Exchange Ratio,
at an exercise price per share of
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Gabriel Common Stock (rounded up to the nearest whole cent) equal to the
exercise price per share of such TriVergent Option divided by the Exchange
Ratio.
(b) The Gabriel Options issued to any TriVergent employee holding
TriVergent Options constituting "incentive stock options" (as defined in Section
422 of the Code) or non-qualified stock options granted pursuant to the
TriVergent Corporation Employee Incentive Plan, as amended through May 11, 2000
(including its predecessor plans, the "TriVergent Plan") who acknowledges and
agrees that the Merger and the other transactions contemplated by this Agreement
shall not be treated as an event resulting in acceleration of exercise rights
under the TriVergent Plan shall contain a three year vesting schedule from the
date of original grant and shall fully vest and be fully exercisable in
accordance with their terms in the event of (i) a diminution or reduction of
such holder's responsibilities, position, authority, duties or compensation
(from those in effect immediately prior to the Effective Time), (ii) a
relocation of fifty (50) miles or more of such employee's work location or (iii)
a termination of the employment of such employee without cause, in each case of
clauses (i), (ii) and (iii), which occurs within one year following the
Effective Time; provided, however, that none of the events specified in clauses
(i) or (ii) above will result in full vesting unless such holder notifies
Gabriel of such holder's desire to obtain full vesting no later than sixty (60)
days after the earlier of the date on which such holder actually became aware of
or reasonably should have become actually aware of the occurrence of such event
or the date on which Gabriel has provided such holder notice of such event, and
Gabriel fails to cure the same within thirty (30) days after Gabriel's receipt
of such holder's notice.
(c) TriVergent confirms that the Gabriel Options issuable in
accordance with the terms and conditions set forth in this Section 1.6
constitute substitute or adjusted options for the TriVergent Options on the same
terms and conditions except as provided in this Section 1.6, and the respective
Boards of Directors of TriVergent and Gabriel shall take all steps necessary to
implement the foregoing. Gabriel shall 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 reserve for issuance a sufficient number
of shares of Gabriel Common Stock for delivery upon the exercise of Gabriel
Options after the Effective Time.
(d) As soon as practicable after the date of effectiveness of the
Registration Statement (as hereinafter defined) and subject to Section 1.11
hereof, TriVergent and Gabriel shall deliver to each of the holders of
TriVergent Options the Prospectus/Information Statement (as hereinafter defined)
and, with respect to employees of TriVergent who hold incentive stock options or
non-qualified stock options who are not listed in Schedule 5.10(b), a form of
agreement, in the form set forth in Schedule 1.6(d) attached hereto (the "Option
Agreement"), providing for the acknowledgment and agreement of each such holder
that the Merger and the other transactions contemplated by this Agreement shall
not be treated as an event resulting in the acceleration of exercise rights
under the TriVergent Plan and instructions for use in surrendering the
TriVergent Options. Any holder of TriVergent Options who does not complete or
return such Option Agreement on or prior to the Effective Time shall be deemed
to have refused to provide the agreement and acknowledgment described in Section
1.6(b), above.
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1.7. CERTIFICATE OF INCORPORATION AND BYLAWS OF SURVIVING
CORPORATION. At the Effective Time, the Certificate of Incorporation of
Acquisition Subsidiary as in effect immediately prior to the Effective Time
shall be the Certificate of Incorporation of the Surviving Corporation, until
thereafter amended as provided therein or by applicable Law. At the Effective
Time, the Bylaws of Acquisition Subsidiary in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation, until
thereafter amended as provided therein or by applicable Law.
1.8. CERTIFICATE OF INCORPORATION AND BYLAWS OF GABRIEL. At the
Effective Time and subject to the terms and conditions of this Agreement and the
Delaware Code, Gabriel shall cause the Amended and Restated Certificate of
Incorporation of Gabriel to be amended and restated in the form set forth on
Schedule 1.8(a) attached hereto. Such amendment and restatement of the Amended
and Restated Certificate of Incorporation of Gabriel is referred to herein as
the "Gabriel Charter Amendment." A true and complete copy of the Bylaws of
Gabriel is attached hereto as Schedule 1.8(b).
1.9. OTHER EFFECTS OF MERGER. The Merger shall have all further
effects as specified in the applicable provisions of the Delaware Code and the
South Carolina Code.
1.10. DIRECTORS AND OFFICERS OF GABRIEL AND THE SURVIVING
CORPORATION. The individuals listed on Schedule 1.10 attached hereto shall be
the directors and officers of Gabriel and the Surviving Corporation,
respectively, until their successors shall have been duly elected and qualified
or until their earlier death, resignation or removal.
1.11. REGISTRATION STATEMENT. (a) For the purposes of registering
the issuance of the shares of Gabriel Common Stock and Gabriel Series C
Preferred Stock, the Gabriel $6.00 Warrants, the Gabriel $10.25 Warrants and the
Gabriel Options (collectively, the "Gabriel Securities") to holders of the
TriVergent Shares and the TriVergent Options and, in the case of such Warrants,
to the holders of Gabriel Preferred Stock in connection with the Merger with the
Securities and Exchange Commission ("SEC") under the Securities Act of 1933 and
the rules and regulations thereunder (the "Securities Act"), and complying with
applicable state securities Laws, Gabriel and TriVergent will cooperate in the
preparation of a registration statement on Form S-4 under the Securities Act
(such registration statement, together with any and all amendments and
supplements thereto, being herein referred to as the "Registration Statement"),
including a prospectus/information statement satisfying all requirements of
applicable state securities Laws and the Securities Act. Such
prospectus/information statement in the form delivered to TriVergent's
stockholders, the holders of the TriVergent Options and Gabriel's stockholders,
together with any and all amendments or supplements thereto, is herein referred
to as the "Prospectus/Information Statement."
(b) TriVergent will furnish Gabriel with such information
concerning TriVergent and its Subsidiaries (the "TriVergent Subsidiaries") as is
necessary in order to cause the Prospectus/Information Statement, insofar as it
relates to TriVergent and the TriVergent Subsidiaries, to comply in all material
respects with the requirements of the Securities Act applicable to a
registration statement on Form S-4. None of the information relating to
TriVergent and the TriVergent Subsidiaries supplied by TriVergent for inclusion
in the
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Prospectus/Information Statement will contain an untrue statement of material
fact or will omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. TriVergent agrees promptly to advise
Gabriel if, at any time prior to the Closing, any information provided by it in
the Prospectus/Information Statement is or becomes incorrect or incomplete in
any material respect and to provide Gabriel with the information needed to
correct such inaccuracy or omission. TriVergent will furnish Gabriel with such
supplemental information as may be necessary in order to cause the
Prospectus/Information Statement, insofar as it relates to TriVergent and the
TriVergent Subsidiaries, to continue to comply with the applicable provisions of
the Securities Act after the delivery thereof to the stockholders of TriVergent
and holders of the TriVergent Options. TriVergent shall cooperate with Gabriel
in the prompt filing with the SEC of any necessary amendment or supplement to
the Registration Statement and, as required by Law, in disseminating such
information to TriVergent's and Gabriel's stockholders.
(c) None of the information relating to Gabriel and its
Subsidiaries (the "Gabriel Subsidiaries") supplied by Gabriel for inclusion in
the Prospectus/Information Statement will contain an untrue statement of
material fact or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Gabriel agrees
promptly to advise TriVergent if, at any time prior to the Closing, any
information provided by it in the Prospectus/Information Statement is or becomes
incorrect or incomplete in any material respect and to provide TriVergent with
the information needed to correct such inaccuracy or omission. Gabriel will
furnish TriVergent with such supplemental information as may be necessary in
order to cause the Prospectus/Information Statement, insofar as it relates to
Gabriel and the Gabriel Subsidiaries, to continue to comply with the applicable
provisions of the Securities Act after the delivery thereof to the stockholders
of TriVergent. Gabriel shall cooperate with TriVergent in the prompt filing with
the SEC of any necessary amendment or supplement to the Registration Statement
and, as required by Law, in disseminating such information to TriVergent's and
Gabriel's stockholders.
(d) As soon as practicable after the date of this Agreement,
Gabriel will file the Registration Statement with the SEC and appropriate
materials with applicable state securities agencies. Each of TriVergent and
Gabriel will use its reasonable best efforts to respond as promptly as
practicable to any comments of the SEC with respect to the Registration
Statement and will use all reasonable efforts to cause the Registration
Statement to become effective under the Securities Act, to deliver to its
respective stockholders and, in the case of TriVergent, the holders of the
TriVergent Options, and to cause all such state-filed materials to comply with
applicable state securities Laws, in each case, as promptly as practicable.
TriVergent authorizes Gabriel to utilize in the Registration Statement and in
all such state-filed materials, the information concerning TriVergent and the
TriVergent Subsidiaries provided to Gabriel in connection with, or contained in,
the Prospectus/Information Statement. Gabriel promptly will advise TriVergent
when the Registration Statement has become effective and of any supplements or
amendments thereto, and Gabriel will furnish TriVergent with copies of all such
documents. TriVergent shall not distribute any written material that might
constitute a "prospectus" relating to the Merger or Gabriel Securities within
the meaning of the Securities Act or any applicable state securities Law without
the prior written consent of Gabriel.
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1.12. REORGANIZATION. The parties intend that the Merger qualify as
a reorganization pursuant to Section 368 of the Code. The parties hereto hereby
adopt this Agreement as a "plan of reorganization" within the meaning of Section
1.368-2(g) of the Treasury regulations. None of the parties will knowingly take
any action that would cause the Merger to fail to qualify as a reorganization
within the meaning of Section 368 of the Code.
1.13. ADDITIONAL ACTIONS. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances, consents or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of Acquisition Subsidiary, TriVergent or the
TriVergent Subsidiaries or otherwise to carry out this Agreement, the officers
and directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of Acquisition Subsidiary, TriVergent or the
TriVergent Subsidiaries, as the case may be, all such deeds, bills of sale,
assignments and assurances and to take and do, in the name and on behalf of
Acquisition Subsidiary, TriVergent or the TriVergent Subsidiaries, as the case
may be, all such other actions and things as may be necessary or desirable to
vest, perfect or confirm any and all right, title and interest in, to and under
such rights, properties or assets in the Surviving Corporation and its
subsidiaries or otherwise to carry out this Agreement.
1.14. REINCORPORATION OF TRIVERGENT IN DELAWARE. The shareholders of
TriVergent have approved the merger of State Communications Inc. into a wholly
owned Delaware subsidiary of State Communications Inc. for the purpose of
reincorporating TriVergent in Delaware. Gabriel consents to such merger and
reincorporation and to the terms of the Certificate of Incorporation of the
resulting corporation, a copy of which has been provided to Gabriel. From and
after such merger and reincorporation, the resulting Delaware corporation shall
succeed to State Communications, Inc. as a party to this Agreement, shall be
"TriVergent" for all purposes of this Agreement, references to TriVergent Common
Stock, TriVergent Preferred Stock and other securities and agreements shall be
to such corporation's securities and agreements, it shall have made all
representations, warranties and covenants of TriVergent hereunder, and shall
succeed to all rights of TriVergent hereunder and any references herein to
"South Carolina" or the Laws of South Carolina shall be to Delaware and the
comparable Laws of the State of Delaware.
ARTICLE II.
REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS
OF TRIVERGENT
TriVergent represents, warrants and/or covenants to and with Gabriel as
follows:
2.1. ORGANIZATION AND GOOD STANDING.
(a) TriVergent is a corporation duly organized, validly
existing and in good standing under the Laws of the State of South Carolina.
Each of the TriVergent Subsidiaries is a
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corporation or limited liability company duly organized, validly existing and in
good standing under the Laws of the State of South Carolina.
(b) Each of TriVergent and the TriVergent Subsidiaries is
qualified to do business as a foreign corporation or, in the case of certain of
the TriVergent Subsidiaries, a foreign limited liability company in each
jurisdiction in which the failure to be so qualified would have a TriVergent
Material Adverse Effect. For purposes of this Agreement, "TriVergent Material
Adverse Effect" shall mean a material adverse effect on (i) the business,
assets, condition (financial or otherwise), properties, liabilities or the
results of operations of TriVergent and the TriVergent Subsidiaries, taken as a
whole, (ii) the ability of TriVergent to perform its obligations set forth in
this Agreement, or (iii) the ability of TriVergent to timely consummate the
transactions contemplated by this Agreement. Schedule 2.1(b) identifies each
jurisdiction in which TriVergent and each of the TriVergent Subsidiaries is
currently qualified to do business as a foreign corporation or foreign limited
liability company, as the case may be.
(c) TriVergent has delivered to Gabriel true and complete
copies of the Articles of Incorporation and Bylaws of TriVergent and the
Articles of Incorporation and Bylaws or the Articles of Organization and
Operating Agreements, as the case may be, of the TriVergent Subsidiaries,
including all amendments thereto, certified by the Secretary of TriVergent as
true and in full force and effect on the date hereof. The Articles of
Incorporation and Bylaws of TriVergent and the Articles of Incorporation and
Bylaws or the Articles of Organization and Operating Agreements, as the case may
be, of the TriVergent Subsidiaries will not be amended prior to the Closing
Date.
(d) TriVergent and the TriVergent Subsidiaries have all
corporate power or limited liability company power, as the case may be, and all
material governmental licenses, authorizations, consents and approvals required
to carry on their respective businesses as now being conducted and necessary to
own, operate and lease their properties and assets.
2.2. CAPITALIZATION.
(a) As of the date hereof, the authorized capital stock of
TriVergent consists of 100,000,000 shares of TriVergent Common Stock and
50,000,000 shares of TriVergent Preferred Stock, 4,791,668 of which have been
designated as Series A Convertible Preferred Stock, 14,133,329 of which have
been designated as Series B Convertible Preferred Stock and 15,776,471 of which
have been designated Series C Convertible Preferred Stock. Of such authorized
shares, as of the date hereof, there are issued and outstanding (i) 11,865,160
shares of TriVergent Common Stock, (ii) 4,711,672 shares of TriVergent Series A
Preferred Stock (4,852,308 shares, giving effect to the issuance of shares as of
July 31, 2000 pursuant to Section 1.3(d) above, assuming such shares are then
authorized), (iii) 13,866,663 shares of TriVergent Series B Preferred Stock
(14,241,537 shares, giving effect to the issuance of shares as of July 31, 2000
pursuant to Section 1.3(d) above, assuming such shares are then authorized), and
(iv) 15,776,471 shares of TriVergent Series C Preferred Stock (15,994,805
shares, giving effect to the issuance of shares as of July 31, 2000 pursuant to
Section 1.3(d) above, assuming such shares are then authorized). No shares of
TriVergent Common Stock or TriVergent Preferred Stock are issued and held in the
treasury of TriVergent, and no other capital stock of TriVergent is issued or
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outstanding. All issued and outstanding shares of capital stock of TriVergent
(including shares issuable pursuant to Section 1.3(d) above) have been duly
authorized, are or will be, as the case may be, validly issued and outstanding,
fully paid and nonassessable and were or will be, as the case may be, issued in
compliance with applicable corporate and securities Laws.
(b) Except as set forth on Schedule 2.2(b) and in Section
1.3(d), above, and except for shares of TriVergent Common Stock issuable upon
conversion of the TriVergent Preferred Stock, there are no outstanding rights
(either preemptive or other) or options to subscribe for or purchase from
TriVergent, or any warrants or other agreements providing for or requiring the
issuance by TriVergent of, any capital stock or any securities convertible into
or exchangeable for, or exercisable into, capital stock of TriVergent. Schedule
2.2(b) sets forth a list of the TriVergent Options.
(c) Schedule 2.2(c) contains a true and correct copy of
TriVergent's current stock transfer ledger reflecting the record holders of
TriVergent's equity securities and the number of shares held by each. Each of
such holders is the owner of record of the number of shares of TriVergent Common
Stock and TriVergent Preferred Stock set forth opposite the name of each holder
on Schedule 2.2(c). Except as set forth in Schedule 2.2(c), there are no liens
of record against such shares, other than the restrictions set forth in the
TriVergent Stockholders' Agreement or the Liquidation Proceeds Agreements
described in Schedule 2.2(c).
(d) Except as set forth in Schedule 2.2(d), there are no
voting trusts, voting agreements, proxies or other agreements, instruments or
understandings with respect to the voting of the capital stock of TriVergent to
which TriVergent or, to TriVergent's knowledge, any of its stockholders is a
party.
(e) TriVergent has reserved, and at all times from and after
the date hereof to the Effective Time will keep reserved, free from preemptive
rights, out of its authorized but unissued shares of TriVergent Common Stock,
solely for the purpose of effecting the conversion of the issued and outstanding
shares of TriVergent Preferred Stock, including the shares of TriVergent
Preferred Stock issuable in accordance with Section 1.3(d) hereof, and exercise
of the TriVergent Options, sufficient shares of TriVergent Common Stock to
provide for the conversion of all such shares of TriVergent Preferred Stock and
exercise of all of the TriVergent Options.
2.3. SUBSIDIARIES. Schedule 2.3(a) attached hereto sets forth the
name and percentages of outstanding capital stock, limited liability company
interest or other interest held, directly or indirectly, by TriVergent and other
Persons, with respect to each TriVergent Subsidiary, or other Person in which
TriVergent or a TriVergent Subsidiary holds, directly or indirectly, any capital
stock, limited liability company interest or other interest (a "TriVergent
Minority Entity"). Except as set forth on Schedule 2.3(a), all of the capital
stock, limited liability company interests and other interests so held are owned
by TriVergent or a TriVergent Subsidiary free and clear of any claim, lien,
encumbrance, security interest or agreement with respect thereto. All of the
outstanding shares of capital stock and limited liability company interests in
each of the TriVergent Subsidiaries are duly authorized, validly issued, fully
paid and nonassessable and were issued free of preemptive rights and in
compliance with applicable corporate, limited liability company and securities
Laws. There are no irrevocable proxies, voting agreements or similar
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obligations with respect to such capital stock or limited liability company
interests of the TriVergent Subsidiaries or a TriVergent Minority Entity, and no
equity securities or other interests of any of the TriVergent Subsidiaries are
or may become required to be issued or purchased by reason of any options,
warrants, rights to subscribe to, puts, calls, reservation of shares or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any capital stock or limited
liability company interests of any TriVergent Subsidiary, and there are no
contracts, commitments, understandings or arrangements by which any TriVergent
Subsidiary is bound to issue additional shares of its capital stock or limited
liability company interests, or options, warrants or rights to purchase or
acquire any additional shares of its capital stock or limited liability company
interests or securities convertible into or exchangeable for such shares or
interests.
2.4. AUTHORIZATION; BINDING AGREEMENT. (a) TriVergent has all
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby, including, but not limited to, the Merger, have been duly and validly
authorized by TriVergent's Board of Directors, and no other corporate
proceedings on the part of TriVergent are necessary to authorize the execution
and delivery of this Agreement or to consummate the transactions contemplated
hereby (other than the adoption of this Agreement by the stockholders of
TriVergent in accordance with the South Carolina Code and the Articles of
Incorporation and Bylaws of TriVergent). This Agreement has been duly and
validly executed and delivered by TriVergent and constitutes the legal, valid
and binding agreement of TriVergent, enforceable against TriVergent in
accordance with its terms, except to the extent that enforceability thereof may
be limited by applicable bankruptcy, insolvency, reorganization or other similar
Laws affecting the enforcement of creditors' rights generally and by principles
of equity regarding the availability of remedies ("Enforceability Exceptions").
(b) The only votes of any class or series of capital stock of
TriVergent necessary to adopt or approve this Agreement and the Merger and the
other transactions contemplated by this Agreement are approvals by the holders
of (i) at least 75% of the outstanding shares of TriVergent Series A Preferred
Stock, (ii) more than 50% of the outstanding shares of TriVergent Series B
Preferred Stock, (iii) more than 50% of the outstanding shares of TriVergent
Series C Preferred Stock, and (iv) at least 66 2/3% of the outstanding shares of
TriVergent Common Stock. As of the date of this Agreement, TriVergent has
delivered, or caused to be delivered, to Gabriel TriVergent Voting Agreements
executed by holders representing more than the votes required to approve this
Agreement and the Merger and the other transactions contemplated hereby.
2.5. GOVERNMENTAL APPROVALS. No consent, approval, waiver or
authorization of, notice to or declaration or filing with ("Consent") any nation
or government, any state or other political subdivision thereof, any Person,
authority or body exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government including, without
limitation, any governmental or regulatory authority, agency, department, board,
commission or instrumentality, any court, tribunal or arbitrator and any
self-regulatory organization ("Governmental Authority") on the part of
TriVergent or any of the TriVergent Subsidiaries is required in connection with
the execution or delivery by TriVergent of this Agreement or the
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consummation by TriVergent of the transactions contemplated hereby other than
(i) the filing of the Articles of Merger with the Secretary of State of the
State of South Carolina in accordance with the South Carolina Code, (ii)
Consents from or with Governmental Authorities set forth on Schedule 2.5
attached hereto, (iii) filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder (the "HSR Act"), (iv) such filings as may be required in any
jurisdictions where TriVergent is qualified or authorized to do business as a
foreign corporation in order for the Surviving Corporation to maintain such
qualification or authorization, and (v) those Consents from or with Governmental
Authorities that, if they were not obtained or made, do not or would not
reasonably be expected to have a TriVergent Material Adverse Effect or a
Surviving Corporation Material Adverse Effect (as hereinafter defined).
2.6. NO VIOLATIONS. The execution and delivery of this Agreement,
the consummation of the transactions contemplated hereby and compliance by
TriVergent with any of the provisions hereof will not (i) conflict with or
result in any breach of any provision of the Articles and/or Certificate of
Incorporation or Bylaws or other governing instruments of TriVergent or any of
the TriVergent Subsidiaries, (ii) except as set forth on Schedule 2.6 attached
hereto, require any Consent under or result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration or augment
the performance required) under any of the terms, conditions or provisions of
any TriVergent Material Contract (as hereinafter defined) or other obligation to
which TriVergent or any TriVergent Subsidiary is a party or by which any of them
or any of their properties or assets may be bound, (iii) result in the creation
or imposition of any lien or encumbrance of any kind upon any of the assets of
TriVergent or any TriVergent Subsidiary, or (iv) subject to obtaining the
Consents from Governmental Authorities referred to in Section 2.5, above,
contravene any applicable provision of any constitution, treaty, statute, law
(including common law), code, rule, regulation, ordinance or order of any
Governmental Authority having the force of Law including, but not limited to,
any orders, decisions, injunctions, judgments, awards and decrees of or
agreements with any court or other Governmental Authority ("Law") currently in
effect to which TriVergent or any TriVergent Subsidiary or its or any of their
respective assets or properties are subject, except in the case of clauses (ii),
(iii) and (iv) above for any deviations from the foregoing which do not or would
not reasonably be expected to have a TriVergent Material Adverse Effect or
Surviving Corporation Material Adverse Effect. For purposes of this Agreement,
"Surviving Corporation Material Adverse Effect" shall mean a material adverse
effect on the business, assets, condition (financial or otherwise), properties,
liabilities or the results of operations of TriVergent, the TriVergent
Subsidiaries, Gabriel and the Gabriel Subsidiaries, as a combined entity taken
as a whole.
2.7. SECURITIES FILINGS; LITIGATION.
(a) TriVergent has made available to Gabriel true and complete
copies of its Registration Statement on Form S-1 (File No. 333-34834) (the
"TriVergent Form S-1") and all other filings or correspondence made by
TriVergent with or received by TriVergent from, the SEC since the initial filing
of the TriVergent Form S-1.
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(b) Except as set forth in Schedule 2.7 attached hereto and
other than general industry rulemaking and other proceedings that affect the
industry generally, there is no action, cause of action, claim, demand, suit,
proceeding, citation, summons, subpoena, inquiry or investigation of any nature,
civil, criminal, regulatory or otherwise, in Law or in equity, by or before any
court, tribunal, arbitrator, mediator or other Governmental Authority
("Litigation") pending or, to the knowledge of TriVergent, threatened against
TriVergent or any TriVergent Subsidiary, or any officer, director, employee or
agent thereof, in his or her capacity as such, or as a fiduciary with respect to
any Benefit Plan (as hereinafter defined) of TriVergent or any TriVergent
Subsidiary, or otherwise relating, in a manner that would reasonably be expected
to have a TriVergent Material Adverse Effect or a Surviving Corporation Material
Adverse Effect.
2.8. TRIVERGENT FINANCIAL STATEMENTS.
(a) Schedule 2.8 contains a true and complete copy of:
(i) the audited balance sheet of TriVergent for the
year ended December 31, 1999 (the "TriVergent Balance Sheet Date") and the
related audited statements of operations, stockholders' equity and cash flows of
TriVergent for the year ended December 31, 1999; and
(ii) the unaudited consolidated balance sheet of
TriVergent for the three-month period ended March 31, 2000 and the related
unaudited consolidated statements of operations, stockholders' equity and cash
flows of TriVergent for such period (the financial statements referred to in
clauses (i) and (ii) of this Section 2.8(a) being collectively referred to as
the "TriVergent Financial Statements").
(b) The TriVergent Financial Statements have been
prepared in accordance with generally accepted accounting principles (except
that such unaudited financial statements do not contain all of the required
footnotes or normal recurring year-end adjustments) applied on a consistent
basis during the respective periods covered thereby. The TriVergent Financial
Statements are correct and complete and present fairly the financial position of
TriVergent at the date of the balance sheets included therein and the results of
operations and cash flows of TriVergent for the respective periods covered by
the statements of operations and cash flows included therein.
2.9. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on
Schedule 2.9 attached hereto, since the TriVergent Balance Sheet Date, there has
not been:
(a) any event, occurrence, fact, condition, change,
development or effect ("Event"), other than operating losses incurred in the
start-up phase of TriVergent's business, that has had or would reasonably be
expected to have a TriVergent Material Adverse Effect;
(b) any declaration, payment or setting aside for payment
of any dividend (except to TriVergent or a TriVergent Subsidiary wholly owned by
TriVergent) or other distribution or any redemption, purchase or other
acquisition of any shares of capital stock or
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securities of TriVergent or any shares of capital stock, limited liability
interests or securities of any TriVergent Subsidiary;
(c) any return of any capital or other distribution of assets
to stockholders of TriVergent or stockholders or members of any TriVergent
Subsidiary (except to TriVergent or a TriVergent Subsidiary wholly owned by
TriVergent);
(d) any acquisition (by merger, consolidation, acquisition of
stock or assets or otherwise) of any Person or business; or
(e) any other action or agreement or undertaking by TriVergent
or any TriVergent Subsidiary that, if taken or done on or after the date hereof
without Gabriel's consent, would result in a breach of Section 4.1, below, and
that has had or would reasonably be expected to have a TriVergent Material
Adverse Effect or a Surviving Corporation Material Adverse Effect.
2.10. COMPLIANCE WITH LAWS. The business of TriVergent and each
TriVergent Subsidiary has been operated in compliance with all Laws applicable
thereto, except for any instances of non-compliance which do not and would not
reasonably be expected to have a TriVergent Material Adverse Effect. Without
limiting the generality of the foregoing, neither TriVergent nor any TriVergent
Subsidiary has conducted its business in violation of applicable Laws, including
without limitation any applicable fictitious name statutes, tariffs, rules and
regulations in any jurisdiction, foreign or domestic, which violation has had or
would reasonably be expected to have a TriVergent Material Adverse Effect or a
Surviving Corporation Material Adverse Effect.
2.11. PERMITS. TriVergent and the TriVergent Subsidiaries have all
permits, certificates, licenses, approvals, tariffs and other authorizations
required in connection with the operation of their respective businesses
(collectively, "TriVergent Permits"), other than those which if not obtained do
not and would not reasonably be expected to have a TriVergent Material Adverse
Effect or a Surviving Corporation Material Adverse Effect. Neither TriVergent
nor any TriVergent Subsidiary is in violation of any TriVergent Permit, and no
proceedings are pending or, to the knowledge of TriVergent, threatened, to
revoke or limit any material TriVergent Permit except those the absence or
violation of which do not and would not reasonably be expected to have a
TriVergent Material Adverse Effect or a Surviving Corporation Material Adverse
Effect.
2.12. FINDERS AND INVESTMENT BANKERS. Neither TriVergent nor any of
its officers or directors has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated hereby other than pursuant to the agreements
with Donaldson, Lufkin & Jenrette Securities Corporation and First Union
Securities, Inc., accurate and complete copies of which have been provided to
Gabriel.
2.13. MATERIAL CONTRACTS. Attached hereto as Schedule 2.13 is a
true, complete and accurate list, categorized by subject matter, of all of the
following outstanding contracts,
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agreements, plans, leases and commitments entered into by TriVergent or any of
the TriVergent Subsidiaries which are in writing or, to the best of TriVergent's
knowledge, have been orally agreed to by TriVergent or any of the TriVergent
Subsidiaries (each, a "TriVergent Material Contract"):
(a) all purchase orders or contracts for the purchase of
equipment, materials, products or supplies which were entered into in the
ordinary course of business of TriVergent and the TriVergent Subsidiaries and
are for a term of more than 6 months or involve aggregate payments by TriVergent
or any of the TriVergent Subsidiaries of more than $250,000, or which were
entered into other than in the ordinary course of business of TriVergent and the
TriVergent Subsidiaries;
(b) all written employment, consulting or service contracts
with any stockholder, director, officer, consultant, advisor or employee of the
Company, any Person related by blood or marriage to any such Person or any other
Affiliate of the Company, and any such oral contracts which are not terminable
at will by TriVergent or any of the TriVergent Subsidiaries;
(c) all plans, contracts or arrangements providing for stock
options or stock purchases, bonuses, pensions, deferred or incentive
compensation, retirement or severance payments, profit-sharing, insurance or
other benefit plans or programs for any stockholder, director, officer,
consultant, advisor or employee of TriVergent or any of the TriVergent
Subsidiaries;
(d) all contracts for construction or for the purchase or
lease of real estate, improvements, fixtures, and other items, including all
central office collocations;
(e) all contracts relating to the rental or use of equipment,
vehicles, other personal property or fixtures involving rental or lease payments
in excess of $50,000 per year;
(f) all contracts relating in any way to direct or indirect
Indebtedness for borrowed money or evidenced by a bond, debenture, note or other
evidence of Indebtedness (whether secured or unsecured) of or to TriVergent or
any of the TriVergent Subsidiaries, and all Liens with respect to any Property
used or owned by TriVergent or any of the TriVergent Subsidiaries;
(g) all contracts substantially restricting TriVergent or any
of the TriVergent Subsidiaries from engaging in any line of business or
competing with any Person or in any geographical area, or from using or
disclosing any information in its possession (other than routine supplier and
customer confidentiality agreements);
(h) all license agreements, either as licensor or licensee;
(i) all joint venture contracts and agreements involving a
sharing of profits;
(j) all contracts, commitments or shared services arrangement
with any Affiliate and all contracts or commitments not made in the ordinary
course of its business; and
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(k) all other contracts which are otherwise material to
TriVergent or any of the TriVergent Subsidiaries or their respective businesses
or assets.
Except as set forth on Schedule 2.13, all of the TriVergent Material
Contracts are valid, binding and in full force and effect as to TriVergent and
the TriVergent Subsidiaries, and none of TriVergent or any of the TriVergent
Subsidiaries or, to the best of TriVergent's knowledge, any other party thereto,
is in material breach or material violation of, or material default under, nor
is there any reasonable basis for a claim of material breach or violation by
TriVergent or any of the TriVergent Subsidiaries of, or default by TriVergent or
any of the TriVergent Subsidiaries under, the terms of any such contract,
agreement, plan, lease or commitment, and no event has occurred which
constitutes or, with the lapse of time or the giving of notice or both, would
constitute such a material breach, violation or default by TriVergent or any of
the TriVergent Subsidiaries thereunder.
2.14. TRIVERGENT EMPLOYEE BENEFIT PLANS. (a) Except as set forth in
Schedule 2.14 attached hereto, there are no Benefit Plans (as defined below)
maintained or contributed to by TriVergent or a TriVergent Subsidiary under
which TriVergent, a TriVergent Subsidiary or the Surviving Corporation could
incur any liability. A "Benefit Plan" shall include (i) an employee benefit plan
as defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended, together with all regulations thereunder ("ERISA"), even if,
because of some other provision of ERISA, such plan is not subject to any or all
of ERISA's provisions, and (ii) whether or not described in the preceding
clause, (a) any pension, profit sharing, stock bonus, deferred or supplemental
compensation, retirement, thrift, stock purchase, stock appreciation or stock
option plan, or any other compensation, welfare, fringe benefit or retirement
plan, program, policy, course of conduct, understanding or arrangement of any
kind whatsoever, whether formal or informal, oral or written, providing for
benefits for or the welfare of any or all of the current or former employees or
agents of a specified Person or their beneficiaries or dependents, (b) a
multi-employer plan as defined in Section 3(37) of ERISA (a "Multi-Employer
Plan"), or (c) a multiple employer plan as defined in Section 413 of the Code.
There are no negotiations, demands or proposals pending or threatened or which
have been made since May 1997 which concern matters now covered, or that would
be covered, by the foregoing types of Benefit Plans.
(b) With respect to each Benefit Plan (where applicable):
TriVergent has made available to Gabriel complete and accurate copies of (i) all
plan and trust texts and agreements, insurance contracts and other funding
arrangements; (ii) the most recent annual report on the Form 5500 series; (iii)
the most recent financial statements and/or annual and periodic accountings of
plan assets for the last two years; (iv) the most recent determination letter
received from the Internal Revenue Service ("IRS"); and (v) the most recent
summary plan description as defined in ERISA.
(c) With respect to each Benefit Plan while maintained or
contributed to by TriVergent or a TriVergent Subsidiary: (i) if intended to
qualify under Code Sections 401(a) or 403(a), such Benefit Plan has received a
favorable determination letter from the IRS that it so qualifies, and its trust
is exempt from taxation under Code Section 501(a) and, to the knowledge of
TriVergent, nothing has since occurred to cause the loss of the Benefit Plan's
qualification; (ii) such Benefit Plan has been administered in accordance with
its terms and applicable Laws;
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(iii) except for payment of benefits made in the ordinary course of the plan
administration, no event has occurred and there exists no circumstance under
which TriVergent, a TriVergent Subsidiary or the Surviving Corporation could
incur liability under ERISA, the Code or otherwise; (iv) no accumulated funding
deficiency as defined in Code Section 412 has occurred or exists; (v) no
non-exempt prohibited transaction as defined under ERISA and the Code has
occurred; (vi) no reportable event as defined in Section 4043 of ERISA has
occurred (other than events as to which the 30-day notice period is waived
pursuant to Section 4043 of ERISA); (vii) all contributions and premiums due
have fully been made and paid on a timely basis; and (viii) all contributions
made or required to be made under any Benefit Plan meet the requirements for
deductibility under the Code, and all contributions accrued prior to March 31,
2000 which have not been made have been properly recorded on the TriVergent
Financial Statements, except, in each case under clauses (i) through (viii)
above, for any deviations from the foregoing which do not and would not
reasonably be expected to have a TriVergent Material Adverse Effect or a
Surviving Corporation Material Adverse Effect. Neither TriVergent nor any
TriVergent Subsidiary has any liability by virtue of its being a member of a
controlled group with a person who has liability under the Code of ERISA.
(d) No Benefit Plan is a defined benefit pension plan subject
to Title IV of ERISA or Section 412 of the Code. Each of the Benefit Plans has
been maintained in compliance with its terms and all applicable Law, except
where the failure to do so would not reasonably be expected to have a TriVergent
Material Adverse Effect or a Surviving Corporation Material Adverse Effect.
Neither TriVergent nor any of the TriVergent Subsidiaries contributes to, or has
any outstanding liability with respect to, any Multi-employer Plan.
(e) With respect to each Benefit Plan which is a welfare plan
(as defined in ERISA Section 3(1)): (i) any liability for medical or death
benefits with respect to current or former employees beyond their termination of
employment (except as may be required by applicable Law) is provided for in the
TriVergent Financial Statements to the extent required by generally accepted
accounting principles; (ii) there are no reserves, assets, surplus or prepaid
premiums under any such plan; (iii) except as set forth in Schedule 2.14
attached hereto, no term or provision of any such plan prohibits the amendment
or termination thereof; and (iv) TriVergent and the TriVergent Subsidiaries have
complied with Code Section 4980B, except, in each case, for any deviations from
the foregoing which do not and would not reasonably be expected to have a
TriVergent Material Adverse Effect or a Surviving Corporation Material Adverse
Effect.
(f) Except as set forth in Schedule 2.14 attached hereto and
except as provided in Section 5.10(b) below, the consummation of the Merger will
not, either alone or in conjunction with another Event under the terms of any
Benefit Plan: (i) entitle any individual to severance pay, or (ii) accelerate
the time of payment or vesting of benefits or increase the amount of
compensation due to any individual.
2.15. TAXES AND RETURNS.
(a) Except as disclosed in Schedule 2.15 attached hereto,
TriVergent and each of the TriVergent Subsidiaries has timely filed, or caused
to be timely filed, all material federal, state, local and foreign income, gross
receipts, sales, use, property, production, payroll, franchise,
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withholding, employment, social security, license, excise, transfer, gains, and
other tax returns or reports required to be filed by it (any of the foregoing
being referred to herein as a "Tax Return"), and has paid, collected or
withheld, or caused to be paid, collected or withheld, all material amounts of
taxes and governmental charges, assessments and contributions of any nature
whatsoever including, but not limited to, any related penalties, interest and
liabilities (any of the foregoing being referred to herein as a "Tax"), required
to be paid, collected or withheld, other than such Taxes for which adequate
reserves in the TriVergent Financial Statements have been established or which
are being contested in good faith as reflected in records made available to
Gabriel prior to the date of this Agreement. Except as set forth in Schedule
2.15 attached hereto, there are no claims or assessments pending against
TriVergent or any TriVergent Subsidiary for any alleged deficiency in any Tax,
and TriVergent has not been notified in writing of any proposed Tax claims or
assessments against TriVergent or any TriVergent Subsidiary (other than, in each
case, those for which adequate reserves in the TriVergent Financial Statements
have been established or which are being contested in good faith as reflected in
records made available to Gabriel prior to the date of this Agreement or are
immaterial in amount). Except as set forth in Schedule 2.15 attached hereto,
neither TriVergent nor any TriVergent Subsidiary has any waivers or extensions
of any applicable statute of limitations to assess any material amount of Taxes.
Except as set forth in Schedule 2.15 attached hereto, there are no outstanding
requests by TriVergent or a TriVergent Subsidiary for any extension of time
within which to file any material Tax Return or within which to pay any material
amount of Taxes shown to be due on any Tax Return. Except as set forth on
Schedule 2.15 attached hereto, no taxing authority is conducting or has notified
or, to the knowledge of TriVergent, has threatened TriVergent or any TriVergent
Subsidiary that it intends to conduct, an audit of any prior Tax period of
TriVergent or any of its past or present subsidiaries. Except as disclosed in
Schedule 2.15 attached hereto, neither TriVergent nor any TriVergent Subsidiary
has ever been an "S" corporation under the Code.
(b) A listing of all Tax sharing agreements or similar
arrangements with respect to or involving TriVergent or a TriVergent Subsidiary
is set forth in Schedule 2.15 attached hereto.
(c) Except as set forth in Schedule 2.15 attached hereto,
neither TriVergent nor any TriVergent Subsidiary has made or become obligated to
make, or will, as a result of the transactions contemplated by this Agreement,
make or become obligated to make, any "excess parachute payment" as defined in
Section 280G of the Code (without regard to Subsection (b)(4) thereof).
(d) Except as set forth in Schedule 2.15 attached hereto,
neither TriVergent nor any TriVergent Subsidiary is or has been a United States
real property holding company (as defined in Section 897(c)(2) of the Code)
during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(e) Except as provided in Schedule 2.15 attached hereto,
neither TriVergent nor any TriVergent Subsidiary is a Person other than a United
States Person within the meaning of the Code.
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(f) None of the assets of TriVergent or of any TriVergent
Subsidiary is property which TriVergent or any TriVergent Subsidiary is required
to treat as being owned by any other Person pursuant to the so-called "safe
harbor lease" provisions of former Section 168(f)(8) of the Code.
(g) There are no liens for Taxes on the assets of TriVergent
or any TriVergent Subsidiary except for statutory liens for current Taxes not
yet due and payable.
(h) All material elections with respect to any material amount
of Taxes affecting TriVergent and the TriVergent Subsidiaries are described in
Schedule 2.15 attached hereto. Neither TriVergent nor any TriVergent Subsidiary:
(i) has consented at any time under Section 341(f)(l) of the Code to have the
provisions of Section 341(f)(2) of the Code apply to any disposition of the
assets of TriVergent or any TriVergent Subsidiary; (ii) has agreed, or is
required, to make any adjustment under Section 481(a) of the Code by reason of a
change in accounting method or otherwise; (iii) has made an express election, or
is required, to treat any asset of TriVergent or any TriVergent Subsidiary as
owned by another Person for federal income tax purposes or as tax-exempt bond
financed property or tax-exempt use property within the meaning of Section 168
of the Code; or (iv) has made any of the foregoing elections or is required to
apply any of the foregoing rules under any comparable state, foreign or local
income Tax provision.
(i) Except as set forth in Schedule 2.15 attached hereto,
TriVergent and the TriVergent Subsidiaries are not and have never been
includable corporations in an affiliated group of corporations, within the
meaning of Section 1504 of the Code, other than in the affiliated group of which
TriVergent is the common parent corporation.
(j) Schedule 2.15 attached hereto sets forth the (i) net
operating lossses, net capital losses, foreign tax credits, investment and other
tax credits, or any carryforward of such losses or credits, of each of the
TriVergent Subsidiaries acquired by TriVergent, as reflected on the final tax
returns of such Subsidiaries prior to their acquisition, (ii) the date
suchTriVergent Subsidiary was acquired; and (iii) the consideration paid for
such TriVergent Subsidiary, provided, however, that the disclosure pursuant to
clause (i) hereof solely with respect to Information Services and Advertising
Corporation and Ester Communications, Inc. shall be promptly provided by
TriVergent after the date hereof but no later than fourteen days prior to
Closing. Schedule 2.15 sets forth TriVergent's net operating losses, net capital
losses, foreign tax credits, investment and other tax credits as reflected on
the TriVergent consolidated group's most recent filed tax return.
(k) Except as set forth in Schedule 2.15 attached hereto,
neither TriVergent nor any TriVergent Subsidiary is a partner or member in or
subject to any joint venture, partnership, limited liability company or other
arrangement or contract that is or should be treated as a partnership for
federal income tax purposes.
(l) Except as set forth on Schedule 2.15 attached hereto,
neither TriVergent nor any of the TriVergent Subsidiaries has entered into any
covenant related to the acquisition of
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any TriVergent Subsidiary with respect to the qualification of such acquisition
as a reorganization under Section 368 of the Code.
2.16. NO UNDISCLOSED LIABILITIES. TriVergent and the TriVergent
Subsidiaries do not have any liabilities or obligations whatsoever, whether
accrued, contingent or otherwise, and TriVergent knows of no basis for any claim
against TriVergent or any TriVergent Subsidiary for any liability or obligation,
except (i) to the extent set forth or reflected in the TriVergent Financial
Statements provided or made available to Gabriel prior to the date of this
Agreement, (ii) to the extent expressly set forth on any Schedule attached
hereto or otherwise as described in this Article II, or (iii) liabilities or
obligations incurred in the normal and ordinary course of business since the
TriVergent Balance Sheet Date, and except, in each case, for any deviations from
the foregoing which individually or in the aggregate do not and would not
reasonably be expected to have a TriVergent Material Adverse Effect or a
Surviving Corporation Material Adverse Effect.
2.17. ENVIRONMENTAL MATTERS. Except as set forth on Schedule 2.17
and except, in each case, for any deviations which do not and would not
reasonably be expected to have a TriVergent Material Adverse Effect or a
Surviving Corporation Material Adverse Effect, as of the date of this Agreement,
(i) each of TriVergent and the TriVergent Subsidiaries is in compliance with all
applicable Environmental Laws (as hereinafter defined), (ii) each of TriVergent
and the TriVergent Subsidiaries has obtained, and is in compliance with, all
permits and other authorizations of Governmental Authorities necessary under
applicable Environmental Laws for the construction of its facilities and the
conduct of its operations, as applicable, (collectively, the "Environmental
Permits"), (iii) there is no civil, criminal or administrative judgment, action,
suit, demand, claim, hearing, notice of violation, investigation, proceeding,
notice or demand letter pending or, to the knowledge of TriVergent, threatened
against TriVergent, a TriVergent Subsidiary or any of their respective
properties alleging a violation of, or liability under, any Environmental Laws
and (iv) there are no past or present Events which reasonably may be expected to
prevent compliance with, or which have given rise to or will give rise to
liability on the part of TriVergent or a TriVergent Subsidiary under,
Environmental Laws. Schedule 2.17 lists all environmental reports in the
possession of TriVergent or a TriVergent Subsidiary relating to any of their
respective past or present properties. For purposes of this Agreement, the term
"Environmental Laws" shall mean Laws regulating asbestos, polychlorinated
biphenyls, radioactive materials and wastes, petroleum and petroleum products,
contaminants, pollutants, hazardous or toxic wastes or substances, and Laws
relating to protection of the environment, pollution, waste control and human
health and safety as it relates to the environment.
2.18. INTELLECTUAL PROPERTY. For purposes of this Agreement,
"Intellectual Property" shall mean all patents, trademarks, service marks, trade
names, copyrights, franchises, know-how and similar rights of or used by a
Person, all applications for any of the foregoing and all permits, grants and
licenses or other rights running to or from such Person relating to any of the
foregoing. Except as set forth on Schedule 2.18 attached hereto, (i) TriVergent
or one of the TriVergent Subsidiaries owns, or is licensed to or otherwise has
the right to use, all material Intellectual Property currently used in its or
their respective businesses, (ii) the rights of TriVergent and the TriVergent
Subsidiaries in such Intellectual Property are, subject to the rights of any
licensor thereof, free and clear of any liens or other encumbrances and
restrictions and neither TriVergent nor any of the TriVergent Subsidiaries has
received, as of the date of this Agreement, notice of
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any adversely-held Intellectual Property of any other Person, or notice of any
charge or claim of infringement or breach from any Person relating to such
Intellectual Property or any material process or confidential information of
TriVergent or any TriVergent Subsidiary ("Claim Notice") and does not know of
any basis for any such charge or claim, and (iii) neither TriVergent, the
TriVergent Subsidiaries nor their respective predecessors, if any, has conducted
business at any time prior to the date hereof under any corporate, trade or
fictitious names other than their current corporate names. TriVergent shall
promptly notify, and shall cause the TriVergent Subsidiaries to promptly notify,
Gabriel of any Claim Notice received by TriVergent or a TriVergent Subsidiary
after the date of this Agreement.
2.19 REAL ESTATE.
(a) Schedule 2.19(a) attached hereto sets forth a true,
correct and complete schedule as of the date of this Agreement of all real
property owned by TriVergent or any of the TriVergent Subsidiaries. TriVergent
or one of the TriVergent Subsidiaries, as indicated thereon, is the owner of fee
title to the real property described on said Schedule 2.19(a) and to all of the
buildings, structures and other improvements located thereon free and clear of
any material mortgage, deed of trust, lien, pledge, security interest, claim,
lease, charge, option, right of first refusal, easement, restrictive covenant,
encroachment or other survey defect, encumbrance or other restriction or
limitation except for the matters listed on said Schedule 2.19(a) and, except
for any exceptions, easements, restrictive covenants, encroachments or other
survey defects, encumbrances, restrictions or limitations which, individually or
in the aggregate, do not and would not reasonably be expected to have a
TriVergent Material Adverse Effect or Surviving Corporation Material Adverse
Effect or to interfere in any material respect with the present use and
enjoyment of such real property.
(b) Schedule 2.19(b) attached hereto sets forth a true,
correct and complete schedule as of the date of this Agreement of all material
leases, subleases, easements, rights-of-way, licenses or other agreements under
which TriVergent or any of the TriVergent Subsidiaries uses or occupies, or has
the right to use or occupy any material real property or improvements thereon
other than collocation agreements (the "TriVergent Real Property Leases").
Except for the matters listed on said Schedule 2.19(b), TriVergent or a
TriVergent Subsidiary, as indicated thereon, holds the leasehold estate under or
other interest in each TriVergent Real Property Lease free and clear of all
liens, encumbrances and other rights of occupancy other than statutory
landlords' or mechanics' liens which have not been executed upon, and except for
liens, encumbrances and rights that do not and would not reasonably be expected
to have a TriVergent Material Adverse Effect or Surviving Corporation Material
Adverse Effect or to interfere in any material respect with the present use and
enjoyment of such leasehold estate or interest.
2.20. CORPORATE RECORDS. The respective corporate and limited
liability company record books of or relating to TriVergent and each of the
TriVergent Subsidiaries made available to Gabriel by TriVergent contain accurate
and complete records of (i) all corporate actions of the stockholders and
directors (and committees thereof) of TriVergent and, as applicable, all
corporate and limited liability company actions of the respective stockholders,
directors (and committees thereof), managers and members of the TriVergent
Subsidiaries, (ii) the Certificate
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and/or Articles of Incorporation, Bylaws and/or other governing instruments, as
amended, of TriVergent and the TriVergent Subsidiaries, and (iii) the issuance
and transfer of stock of TriVergent and, as applicable, stock or limited
liability company interests of the TriVergent Subsidiaries. Except as set forth
on Schedule 2.20 attached hereto, neither TriVergent nor any TriVergent
Subsidiary has any of its material records or information recorded, stored,
maintained or held off the premises of TriVergent and the TriVergent
Subsidiaries.
2.21. TITLE TO AND CONDITION OF PERSONAL PROPERTY. TriVergent and
each of the TriVergent Subsidiaries have good and marketable title to, or a
valid leasehold interest in, all material items of any personal property
currently used in the operation of their respective businesses, and such
property or leasehold interests are free and clear of all liens, claims,
charges, security interests, options, or other title defects or encumbrances
that have had or would reasonably be expected to have a TriVergent Material
Adverse Effect or Surviving Corporation Material Adverse Effect or to interfere
in any material respect with the present use and enjoyment of such property or
interests. As of the date of this Agreement, all such personal property is in
reasonably good operating condition and repair as required for use in the
businesses of TriVergent and the TriVergent Subsidiaries (ordinary wear and tear
excepted), is reasonably suitable for the use to which the same is customarily
put by TriVergent or any TriVergent Subsidiary and is free from material
defects.
2.22. NO ADVERSE ACTIONS. Except as set forth on Schedule 2.22
attached hereto, there is no existing, pending or, to the knowledge of
TriVergent, overtly threatened termination, cancellation, limitation,
modification or change in the business relationship of TriVergent or any of the
TriVergent Subsidiaries, with any supplier, customer or other Person except such
as would not reasonably be expected to have a TriVergent Material Adverse Effect
or Surviving Corporation Material Adverse Effect. None of TriVergent, any
TriVergent Subsidiary or, to the knowledge of TriVergent, any director, officer,
agent, employee or other Person acting on behalf of TriVergent or any TriVergent
Subsidiary has used any corporate funds for unlawful contributions, payments,
gifts or entertainment or for the payment of other unlawful expenses relating to
political activity, or made any direct or indirect unlawful payments to
governmental or regulatory officials or others, which would reasonably be
expected to have a TriVergent Material Adverse Effect or Surviving Corporation
Material Adverse Effect.
2.23. LABOR MATTERS. Except as set forth on Schedules 2.13, 2.14 or
2.23 attached hereto, neither TriVergent nor any of the TriVergent Subsidiaries
has any material obligations, contingent or otherwise, under any employment,
severance or consulting agreement, any collective bargaining agreement or any
other contract with a labor union or other labor or employee group. To the
knowledge of TriVergent, as of the date of this Agreement, there are no
negotiations, demands or proposals which are presently pending or overtly
threatened by or on behalf of any labor union with respect to the unionizing of
employees of TriVergent or any TriVergent Subsidiary. As of the date of this
Agreement, there is no unfair labor practice complaint against TriVergent or any
TriVergent Subsidiary pending or, to the knowledge of TriVergent, threatened
before the National Labor Relations Board or comparable agency, no unresolved
grievance against TriVergent or any TriVergent Subsidiary, no collective
bargaining agreement which is currently being negotiated by TriVergent or any
TriVergent Subsidiary, and neither TriVergent nor any TriVergent Subsidiary is
experiencing any work stoppage, strike,
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slowdown or other labor difficulty which, in each case, would reasonably be
expected to have a TriVergent Material Adverse Effect or Surviving Corporation
Material Adverse Effect. As of the date of this Agreement, no employee has
informed TriVergent or any TriVergent Subsidiary of his or her intention to
terminate his or her employment with TriVergent or any TriVergent Subsidiary as
a result of any announcement or consummation of the transactions contemplated by
this Agreement. TriVergent shall promptly notify, and shall cause the TriVergent
Subsidiaries to promptly notify, Gabriel upon knowledge by TriVergent or a
TriVergent Subsidiary of the occurrence after the date hereof of any matter
referenced in this Section 2.23.
2.24. INDEBTEDNESS TO AND FROM OFFICERS, DIRECTORS AND OTHERS.
Except as set forth on Schedule 2.24 hereto, neither TriVergent nor any of the
TriVergent Subsidiaries is indebted to any director, officer, employee or
consultant of TriVergent or any of the TriVergent Subsidiaries or to any other
Affiliate of TriVergent, except for amounts due as normal salaries, fees or
reimbursement of ordinary business expenses. Except as set forth on Schedule
2.24, no director, officer, employee or consultant of TriVergent or any of the
TriVergent Subsidiaries and no other Affiliate of TriVergent is now, or on the
Closing Date will be, indebted to TriVergent or any of the TriVergent
Subsidiaries except for ordinary business expense advances.
2.25. INSURANCE. Schedule 2.25 attached hereto lists each policy of
insurance which TriVergent and each of the TriVergent Subsidiaries has obtained
and maintains. As of the date of this Agreement, neither TriVergent nor any of
the TriVergent Subsidiaries has received notice of default under, or intended
cancellation or nonrenewal of, any of such policies of insurance. Neither
TriVergent nor any TriVergent Subsidiary has been refused any insurance for any
material coverage by an insurance carrier to which it has applied for such
insurance coverage.
2.26. TAKEOVER STATUTES. TriVergent is not subject to any "business
combination," "fair price," "moratorium," "control share acquisition" or other
similar anti-takeover statute or regulation enacted under state or federal Laws
in the United States (each a "Takeover Statute") applicable to Gabriel or the
Merger.
2.27. INVESTMENT COMPANY. TriVergent is not an "investment company",
or an "affiliated person" of an "investment company", or a company "controlled"
by an "investment company" as such terms are defined in the Investment Company
Act of 1940.
2.28. FAIRNESS OPINION. TriVergent's Board of Directors has received
from its financial advisors, Donaldson, Lufkin & Jenrette Securities
Corporation, a written opinion addressed to it for inclusion in the
Prospectus/Information Statement to the effect that the Merger Consideration is
fair to the holders of the TriVergent Shares from a financial point of view. An
accurate and complete copy of such opinion has been provided to Gabriel.
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ARTICLE III.
REPRESENTATIONS, WARRANTIES AND
CERTAIN COVENANTS OF GABRIEL
Gabriel represents, warrants and/or covenants to and with TriVergent as
follows:
3.1. ORGANIZATION AND GOOD STANDING.
(a) Gabriel is a corporation duly organized, validly existing
and in good standing under the Laws of the State of Delaware. Each of the
Gabriel Subsidiaries is a corporation duly organized, validly existing and in
good standing under the Laws of the state of its incorporation, as set forth on
Schedule 3.1(a).
(b) Each of Gabriel and the Gabriel Subsidiaries is qualified
to do business as a foreign corporation in each jurisdiction in which the
failure to be so qualified would have a Gabriel Material Adverse Effect. For
purposes of this Agreement, "Gabriel Material Adverse Effect" shall mean a
material adverse effect on (i) the business, assets, condition (financial or
otherwise), properties, liabilities or the results of operations of Gabriel and
the Gabriel Subsidiaries, taken as a whole, (ii) the ability of Gabriel to
perform its obligations set forth in this Agreement, or (iii) the ability of
Gabriel to timely consummate the transactions contemplated by this Agreement.
Schedule 3.1(a) also identifies each jurisdiction in which Gabriel and each of
the Gabriel Subsidiaries is currently qualified to do business as a foreign
corporation.
(c) Gabriel has delivered to TriVergent true and complete
copies of the Amended and Restated Certificate of Incorporation and Bylaws of
Gabriel and the Gabriel Subsidiaries, including all amendments thereto,
certified by the Secretary of Gabriel as true and in full force and effect on
the date hereof. Except as set forth in the Gabriel Charter Amendment, the
Amended and Restated Certificate of Incorporation and Bylaws of Gabriel and the
Gabriel Subsidiaries will not be amended prior to the Closing Date.
(d) Gabriel and the Gabriel Subsidiaries have all corporate
power and all material governmental licenses, authorizations, consents and
approvals required to carry on their respective businesses as now being
conducted and necessary to own, operate and lease their properties and assets.
3.2. CAPITALIZATION.
(a) As of the date hereof, the authorized capital stock
consists of 200,000,000 shares of common stock, $0.01 par value per share, and
100,000,000 shares of preferred stock, $0.01 par value per share, of which
26,850,000 shares are designated as Series A Convertible Preferred Stock (the
"Gabriel Series A Preferred Stock"), 3,125,000 shares are designated as Series
A-1 Convertible Preferred Stock (the "Gabriel Series A-1 Preferred Stock") and
32,500,000 shares are designated as the Gabriel Series B Preferred Stock
(together with the Gabriel Series A Preferred Stock and the Gabriel Series A-1
Preferred Stock, the "Gabriel Preferred Stock"). Of such authorized shares, as
of the date hereof, 5,934,200 shares of Gabriel Common Stock, 26,850,000 shares
of Gabriel Series A Preferred Stock, 3,125,000 shares of
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Gabriel Series A-1 Preferred Stock and 9,930,294 shares of Gabriel Series B
Preferred Stock are issued and outstanding, 90,000 shares of Gabriel Common
Stock are issued and held in the treasury of Gabriel, and no other capital stock
of Gabriel is issued or outstanding. All issued and outstanding shares of
capital stock of Gabriel and all the shares of Gabriel Series B Preferred Stock
reserved for issuance upon payment of the Total Committed Capital have been duly
authorized, are or will be, as the case may be, validly issued and outstanding,
fully paid and nonassessable and were or will be, as the case may be, issued in
compliance with applicable corporate and securities Laws.
(b) Except as set forth on Schedule 3.2(b) and except for
shares of Gabriel Common Stock issuable upon conversion of the Gabriel Preferred
Stock, there are no outstanding rights (either preemptive or other) or options
to subscribe for or purchase from Gabriel, or any warrants or other agreements
providing for or requiring the issuance by Gabriel of, any capital stock or any
securities convertible into or exchangeable for, or exercisable into, capital
stock of Gabriel.
(c) Except as set forth in Schedule 3.2(c), there are no
voting trusts, voting agreements, proxies or other agreements, instruments or
understandings with respect to the voting of the capital stock of Gabriel to
which Gabriel or, to Gabriel's knowledge, any of its stockholders is a party.
3.3. SUBSIDIARIES. Schedule 3.3(a) attached hereto sets forth the
name and percentages of outstanding capital stock or other interest held,
directly or indirectly, by Gabriel and other Persons, with respect to each
Gabriel Subsidiary, or other Person in which Gabriel or a Gabriel Subsidiary
holds, directly or indirectly, any capital stock or other interest (a "Gabriel
Minority Entity"). Except as set forth on Schedule 3.3(a), all of the capital
stock and other interests so held are owned by Gabriel or a Gabriel Subsidiary
free and clear of any claim, lien, encumbrance, security interest or agreement
with respect thereto. All of the outstanding shares of capital stock in each of
the Gabriel Subsidiaries are duly authorized, validly issued, fully paid and
nonassessable and were issued free of preemptive rights and in compliance with
applicable corporate and securities Laws. There are no irrevocable proxies,
voting agreements or similar obligations with respect to such capital stock of
the Gabriel Subsidiaries or a Gabriel Minority Entity, and no equity securities
or other interests of any of the Gabriel Subsidiaries are or may become required
to be issued or purchased by reason of any options, warrants, rights to
subscribe to, puts, calls, reservation of shares or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, shares of any capital stock of any Gabriel Subsidiary, and there are no
contracts, commitments, understandings or arrangements by which any Gabriel
Subsidiary is bound to issue additional shares of its capital stock, or options,
warrants or rights to purchase or acquire any additional shares of its capital
stock or securities convertible into or exchangeable for such shares.
3.4. AUTHORIZATION; BINDING AGREEMENT.
(a) Gabriel has all requisite corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby,
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including, but not limited to, the Merger, have been duly and validly authorized
by the Boards of Directors of Gabriel and Acquisition Subsidiary and by Gabriel
as the sole stockholder of Acquisition Subsidiary, and no other corporate
proceedings on the part of Gabriel or Acquisition Subsidiary are necessary to
authorize the execution and delivery of this Agreement or to consummate the
transactions contemplated hereby (other than the adoption of the Gabriel Charter
Amendment in accordance with the Delaware Code and the Amended and Restated
Certificate of Incorporation and Bylaws of Gabriel). This Agreement has been
duly and validly executed and delivered by Gabriel and Acquisition Subsidiary
and constitutes the legal, valid and binding agreement of each of Gabriel and
Acquisition Subsidiary, enforceable against each of them in accordance with its
terms, except to the extent that enforceability thereof may be limited by the
Enforceability Exceptions.
(b) The only votes of any class or series of capital stock of
Gabriel necessary to adopt or approve this Agreement and the Merger and the
other transactions contemplated by this Agreement are approvals by the holders
of at least 66 2/3% 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, in each case, voting together as a single class, and by at
least 66 2/3% of each of such series of Preferred Stock, voting as separate
classes. As of the date of this Agreement, Gabriel has delivered, or caused to
be delivered, to TriVergent Gabriel Voting Agreements executed by holders
representing more than the votes required to adopt or approve this Agreement and
the Merger and the other transactions contemplated hereby.
3.5. GOVERNMENTAL APPROVALS. No Consent of any Governmental
Authority on the part of Gabriel or any of the Gabriel Subsidiaries is required
in connection with the execution or delivery by Gabriel of this Agreement or the
consummation by Gabriel of the transactions contemplated hereby other than (i)
the filing of the Certificate of Merger with the Secretary of State of the State
of Delaware in accordance with the Delaware Code, (ii) Consents from or with
Governmental Authorities set forth on Schedule 3.5 attached hereto, (iii)
filings under the HSR Act, (iv) such filings as may be required in any
jurisdictions where Gabriel is qualified or authorized to do business as a
foreign corporation in order for the Surviving Corporation to maintain such
qualification or authorization, and (v) those Consents from or with Governmental
Authorities that, if they were not obtained or made, do not or would not
reasonably be expected to have a Gabriel Material Adverse Effect or a Surviving
Corporation Material Adverse Effect.
3.6. NO VIOLATIONS. The execution and delivery of this Agreement,
the consummation of the transactions contemplated hereby and compliance by
Gabriel with any of the provisions hereof will not (i) conflict with or result
in any breach of any provision of the Articles and/or Certificate of
Incorporation or Bylaws or other governing instruments of Gabriel or any of the
Gabriel Subsidiaries, (ii) except as set forth on Schedule 3.6 attached hereto,
require any Consent under or result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, cancellation or acceleration or augment the
performance required) under any of the terms, conditions or provisions of any
Gabriel Material Contract (as hereinafter defined) or other obligation to which
Gabriel or any Gabriel Subsidiary is a party or by which any of them or any of
their properties or assets may be bound, (iii) result in the creation or
imposition of any lien or encumbrance of any kind upon any of the assets of
Gabriel or any Gabriel Subsidiary, or (iv) subject to obtaining the Consents
from
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Governmental Authorities referred to in Section 3.5, above, contravene any
applicable Law currently in effect to which Gabriel or any Gabriel Subsidiary or
its or any of their respective assets or properties are subject, except in the
case of clauses (ii), (iii) and (iv) above for any deviations from the foregoing
which do not or would not reasonably be expected to have a Gabriel Material
Adverse Effect or a Surviving Corporation Material Adverse Effect.
3.7. LITIGATION Except as set forth in Schedule 3.7 attached hereto
and other than general industry rulemaking and other proceedings that affect the
industry generally, there is no Litigation pending or, to the knowledge of
Gabriel, threatened against Gabriel or any Gabriel Subsidiary, or any officer,
director, employee or agent thereof, in his or her capacity as such, or as a
fiduciary with respect to any Benefit Plan of Gabriel or any Gabriel Subsidiary,
or otherwise relating, in a manner that would reasonably be expected to have a
Gabriel Material Adverse Effect or a Surviving Corporation Material Adverse
Effect.
3.8. GABRIEL FINANCIAL STATEMENTS.
(a) Schedule 3.8 contains a true and complete copy of:
(i) the audited balance sheet of Gabriel for
the year ended December 31, 1999 (the "Gabriel Balance Sheet Date") and the
related audited statements of operations, stockholders' equity and cash flows of
Gabriel for the year ended December 31, 1999; and
(ii) the unaudited consolidated balance sheet of
Gabriel for the three-month period ended March 31, 2000 and the related
unaudited consolidated statements of operations, stockholders' equity and cash
flows of Gabriel for such period (the financial statements referred to in
clauses (i) and (ii) of this Section 3.8(a) being collectively referred to as
the "Gabriel Financial Statements").
(b) The Gabriel Financial Statements have been prepared in
accordance with generally accepted accounting principles (except that such
unaudited financial statements do not contain all of the required footnotes or
normal recurring year-end adjustments) applied on a consistent basis during the
respective periods covered thereby. The Gabriel Financial Statements are correct
and complete and present fairly the financial position of Gabriel at the date of
the balance sheets included therein and the results of operations and cash flows
of Gabriel for the respective periods covered by the statements of operations
and cash flows included therein.
3.9. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on
Schedule 3.9 attached hereto, since the Gabriel Balance Sheet Date, there has
not been:
(a) any Event, other than operating losses incurred in the
start-up phase of Gabriel's business, that has had or would reasonably be
expected to have a Gabriel Material Adverse Effect;
(b) any declaration, payment or setting aside for payment of
any dividend (except to Gabriel or a Gabriel Subsidiary wholly owned by Gabriel)
or other distribution or any redemption, purchase or other acquisition of any
shares of capital stock or securities of Gabriel or
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any Gabriel Subsidiary (except in connection with repurchases of stock from
employees whose employment has been terminated);
(c) any return of any capital or other distribution of assets
to stockholders of Gabriel or any Gabriel Subsidiary (except in connection with
repurchases of stock from employees whose employment has been terminated);
(d) any acquisition (by merger, consolidation, acquisition of
stock or assets or otherwise) of any Person or business; or
(e) any other action or agreement or undertaking by Gabriel or
any Gabriel Subsidiary that, if taken or done on or after the date hereof
without Gabriel's consent, would result in a breach of Section 5.1, below, and
that has had or would reasonably be expected to have a Gabriel Material Adverse
Effect or a Surviving Corporation Material Adverse Effect.
3.10. COMPLIANCE WITH LAWS. The business of Gabriel and each Gabriel
Subsidiary has been operated in compliance with all Laws applicable thereto,
except for any instances of non-compliance which do not and would not reasonably
be expected to have a Gabriel Material Adverse Effect. Without limiting the
generality of the foregoing, neither Gabriel nor any Gabriel Subsidiary has
conducted its business in violation of applicable Laws, including without
limitation any applicable fictitious name statutes, tariffs, rules and
regulations in any jurisdiction, foreign or domestic, which violation has had or
would reasonably be expected to have a Gabriel Material Adverse Effect or a
Surviving Corporation Material Adverse Effect.
3.11. PERMITS. Gabriel and the Gabriel Subsidiaries have all
permits, certificates, licenses, approvals, tariffs and other authorizations
required in connection with the operation of their respective businesses
(collectively, "Gabriel Permits"), other than those which if not obtained do not
and would not reasonably be expected to have a Gabriel Material Adverse Effect
or a Surviving Corporation Material Adverse Effect. Neither Gabriel nor any
Gabriel Subsidiary is in violation of any Gabriel Permit, and no proceedings are
pending or, to the knowledge of Gabriel, threatened, to revoke or limit any
material Gabriel Permit except those the absence or violation of which do not
and would not reasonably be expected to have a Gabriel Material Adverse Effect
or a Surviving Corporation Material Adverse Effect.
3.12. FINDERS AND INVESTMENT BANKERS. Neither Gabriel nor any of its
officers or directors has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated hereby other than pursuant to the agreement
with Salomon Smith Barney Inc., an accurate and complete copy of which has been
provided to TriVergent.
3.13. MATERIAL CONTRACTS. Attached hereto as Schedule 3.13 is a
true, complete and accurate list, categorized by subject matter, of all of the
following outstanding contracts, agreements, plans, leases and commitments
entered into by Gabriel or any of the Gabriel Subsidiaries which are in writing
or, to the best of Gabriel's knowledge, have been orally agreed to by Gabriel or
any of the Gabriel Subsidiaries (each, a "Gabriel Material Contract"):
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(a) all purchase orders or contracts for the purchase of
equipment, materials, products or supplies which were entered into in the
ordinary course of business of Gabriel and the Gabriel Subsidiaries and are for
a term of more than 6 months or involve aggregate payments by Gabriel or any of
the Gabriel Subsidiaries of more than $250,000, or which were entered into other
than in the ordinary course of business of Gabriel and the Gabriel Subsidiaries;
(b) all written employment, consulting or service contracts
with any stockholder, director, officer, consultant, advisor or employee of
Gabriel, any Person related by blood or marriage to any such Person or any other
Affiliate of Gabriel, and any such oral contracts which are not terminable at
will by Gabriel or any of the Gabriel Subsidiaries;
(c) all plans, contracts or arrangements providing for stock
options or stock purchases, bonuses, pensions, deferred or incentive
compensation, retirement or severance payments, profit-sharing, insurance or
other benefit plans or programs for any stockholder, director, officer,
consultant, advisor or employee of Gabriel or any of the Gabriel Subsidiaries;
(d) all contracts for construction or for the purchase or
lease of real estate, improvements, fixtures and other items, including all
central office collocations;
(e) all contracts relating to the rental or use of equipment,
vehicles, other personal property or fixtures involving rental or lease payments
in excess of $50,000 per year;
(f) all contracts relating in any way to direct or indirect
Indebtedness for borrowed money or evidenced by a bond, debenture, note or other
evidence of Indebtedness (whether secured or unsecured) of or to Gabriel or any
of the Gabriel Subsidiaries, and all Liens with respect to any Property used or
owned by Gabriel or any of the Gabriel Subsidiaries;
(g) all contracts substantially restricting Gabriel or any of
the Gabriel Subsidiaries from engaging in any line of business or competing with
any Person or in any geographical area, or from using or disclosing any
information in its possession (other than routine supplier and customer
confidentiality agreements);
(h) all license agreements, either as licensor or licensee;
(i) all joint venture contracts and agreements involving a
sharing of profits;
(j) all contracts, commitments or shared services arrangement
with any Affiliate and all contracts or commitments not made in the ordinary
course of its business; and
(k) all other contracts which are otherwise material to
Gabriel or any of the Gabriel Subsidiaries or their respective businesses or
assets.
Except as set forth on Schedule 3.13, all of the Gabriel Material
Contracts are valid, binding and in full force and effect as to Gabriel and the
Gabriel Subsidiaries, and none of Gabriel or any of the Gabriel Subsidiaries or,
to the best of Gabriel's knowledge, any other party thereto, is in material
breach or material violation of, or material default under, nor is there any
reasonable basis for a claim of material breach or violation by Gabriel or any
of the Gabriel Subsidiaries of, or
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default by Gabriel or any of the Gabriel Subsidiaries under, the terms of any
such contract, agreement, plan, lease or commitment, and no event has occurred
which constitutes or, with the lapse of time or the giving of notice or both,
would constitute such a material breach, violation or default by Gabriel or any
of the Gabriel Subsidiaries thereunder.
3.14. GABRIEL EMPLOYEE BENEFIT PLANS. (a)Except as set forth in
Schedule 3.14 attached hereto, there are no Benefit Plans maintained or
contributed to by Gabriel or a Gabriel Subsidiary under which Gabriel, a Gabriel
Subsidiary or the Surviving Corporation could incur any liability. There are no
negotiations, demands or proposals pending or threatened or which have been made
since May 1997 which concern matters now covered, or that would be covered, by
the types of Benefit Plans of Gabriel or any Gabriel Subsidiary described in
clauses (i) and (ii) of Section 2.14 hereof.
(b) With respect to each Benefit Plan (where applicable):
Gabriel has made available to TriVergent complete and accurate copies of (i) all
plan and trust texts and agreements, insurance contracts and other funding
arrangements; (ii) the most recent annual report on the Form 5500 series; (iii)
the most recent financial statements and/or annual and periodic accountings of
plan assets for the last two years; (iv) the most recent determination letter
received from the IRS; and (v) the most recent summary plan description as
defined in ERISA.
(c) With respect to each Benefit Plan while maintained or
contributed to by Gabriel or a Gabriel Subsidiary: (i) if intended to qualify
under Code Sections 401(a) or 403(a), such Benefit Plan has received a favorable
determination letter from the IRS that it so qualifies, and its trust is exempt
from taxation under Code Section 501(a) and, to the knowledge of Gabriel,
nothing has since occurred to cause the loss of the Benefit Plan's
qualification; (ii) such Benefit Plan has been administered in accordance with
its terms and applicable Laws; (iii) except for payment of benefits made in the
ordinary course of the plan administration, no event has occurred and there
exists no circumstance under which Gabriel, a Gabriel Subsidiary or the
Surviving Corporation could incur liability under ERISA, the Code or otherwise;
(iv) no accumulated funding deficiency as defined in Code Section 412 has
occurred or exists; (v) no non-exempt prohibited transaction as defined under
ERISA and the Code has occurred; (vi) no reportable event as defined in Section
4043 of ERISA has occurred (other than events as to which the 30-day notice
period is waived pursuant to Section 4043 of ERISA); (vii) all contributions and
premiums due have fully been made and paid on a timely basis; and (viii) all
contributions made or required to be made under any Benefit Plan meet the
requirements for deductibility under the Code, and all contributions accrued
prior to March 31, 2000 which have not been made have been properly recorded on
the Gabriel Financial Statements, except, in each case under clauses (i) through
(viii) above, for any deviations from the foregoing which do not and would not
reasonably be expected to have a Gabriel Material Adverse Effect or a Surviving
Corporation Material Adverse Effect. Neither Gabriel nor any Gabriel Subsidiary
has any liability by virtue of its being a member of a controlled group with a
person who has liability under the Code of ERISA.
(d) No Benefit Plan is a defined benefit pension plan subject
to Title IV of ERISA or Section 412 of the Code. Each of the Benefit Plans has
been maintained in compliance with its terms and all applicable Law, except
where the failure to do so would not reasonably be
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expected to have a Gabriel Material Adverse Effect. Neither Gabriel nor any of
the Gabriel Subsidiaries contributes to, or has any outstanding liability with
respect to, any Multi-employer Plan.
(e) With respect to each Benefit Plan which is a welfare plan
(as defined in ERISA Section 3(1)): (i) any liability for medical or death
benefits with respect to current or former employees beyond their termination of
employment (except as may be required by applicable Law) is provided for in the
Gabriel Financial Statements to the extent required by generally accepted
accounting principles; (ii) there are no reserves, assets, surplus or prepaid
premiums under any such plan; (iii) except as set forth in Schedule 3.14
attached hereto, no term or provision of any such plan prohibits the amendment
or termination thereof; and (iv) Gabriel and the Gabriel Subsidiaries have
complied with Code Section 4980B, except, in each case, for any deviations from
the foregoing which do not and would not reasonably be expected to have a
Gabriel Material Adverse Effect.
(f) Except as set forth in Schedule 3.14 attached hereto, the
consummation of the Merger will not, either alone or in conjunction with another
Event under the terms of any Benefit Plan: (i) entitle any individual to
severance pay, or (ii) accelerate the time of payment or vesting of benefits or
increase the amount of compensation due to any individual.
3.15. TAXES AND RETURNS.
(a) Except as disclosed in Schedule 3.15 attached hereto,
Gabriel and each of the Gabriel Subsidiaries has timely filed, or caused to be
timely filed, all Tax Returns, and has paid, collected or withheld, or caused to
be paid, collected or withheld, all material amounts of Taxes required to be
paid, collected or withheld, other than such Taxes for which adequate reserves
in the Gabriel Financial Statements have been established or which are being
contested in good faith as reflected in records made available to TriVergent
prior to the date of this Agreement. Except as set forth in Schedule 3.15
attached hereto, there are no claims or assessments pending against Gabriel or
any Gabriel Subsidiary for any alleged deficiency in any Tax, and Gabriel has
not been notified in writing of any proposed Tax claims or assessments against
Gabriel or any Gabriel Subsidiary (other than, in each case, those for which
adequate reserves in the Gabriel Financial Statements have been established or
which are being contested in good faith as reflected in records made available
to TriVergent prior to the date of this Agreement or are immaterial in amount).
Except as set forth in Schedule 3.15 attached hereto, neither Gabriel nor any
Gabriel Subsidiary has any waivers or extensions of any applicable statute of
limitations to assess any material amount of Taxes. Except as set forth in
Schedule 3.15 attached hereto, there are no outstanding requests by Gabriel or a
Gabriel Subsidiary for any extension of time within which to file any material
Tax Return or within which to pay any material amount of Taxes shown to be due
on any Tax Return. Except as set forth on Schedule 3.15 attached hereto, no
taxing authority is conducting or has notified or, to the knowledge of Gabriel,
has threatened Gabriel or any Gabriel Subsidiary that it intends to conduct, an
audit of any prior Tax period of Gabriel or any of its past or present
subsidiaries. Except as disclosed in Schedule 3.15 attached hereto, neither
Gabriel nor any Gabriel Subsidiary has ever been an "S" corporation under the
Code.
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(b) A listing of all Tax sharing agreements or similar
arrangements with respect to or involving Gabriel or a Gabriel Subsidiary is set
forth in Schedule 3.15 attached hereto.
(c) Except as set forth in Schedule 3.15 attached hereto,
neither Gabriel nor any Gabriel Subsidiary has made or become obligated to make,
or will, as a result of the transactions contemplated by this Agreement, make or
become obligated to make, any "excess parachute payment" as defined in Section
280G of the Code (without regard to Subsection (b)(4) thereof).
(d) Except as set forth in Schedule 3.15 attached hereto,
neither Gabriel nor any Gabriel Subsidiary is or has been a United States real
property holding company (as defined in Section 897(c)(2) of the Code) during
the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(e) Except as provided in Schedule 3.15 attached hereto,
neither Gabriel nor any Gabriel Subsidiary is a Person other than a United
States Person within the meaning of the Code.
(f) None of the assets of Gabriel or of any Gabriel Subsidiary
is property which Gabriel or any Gabriel Subsidiary is required to treat as
being owned by any other Person pursuant to the so-called "safe harbor lease"
provisions of former Section 168(f)(8) of the Code.
(g) There are no liens for Taxes on the assets of Gabriel or
any Gabriel Subsidiary except for statutory liens for current Taxes not yet due
and payable.
(h) All material elections with respect to any material amount
of Taxes affecting Gabriel and the Gabriel Subsidiaries are described in
Schedule 3.15 attached hereto. Neither Gabriel nor any Gabriel Subsidiary: (i)
has consented at any time under Section 341(f)(l) of the Code to have the
provisions of Section 341(f)(2) of the Code apply to any disposition of the
assets of Gabriel or any Gabriel Subsidiary; (ii) has agreed, or is required, to
make any adjustment under Section 481(a) of the Code by reason of a change in
accounting method or otherwise; (iii) has made an express election, or is
required, to treat any asset of Gabriel or any Gabriel Subsidiary as owned by
another Person for federal income tax purposes or as tax-exempt bond financed
property or tax-exempt use property within the meaning of Section 168 of the
Code; or (iv) has made any of the foregoing elections or is required to apply
any of the foregoing rules under any comparable state, foreign or local income
Tax provision.
(i) Except as set forth in Schedule 3.15 attached hereto,
Gabriel and the Gabriel Subsidiaries are not and have never been includable
corporations in an affiliated group of corporations, within the meaning of
Section 1504 of the Code, other than in the affiliated group of which Gabriel is
the common parent corporation.
(j) Except as set forth in Schedule 3.15 attached hereto or as
a result of the Merger, the consolidated net operating losses, net capital
losses, foreign tax credits, investment and other tax credits set forth in the
Gabriel Financial Statements are not subject to any limitations
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under Section 382, Section 383 or the Treasury regulations (whether temporary,
proposed or final) under Section 1502 of the Code.
(k) Except as set forth in Schedule 3.15 attached hereto,
neither Gabriel nor any Gabriel Subsidiary is a partner or member in or subject
to any joint venture, partnership, limited liability company or other
arrangement or contract that is or should be treated as a partnership for
federal income tax purposes.
(l) Except as set forth on Schedule 3.15 attached hereto,
neither Gabriel nor any of the Gabriel Subsidiaries has entered into any
covenant related to the acquisition of any Gabriel Subsidiary with respect to
the qualification of such acquisition as a reorganization under Section 368 of
the Code.
3.16. NO UNDISCLOSED LIABILITIES. Gabriel and the Gabriel
Subsidiaries do not have any liabilities or obligations whatsoever, whether
accrued, contingent or otherwise, and Gabriel knows of no basis for any claim
against Gabriel or any Gabriel Subsidiary for any liability or obligation,
except (i) to the extent set forth or reflected in the Gabriel Financial
Statements provided or made available to TriVergent prior to the date of this
Agreement, (ii) to the extent expressly set forth on any Schedule attached
hereto or otherwise as described in this Article II, or (iii) liabilities or
obligations incurred in the normal and ordinary course of business since the
Gabriel Balance Sheet Date, and except, in each case, for any deviations from
the foregoing which individually or in the aggregate do not and would not
reasonably be expected to have a Gabriel Material Adverse Effect or a Surviving
Corporation Material Adverse Effect.
3.17. ENVIRONMENTAL MATTERS. Except as set forth on Schedule 3.17,
and except, in each case, for any deviations which do not and would not
reasonably be expected to have a Gabriel Material Adverse Effect or a Surviving
Corporation Material Adverse Effect, as of the date of this Agreement, (i) each
of Gabriel and the Gabriel Subsidiaries is in compliance with all applicable
Environmental Laws (as hereinafter defined), (ii) each of Gabriel and the
Gabriel Subsidiaries has obtained, and is in compliance with, all Environmental
Permits, (iii) there is no civil, criminal or administrative judgment, action,
suit, demand, claim, hearing, notice of violation, investigation, proceeding,
notice or demand letter pending or, to the knowledge of Gabriel, threatened
against Gabriel, a Gabriel Subsidiary or any of their respective properties
alleging a violation of, or liability under, any Environmental Laws and (iv)
there are no past or present Events which reasonably may be expected to prevent
compliance with, or which have given rise to or will give rise to liability on
the part of Gabriel or a Gabriel Subsidiary, under Environmental Laws. Schedule
3.17 lists all environmental reports in the possession of Gabriel or a Gabriel
Subsidiary relating to any of their respective past or present properties.
3.18. INTELLECTUAL PROPERTY. Except as set forth on Schedule 3.18
attached hereto, (i) Gabriel or one of the Gabriel Subsidiaries owns, or is
licensed to or otherwise has the right to use, all material Intellectual
Property currently used in its or their respective businesses, (ii) the rights
of Gabriel and the Gabriel Subsidiaries in such Intellectual Property are,
subject to the rights of any licensor thereof, free and clear of any liens or
other encumbrances and restrictions and neither Gabriel nor any of the Gabriel
Subsidiaries has received, as of the date of this Agreement, any Claim Notice
and does not know of any basis for any such charge or claim, and
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(iii) neither Gabriel, the Gabriel Subsidiaries nor their respective
predecessors, if any, have conducted business at any time during the period
prior to the date hereof under any corporate, trade or fictitious names other
than their current corporate names. Gabriel shall promptly notify, and shall
cause the Gabriel Subsidiaries to promptly notify, TriVergent of any Claim
Notice received by Gabriel or a Gabriel Subsidiary after the date of this
Agreement.
3.19. REAL ESTATE.
(a) Schedule 3.19(a) attached hereto sets forth a true,
correct and complete schedule as of the date of this Agreement of all real
property owned by Gabriel or any of the Gabriel Subsidiaries. Gabriel or one of
the Gabriel Subsidiaries, as indicated thereon, is the owner of fee title to the
real property described on said Schedule 3.19(a) and to all of the buildings,
structures and other improvements located thereon free and clear of any material
mortgage, deed of trust, lien, pledge, security interest, claim, lease, charge,
option, right of first refusal, easement, restrictive covenant, encroachment or
other survey defect, encumbrance or other restriction or limitation except for
the matters listed on said Schedule 3.19(a) and, except for any exceptions,
easements, restrictive covenants, encroachments or other survey defects,
encumbrances, restrictions or limitations which, individually or in the
aggregate, do not and would not reasonably be expected to have a Gabriel
Material Adverse Effect or a Surviving Corporation Material Adverse Effect or to
interfere in any material respect with the present use and enjoyment of such
real property.
(b) Schedule 3.19(b) attached hereto sets forth a true,
correct and complete schedule as of the date of this Agreement of all material
leases, subleases, easements, rights-of-way, licenses or other agreements under
which Gabriel or any of the Gabriel Subsidiaries uses or occupies, or has the
right to use or occupy any material real property or improvements thereon other
than collocation agreements (the "Gabriel Real Property Leases"). Except for the
matters listed on said Schedule 3.19(b), Gabriel or a Gabriel Subsidiary, as
indicated thereon, holds the leasehold estate under or other interest in each
Gabriel Real Property Lease free and clear of all liens, encumbrances and other
rights of occupancy other than statutory landlords' or mechanics' liens which
have not been executed upon, and except for liens, encumbrances and rights that
do not and would not reasonably be expected to have a Gabriel Material Adverse
Effect or a Surviving Corporation Material Adverse Effect or to interfere in any
material respect with the present use and enjoyment of such leasehold estate or
interest.
3.20. CORPORATE RECORDS. The respective corporate record books of or
relating to Gabriel and each of the Gabriel Subsidiaries made available to
TriVergent by Gabriel contain accurate and complete records of (i) all corporate
actions of the respective stockholders and directors (and committees thereof) of
Gabriel and the Gabriel Subsidiaries, (ii) the Certificate and/or Articles of
Incorporation, Bylaws and/or other governing instruments, as amended, of Gabriel
and the Gabriel Subsidiaries, and (iii) the issuance and transfer of stock of
Gabriel and the Gabriel Subsidiaries. Except as set forth on Schedule 3.20
attached hereto, neither Gabriel nor any Gabriel Subsidiary has any of its
material records or information recorded, stored, maintained or held off the
premises of Gabriel and the Gabriel Subsidiaries.
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3.21. TITLE TO AND CONDITION OF PERSONAL PROPERTY. Gabriel and each
of the Gabriel Subsidiaries have good and marketable title to, or a valid
leasehold interest in, all material items of any personal property currently
used in the operation of their respective businesses, and such property or
leasehold interests are free and clear of all liens, claims, charges, security
interests, options, or other title defects or encumbrances that have had or
would reasonably be expected to have a Gabriel Material Adverse Effect or a
Surviving Corporation Material Adverse Effect or to interfere in any material
respect with the present use and enjoyment of such property or interests. As of
the date of this Agreement, all such personal property is in reasonably good
operating condition and repair as required for use in the businesses of Gabriel
and the Gabriel Subsidiaries (ordinary wear and tear excepted), is reasonably
suitable for the use to which the same is customarily put by Gabriel or any
Gabriel Subsidiary and is free from material defects.
3.22. NO ADVERSE ACTIONS. Except as set forth on Schedule 3.22
attached hereto, there is no existing, pending or, to the knowledge of Gabriel,
overtly threatened termination, cancellation, limitation, modification or change
in the business relationship of Gabriel or any of the Gabriel Subsidiaries, with
any supplier, customer or other Person except such as would not reasonably be
expected to have a Gabriel Material Adverse Effect or a Surviving Corporation
Material Adverse Effect. None of Gabriel, any Gabriel Subsidiary or, to the
knowledge of Gabriel, any director, officer, agent, employee or other Person
acting on behalf of Gabriel or any Gabriel Subsidiary has used any corporate
funds for unlawful contributions, payments, gifts or entertainment or for the
payment of other unlawful expenses relating to political activity, or made any
direct or indirect unlawful payments to governmental or regulatory officials or
others, which would reasonably be expected to have a Gabriel Material Adverse
Effect or a Surviving Corporation Material Adverse Effect.
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3.23. LABOR MATTERS. Except as set forth on Schedules 3.13, 3.14 or
3.23 attached hereto, neither Gabriel nor any of the Gabriel Subsidiaries has
any material obligations, contingent or otherwise, under any employment,
severance or consulting agreement, any collective bargaining agreement or any
other contract with a labor union or other labor or employee group. To the
knowledge of Gabriel, as of the date of this Agreement, there are no
negotiations, demands or proposals which are presently pending or overtly
threatened by or on behalf of any labor union with respect to the unionizing of
employees of Gabriel or any Gabriel Subsidiary. As of the date of this
Agreement, there is no unfair labor practice complaint against Gabriel or any
Gabriel Subsidiary pending or, to the knowledge of Gabriel, threatened before
the National Labor Relations Board or comparable agency, no unresolved grievance
against Gabriel or any Gabriel Subsidiary, no collective bargaining agreement
which is currently being negotiated by Gabriel or any Gabriel Subsidiary, and
neither Gabriel nor any Gabriel Subsidiary is experiencing any work stoppage,
strike, slowdown or other labor difficulty which, in each case, would reasonably
be expected to have a Gabriel Material Adverse Effect or a Surviving Corporation
Material Adverse Effect. As of the date of this Agreement, no employee has
informed Gabriel or any Gabriel Subsidiary of his or her intention to terminate
his or her employment with Gabriel or any Gabriel Subsidiary as a result of any
announcement or consummation of the transactions contemplated by this Agreement.
Gabriel shall promptly notify, and shall cause the Gabriel Subsidiaries to
promptly notify, TriVergent upon knowledge by Gabriel or a Gabriel Subsidiary of
the occurrence after the date hereof of any matter referenced in this Section
3.23.
3.24. INDEBTEDNESS TO AND FROM OFFICERS, DIRECTORS AND OTHERS.
Except as set forth on Schedule 3.24 hereto, neither Gabriel nor any of the
Gabriel Subsidiaries is indebted to any director, officer, employee or
consultant of Gabriel or any of the Gabriel Subsidiaries or to any other
Affiliate of Gabriel, except for amounts due as normal salaries, fees or
reimbursement of ordinary business expenses. Except as set forth on Schedule
3.24, no director, officer, employee or consultant of Gabriel or any of the
Gabriel Subsidiaries and no other Affiliate of Gabriel is now, or on the Closing
Date will be, indebted to Gabriel or any of the Gabriel Subsidiaries except for
ordinary business expense advances.
3.25. INSURANCE. Schedule 3.25 attached hereto lists each policy of
insurance which Gabriel and each of the Gabriel Subsidiaries has obtained and
maintains. As of the date of this Agreement, neither Gabriel nor any of the
Gabriel Subsidiaries has received notice of default under, or intended
cancellation or nonrenewal of, any of such policies of insurance. Neither
Gabriel nor any Gabriel Subsidiary has been refused any insurance for any
material coverage by an insurance carrier to which it has applied for such
insurance coverage.
3.26. INVESTMENT COMPANY. Gabriel is not an "investment company", or
an "affiliated person" of an "investment company", or a company "controlled" by
an "investment company" as such terms are defined in the Investment Company Act
of 1940.
3.27. FAIRNESS OPINION. Gabriel's Board of Directors has received
from its financial advisors, Salomon Smith Barney Inc., a written opinion
addressed to it for inclusion in the Prospectus/Information Statement to the
effect that the Merger Consideration is fair to the holders of Gabriel Common
Stock and Gabriel Preferred Stock from a financial point of view. An accurate
and complete copy of such opinion has been provided to TriVergent.
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ARTICLE IV.
ADDITIONAL COVENANTS OF TRIVERGENT
TriVergent represents, covenants and agrees as follows:
4.1. CONDUCT OF BUSINESS OF TRIVERGENT AND THE TRIVERGENT
SUBSIDIARIES. Except as expressly contemplated by this Agreement, during the
period from the date of this Agreement to the Effective Time, TriVergent shall
conduct, and it shall cause the TriVergent Subsidiaries to conduct, its or their
respective businesses in the ordinary course and consistent with past practice,
subject to the limitations contained in this Agreement, and TriVergent shall,
and it shall cause the TriVergent Subsidiaries to, use commercially reasonable
efforts to preserve intact its or their respective business organizations, to
keep available the services of its or their respective officers, agents and
employees and to maintain satisfactory relationships with all Persons with whom
any of them does business. Without limiting the generality of the foregoing, and
except as otherwise expressly provided in this Agreement or as set forth in
Schedule 4.1, after the date of this Agreement and prior to the Effective Time,
neither TriVergent nor any TriVergent Subsidiary will, without the prior written
consent of Gabriel:
(i) amend or propose to amend its Articles or Certificate of
Incorporation or Bylaws (or comparable governing instruments);
(ii) authorize for issuance, issue, grant, sell, pledge,
dispose of or propose to issue, grant, sell, pledge or dispose of any
shares of, or any options, warrants, commitments, subscriptions or
rights of any kind to acquire or sell any shares of, the capital stock,
limited liability company interests or other securities of TriVergent
or any TriVergent Subsidiary including, but not limited to, any
securities convertible into or exchangeable for shares of capital
stock, limited liability company interests or other securities of any
class of TriVergent or any TriVergent Subsidiary, except for the (a)
issuance of shares of TriVergent Common Stock pursuant to the
conversion of shares of TriVergent Preferred Stock and the exercise of
TriVergent Options outstanding on the date of this Agreement in
accordance with their present terms, (b) the issuance of shares of
TriVergent Preferred Stock pursuant to Section 1.3(d) above, (c) for
the grant of employee stock options as permitted by Section 4.9(a),
below, (d) the issuance of up to 196,000 shares of TriVergent Common
Stock as part of the consideration for the acquisition by TriVergent of
NetMCR, and (e) the issuance of debt securities as permitted by clause
(iv) of this Section 4.1;
(iii) split, combine or reclassify any shares of its capital
stock or any of its limited liability company interests, as the case
may be, or declare, pay or set aside any dividend (except as
contemplated by Section 1.3(d) above) or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock or limited liability company interests, as the case may
be, other than dividends or distributions to its parent by a TriVergent
Subsidiary wholly owned, directly or indirectly, by TriVergent, or
redeem, purchase or otherwise acquire or offer to acquire any shares of
its capital stock, limited liability company interests or other
securities, except for repurchases
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of TriVergent Common Stock at a price no greater than $4.25 per share from
employees whose employment is terminated;
(iv) (a) except for debt (including, but not limited to,
obligations in respect of capital leases) provided for in the budget and
business plan of TriVergent for the fiscal year ending December 31, 2000, a copy
of which has been delivered to Gabriel (the "TriVergent Business Plan"), create,
incur or assume any short-term debt, long-term debt or obligations in respect of
capital leases; (b) assume, guarantee, endorse or otherwise become liable or
responsible for (whether directly, indirectly, contingently or otherwise) any
material obligation of any Person, other than TriVergent or any wholly owned
TriVergent Subsidiary; (c) make any capital expenditures or make any loans,
advances or capital contributions to, or investments in, any other Person (other
than to a wholly-owned TriVergent Subsidiary or pursuant to the terms of
agreements as in effect on the date hereof and/or customary advances to
employees made in the ordinary course of business consistent with past
practice), provided TriVergent will continue to make capital expenditures,
maintain, upgrade and expand its facilities and those of the TriVergent
Subsidiaries and otherwise operate in accordance with the TriVergent Business
Plan; (d) except for the acquisition of NetMCR, acquire the stock or all or a
substantial portion of the assets of, or merge or consolidate with, any other
Person or business; or (e) voluntarily incur any material liability or
obligation (absolute, accrued, contingent or otherwise), other than (1) as
provided in the TriVergent Business Plan, (2) liabilities or obligations which
are not in excess of $1,000,000 in the aggregate or (3) as otherwise permitted
by this Section 4.1;
(v) sell, transfer, mortgage, pledge or otherwise dispose of,
or encumber, or agree to sell, transfer, mortgage, pledge or otherwise dispose
of or encumber, any assets or properties, real, personal or mixed, other than in
the ordinary course of business consistent with past practice and having a net
book value not in excess of $250,000 individually or $500,000 in the aggregate,
and other than to secure indebtedness permitted by the preceding clause (iv) of
this Section 4.1;
(vi) increase in any manner the compensation of any of its
officers (at or above the office of Vice President) or agents other than any
increases required pursuant to the TriVergent Material Contracts in accordance
with their terms in effect on the date of this Agreement and increases in the
ordinary course of business consistent with past practice not in excess on an
individual basis of the lesser of 10% of the current compensation of such
individual or $10,000 per annum;
(vii) enter into, establish, amend or terminate any
employment, retention, change in control (except as required to obtain the
acknowledgments referred to in Section 5.10(b) hereof), collective bargaining,
bonus or other incentive compensation agreement, or any profit sharing, health
or other welfare, stock option, stock purchase, restricted stock, or other
equity, pension, retirement, vacation, severance, deferred compensation or other
compensation or benefit plan, policy, agreement, trust, fund or arrangement
with, for or in respect of, its officers, directors, other employees, agents,
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consultants or affiliates, other than as required by Law or pursuant to the
terms of agreements as in effect on the date hereof or as otherwise permitted by
this Section 4.1;
(viii) make any material elections with respect to Taxes that
are inconsistent with the prior elections reflected in the TriVergent Financial
Statements as of and for the period ended December 31, 1999;
(ix) compromise, settle, forgive, cancel, grant any waiver
or release relating to or otherwise adjust any debts, claims, rights or
Litigation, except routine debts, claims, rights or Litigation in the ordinary
course of business consistent with past practice, involving only a payment not
in excess of $10,000 individually or $25,000 when aggregated with all such
payments by TriVergent and the TriVergent Subsidiaries combined;
(x) take any action or omit to take any action, which
action or omission, if taken prior to, on or after the date hereof, would have a
TriVergent Material Adverse Effect or a Surviving Corporation Material Adverse
Effect;
(xi) enter into any lease or other agreement, or amend in
any respect materially adverse to TriVergent or a TriVergent Subsidiary any
lease or other agreement, with respect to real property, not contemplated by the
TriVergent Business Plan, or which obligates TriVergent or any TriVergent
Subsidiary to pay total rent in excess of $50,000 per year;
(xii) enter into any agreement or transaction or series of
agreements or transactions, whether for the purchase or sale of materials,
supplies, component parts or other items or services or otherwise, and whether
in the ordinary course of its business or otherwise, which is not contemplated
by the TriVergent Business Plan and involves in excess of $50,000 individually
or in the aggregate for all such agreements or transactions with any one Person
or affiliated group of Persons;
(xiii) take any action with respect to the indemnification of
any current or former director, officer employee or agent;
(xiv) change any accounting practices or policies or
depreciation or amortization rates, except as required by generally accepted
accounting principles or Laws or as agreed to or requested by TriVergent's
auditors after consultation with Gabriel's auditors;
(xv) enter into, amend, modify, terminate or waive any
material rights under any TriVergent Material Contract or any material agreement
or other material obligation that restricts, in any material respect, the
activities of TriVergent or a TriVergent Subsidiary;
(xvi) adopt a plan of liquidation, dissolution, merger,
consolidation, share exchange, restructuring, recapitalization, or other
reorganization; or
(xvii) resolve, agree, commit or arrange to do any of the
foregoing.
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Furthermore, TriVergent covenants, represents and warrants that from and
after the date hereof, unless Gabriel shall otherwise expressly consent in
writing, TriVergent shall, and TriVergent shall cause each TriVergent Subsidiary
to, use its or their respective reasonable best efforts to:
(i) keep in full force and effect insurance comparable in amount and
scope of coverage to insurance now carried by it or them;
(ii) pay all accounts payable and other obligations in the ordinary
course of business consistent with past practice, except if the same are
contested in good faith, and, in the case of the failure to pay any
material accounts payable or other material obligations which are contested
in good faith, only after consultation with Gabriel; and
(iii) comply in all material respects with all Laws applicable to any
of them or their respective properties, assets or businesses and maintain
in full force and effect all TriVergent Permits necessary for, or otherwise
material to, such businesses.
4.2. NOTIFICATION OF CERTAIN MATTERS. TriVergent shall give prompt notice
to Gabriel if any of the following occurs after the date of this Agreement: (i)
any breach or event of default under any TriVergent Material Contract giving
rise to a right of termination; (ii) receipt of any notice or other
communication from any third party alleging that the Consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement, other than a Consent disclosed pursuant to Section 2.5 or Section 2.6
above; (iii) receipt of any material notice or other communication from any
Governmental Authority in connection with the transactions contemplated by this
Agreement; (iv) the occurrence of an Event which would reasonably be expected to
have a TriVergent Material Adverse Effect or a Surviving Corporation Material
Adverse Effect; and (v) the commencement or threat of any Litigation involving
or affecting TriVergent or any TriVergent Subsidiary, or any of their respective
properties or assets, or, to its knowledge, any employee, agent, director or
officer of TriVergent or any TriVergent Subsidiary, in his or her capacity as
such or as a fiduciary under a Benefit Plan of TriVergent, which, if pending on
the date hereof, would have been required to have been disclosed in or pursuant
to this Agreement or which relates to the consummation of the Merger, or any
material development in connection with any Litigation disclosed by TriVergent
in or pursuant to this Agreement or the TriVergent Form S-1.
4.3. ACCESS AND INFORMATION. Between the date of this Agreement and the
Effective Time, TriVergent will give, and will cause each of the TriVergent
Subsidiaries to give, and shall direct its financial advisors, accountants and
legal counsel to give, upon reasonable notice, Gabriel, its lenders, financial
advisors, accountants and legal counsel and their respective authorized
representatives at all reasonable times reasonable access to all offices and
other facilities and to all contracts, agreements, commitments, books and
records of or pertaining to TriVergent and the TriVergent Subsidiaries, will
permit the foregoing to make such reasonable inspections as they may require and
will cause its officers promptly to furnish Gabriel with such financial and
operating data and other information with respect to the business and properties
of TriVergent and the TriVergent Subsidiaries as Gabriel may from time to time
reasonably request in connection with the transactions contemplated hereby,
including, but not limited to, data and
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information required for inclusion in the Registration Statement and/or other
Gabriel securities Law filings. The foregoing access will be subject to
government security restrictions and restrictions contained in confidentiality
agreements to which TriVergent is subject and of which Gabriel has been advised
prior to the date of this Agreement (if requested, prior to the date hereof);
provided that TriVergent shall use commercially reasonable efforts to obtain
waivers of such restrictions.
4.4. STOCKHOLDER APPROVAL. As soon as practicable after the Registration
Statement is declared effective, TriVergent will, subject to obtaining Gabriel's
written consent pursuant to Section 1.11(d) of this Agreement, take all steps
necessary to obtain the vote of its stockholders for the purpose of adopting
this Agreement and for such other purposes as may be necessary or desirable in
connection with effectuating the transactions contemplated hereby (the
"TriVergent Stockholder Approval"). The Board of Directors of TriVergent (i)
will recommend to the stockholders of TriVergent that they adopt this Agreement
and approve the transactions contemplated hereby and (ii) will use its
reasonable best efforts to obtain any necessary adoption and approval by
TriVergent's stockholders of this Agreement and the transactions contemplated
hereby.
4.5. REASONABLE BEST EFFORTS. Upon the terms and subject to conditions
herein provided, TriVergent agrees to use its reasonable best efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the Merger and the other transactions contemplated by this Agreement
including, but not limited to (i) obtaining any third party Consent required in
connection with the execution and delivery by TriVergent of this Agreement or
the consummation by TriVergent of the transactions contemplated hereby, (ii) the
defending of any Litigation against TriVergent or any TriVergent Subsidiary
challenging this Agreement or the consummation of the transactions contemplated
hereby, (iii) obtaining all Consents from Governmental Authorities required for
the consummation of the Merger and the transactions contemplated hereby, and
(iv) timely making all necessary filings under the HSR Act. TriVergent will
consult with counsel for Gabriel as to, and will permit such counsel to
participate in, at Gabriel's expense, any Litigation referred to in clause (ii)
above brought against or involving TriVergent or any TriVergent Subsidiary.
4.6. PUBLIC ANNOUNCEMENTS. So long as this Agreement is in effect,
TriVergent shall not, and shall cause its Affiliates not to, issue or cause the
publication of any press release or any other announcement with respect to the
Merger or the transactions contemplated by this Agreement without the consent of
Gabriel, except when such release or announcement is required by applicable Law,
in which case TriVergent, prior to making such announcement, shall, to the
extent practicable, consult with Gabriel regarding the same.
4.7. INTENTIONALLY OMITTED.
4.8. TAX TREATMENT. TriVergent shall use its reasonable best efforts to
cause the Merger to qualify, and will not take any action which to its knowledge
could reasonably be expected to prevent the Merger from qualifying, as a
reorganization under Section 368 of the Code. Prior to the Effective Time,
TriVergent shall provide tax counsel rendering an opinion
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under Subsection 6.2.4 and Subsection 6.3.4 below with a certificate concerning
such matters as such counsel identifies are relevant to its opinion and will use
its reasonable best efforts to obtain such a certificate from any stockholder of
TriVergent identified by such counsel.
4.9. TRIVERGENT BENEFIT PLANS. Between the date of this Agreement and
through the Effective Time, no discretionary award or grant under any Benefit
Plan of TriVergent or a TriVergent Subsidiary shall be made without the consent
of Gabriel, except options for shares of TriVergent Common Stock (with exercise
prices at or above the fair market value, as determined by the Board of
Directors of TriVergent, of the underlying shares of TriVergent Common Stock on
the date of grant) granted to employees of TriVergent hired on or after the date
of this Agreement in the ordinary course of business consistent with past
practice as heretofore disclosed to Gabriel; nor shall TriVergent or a
TriVergent Subsidiary take any action or permit any action to be taken to
accelerate the vesting of any warrants or options previously granted pursuant to
any such Benefit Plan except as specifically required pursuant to the terms
thereof as in effect on the date of this Agreement or as specifically provided
herein, provided, however, that in no event shall any such acceleration of
vesting be effected or permitted in contravention of Section 1.6 or Section
5.10(b) hereof. Except as required by law, neither TriVergent nor any TriVergent
Subsidiary shall make any amendment to any Benefit Plan or any awards thereunder
without the consent of Gabriel, which consent shall not be unreasonably
withheld.
4.10. NO SOLICITATION OF ACQUISITION PROPOSAL.
(a) TriVergent shall, and shall direct and use its reasonable best
efforts to cause its officers, directors, employees, representatives and agents
to, immediately cease any discussions or negotiations with any parties that may
be ongoing with respect to a TriVergent Acquisition Proposal (as hereinafter
defined). TriVergent shall not, nor shall it permit any of the TriVergent
Subsidiaries to, nor shall it authorize or permit any of its officers, directors
or employees or any investment banker, financial advisor, attorney, accountant
or other representative retained by it or any of the TriVergent Subsidiaries to,
directly or indirectly, (i) solicit, initiate or encourage (including by way of
furnishing information), or take any other action designed or reasonably likely
to facilitate, any inquiries or the making of any proposal which constitutes, or
may reasonably be expected to lead to, any TriVergent Acquisition Proposal or
(ii) participate in any discussions or negotiations regarding any TriVergent
Acquisition Proposal. "TriVergent Acquisition Proposal" means any inquiry,
proposal or offer from any Person relating to any direct or indirect acquisition
or purchase of 15% or more of the assets of TriVergent and the TriVergent
Subsidiaries, taken as a whole, or 15% or more of any class of equity securities
of TriVergent or any of the TriVergent Subsidiaries, any tender offer or
exchange offer that if consummated would result in any Person beneficially
owning 15% or more of any class of equity securities of TriVergent or any of the
TriVergent Subsidiaries, any merger, consolidation, share exchange, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving TriVergent or any of the TriVergent Subsidiaries other than the
transactions contemplated by this Agreement, or any other transaction the
consummation of which would reasonably be expected to impede, interfere with,
prevent or materially delay the Merger.
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(b) Neither the Board of Directors of TriVergent nor any committee
thereof shall (i) withdraw or modify, or propose publicly to withdraw or modify,
in a manner adverse to Gabriel, the approval or recommendation by such Board of
Directors of this Agreement, (ii) approve or recommend, or propose publicly to
approve or recommend, any TriVergent Acquisition Proposal other than the Merger
or (iii) cause TriVergent to enter into any letter of intent, agreement in
principle, acquisition agreement or other similar agreement (each, a "TriVergent
Acquisition Agreement") related to any TriVergent Acquisition Proposal other
than the Merger.
(c) In addition to the obligations of TriVergent set forth in
paragraphs (a) and (b) of this Section 4.10, TriVergent shall immediately advise
Gabriel orally and in writing of any TriVergent Acquisition Proposal, the
material terms and conditions of such request or TriVergent Acquisition Proposal
and the identity of the Person making such request or TriVergent Acquisition
Proposal. TriVergent will keep Gabriel fully informed of the status and details
(including amendments or proposed amendments) of any such request or TriVergent
Acquisition Proposal.
4.11. SECURITIES AND STOCKHOLDER MATERIALS; WITHDRAWAL OF FORM S-1.
TriVergent shall send to Gabriel a copy of all material reports and other
documents, if any, as and when it sends the same to its stockholders, the SEC or
any state securities commission. TriVergent shall take such action, if any, as
is required in connection with the registration of the issuance of the Gabriel
Securities to formally withdraw the TriVergent Form S-1, effective at the
Effective Time. TriVergent shall not, prior to the Effective Time, amend the
TriVergent Form S-1.
4.12. TAKEOVER STATUTES. If any Takeover Statute is or may become
applicable to the Merger or the transactions contemplated hereby, TriVergent and
the members of its Board of Directors will grant such approvals and will take
such other actions as are necessary so that the Merger and the other
transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated hereby and will otherwise act to eliminate
or minimize the effects of any Takeover Statute on the Merger and any of the
other transactions contemplated hereby.
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4.13. COMFORT LETTERS. Upon the request of Gabriel, TriVergent shall use
its reasonable best efforts to provide to Gabriel a "comfort letter" from KPMG
LLP, the independent certified public accountants for TriVergent, dated a date
within two business days before the date on which the Registration Statement
shall become effective, addressed to the Board of Directors of each of
TriVergent and Gabriel, in form and substance reasonably satisfactory to Gabriel
and customary in scope and substance for letters delivered by certified public
accountants in connection with registration statements similar to the
Registration Statement.
ARTICLE V.
ADDITIONAL COVENANTS OF GABRIEL
Gabriel covenants and agrees as follows:
5.1. CONDUCT OF BUSINESS OF GABRIEL AND THE GABRIEL SUBSIDIARIES. Except as
expressly contemplated by this Agreement, during the period from the date of
this Agreement to the Effective Time, Gabriel shall conduct, and it shall cause
the Gabriel Subsidiaries to conduct, its or their respective businesses in the
ordinary course and consistent with past practice, subject to the limitations
contained in this Agreement, and Gabriel shall, and it shall cause the Gabriel
Subsidiaries to, use commercially reasonable efforts to preserve intact its or
their respective business organizations, to keep available the services of its
or their respective officers, agents and employees and to maintain satisfactory
relationships with all Persons with whom any of them does business. Without
limiting the generality of the foregoing, and except as otherwise expressly
provided in this Agreement or as set forth on Schedule 5.1, after the date of
this Agreement and prior to the Effective Time, neither Gabriel nor any Gabriel
Subsidiary will, without the prior written consent of TriVergent:
(i) amend or propose to amend its Articles or Certificate of
Incorporation or Bylaws (or comparable governing instruments);
(ii) authorize for issuance, issue, grant, sell, pledge, dispose of
or propose to issue, grant, sell, pledge or dispose of any shares of, or
any options, warrants, commitments, subscriptions or rights of any kind to
acquire or sell any shares of, the capital stock or other securities of
Gabriel or any Gabriel Subsidiary including, but not limited to, any
securities convertible into or exchangeable for shares of capital stock of
any class of Gabriel or any Gabriel Subsidiary, except for the (a) the
issuance of shares of Gabriel Common Stock pursuant to the conversion of
shares of Gabriel Preferred Stock and the exercise of Gabriel Options
outstanding on the date of this Agreement in accordance with their present
terms, (b) the issuance of shares of Gabriel Series B Preferred Stock
pursuant to the Gabriel Series B Purchase Agreement, (c) the grant of
employee stock options as permitted by Section 5.10(c), below, and (d) the
issuance of debt securities as permitted by clause (iv) of this Section
5.1;
(iii) split, combine or reclassify any shares of its capital stock or
declare, pay or set aside any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, other than dividends or distributions to
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its parent by a Gabriel Subsidiary wholly owned, directly or indirectly, by
Gabriel, or redeem, purchase or otherwise acquire or offer to acquire any
shares of its capital stock or other securities, except for repurchases of
Gabriel Common Stock at a price no greater than $7.00 per share from
employees whose employment is terminated;
(iv) (a) except for debt (including, but not limited to, obligations
in respect of capital leases) provided for in the budget and business plan
of Gabriel for the year ending December 31, 2000, a copy of which has been
delivered to TriVergent (the "Gabriel Business Plan"), create, incur or
assume any short-term debt, long-term debt or obligations in respect of
capital leases; (b) assume, guarantee, endorse or otherwise become liable
or responsible for (whether directly, indirectly, contingently or
otherwise) any material obligation of any Person, other than Gabriel or any
wholly owned Gabriel Subsidiary; (c) make any capital expenditures or make
any loans, advances or capital contributions to, or investments in, any
other Person (other than to a wholly owned Gabriel Subsidiary or pursuant
to the terms of agreements as in effect on the date hereof and/or customary
advances to employees made in the ordinary course of business consistent
with past practice), provided Gabriel will continue to make capital
expenditures, maintain, upgrade and expand its facilities and those of the
Gabriel Subsidiaries and otherwise operate in accordance with the Gabriel
Business Plan; (d) except as heretofore disclosed to the Chief Executive
Officer of TriVergent, acquire the stock or all or a substantial portion of
the assets of, or merge or consolidate with, any other Person or business;
or (e) voluntarily incur any material liability or obligation (absolute,
accrued, contingent or otherwise), other than (1) as provided in the
Gabriel Business Plan, (2) liabilities or obligations which are not in
excess of $1,000,000 in the aggregate, (3) or as otherwise permitted by
this Section 5.1;
(v) sell, transfer, mortgage, pledge or otherwise dispose of, or
encumber, or agree to sell, transfer, mortgage, pledge or otherwise dispose
of or encumber, any assets or properties, real, personal or mixed, other
than in the ordinary course of business consistent with past practice and
having a net book value not in excess of $250,000 individually or $500,000
in the aggregate, and other than to secure indebtedness permitted by the
preceding clause (iv) of this Section 5.1;
(vi) increase in any manner the compensation of any of its officers
(at or above the office of Vice President) or agents other than any
increases required pursuant to the Gabriel Material Contracts in accordance
with their terms in effect on the date of this Agreement and increases in
the ordinary course of business consistent with past practice not in excess
on an individual basis of the lesser of 10% of the current compensation of
such individual or $10,000 per annum;
(vii) other than the employment agreements to be entered into with
certain executive officers of Gabriel as set forth on Schedule 5.1(vii)
attached hereto, enter into, establish, amend, make material
interpretations or determinations with respect to, or terminate any
employment, retention, change in control, collective bargaining, bonus or
other incentive compensation agreement, or any profit sharing, health or
other welfare, stock option, stock purchase, restricted stock, or other
equity, pension, retirement,
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vacation, severance, deferred compensation or other compensation or benefit
plan, policy, agreement, trust, fund or arrangement with, for or in respect
of, its officers, directors, other employees, agents, consultants or
affiliates, other than as required by Law or pursuant to the terms of
agreements as in effect on the date hereof or as otherwise permitted by
this Section 5.1;
(viii) make any material elections with respect to Taxes that are
inconsistent with the prior elections reflected in the Gabriel Financial
Statements as of and for the period ended December 31, 1999;
(ix) compromise, settle, forgive, cancel, grant any waiver or
release relating to or otherwise adjust any debts, claims, rights or
Litigation, except routine debts, claims, rights or Litigation in the
ordinary course of business consistent with past practice, involving only a
payment not in excess of $10,000 individually or $25,000 when aggregated
with all such payments by Gabriel and the Gabriel Subsidiaries combined;
(x) take any action or omit to take any action, which action or
omission, if taken prior to, on or after the date hereof, would have a
Gabriel Material Adverse Effect or a Surviving Corporation Material Adverse
Effect;
(xi) enter into any lease or other agreement, or amend in any
respect materially adverse to Gabriel or a Gabriel Subsidiary any lease or
other agreement, with respect to real property, not contemplated by the
Gabriel Business Plan, or which obligates Gabriel or any Gabriel Subsidiary
to pay total rent in excess of $50,000 per year;
(xii) Enter into any agreement or transaction or series of agreements
or transactions, whether for the purchase or sale of materials, supplies,
component parts or other items or services or otherwise, and whether in the
ordinary course of its business or otherwise, which is not contemplated by
the Gabriel Business Plan and involves in excess of $50,000 individually or
in the aggregate for all such agreements or transactions with any one
Person or affiliated group of Persons;
(xiii) take any action with respect to the indemnification of any
current or former director, officer employee or agent;
(xiv) change any accounting practices or policies or depreciation or
amortization rates, except as required by generally accepted accounting
principles or Laws or as agreed to or requested by Gabriel's auditors after
consultation with Gabriel's auditors;
(xv) enter into, amend, modify, terminate or waive any material
rights under any Gabriel Material Contract or any material agreement or
other material obligation that restricts, in any material respect, the
activities of Gabriel or a Gabriel Subsidiary;
(xvi) adopt a plan of liquidation, dissolution, merger,
consolidation, share exchange, restructuring, recapitalization, or other
reorganization, except for any reorganization contemplated as part of the
proposed expanded secured credit facility of Gabriel referenced on Schedule
3.6 attached hereto (the "Gabriel Credit Agreement"); or
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(xvii) resolve, agree, commit or arrange to do any of the foregoing.
Furthermore, Gabriel covenants, represents and warrants that from and after
the date hereof, unless Gabriel shall otherwise expressly consent in writing,
Gabriel shall, and Gabriel shall cause each Gabriel Subsidiary to, use its or
their respective reasonable best efforts to:
(i) keep in full force and effect insurance comparable in amount and
scope of coverage to insurance now carried by it or them;
(ii) pay all accounts payable and other obligations in the ordinary
course of business consistent with past practice, except if the same are
contested in good faith, and, in the case of the failure to pay any
material accounts payable or other material obligations which are contested
in good faith, only after consultation with Gabriel; and
(iii) comply in all material respects with all Laws applicable to any
of them or their respective properties, assets or businesses and maintain
in full force and effect all Gabriel Permits necessary for, or otherwise
material to, such businesses.
5.2. NOTIFICATION OF CERTAIN MATTERS. Gabriel shall give prompt notice to
TriVergent if any of the following occurs after the date of this Agreement: (i)
any breach or event of default under any Gabriel Material Contract which could
have a Gabriel Material Adverse Effect; (ii) receipt of any notice or other
communication from any third party alleging that the Consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement, other than a Consent disclosed pursuant to Section 3.5 or Section 3.6
above; (iii) receipt of any material notice or other communication from any
Governmental Authority in connection with the transactions contemplated by this
Agreement; (iv) the occurrence of an Event which would reasonably be expected to
have a Gabriel Material Adverse Effect or a Surviving Corporation Material
Adverse Effect; and (v) the commencement or threat of any Litigation involving
or affecting Gabriel or any Gabriel Subsidiary or any of their respective
properties or assets, or, to its knowledge, any employee, agent, director or
officer, in his or her capacity as such, of Gabriel or any Gabriel Subsidiary
which, if pending on the date hereof, would have been required to have been
disclosed in or pursuant to this Agreement or which relates to the consummation
of the Merger, or any material development in connection with any Litigation
disclosed by Gabriel in or pursuant to this Agreement or the Registration
Statement.
5.3. ACCESS AND INFORMATION. Between the date of this Agreement and the
Effective Time, Gabriel will give, and will cause each of the Gabriel
Subsidiaries to give, and shall direct its financial advisors, accountants and
legal counsel to give, upon reasonable notice, TriVergent, its lenders,
financial advisors, accountants and legal counsel and their respective
authorized representatives at all reasonable times reasonable access as
reasonably requested to all offices and other facilities and to all contracts,
agreements, commitments, books and records of or pertaining to Gabriel and the
Gabriel Subsidiaries, will permit TriVergent to make such reasonable inspections
as it may require and will cause its officers promptly to furnish TriVergent
with such financial and operating data and other information with respect to the
business and properties of Gabriel and the Gabriel Subsidiaries as TriVergent
may from time to time reasonably request in connection with the transactions
contemplated hereby. The foregoing access will be subject to
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government security restrictions and restrictions contained in confidentiality
agreements to which Gabriel is subject and of which TriVergent is advised;
provided that Gabriel shall use commercially reasonable efforts to obtain
waivers of such restrictions.
5.4. STOCKHOLDER APPROVAL. As soon as practicable after the Registration
Statement is declared effective, Gabriel will take all steps necessary to obtain
the vote of its stockholders for the purpose of approving the acquisition by
Gabriel of TriVergent by means of the Merger and approving the Gabriel Charter
Amendment and for such other purposes as may be necessary or desirable in
connection with effectuating the transactions contemplated hereby (the "Gabriel
Stockholder Approval"). The Board of Directors of Gabriel (i) will recommend to
the stockholders of Gabriel that they adopt this Agreement and approve the
transactions contemplated hereby and (ii) will use its reasonable best efforts
to obtain any necessary adoption and approval by Gabriel's stockholders of this
Agreement and the transactions contemplated hereby.
5.5. REASONABLE BEST EFFORTS. Upon the terms and subject to conditions
herein provided, Gabriel agrees to use its reasonable best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the Merger and the transactions contemplated by this Agreement
including, but not limited to (i) obtaining any third party Consent required in
connection with the execution and delivery by Gabriel and Acquisition Subsidiary
of this Agreement or the consummation by Gabriel and Acquisition Subsidiary of
the transactions contemplated hereby, (ii) the defending of any Litigation
against Gabriel or any Gabriel Subsidiary challenging this Agreement or the
consummation of the transactions contemplated hereby, (iii) obtaining all
Consents from Governmental Authorities required for the consummation of the
Merger and the transactions contemplated hereby, and (iv) timely making all
necessary filings under the HSR Act.
5.6. PUBLIC ANNOUNCEMENTS. So long as this Agreement is in effect, Gabriel
shall not, and shall cause its Affiliates not to, issue or cause the publication
of any press release or any other announcement with respect to the Merger or the
transactions contemplated by this Agreement without the consent of TriVergent,
except when such release or announcement is required by applicable Law, in which
case Gabriel, prior to making such announcement, shall, to the extent
practicable, consult with TriVergent regarding the same.
5.7. INTENTIONALLY OMITTED.
5.8. TAX TREATMENT. Gabriel and Acquisition Subsidiary shall use their
reasonable best efforts to cause the Merger to qualify, and will not take any
action which to their knowledge could reasonably be expected to prevent the
Merger from qualifying, as a reorganization under Section 368 of the Code. Prior
to the Effective Time, Gabriel and Acquisition Subsidiary shall provide tax
counsel rendering an opinion under Subsection 6.2.4 and Subsection 6.3.4, below,
with a certificate concerning such matters as such counsel identifies are
relevant to its opinion.
5.9. INDEMNIFICATION. From and after the Effective Time, Gabriel shall
cause the Surviving Corporation to indemnify, defend and hold harmless the
directors, officers, employees
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and agents of TriVergent as, and to the extent, provided in TriVergent's
Articles of Incorporation or Bylaws, as in effect as of the date of this
Agreement and provided or made available to Gabriel prior to the date of this
Agreement, with respect to matters occurring through the Effective Time.
5.10. EMPLOYEE BENEFIT PLANS.
(a) After the Effective Time, Gabriel shall arrange for each employee
participating in any of the Benefit Plans of TriVergent as are in effect at the
Effective Time either (i) to participate in any counterpart Benefit Plans of
Gabriel in accordance with the eligibility criteria thereof, provided that (A)
such participants shall receive full 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 such service was recognized under the
Benefit Plans of TriVergent, (B) such participants shall participate in the
Benefit Plans of Gabriel on terms no less favorable than those offered by
Gabriel to similarly situated employees of Gabriel, and (C) Gabriel shall cause
any 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)
to be waived with respect to such participants and their eligible dependents, or
(ii) to continue to participate in one or more of the Benefit Plans of
TriVergent on the same terms as in effect immediately prior to the Effective
Time.
(b) Each of the TriVergent officers and employees listed on Schedule
5.10(b) has acknowledged and agreed that the Merger and the consummation of the
other transactions contemplated under this Agreement shall not be treated as a
"Change in Control" for purposes of any of the applicable Benefit Plans of
TriVergent and any applicable employment, severance or similar agreement
applicable to such officer or employee of TriVergent or any of the TriVergent
Subsidiaries (collectively, "TriVergent Change in Control Plans and
Agreements").
(c) Between the date of this Agreement and through the Effective Time,
no discretionary award or grant under any Benefit Plan of Gabriel or a Gabriel
Subsidiary shall be made without the consent of TriVergent, except options for
shares of Gabriel Common Stock (with exercise prices at or above the fair market
value, as determined by the Board of Directors of Gabriel, of the underlying
shares of Gabriel Common Stock on the date of grant) granted (i) to employees of
Gabriel hired on or after the date of this Agreement in the ordinary course of
business consistent with past practice as heretofore disclosed to TriVergent or
(ii) to existing employees of Gabriel, but in the case of this clause (ii) for
not in excess of 1,380,000 shares of Gabriel Common Stock; nor shall Gabriel or
a Gabriel Subsidiary take any action or permit any action to be taken to
accelerate the vesting of any warrants or options previously granted pursuant to
any such Benefit Plan except as specifically required pursuant to the terms
thereof as in effect on the date of this Agreement. Except as required by law,
neither Gabriel nor any Gabriel Subsidiary shall make any amendment to any
Benefit Plan or any awards thereunder without the consent of TriVergent, which
consent shall not be unreasonably withheld.
(d) Subject to Section 1.6 and Section 5.10(b), following the
Effective Time, the Surviving Corporation shall honor the contracts and
commitments set forth on Schedule 5.10(d) owing as of the Effective Time by
TriVergent to its current and former employees and
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directors (or their respective beneficiaries and dependents) in accordance with
their respective terms.
5.11. OFFERS OF EMPLOYMENT. At the Effective Time, Gabriel or the Surviving
Corporation shall offer employment on mutually agreeable terms to all employees
of TriVergent employed as of the Effective Time.
5.12. NO SOLICITATION OF ACQUISITION PROPOSAL.
(a) Gabriel shall, and shall direct and use its reasonable best
efforts to cause its respective officers, directors, employees, representatives
and agents to, immediately cease any discussions or negotiations with any
parties that may be ongoing with respect to a Gabriel Acquisition Proposal (as
hereinafter defined). Gabriel shall not, nor shall it permit any of the Gabriel
Subsidiaries to, nor shall it authorize or permit any of its officers, directors
or employees or any investment banker, financial advisor, attorney, accountant
or other representative retained by it or any of the Gabriel Subsidiaries to,
directly or indirectly, (i) solicit, initiate or encourage (including by way of
furnishing information), or take any other action designed or reasonably likely
to facilitate, any inquiries or the making of any proposal which constitutes, or
may reasonably be expected to lead to, any Gabriel Acquisition Proposal or (ii)
participate in any discussions or negotiations regarding any Gabriel Acquisition
Proposal. "Gabriel Acquisition Proposal" means any inquiry, proposal or offer
from any Person relating to any direct or indirect acquisition or purchase of
15% or more of the assets of Gabriel and the Gabriel Subsidiaries, taken as a
whole, or 15% or more of any class of equity securities of Gabriel or any of the
Gabriel Subsidiaries, any tender offer or exchange offer that if consummated
would result in any Person beneficially owning 15% or more of any class of
equity securities of Gabriel or any of the Gabriel Subsidiaries, any merger,
consolidation, share exchange, business combination, recapitalization,
liquidation, dissolution or similar transaction involving Gabriel or any of the
Gabriel Subsidiaries other than the transactions contemplated by this Agreement,
or any other transaction the consummation of which would reasonably be expected
to impede, interfere with, prevent or materially delay the Merger.
(b) Neither the Board of Directors of Gabriel nor any committee
thereof shall (i) withdraw or modify, or propose publicly to withdraw or modify,
in a manner adverse to TriVergent, the approval or recommendation by such Board
of Directors of this Agreement, (ii) approve or recommend, or propose publicly
to approve or recommend, any Gabriel Acquisition Proposal other than the Merger
or (iii) cause Gabriel to enter into any letter of intent, agreement in
principle, acquisition agreement or other similar agreement (each, a "Gabriel
Acquisition Agreement") related to any Gabriel Acquisition Proposal other than
the Merger.
(c) In addition to the obligations of Gabriel set forth in paragraphs
(a) and (b) of this Section 5.12, Gabriel shall immediately advise TriVergent
orally and in writing of any Gabriel Acquisition Proposal, the material terms
and conditions of such request or Gabriel Acquisition Proposal and the identity
of the Person making such request or Gabriel Acquisition Proposal. Gabriel will
keep TriVergent fully informed of the status and details (including amendments
or proposed amendments) of any such request or Gabriel Acquisition Proposal.
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5.13. GABRIEL CHARTER AMENDMENT. Immediately prior to the Effective Time,
Gabriel shall file the Gabriel Charter Amendment with the Secretary of State of
the State of Delaware, which Amendment shall become effective as of the
Effective Time, and, as of the Effective Time, shall have reserved, free from
preemptive rights, out of its authorized but unissued shares of Gabriel Common
Stock and Gabriel Preferred Stock, for the purpose of effecting the conversion
of the issued and outstanding shares of TriVergent Common Stock pursuant to this
Agreement, sufficient shares of Gabriel Common Stock to provide for the
conversion or exercise of all such shares of Gabriel Preferred Stock and the
Gabriel $6.00 Warrants, the Gabriel $10.25 Warrants and the Gabriel Options to
be issued pursuant to this Agreement.
5.14. COMFORT LETTERS. Upon the request of TriVergent, Gabriel shall use
its reasonable best efforts to provide to TriVergent on or prior to the Closing
Date a "comfort letter" from KPMG LLP, the independent certified public
accountants for Gabriel and the Gabriel Subsidiaries, dated a date within two
business days before the date on which the Registration Statement shall become
effective, addressed to the Board of Directors of each of TriVergent and
Gabriel, in form and substance reasonably satisfactory to TriVergent and
customary in scope and substance for letters delivered by certified public
accountants in connection with registration statement similar to the
Registration Statement.
5.15. GABRIEL SERIES B PREFERRED CAPITAL CALLS. The Board of Directors of
Gabriel shall make a Capital Call (as such term is defined in the Gabriel Series
B Purchase Agreement) no later than the Effective Time and shall make a second
such Capital Call no later than November 30, 2000, each in accordance with the
terms and conditions of the Gabriel Series B Purchase Agreement and together so
as to cause the Purchasers (not including any Additional Purchaser, as such
terms are defined in such Agreement) to satisfy their Additional Preferred Stock
Subscription Obligations (as such term is defined in such Agreement) thereunder.
ARTICLE VI.
CONDITIONS
6.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each party to effect the Merger shall be subject to the fulfillment or waiver on
or prior to the Closing Date of the following conditions:
6.1.1. STOCKHOLDER APPROVALS. TriVergent shall have obtained the
TriVergent Stockholder Approval, Gabriel shall have obtained the Gabriel
Stockholder Approval, and the Gabriel Charter Amendment shall have been
adopted by the requisite vote of the stockholders of Gabriel in accordance
with the Delaware Code.
6.1.2. NO INJUNCTION OR ACTION. No order, statute, rule, regulation,
executive order, stay, decree, judgment or injunction (whether temporary,
preliminary or permanent) shall have been enacted, entered, promulgated or
enforced by any court or other Governmental Authority, which prohibits or
prevents the consummation of the Merger and which has not been vacated,
dismissed or withdrawn by the Closing Date.
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6.1.3. GOVERNMENTAL APPROVALS. All Consents as set forth on Schedule
2.5 and Schedule 3.5 of any Governmental Authority required for the
consummation of the Merger and the transactions contemplated by this
Agreement shall have been obtained.
6.1.4. HSR ACT. The waiting period applicable to the Merger under the
HSR Act shall have expired or earlier termination thereof shall have been
granted, and no action shall have been instituted by either the United
States Department of Justice or the Federal Trade Commission to prevent the
consummation of the transactions contemplated by this Agreement or to
modify or amend such transactions in any material manner, or if any such
action shall have been instituted, it shall have been withdrawn or a final
order having the effect of permitting the consummation of the transactions
contemplated by this Agreement shall have been entered by or against such
Department or Commission, as the case may be.
6.1.5. REGISTRATION STATEMENT. The Registration Statement shall have
been declared effective and no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceeding for
that purpose shall have been initiated or threatened by the SEC.
6.1.6. BLUE SKY. Gabriel shall have received all state securities Law
authorizations necessary to consummate the transactions contemplated
hereby.
6.1.7. CONSENTS OF CERTAIN THIRD PARTIES. Gabriel shall have received
Consents required for the consummation of the Merger and the other
transactions contemplated by this Agreement under the Gabriel Credit
Agreement. TriVergent shall have received Consents required for the
consummation of the Merger and the other transactions contemplated by this
Agreement under (i) the Loan Agreement dated February 1, 2000 by and among
TriVergent Communications, Inc., Toronto Dominion (Texas), Inc., as
administrative agent, and certain other financial institutions, and the
documents relating thereto and (ii) the Credit Agreement dated as of March
7, 2000 by and among TriVergent Communications South, Inc., Nortel
Networks, Inc., as administrative agent, and the lenders named therein, and
the documents relating thereto, each as identified on Schedule 2.6 hereof
and together referred to herein as the "TriVergent Credit Agreements."
6.2. CONDITIONS TO OBLIGATIONS OF TRIVERGENT. The obligation of TriVergent
to effect the Merger shall be subject to the fulfillment on or prior to the
Closing Date of the following additional conditions, any one or more of which
may be waived by TriVergent:
6.2.1. GABRIEL REPRESENTATIONS AND WARRANTIES. None of the
representations or warranties of Gabriel contained in this Agreement,
disregarding any qualifications herein regarding materiality or Gabriel
Material Adverse Effect, shall be untrue or incorrect to the extent that
such untrue or incorrect representations or warranties, when taken together
as a whole, have had or would reasonably be expected to have a Gabriel
Material Adverse Effect or a Surviving Corporation Material Adverse Effect.
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6.2.2. PERFORMANCE BY GABRIEL. Gabriel shall have performed and
complied with all of the covenants and agreements in all material respects
and satisfied in all material respects all of the conditions required by
this Agreement to be performed or complied with or satisfied by Gabriel on
or prior to the Closing Date.
6.2.3. CERTIFICATES AND OTHER DELIVERIES. Gabriel shall have delivered
to TriVergent (i) a certificate executed on its behalf by its Chief
Executive Officer to the effect that the conditions set forth in
Subsections 6.2.1 and 6.2.2, above, have been satisfied; (ii) a certificate
of existence from the Secretary of State of the State of Delaware stating
that Gabriel is a validly existing corporation; (iii) duly adopted
resolutions of the Board of Directors of Gabriel and Acquisition Subsidiary
approving the execution, delivery and performance of this Agreement and the
instruments contemplated hereby and duly adopted resolutions of the Board
of Directors and stockholders of Gabriel approving the acquisition by
Gabriel of TriVergent by means of the Merger and approving the Gabriel
Charter Amendment, each certified by its Secretary or an Assistant
Secretary; (iv) the representations and warranties set forth in Section
3.2(a) updated as of the Closing Date and (v) such other documents and
instruments as TriVergent reasonably may request.
6.2.4. OPINIONS OF GABRIEL COUNSEL. TriVergent shall have received
opinions of Bryan Cave LLP and Morrison & Foerster LLP, counsel to Gabriel,
in form and substance reasonably satisfactory to TriVergent, covering the
matters set forth in Schedule 6.2.4 attached hereto.
6.2.5. TAX OPINION. TriVergent shall have received an opinion from
Cravath, Swaine & Moore, counsel to TriVergent, dated as of the Effective
Time, based on customary representations contained in certificates of
Gabriel, Acquisition Subsidiary and TriVergent, to the effect that, if the
Merger is consummated in accordance with the provisions of this Agreement,
under current Law, for federal income tax purposes, the Merger will qualify
as a reorganization within the meaning of Section 368 of the Code.
6.2.6. REQUIRED THIRD PARTY CONSENTS. All required Consents of any
Person (other than a Governmental Authority) listed on Schedule 6.2.6 to
the Merger or the other transactions contemplated hereby shall have been
obtained.
6.3. CONDITIONS TO OBLIGATIONS OF GABRIEL AND ACQUISITION SUBSIDIARY. The
obligations of Gabriel and Acquisition Subsidiary to effect the Merger shall be
subject to the fulfillment on or prior to the Closing Date of the following
additional conditions, any one or more of which may be waived by Gabriel:
6.3.1. TRIVERGENT REPRESENTATIONS AND WARRANTIES. None of the
representations or warranties of TriVergent contained in this Agreement,
disregarding any qualifications herein regarding materiality, TriVergent
Material Adverse Effect or Surviving Corporation Material Adverse Effect,
shall be untrue or incorrect to the extent that such untrue or incorrect
representations or warranties, when taken together as a
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whole, have had or would reasonably be expected to have a TriVergent
Material Adverse Effect or a Surviving Corporation Material Adverse Effect.
6.3.2. PERFORMANCE BY TRIVERGENT. TriVergent shall have performed and
complied with all the covenants and agreements in all material respects and
satisfied in all material respects all the conditions required by this
Agreement to be performed or complied with or satisfied by TriVergent on or
prior to the Closing Date.
6.3.3. CERTIFICATES AND OTHER DELIVERIES. TriVergent shall have
delivered, or caused to be delivered, to Gabriel (i) a certificate executed
on its behalf by its Chief Executive Officer to the effect that the
conditions set forth in Subsections 6.3.1 and 6.3.2, above, have been
satisfied; (ii) a certificate of good standing from the Secretary of State
of the State of South Carolina stating that TriVergent is a validly
existing corporation in good standing; (iii) duly adopted resolutions of
the Board of Directors and stockholders of TriVergent approving the
execution, delivery and performance of this Agreement and the instruments
contemplated hereby, certified by the Secretary or an Assistant Secretary
of TriVergent; (iv) a true and complete copy of the Articles of
Incorporation of TriVergent certified by the Secretary of State of the
State of South Carolina, and a true and complete copy of the Bylaws of
TriVergent certified by the Secretary or an Assistant Secretary of
TriVergent; (v) a list of the stockholders of TriVergent entitled to vote
on the adoption of this Agreement and an undertaking from the Secretary of
TriVergent to deliver a list of the stockholders of TriVergent and the
holders of TriVergent Options as of the Effective Time as soon thereafter
as it is available, each such list to be certified by the Secretary of
TriVergent; (vi) the representations and warranties set forth in Section
2.2(a) updated as of the Closing Date and (vii) such other documents and
instruments as Gabriel reasonably may request.
6.3.4. OPINIONS OF TRIVERGENT COUNSEL. Gabriel shall have received the
opinions of Cravath, Swaine & Moore and Kelley Drye & Warren LLP counsel to
TriVergent, in form and substance reasonably satisfactory to Gabriel,
covering the matters set forth in Schedule 6.3.4 attached hereto.
6.3.5. TAX OPINION. Gabriel shall have received an opinion from Bryan
Cave LLP, counsel to Gabriel, dated as of the Effective Time, based on
customary representations contained in certificates of Gabriel, Acquisition
Subsidiary and TriVergent, to the effect that, if the Merger is consummated
in accordance with the provisions of this Agreement, under current Law, for
federal income tax purposes, the Merger will qualify as a reorganization
within the meaning of Section 368 of the Code.
6.3.6. REQUIRED THIRD-PARTY CONSENTS. All required Consents of any
Person (other than a Governmental Authority) listed on Schedule 6.3.6 to
the Merger or the transactions contemplated hereby shall have been
obtained.
6.3.7. GABRIEL OPTION AGREEMENTS. TriVergent shall have delivered, or
cause to be delivered, to Gabriel, Option Agreements, which have been duly
executed and delivered in accordance with Section 1.6(d) hereof, and such
supporting documentation as
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may be reasonably requested by Gabriel, including without limitation an
updated Schedule 2.2(b) reflecting TriVergent Options outstanding as of the
Effective Time, evidencing 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 the holders listed on Schedule 5.10(b).
ARTICLE VII.
TERMINATION AND ABANDONMENT
7.1. TERMINATION. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time
only as follows, whether before or after approval by the stockholders of
TriVergent and the approval by the stockholders of Gabriel referenced herein:
(a) by mutual written consent of TriVergent and Gabriel, duly
authorized by the Board of Directors of each;
(b) by either TriVergent or Gabriel if:
(i) the Merger shall not have been consummated on or before
October 31, 2000 (or such other date as may be agreed to by
TriVergent and Gabriel); provided, that, no party may terminate
this Agreement under this clause (i) if such party's breach of
this Agreement has caused or resulted in the failure of the
Merger to occur on or before such date; or
(ii) if any of the conditions specified in Section 6.1 becomes
incapable of satisfaction prior to October 31, 2000;
(c) by TriVergent if (i) any of the conditions specified in Section
6.2 becomes incapable of satisfaction prior to October 31, 2000, or (ii) Gabriel
has breached or failed to perform, in any material respect, any of its covenants
or agreements contained herein, which breach or failure to perform is incapable
of being cured or, if curable, has not been cured within 20 days after the
receipt by Gabriel of written notice specifying such breach or failure; or
(d) by Gabriel if (i) any of the conditions specified in Section 6.3
becomes incapable of satisfaction prior to October 31, 2000, or (ii) TriVergent
has breached or failed to perform, in any material respect, any of its material
covenants or agreements contained herein, which breach or failure is incapable
of being cured or, if curable, has been not been cured within 20 days after
receipt by TriVergent of written notice specifying such breach or failure.
The party desiring to terminate this Agreement pursuant to the preceding
clauses (b), (c) or (d) shall give written notice of such termination to the
other party in accordance with Section 8.5, below.
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7.2. PROCEDURE UPON TERMINATION. In the event of termination pursuant to
this Article VII, the Merger shall be abandoned without further action by
TriVergent or Gabriel, provided that the agreements contained in Sections 7.2,
8.1 and 8.7 hereof shall remain in full force and effect. If this Agreement is
terminated as provided herein, each party shall use its reasonable best efforts
to redeliver all documents, work papers and other material (including any copies
thereof) of any other party relating to the transactions contemplated hereby,
whether obtained before or after the execution hereof, to the party furnishing
the same. Nothing contained in this Agreement shall relieve any party from any
liability for any inaccuracy, misrepresentation or breach of this Agreement
prior to termination.
ARTICLE VIII.
MISCELLANEOUS
8.1. CONFIDENTIALITY. Unless (i) otherwise expressly provided in this
Agreement, (ii) required by applicable Law, (iii) necessary to secure any
required Consents as to which the other party has been advised, or (iv)
consented to in writing by Gabriel and TriVergent, this Agreement and any
information or documents furnished in connection herewith shall be kept strictly
confidential by TriVergent and the TriVergent Subsidiaries, Gabriel and the
Gabriel Subsidiaries, and their respective officers, directors, employees and
agents. Prior to any disclosure pursuant to the preceding sentence, the party
intending to make such disclosure shall consult with the other party regarding
the nature and extent of the disclosure. Subject to the preceding sentence,
nothing contained herein shall preclude disclosures to the extent necessary to
comply with accounting, SEC and other disclosure obligations imposed by
applicable Law. To the extent required by such disclosure obligations, Gabriel
or TriVergent, after consultation with the other party, may file with the SEC
any written communications relating to the Merger and the transactions
contemplated hereby pursuant to Rule 425 promulgated under the Securities Act.
Gabriel and TriVergent shall cooperate with the other and provide such
information and documents as may be required in connection with any such
filings. In the event the Merger is not consummated, Gabriel and TriVergent
shall return to the other all documents furnished by the other and all copies
thereof made by such party and will hold in absolute confidence all information
obtained from the other party except to the extent (i) such party is required to
disclose such information by Law or such disclosure is necessary in connection
with the pursuit or defense of a claim, (ii) such information was known by such
party prior to such disclosure or was thereafter developed or obtained by such
party independent of such disclosure, (iii) such party received such information
on a non-confidential basis from a source, other than the other party, which is
not known by such party to be bound by a confidentiality obligation with respect
thereto or (iv) such information becomes generally available to the public or is
otherwise no longer confidential. Prior to any disclosure of information
pursuant to the exception in clause (i) of the preceding sentence, the party
intending to disclose the same shall so notify the party which provided the same
in order that such party may seek a protective order or other appropriate remedy
should it choose to do so.
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8.2. AMENDMENT AND MODIFICATION. This Agreement may be amended, modified or
supplemented only by a written agreement among TriVergent, Gabriel and
Acquisition Subsidiary.
8.3. WAIVER OF COMPLIANCE; CONSENTS. Any failure of TriVergent on the one
hand, or Gabriel and Acquisition Subsidiary on the other hand, to comply with
any obligation, covenant, agreement or condition herein may be waived by Gabriel
on the one hand, or TriVergent on the other hand, only by a written instrument
signed by the party granting such waiver, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure. Whenever this Agreement requires or permits consent by or on
behalf of any party hereto, such consent shall be given in writing in a manner
consistent with the requirements for a waiver of compliance as set forth in this
Section 8.3.
8.4. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations and warranties of TriVergent and Gabriel contained herein or in
any certificates or other documents delivered prior to or at the Closing shall
survive the execution and delivery of this Agreement, notwithstanding any
investigation made or information obtained by the other party, but shall
terminate at the Effective Time.
8.5. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given when delivered in Person, by
facsimile, receipt confirmed, or on the next business day when sent by overnight
courier or on the second succeeding business day when sent by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(i) if to TriVergent, to:
TriVergent Corporation
200 North Main Street
Greenville, South Carolina 29601
Attention: Charles S. Houser
Chairman and Chief
Executive Officer
Telecopy: (864) 331-7146
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attention: Thomas R. Brome, Esq.
Telecopy: (212) 474-3700
and
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(ii) if to Gabriel or Acquisition Subsidiary, to:
Gabriel Communications, Inc.
16090 Swingley Ridge Road
Chesterfield, Missouri 63017
Attention: David L. Solomon
Vice Chairman and
Chief Executive Officer
Telecopy: (636) 757-0000
with a copy to:
Bryan Cave LLP
211 North Broadway, Suite 3600
St. Louis, Missouri 63102-2750
Attention: Nick H. Varsam, Esq.
Telecopy: (314) 259-2020
8.6. BINDING EFFECT; ASSIGNMENT. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto prior to the Effective Time without the prior written
consent of the other party hereto, except that Acquisition Subsidiary may assign
to Gabriel or any other Gabriel Subsidiary any and all rights, interests and
obligations of Acquisition Subsidiary under this Agreement; provided that any
assignment by Acquisition Subsidiary of all of its rights, interests and
obligations under this Agreement to Gabriel shall require that the Merger
contemplated by this Agreement shall then be structured as a direct merger of
TriVergent with and into Gabriel or any other structure approved by TriVergent.
8.7. EXPENSES. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs or expenses whether or not the transactions contemplated
hereby are consummated.
8.8. GOVERNING LAW. This Agreement shall be deemed to be made in, and in
all respects shall be interpreted, construed and governed by and in accordance
with the internal Laws of, the State of Delaware, and the parties hereto consent
to the jurisdiction of the courts of or in the State of Delaware in connection
with any dispute or controversy relating to or arising out of this Agreement and
the transactions contemplated hereby.
8.9. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.10. INTERPRETATION. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement. No rule of construction shall
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apply to this Agreement which construes ambiguous language in favor of or
against any party by reason of that party's role in drafting this Agreement. As
used in this Agreement, (i) the term "Person" shall mean and include an
individual, a partnership, a joint venture, a corporation, a limited liability
company, a trust, an association, an unincorporated organization, a Governmental
Authority and any other entity; (ii) the term "Affiliate," with respect to any
Person, shall mean and include any Person controlling, controlled by or under
common control with such Person; and (iii) the term "Subsidiary" of any
specified Person shall mean any corporation 50 percent or more of the
outstanding voting power of which, or any partnership, joint venture, limited
liability company or other entity 50 percent or more of the total equity
interest of which, is directly or indirectly owned by such specified Person.
8.11. ENTIRE AGREEMENT. This Agreement and the other agreements, documents
or instruments referred to herein or executed in connection herewith including,
but not limited to, the Schedules attached hereto, which Schedules are
incorporated herein by reference, embody the entire agreement and understanding
of the parties hereto in respect of the subject matter contained herein. There
are no restrictions, promises, representations, warranties, covenants, or
undertakings, other than those expressly set forth or referred to herein. This
Agreement supersedes all prior agreements and the understandings between the
parties with respect to such subject matter.
8.12. SEVERABILITY. In case any provision in this Agreement or in any of
the other agreements, documents or instruments referred to herein shall be held
invalid, illegal or unenforceable in any jurisdiction, such provision shall be
modified or deleted, as to the jurisdiction involved, only to the extent
necessary to render the same valid, legal and enforceable, and the validity,
legality and enforceability of the remaining provisions hereof or thereof shall
not in any way be affected or impaired thereby nor shall the validity, legality
or enforceability of such provision be affected thereby in any other
jurisdiction.
8.13. SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions in this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. Accordingly, the parties further agree that each party shall be
entitled to an injunction or restraining order to prevent breaches hereof or
thereof and to enforce specifically the terms and provisions hereof or thereof
in any court of the United States or any state having jurisdiction, this being
in addition to any other right or remedy to which such party may be entitled
under this Agreement, at Law or in equity.
8.14. THIRD PARTIES. Except for the provisions of Section 1.6, Section 5.9
and Section 5.10, nothing contained in this Agreement or in any instrument or
document executed by any party in connection with the other transactions
contemplated hereby shall create any rights in, or be deemed to have been
executed for the benefit of, any Person that is not a party hereto or thereto,
or, a successor or permitted assign of such a party.
8.15. SCHEDULES. The Schedules in this Agreement shall be arranged in
separate parts corresponding to the numbered and lettered sections, and the
disclosure in any numbered or lettered part shall be deemed to relate to and to
qualify only the particular representation or warranty set forth in the
corresponding numbered or lettered section, and not any other
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representation or warranty (unless an express and specific reference to any
other Schedule which clearly identifies the particular item being referred to is
set forth therein).
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, Gabriel, Acquisition Subsidiary and TriVergent have
caused this Agreement to be signed and delivered by their respective duly
authorized officers as of the date first above written.
GABRIEL COMMUNICATIONS, INC.
By
------------------------------------
Name: David L. Solomon
Title: Vice Chairman and Chief
Executive Officer
TRIANGLE ACQUISITION, INC.
By
------------------------------------
Name: David L. Solomon
Title: Chairman and Chief Executive
Officer
STATE COMMUNICATIONS, INC.
By
------------------------------------
Name: Charles S. Houser
Title: Chairman and Chief Executive
Officer
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CERTIFICATE OF SECRETARY
OF
STATE COMMUNICATIONS, INC.
I, Riley Murphy, the Secretary of State Communications, Inc., a South
Carolina corporation ("TriVergent"), hereby certify that the Agreement and Plan
of Merger to which this certificate is attached, after having been first duly
signed on behalf of TriVergent by its Chairman and Chief Executive Officer, was
duly submitted to the stockholders of TriVergent at a Special Meeting of
Stockholders of TriVergent duly called and held on the date hereof separately
from the meeting of stockholders of any other corporation, at which a quorum was
present and acting throughout and at which two-thirds of all the issued and
outstanding shares of stock of TriVergent entitled to vote thereon and
two-thirds of all the issued and outstanding shares of each class of stock of
TriVergent entitled to vote thereon voted for the adoption of said Agreement and
Plan of Merger.
WITNESS my hand as of the day of , 2000.
--------------------------------------
Secretary
<PAGE> 277
CERTIFICATE OF SECRETARY
OF
TRIANGLE ACQUISITION, INC.
I, John P. Denneen, the Secretary of Triangle Acquisition, Inc., a Delaware
corporation ("Acquisition Subsidiary"), hereby certify that the Agreement and
Plan of Merger to which this certificate is attached, after having been first
duly signed on behalf of Acquisition Subsidiary by its Chief Executive Officer,
was duly submitted to the sole stockholder of Acquisition Subsidiary by written
consent and that the holder of all outstanding shares of stock of Acquisition
Subsidiary entitled to vote thereon voted for the adoption of said Agreement and
Plan of Merger.
WITNESS my hand as of the day of , 2000.
--------------------------------------
Secretary
<PAGE> 278
ANNEX B
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
GABRIEL COMMUNICATIONS, INC.
* * * * *
GABRIEL COMMUNICATIONS, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the original Certificate of Incorporation of Gabriel
Communications, Inc. was filed with the Secretary of State of Delaware on June
15, 1998;
SECOND: That an Amended and Restated Certificate of Incorporation of
Gabriel Communications, Inc. was filed with the Secretary of State of Delaware
on November 17, 1998;
THIRD: That a Certificate of Designations, Preferences and Rights of
Series A-1 Convertible Preferred Stock of Gabriel Communications, Inc. was filed
with the Secretary of State of Delaware on December 10, 1999;
FOURTH: That an Amended and Restated Certificate of Incorporation of
Gabriel Communications, Inc. was filed with the Secretary of State of Delaware
on April 14, 2000;
FIFTH: That on , 2000 the Board of Directors of said
corporation adopted a resolution proposing and declaring advisable that the
Certificate of Incorporation of GABRIEL COMMUNICATIONS, INC. be amended and
restated in its entirety to read as set forth on Annex A hereto;
SIXTH: That in lieu of a meeting of stockholders, holders of more than
66 2/3% of all of the outstanding Preferred Stock and Common Stock entitled to
vote generally in the election of directors, voting together as a single class,
have given written consents in favor of said amendment and restatement in
accordance with the provisions of Section 228 of the General Corporation Law of
the State of Delaware; and
SEVENTH: That said amendment and restatement was duly adopted in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said GABRIEL COMMUNICATIONS, INC. has caused this
certificate to be signed by John P. Denneen, its Executive Vice President and
Secretary, this day of , 2000.
GABRIEL COMMUNICATIONS, INC.
By:
----------------------------------------
John P. Denneen
Executive Vice President and Secretary
<PAGE> 279
ANNEX B
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
GABRIEL COMMUNICATIONS, INC.
FIRST. The name of the Corporation is
GABRIEL COMMUNICATIONS, INC.
SECOND. The address of its registered office in the State of Delaware
is located at 1013 Centre Road, in the City of Wilmington, County of New Castle,
Delaware 19805. The name of its registered agent at such address is Corporation
Service Company.
THIRD. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware ("GCL").
FOURTH:
A. CLASSES AND NUMBER OF SHARES.
The aggregate number of shares of capital stock which the Corporation
is authorized to issue is 600,000,000 shares, consisting of:
(i) 400,000,000 shares of Common Stock, par value $.01 per share
("Common Stock"); and
(ii) 200,000,000 shares of Preferred Stock, par value $.01 per share
("Preferred Stock"), of which (a) 26,850,000 shares are designated as Series A
Convertible Preferred Stock ("Series A Preferred Stock"), (b) 3,125,000 shares
are designated as Series A-1 Convertible Preferred Stock ("Series A-1 Preferred
Stock"), (c) 32,500,000 shares are designated as Series B Convertible Preferred
Stock ("Series B Preferred Stock"), (d) 6,000,000 shares are designated as
Series C-1 Convertible Preferred Stock ("Series C-1 Preferred Stock"), (e)
16,500,000 shares are designated as Series C-2 Convertible Preferred Stock
("Series C-2 Preferred Stock") and (f) 18,500,000 shares are designated as
Series C-3 Convertible Preferred Stock ("Series C-3 Preferred Stock").
B. PREEMPTIVE RIGHTS.
Except as may otherwise be provided by agreement among stockholders of
the Corporation, no stockholder of any class of stock of the Corporation shall
have any preemptive right to acquire any additional shares of stock of the
Corporation of any class or series or any security convertible into, or
exercisable or exchangeable for, such stock.
C. TERMS OF PREFERRED STOCK.
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1. SERIES A, SERIES A-1, SERIES B, SERIES C-1, SERIES C-2 AND SERIES
C-3 PREFERRED Stock. The preferences and relative, participating, optional and
other special rights of the Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series C-2
Preferred Stock and Series C-3 Preferred Stock, and the qualifications,
limitations and restrictions thereof, are as follows:
(i) DIVIDENDS.
The holders of shares of the Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series C-2
Preferred Stock and Series C-3 Preferred Stock shall not be entitled to receive
cash dividends thereon. No dividends or other distributions shall be made with
respect to any such Series of Preferred Stock unless equivalent dividends or
other distributions are simultaneously made on a pro rata basis to all holders
of each such Series; provided, however, that in the case of a dividend payable
in additional shares of Preferred Stock, the holders of Series A Preferred Stock
shall receive additional shares of Series A Preferred Stock, the holders of
Series A-1 Preferred Stock shall receive additional shares of Series A-1
Preferred Stock, the holders of Series B Preferred Stock shall receive
additional shares of Series B Preferred Stock, the holders of Series C-1
Preferred Stock shall receive additional shares of Series C-1 Preferred Stock,
the holders of Series C-2 Preferred Stock shall receive additional shares of
Series C-2 Preferred Stock. and the holders of Series C-3 Preferred Stock shall
receive additional shares of Series C-3 Preferred Stock.
(ii) REDEMPTION.
The shares of the Series A Preferred Stock, Series A-1 Preferred Stock,
Series B Preferred Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock
and Series C-3 Preferred Stock shall not be redeemable at the election of the
Corporation at any time except pursuant to the terms of an agreement between the
Corporation and the holder or holders of any of such shares. No shares of any
such Series of Preferred Stock shall be reacquired for value by the Corporation
other than pursuant to a purchase offer made on a pro rata basis to all holders
of each such Series of Preferred Stock.
(iii) LIQUIDATION RIGHTS.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of shares of the
Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock,
Series C-1 Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred
Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets or surplus funds of the Corporation to the holders of the
Common Stock or any other stock of the Corporation ranking junior to the shares
of such Series of Preferred Stock, by reason of their ownership thereof,
distributions equal to the greater of (i) an amount equal to the sum of (x) the
amount (as adjusted for any stock dividends, combinations or splits with respect
to such shares) of $3.00 per share for each share of Series A Preferred Stock,
$4.00 per share for each share of Series A-1 Preferred Stock, $7.00 per share
for
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each share of Series B Preferred Stock, $2.19 per share for each share of Series
C-1 Preferred Stock, $3.41 per share for each share of Series C-2 Preferred
Stock and $3.87 per share for each share of Series C-3 Preferred Stock (each, an
"Initial Amount") then held by them, plus (y) an amount equal to a preferred
return, for each share of such Series of Preferred Stock, on the respective
Initial Amount of eight percent (8%) per annum, with such return to begin
accruing as of the Original Issue Date (as defined under paragraph (d)(I)(2) of
Section C.1(iv) below), or (ii) the amount such holders of Preferred Stock would
have received as holders of shares of Common Stock issuable upon the conversion
of such Preferred Stock immediately prior to such liquidation, dissolution or
winding up of the Corporation. If upon the occurrence of such an event, the
assets and funds thus distributed among the holders of the Series A Preferred
Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C-1
Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock shall
be insufficient to permit the payment to such holders of the full aforesaid
preferential amount, then the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among the holders of the
Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock,
Series C-1 Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred
Stock in proportion to the full preferential amount each such holder is
otherwise entitled to receive.
(b) After the payment to the holders of shares of the Series A Preferred
Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C-1
Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock of
the full preferential amounts provided for in paragraph (a) of this Section
C.1(iii), the holders of shares of the Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock and Series C-3 Preferred Stock as such shall have no right
or claim to the remaining assets and funds of the Corporation, if any.
(c) For purposes of this Section C.1(iii), (1) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary (other than a mere reincorporation transaction) or (2) any
sale or other disposition of all or substantially all of the assets of the
Corporation, shall be treated as a liquidation, dissolution or winding up of the
Corporation and shall entitle the holders of Series A Preferred Stock, Series
A-1 Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock,
Series C-2 Preferred Stock and Series C-3 Preferred Stock to receive at the
closing in cash, securities or other property (valued as provided in paragraph
(d) of this Section C.1(iii)) amounts as specified in paragraph (a) of this
Section C.1(iii).
(d) Whenever the distribution provided for in this Section C.1(iii) shall
be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other property
as determined in good faith by the Board of Directors.
(iv) CONVERSION. The holders of the Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock and Series C-3 Preferred Stock shall have conversion rights
as follows:
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(a) Right to Convert. Each share of Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock and Series C-3 Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of such
share at the office of the Corporation or any transfer agent for such stock,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing (x) $3.00, with respect to Series A Preferred Stock,
$4.00, with respect to the Series A-1 Preferred Stock, $7.00, with respect to
Series B Preferred Stock, $2.19, with respect to Series C-1 Preferred Stock,
$3.41, with respect to Series C-2 Preferred Stock and $3.87, with respect to
Series C-3 Preferred Stock (in each case, as appropriately adjusted for any
stock dividends, combinations or splits with respect to the outstanding
Preferred Stock), by (y) the conversion price applicable to such share,
determined as hereinafter provided, in effect on the date the certificate is
surrendered for conversion in accordance with paragraph (c) of this Section
C.1(iv). The price at which shares of Common Stock shall be deliverable upon
conversion of shares of the Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series C-2
Preferred Stock and Series C-3 Preferred Stock (each, a "Conversion Price")
shall initially be $3.00, $4.00, $7.00, $2.19, $3.41 and $3.87, respectively,
per share of Common Stock. Such initial Conversion Price shall be adjusted as
hereinafter provided.
(b) Automatic Conversion. Each share of Series A Preferred Stock, Series
A-1 Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock,
Series C-2 Preferred Stock and Series C-3 Preferred Stock shall automatically be
converted into shares of Common Stock at the then-effective Conversion Price
upon the closing of the sale of the Corporation's Common Stock in a firm
commitment, underwritten public offering registered under the Securities Act of
1933, as amended (the "Securities Act"), other than a registration relating
solely to a transaction under Rule 145 under the Securities Act (or any
successor thereto) or to an employee benefit plan of the Corporation, at a
public offering price (prior to underwriters' discounts and expenses) equal to
or exceeding $12.00 per share of Common Stock (as adjusted for any stock
dividends, combinations or splits with respect to the Common Stock), in which
the aggregate proceeds to the Corporation and/or any selling stockholders (prior
to underwriters' discounts and expenses) are at least $50,000,000.
(c) Mechanics of Conversion.
(I) Before any holder of Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock or Series C-3 Preferred Stock shall be entitled to convert
the same into shares of Common Stock pursuant to paragraph (a) of this Section
C.1(iv), such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for
such stock, and shall give written notice to the Corporation at such office that
such holder elects to convert the same and shall state therein the name or names
in which such holder wishes the certificate or certificates for such shares of
Common Stock to be issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver to such holder of Series A Preferred Stock, Series
A-1 Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock,
Series C-2 Preferred Stock or Series C-3 Preferred Stock, as the case may be, a
certificate or certificates for the
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number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of surrender of the certificate or
certificates for the shares of Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series C-2
Preferred Stock or Series C-3 Preferred Stock, as the case may be, to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(II) In the event of an automatic conversion pursuant to paragraph (b)
of this Section C.1(iv), the conversion may, at the option of any holder
tendering shares of Series A Preferred Stock, Series A-1 Preferred Stock, Series
B Preferred Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock or
Series C-3 Preferred Stock for conversion, be conditioned upon the closing with
the underwriters of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock upon conversion of the
Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock,
Series C-1 Preferred Stock, Series C-2 Preferred Stock or Series C-3 Preferred
Stock shall not be deemed to have converted such Series of Preferred Stock until
immediately prior to the closing of such sale of securities. No holder of shares
of Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred
Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock or Series C-3
Preferred Stock shall receive certificates for shares of Common Stock upon such
conversion unless and until such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for such stock and shall give written direction to the
Corporation of the name or names in which such holder wishes the certificate or
certificates for such shares of Common Stock to be issued. Until surrendered as
provided above, each certificate previously representing shares of Preferred
Stock shall be deemed for all corporate purposes to represent the number of
shares of Common Stock resulting from such automatic conversion.
(d) Adjustments to Conversion Price for Certain Diluting Issues.
(I) Special Definitions. For purposes of paragraph (d) of this Section
C.1(iv), the following definitions apply:
(1) "Options" shall mean rights, options and warrants to
subscribe for, purchase or otherwise acquire Common Stock, Series A Preferred
Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C-1
Preferred Stock, Series C-2 Preferred Stock or Series C-3 Preferred Stock or
Convertible Securities (defined below).
(2) "Original Issue Date" shall mean:
(A) for Series A Preferred Stock, Series A-1 Preferred Stock
or Series B Preferred Stock, the date on which a share was first issued by the
Corporation; or
(B) for Series C-1 Preferred Stock, Series C-2 Preferred
Stock or Series C-3 Preferred Stock, [August 1, 2000].
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(3) "Convertible Securities" shall mean any evidences of
indebtedness, shares (other than Common Stock, Series A Preferred Stock, Series
A-1 Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock,
Series C-2 Preferred Stock and Series C-3 Preferred Stock) or other securities
convertible into or exchangeable for Common Stock.
(4) "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued (or, pursuant to subparagraph (d)(III) of this Section
C.1(iv), deemed to be issued) by the Corporation after the Original Issue Date,
other than shares of Common Stock issued or issuable in any of the following
transactions;
(A) upon conversion of shares of Series A Preferred Stock,
Series A-1 Preferred Stock, Series B Preferred Stock, Series C-1 Preferred
Stock, Series C-2 Preferred Stock or Series C-3 Preferred Stock;
(B) to officers, directors or employees of, or consultants
or advisers to, the Corporation pursuant to stock option or stock purchase
plans, warrants or agreements on terms from time to time approved by the Board
of Directors (including, without limitation, shares of Common Stock issued or
issuable pursuant to stock options or warrants assumed in connection with
acquisitions described in clause (E) below).
(C) upon the issuance or exercise of the warrants issued or
to be issued under and pursuant to the terms of an Agreement and Plan of Merger
by and among the Corporation, Triangle Acquisition, Inc. and State
Communications, Inc., dated as of June 9, 2000 and referred to therein as the
"$6.00 Warrants" and the "$10.25 Warrants";
(D) as a dividend or distribution on the Series A Preferred
Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C-1
Preferred Stock, Series C-2 Preferred Stock or Series C-3 Preferred Stock;
(E) in connection with acquisitions from time to time
approved by the Board of Directors; and
(F) for which adjustment of the Conversion Price is made
pursuant to paragraph (e) or paragraph (f) of this Section C.1(iv).
(II) No Adjustment of Conversion Price. Any provision herein to the
contrary notwithstanding, no adjustment in any Conversion Price shall be made in
respect of the issuance of Additional Shares of Common Stock unless the
consideration per share (determined pursuant to subparagraph (d)(V) of this
Section C.1(iv)) for an Additional Share of Common Stock issued or deemed to be
issued by the Corporation is less than such applicable Conversion Price in
effect on the date of, and immediately prior to, such issue.
(III) Deemed Issue of Additional Shares of Common Stock. In the event
the Corporation at any time or from time to time after the Original Issue Date
shall issue any Options
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or Convertible Securities or shall fix a record date for the determination of
holders of any class of securities then entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
designed to protect against dilution) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options for
Convertible Securities, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue or, in case such a record date shall have been fixed, as
of the close of business on such record date, provided that in any such case in
which Additional Shares of Common Stock are deemed to be issued:
(1) no further adjustments in the applicable Conversion Price
shall be made upon the subsequent issue of such Convertible Securities or shares
of Common Stock upon the exercise of such Options or conversion or exchange of
such Convertible Securities;
(2) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase or decrease in
the consideration payable to the Corporation, or decrease or increase in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the applicable Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
insofar as it affects such Options or the rights of conversion or exchange under
such Convertible Securities (provided, however, that no such adjustment of the
applicable Conversion Price shall affect Common Stock previously issued upon
conversion of the Series A Preferred Stock, Series A-1 Preferred Stock, Series B
Preferred Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock or
Series C-3 Preferred Stock);
(3) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not have
been exercised, the applicable Conversion Price computed upon the original
issuance thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon such expiration, be
recomputed as if:
(A) in the case of Convertible Securities or Options for
Common Stock, the only Additional Shares of Common Stock issued were the shares
of Common Stock, if any, actually issued upon the exercise of such Options or
the conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Corporation upon such exercise or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
(B) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued upon the exercise thereof
were issued at the time of issue of such Options, and the consideration received
by the Corporation for the Additional
<PAGE> 286
Shares of Common Stock deemed to have been then issued was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration deemed to have been received by the
Corporation (determined pursuant to subparagraph (d)(V) of this Section C.1(iv))
upon the issue of the Convertible Securities with respect to which such Options
were actually exercised;
(4) no readjustment pursuant to clause (2) or (3) above shall
have the effect of increasing the applicable Conversion Price to an amount which
exceeds the lower of (a) the applicable Conversion Price on the original
adjustment date, or (b) the applicable Conversion Price that would have resulted
from any issuance of Additional Shares of Common Stock between the original
adjustment date and such readjustment date;
(5) in the case of any Options which expire by their terms not
more than 30 days after the date of issue thereof, no adjustment of the
applicable Conversion Price shall be made until the expiration or exercise of
all such Options, whereupon such adjustment shall be made in the same manner
provided in clause (3) above; and
(6) in the event that any adjustment described in this
subparagraph (d)(III) is made with respect to any Additional Shares of Common
Stock that were originally issued (or deemed issued) for a consideration per
share equal to or in excess of the applicable Conversion Price then in effect
that, had such adjustment been made prior to such original issue date (or deemed
original issue date) would have caused such Additional Shares of Common Stock to
be issued for a consideration per share less than the applicable Conversion
Price then in effect, then such Additional Shares of Common Stock shall be
deemed to have been issued as of the date of any such adjustment.
(IV) Adjustment of Conversion Price Upon Issuance of Additional Shares
of Common Stock. In the event this Corporation, at any time after the Original
Issue Date, shall issue Additional Shares of Common Stock (including Additional
Shares of Common Stock deemed to be issued pursuant to subparagraph (d)(III) of
this Section C.1(iv)) without consideration or for a consideration per share
less than the applicable Conversion Price in effect on the date of and
immediately prior to such issue, then and in such event, the applicable
Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying the applicable
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the total number of Additional Shares of Common Stock so
issued would purchase at the applicable Conversion Price in effect immediately
prior to such issuance, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued. For the purpose of
the above calculation, the number of shares of Common Stock outstanding
immediately prior to such issue shall be calculated on a fully diluted basis, as
if all outstanding shares of Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series C-2
Preferred Stock and Series C-3 Preferred Stock and all Convertible Securities
had been fully converted into shares of Common
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Stock immediately prior to such issuance and all outstanding Options had been
fully exercised immediately prior to such issuance (and the resulting securities
fully converted into shares of Common Stock, if so convertible) as of such date,
but not including in such calculation any additional shares of Common Stock
issuable with respect to outstanding shares of Series A Preferred Stock, Series
A-1 Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock,
Series C-2 Preferred Stock and Series C-3 Preferred Stock, Convertible
Securities or Options solely as a result of the adjustment of the respective
conversion prices (or other conversion ratios) resulting from the issuance of
the Additional Shares of Common Stock causing the adjustment in question.
(V) Determination of Consideration. For purposes of paragraph (d) of
this Section C.1(iv), the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration shall:
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of such issue, as determined in
good faith by the Board of Directors; and
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The consideration per
share received by the Corporation for Additional Shares of Common Stock deemed
to have been issued pursuant to subparagraph (d)(III) of this Section C.1(iv),
relating to Options and Convertible Securities shall be determined by dividing:
(A) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution) payable to the
Corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any provision
contained therein
<PAGE> 288
designed to protect against dilution) issuable upon the exercise of such Options
or conversion or exchange of such Convertible Securities.
(e) Adjustments to Conversion Prices for Stock Dividends and for
Combinations or Subdivisions of Common Stock. In the event that the Corporation
at any time or from time to time after the Original Issue Date shall declare or
pay, without consideration, any dividend on the Common Stock payable in shares
of Common Stock or in any right to acquire shares of Common Stock for no
consideration, or shall effect a subdivision of the outstanding shares of Common
Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise than by payment of a dividend in shares of Common
Stock or in any right to acquire shares of Common Stock), or in the event the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
then the applicable Conversion Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be proportionately
decreased or increased, as appropriate. In the event that the Corporation shall
declare or pay, without consideration, any dividend on the Common Stock payable
in any right to acquire shares of Common Stock for no consideration, then the
Corporation shall be deemed to have made a dividend payable in shares of Common
Stock in an amount equal to the maximum number of shares issuable upon exercise
of such rights to acquire Common Stock.
(f) Adjustments for Reclassification and Reorganization. If the Common
Stock issuable upon conversion of the Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock or Series C-3 Preferred Stock shall be changed into the same
or a different number of shares of any other class or classes of stock, whether
by capital reorganization, reclassification or otherwise (other than a
subdivision or combination of shares provided for in paragraph (e) of this
Section C.1(iv) above or a merger or other reorganization referred to in
paragraph (c) of Section C.1(iii) above), the applicable Conversion Price then
in effect shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the Series A Preferred
Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C-1
Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock shall
thereafter be convertible into, in lieu of the number of shares of Common Stock
which the holders would otherwise have been entitled to receive, a number of
shares of such other class or classes of stock equivalent to the number of
shares of Common Stock that would have been received by the holders upon
conversion of the Series A Preferred Stock, Series A-1 Preferred Stock, Series B
Preferred Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock or
Series C-3 Preferred Stock immediately before that change.
(g) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance of performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section C.1(iv) and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Price against impairment.
<PAGE> 289
(h) Certificates as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the applicable Conversion Price pursuant to this Section
C.1(iv), the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series A Preferred Stock, Series A-1 Preferred Stock, Series B
Preferred Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock or
Series C-3 Preferred Stock, as the case may be, a certificate executed by the
Corporation's President or Chief Financial Officer setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any such holder, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
applicable Conversion Price at the time in effect, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of the Series A Preferred Stock,
Series A-1 Preferred Stock, Series B Preferred Stock, Series C-1 Preferred
Stock, Series C-2 Preferred Stock or Series C-3 Preferred Stock, as the case may
be.
(i) Notices of Record Date. In the event that the Corporation shall propose
at any time prior to the conversion of all outstanding shares of the Series A
Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series
C-1 Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock:
(I) to declare any dividend or distribution upon its Common Stock, whether in
cash, property, stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus; (II) to offer for
subscription pro rata to the holders of any class or series of its stock any
additional shares of stock of any class or series or other rights; (III) to
effect any reclassification or recapitalization of its Common Stock outstanding
involving a change in the Common Stock; or (IV) to merge or consolidate with or
into any other corporation, or sell, lease or convey all or substantially all of
its assets, or to liquidate, dissolve or wind up; then, in connection with each
such event, the Corporation shall send to the holders of Series A Preferred
Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C-1
Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock:
(1) at least twenty (20) days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote, if any, in respect of the
matters referred to in clauses (III) and (IV) above; and
(2) in the case of the matters referred to in clauses (III) and (IV)
above, at least twenty (20) days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event).
(j) Issue Taxes. The Corporation shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series C-2
Preferred Stock or Series C-3 Preferred Stock pursuant hereto; provided,
<PAGE> 290
however, that the Corporation shall not be obligated to pay any transfer taxes
resulting from any transfer requested by any holder in connection with any such
conversion.
(k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock, solely for the purpose of effecting the conversion of the
shares of the Series A Preferred Stock, Series A-1 Preferred Stock, Series B
Preferred Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock and
Series C-3 Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of each such Series of Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of each such Series of Preferred
Stock, the Corporation will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to this Certificate of
Incorporation.
(l) Fractional Shares. No fractional share shall be issued upon the
conversion of any share or shares of Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock or Series C-3 Preferred Stock. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock,
Series C-1 Preferred Stock, Series C-2 Preferred Stock or Series C-3 Preferred
Stock by a holder thereof shall be aggregated for purposes of determining
whether the conversion would result in the issuance of any fractional share. If,
after the aforementioned aggregation, the conversion would result in the
issuance of a fraction of a share of Common Stock, the Corporation shall, in
lieu of issuing any fractional share, pay the holder otherwise entitled to such
fraction a sum in cash equal to the fair market value of such fraction on the
date of conversion (as determined in good faith by the Board of Directors).
(m) Notices. Any notice required by the provisions of this Section C.1(iv)
to be given to the holders of shares of Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock and Series C-3 Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, or if sent by facsimile or
delivered personally by hand or nationally recognized courier and addressed to
each holder of record at such holder's address or facsimile number appearing in
the records of the Corporation.
(v) VOTING. At any meeting of the stockholders of the Corporation, the shares of
the Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred
Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock and Series C-3
Preferred Stock shall be entitled to the number of votes for each such share
held that would equal the number of shares of Common Stock resulting from
conversion of such shares on the record date of the meeting. The shares of the
Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock,
Series C-1 Preferred Stock, Series C-2 Preferred Stock, Series C-3 Preferred
Stock and the Common Stock
<PAGE> 291
shall vote together as a single class of stock, except where voting separately
by class is required by the GCL.
(vi) REACQUIRED SHARES. Shares of the Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock or Series C-3 Preferred Stock which have been issued and
reacquired through purchase, conversion or otherwise shall, upon compliance with
the applicable provisions of the GCL, have the status of authorized and unissued
shares of Preferred Stock and may be reissued, but only as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors.
(vii) RELATION TO OTHER SERIES OF PREFERRED STOCK. The Series A Preferred Stock,
Series A-1 Preferred Stock, Series B Preferred Stock, Series C-1 Preferred
Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock shall rank on a
parity with each other such series. Any stock of any other series, class or
classes of the Corporation shall be deemed to rank:
(a) prior to the shares of the Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock and Series C-3 Preferred Stock, either as to dividends or
upon liquidation, if the holders of such series, class or classes of stock shall
be entitled to the receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, as the case may be,
in preference or priority to the holders of shares of the Series A Preferred
Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C-1
Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock;
(b) on a parity with the shares of the Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock and Series C-3 Preferred Stock upon liquidation, whether or
not the liquidation prices per share are different from those of the Series A
Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series
C-1 Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock,
if the holders of such series, class or classes of stock shall be entitled to
the receipt of amounts distributable upon dissolution, liquidation or winding up
of the Corporation in proportion to their respective liquidation prices, without
preference or priority, one over the other, as between the holders of such stock
and the holders of shares of the Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series C-2
Preferred Stock and Series C-3 Preferred Stock; and
(c) junior to the shares of the Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock and Series C-3 Preferred Stock, either as to dividends or
upon liquidation, if such class shall be Common Stock or if the holders of
shares of the Series A Preferred Stock, Series A-1 Preferred Stock, Series B
Preferred Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock and
Series C-3 Preferred Stock shall be entitled to the receipt of amounts
distributable upon dissolution, liquidation or winding up of the Corporation in
preference or priority to the holders of shares of such series, class or classes
of stock.
<PAGE> 292
2. OTHER SERIES OF PREFERRED STOCK. The terms of the shares of each other
series of Preferred Stock shall be as stated and expressed in this Certificate
of Incorporation or any amendment hereto, or in the resolution or resolutions
providing for the issuance of such series of Preferred Stock adopted by the
Board of Directors. Subject to the requirements of the GCL and the provisions of
this Certificate of Incorporation, the Board of Directors is expressly
authorized to cause any number of the authorized and undesignated shares of
Preferred Stock to be issued from time to time in one or more series of
Preferred Stock with such voting powers, full or limited, or no voting powers,
and such designations, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions thereof,
if any, as the Board of Directors may fix by resolution or resolutions, prior to
the issuance of any shares of such series of Preferred Stock, each of which
series may differ from any and all other series, including, without limiting the
generality of the foregoing, the following:
(i) The number of shares constituting such series of Preferred Stock and
the designation thereof;
(ii) The dividend rate, if any, on the shares of such series of Preferred
Stock, whether and the extent to which any such dividends shall be cumulative or
non-cumulative, the relative rights of priority, if any, of payments of any
dividends, and the times at which, and the terms and conditions on which, any
dividends shall be paid;
(iii) The right, if any, of the holders of shares of such series of
Preferred Stock to vote and the manner of voting, except as may otherwise be
provided by the GCL;
(iv) The right, if any, of the holders of shares of such series of
Preferred Stock to convert the same into, or the right, if any, of the
Corporation to exchange the same for, another class or series of stock of the
Corporation and the terms and conditions, including any provision for future
adjustment in the conversion or exchange rate, under which said shares may be
converted or exchanged;
(v) The redemption or purchase price or prices of the shares of such series
of Preferred Stock, if any, and the times at which, and the terms and conditions
on which, the shares of such series of Preferred Stock may be redeemed or
purchased;
(vi) The terms of the sinking fund, if any, to be provided for such series
of Preferred Stock, and the terms and amount of such sinking fund;
(vii) The rights of the holders of shares of such series of Preferred Stock
in the event of a voluntary or involuntary liquidation, dissolution or winding
up of the Corporation and the relative rights of priority, if any, of such
holders with respect thereto; and
(viii) Any other relative powers, preferences and rights, and any
qualifications, limitations or restrictions, of such series of Preferred Stock.
<PAGE> 293
D. TERMS OF COMMON STOCK.
The voting powers and relative, participating, optional and other
special rights of the Common Stock, and the qualifications, limitations and
restrictions thereof, are as follows:
1. VOTING RIGHTS AND POWERS. Except as provided in the GCL, the
holders of shares of the Common Stock shall vote together as a single class
(with the holders of all series of Preferred Stock entitled to vote together
with the holders of the shares of Common Stock) on all matters as to which such
holders are entitled to vote.
2. DIVIDEND RIGHTS. No cash dividends may be declared and paid upon
the Common Stock so long as any Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series C-2
Preferred Stock or Series C-3 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. Funds otherwise legally
available for the payment of dividends on the Common Stock shall not be
restricted or reduced by reason of there being any excess of the aggregate
preferential amount of any series of Preferred Stock outstanding over the
aggregate par value thereof.
3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, after there
shall have been paid or set apart for payment of holders of any outstanding
shares of Preferred Stock the full preferential amounts to which they are
entitled under Section C.1(iii) or otherwise, the entire remaining assets and
funds of the Corporation legally available for distribution, if any, to its
shareholders shall be distributed ratably among the holders of the Common Stock
in proportion to the shares of Common Stock then held by them.
FIFTH. All corporate powers of the Corporation shall be exercised by
or under the direction of the Board of Directors except as otherwise provided
herein or by applicable law. In furtherance and not in limitation of the powers
conferred by law, the Board of Directors is expressly authorized:
(i) to adopt, amend or repeal By-laws of the Corporation, subject
to the right of the stockholders of the Corporation entitled to vote with
respect thereto to adopt By-laws and to amend or repeal By-laws made by the
Board of Directors; and
(ii) from time to time to determine whether and to what extent,
at what time and place, and under what conditions and regulations the accounts
and books of the Corporation, or any of them, shall be open to the inspection of
any stockholder; and no stockholder shall have any right to inspect any account
or book or document of the Corporation except as provided by applicable law or
the By-laws of the Corporation, as authorized by resolution of the stockholders
or Board of Directors of the Corporation or as set forth in any agreement among
the Corporation and any of its stockholders.
<PAGE> 294
SIXTH. No director of the Corporation or any person acting at the
direction of the Board of Directors shall be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty by such director as a director; provided, however, that the foregoing shall
not be deemed to eliminate or limit the liability of a director to the extent
provided by applicable law (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the GCL, or (iv) for any transaction from which the
director derived an improper personal benefit. This provision is not intended to
eliminate or narrow any defenses to or protection against liability otherwise
available to directors of the Corporation. No amendment to or repeal of this
Article Sixth shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment. Any person or
persons who, pursuant to any provision of this Certificate of Incorporation,
exercises or performs any of the powers or duties conferred or imposed upon a
director of the Corporation shall be treated as a director for purposes of this
Article Sixth and shall be entitled to the limitation of liability set forth in
this Article Sixth.
SEVENTH.
A. Every person who was or is a party or is threatened to be made
a party to or is involved in any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person or a person of whom such person is a legal
representative is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation or for its benefit as a director,
officer, employee or agent of any other corporation, or as the representative of
the Corporation in a partnership, joint venture, trust or other entity, shall be
indemnified and held harmless by the Corporation to the fullest extent legally
permissible under the GCL, as amended from time to time, against all expenses,
liabilities and losses (including attorneys' fees, judgments, fines and amounts
paid or to be paid in settlement) reasonably paid or incurred by such person in
connection therewith. Such right of indemnification shall be a contract right
that may be enforced in any manner desired by such person. Such right of
indemnification shall include the right to be paid by the Corporation the
expenses incurred in defending any such action, suit or proceeding in advance of
its final disposition upon receipt of an undertaking by or on behalf of such
person to repay such amount if ultimately it should be determined that such
person is not entitled to be indemnified by the Corporation under the GCL. Such
right of indemnification shall not be exclusive of any other right which such
directors, officers or representatives may have or hereafter acquire and,
without limiting the generality of such statement, they shall be entitled to
their respective rights of indemnification under any By-law, agreement, vote of
stockholders, provision of law or otherwise, as well as their rights under this
Article Seventh.
B. The Board of Directors may adopt By-laws from time to time
with respect to indemnification to provide at all times the fullest
indemnification permitted by the GCL, as amended from time to time, and may
cause the Corporation to purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation or for its benefit as a
director, officer,
<PAGE> 295
employee or agent of any other corporation, or as the representative of the
Corporation in a partnership, joint venture, trust or other entity, against any
expense, liability or loss asserted against or incurred by any such person in
any such capacity or arising out of any such status, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss.
EIGHTH. The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Certificate of Incorporation in
the manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders, directors and officers herein are granted subject to this
reservation; provided that (i) in addition to any required class or other vote,
the affirmative vote of the holders of record of outstanding shares representing
at least 66 2/3% of all the outstanding Common Stock and Preferred Stock
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend, alter, change or repeal, or adopt any
provision or provisions inconsistent with, Article Fourth of this Certificate of
Incorporation and (ii) the number of authorized shares of Common Stock may be
increased or decreased (but not below the number of shares of Common Stock then
outstanding or reserved for issuance) by the affirmative vote of the holders of
record of a majority of all the outstanding Common Stock and Preferred Stock
entitled to vote generally in the election of directors, voting together as a
single class.
<PAGE> 296
ANNEX C
DONALDSON, LUFKIN & JENRETTE
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue, New York, New York 10172 - (212) 892-3000
June 8, 2000
Board of Directors
State Communications, Inc.
200 North Main Street, Suite 303
Greenville, South Carolina 29601
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the stockholders of State Communications, Inc. (also known as
TriVergent), a South Carolina corporation (the "Company"), of the Fully Diluted
Equity Interest (as defined below) to which such stockholders will be entitled
pursuant to the terms of the Agreement and Plan of Merger, dated as of June 6,
2000 (the "Agreement"), by and among Gabriel Communications, Inc., a Delaware
corporation ("Gabriel"), the Company and Triangle Acquisition, Inc., a Delaware
corporation ("Merger Sub"), a wholly-owned subsidiary of Gabriel. Pursuant to
the Agreement, the Company will be merged with and into Merger Sub (the
"Merger").
Pursuant to the Agreement, (i) each outstanding share of common stock of the
Company will be converted into the right to receive 1.1005 shares (as such ratio
may be adjusted from time to time pursuant to the Agreement, the "Exchange
Ratio") of Gabriel Common Stock and (ii) each outstanding share of Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock of the Company (collectively, "TriVergent Preferred
Stock") will be converted into the right to receive (x) that number of shares of
Series C-1 Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred
Stock of Gabriel as shall be determined at the Exchange Ratio (the terms of
which would be pari passu with Gabriel's outstanding Preferred Stock and
convertible into shares of Gabriel Common Stock on a one-for-one basis, subject
to conversion price adjustments), (y) as described in the next paragraph,
warrants to purchase Gabriel Common Stock at an exercise price of $6.00 per
share ("$6.00 Warrants") and (z) as described in the next paragraph, warrants to
purchase Gabriel Common Stock at an exercise price of $10.25 per share ("$10.25
Warrants").
<PAGE> 297
State Communications, Inc. 2 June 8, 2000
Pursuant to the Agreement, an aggregate of 8,000,000 $6.00 Warrants and
5,000,000 $10.25 Warrants will be available for issuance to the holders of
TriVergent Preferred Stock and Gabriel Preferred Stock based on their "Total
Invested Capital" and "Total Committed Capital" as described in the Agreement.
Approximately 30% of the total number of warrants are available for issuance to
holders of TriVergent Preferred Stock and approximately 70% are available for
issuance to holders of Gabriel Preferred Stock. In addition, immediately prior
to the effective time of the Merger, additional shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock will be issued in
satisfaction of all accrued and unpaid dividends on each such series of
TriVergent Preferred Stock.
After giving effect to the foregoing, at the effective time of the Merger,
stockholders of the Company will be entitled to approximately 46% and
stockholders of Gabriel will be entitled to approximately 54% of the equity of
the combined entity calculated on a fully-diluted basis using the treasury stock
method and including the $6.00 Warrants and the $10.25 Warrants (subject to
adjustment pursuant to the merger agreement, the "Fully Diluted Equity
Interest").
In arriving at our opinion, we have reviewed the draft dated June 6, 2000
of the Agreement and the exhibits thereto. We also have reviewed financial and
other information that was publicly available or furnished to us by the Company
and Gabriel, including information provided during discussions with their
respective managements. Included in the information provided during discussions
with the respective managements were certain financial projections of the
Company for the years 2000 through 2009 prepared by the management of the
Company and certain financial projections of Gabriel for the same periods
prepared by the management of Gabriel. In addition, we have compared certain
financial data of the Company and Gabriel with various other companies whose
securities are traded in public markets, reviewed prices and premiums paid in
certain other business combinations and conducted such other financial studies,
analyses and investigations as we deemed appropriate for purposes of this
opinion. We were not requested to, nor did we, solicit the interest of any other
party in acquiring the Company.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and Gabriel or
their respective representatives, or that was otherwise reviewed by us. With
respect to the financial projections supplied to us, we have relied on
representations that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the management of the
Company or Gabriel, as the case may be, as to the future operating and financial
performance of the Company and Gabriel, respectively. We have not assumed any
responsibility for making an independent evaluation of any assets or liabilities
or for making any independent verification of
2
<PAGE> 298
State Communications, Inc. 3 June 8, 2000
any of the information reviewed by us. We have relied as to certain legal
matters on advice of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and
other conditions as they exist on, and on the information made available to us
as of, the date of this letter. It should be understood that, although
subsequent developments may affect the conclusion reached in this opinion, we
do not have any obligation to update, review or reaffirm this opinion. We are
expressing no opinion herein as to the prices at which the Securities will
actually trade at any time. Our opinion does not address the relative merits
of the Merger and the other business strategies being considered by the
Company's Board of Directors, nor does it address the Board's decision to
proceed with the Merger. Our opinion does not constitute a recommendation to
any stockholder as to how such stockholder should vote on the proposed Merger.
In addition, our opinion does not address the fairness of the consideration to
be received by any individual class of securityholders of the Company.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), 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. DLJ has
performed investment banking and other services for the Company in the past.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the Fully Diluted Equity Interest is fair to the
stockholders of the Company as a whole from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /S/ James Broner
------------------------------
Name: James Broner
Title: Senior Vice President
<PAGE> 299
ANNEX D
SALOMON SMITH BARNEY
A member of citigroup
June 8, 2000
Board of Directors
Gabriel Communications, Inc.
16090 Swingley Ridge Road
Chesterfield, Missouri 63017
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a
financial point of view, to Gabriel Communications, Inc. ("Gabriel") of the
consideration to be paid by Gabriel in connection with the Merger (as defined
below) contemplated by the Agreement and Plan of Merger (the "Agreement") to be
entered into among Gabriel, Triangle Acquisition, Inc., a direct wholly owned
subsidiary of Gabriel ("Merger Sub"), and State Communications, Inc. (the
"Company").
As more specifically set forth in the Agreement, and subject
to the terms and conditions thereof, the Company will merge with and into Merger
Sub (the "Merger"), and as a result of the Merger (i) each issued and
outstanding share of the common stock, par value $0.001 per share, of the
Company (the "Company Common Stock"), will be exchanged for 1.0984 shares (which
number may be adjusted pursuant to the terms of the Agreement) of the common
stock, par value $0.01 per share, of Gabriel (the "Gabriel Common Stock"), and
(ii) each issued and outstanding share of the Company's Series A Convertible
Preferred Stock, par value $0.01 per share (the "Company Series A Preferred"),
Series B Convertible Preferred Stock, par value $0.01 per share (the "Company
Series B Preferred"), and Series C Convertible Preferred Stock, par value $0.01
per share (the "Company Series C Preferred," and together with the Company
Series A Preferred and Company Series B Preferred, the "Company Preferred
Stock"), will be exchanged for 1.0984 shares (which number may be adjusted
pursuant to the terms of the Agreement) of Gabriel's Series C-1 Preferred Stock,
par value $0.01 per share (the "Gabriel Series C-1 Preferred"), Series C-2
Preferred Stock, par value $0.01 per share (the "Gabriel Series C-2 Preferred"),
and Series C-3 Preferred Stock, par value $0.01 per share (the "Gabriel Series
C-3 Preferred," and together with the Gabriel Series C-1 Preferred and Gabriel
Series C-2 Preferred, the "Gabriel Series C Preferred Stock"), respectively. In
addition, as a result of the Merger, each holder of Company Preferred Stock and
each holder of Gabriel Preferred Stock (as defined in the Agreement) will
receive (A) warrants to purchase that number of shares of Gabriel Common Stock
at an exercise price of $6.00 per share (the "Gabriel $6.00 Warrants") equal to
the product of 8,000,000 and a fraction, the numerator of which shall equal such
holder's Total Invested Capital (as defined in the Agreement) and the
denominator of which shall equal the sum of the Total Invested Capital of all
such holders and the Total Committed Capital (as defined in the Agreement) of
certain holders of Gabriel Preferred Stock, and (B) warrants to purchase that
number of shares of Gabriel Common Stock at an exercise price of $10.25 per
share (the
<PAGE> 300
"Gabriel $10.25 Warrants" and, together with the Gabriel $6.00 Warrants, the
"Gabriel Warrants") equal to the product of 5,000,000 and a fraction, the
numerator of which shall equal such holder's Total Invested Capital and the
denominator of which shall equal the sum of the Total Invested Capital of all
such holders and the Total Committed Capital of certain holders of Gabriel
Preferred Stock.
In arriving at our opinion, we reviewed a draft of the
Agreement, dated June 6, 2000, and held discussions with certain senior
officers, directors and other representatives and advisors of each of Gabriel
and the Company concerning the businesses, operations and prospects of Gabriel
and the Company. We examined certain publicly available business and financial
information relating to the Company, as well as certain financial forecasts and
other information and data for Gabriel and the Company which were provided to or
otherwise discussed with us by the managements of Gabriel and the Company,
including certain strategic implications and operational benefits anticipated to
result from the Merger. We reviewed the financial terms of the Merger as set
forth in the Agreement in relation to, among other things: the historical and
projected earnings and other operating data of Gabriel and the Company; and the
historical and projected capitalization and financial condition of Gabriel and
the Company. We analyzed certain financial, stock market and other publicly
available information relating to the businesses of other companies whose
operations we considered relevant in evaluating those of Gabriel and the
Company. We also evaluated the pro forma financial impact of the Merger on
Gabriel. In addition to the foregoing, we conducted such other analyses and
examinations and considered such other information and financial, economic and
market criteria as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have 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 us and have further relied upon the assurances of
the managements of Gabriel and the Company that they are not aware of any facts
that would make any of such information inaccurate or misleading. With respect
to financial forecasts and other information and data provided to or otherwise
reviewed by or discussed with us, we have been advised by the managements of
Gabriel and the Company that such forecasts and other information and data were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the managements of Gabriel and the Company as to the future
financial performance of Gabriel and the Company and the strategic implications
and operational benefits anticipated to result from the Merger. We express no
view with respect to such forecasts and other information and data or the
assumptions on which they were based. We have assumed, with your consent, that
the Merger will be treated as a tax-free reorganization for U.S. federal income
tax purposes. We have not made or been provided with an independent evaluation
or appraisal of the assets or liabilities (contingent or otherwise) of Gabriel
or the Company nor have we made any physical inspection of the properties or
assets of Gabriel or the Company. You have advised us, and we have assumed, that
except as explicitly set forth in this letter, the final terms of the Agreement
will not vary materially from those set forth in the draft reviewed by us. We
have further assumed that the Merger will be consummated in accordance with the
terms of the Agreement without waiver of any of the conditions precedent to the
Merger contained in the Agreement.
2
<PAGE> 301
Our opinion, as set forth herein, relates to the relative
values of Gabriel and the Company. We are not expressing any opinion as to what
the value of any of the Gabriel Common Stock, Gabriel Series C Preferred Stock
or Gabriel Warrants actually will be when issued in the Merger; nor are we
expressing any opinion with respect to the allocation of the consideration to be
paid in the Merger. We were not requested to consider, and our 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. Our opinion necessarily is based upon
information available to us and financial, stock market and other conditions and
circumstances existing and disclosed to us as of the date hereof.
Salomon Smith Barney Inc. is acting as financial advisor to
Gabriel in connection with the Merger and will receive a fee for our services, a
portion of which is payable only upon the consummation of the Merger. In the
ordinary course of our business, we and our affiliates may actively trade or
hold the securities of Gabriel and the Company for our own account or for the
account of our customers and, accordingly, may at any time hold a long or short
position in such securities. Salomon Smith Barney Inc. and its affiliates
(including Citigroup Inc. and its affiliates) may maintain relationships with
Gabriel and the Company and their respective affiliates.
Our advisory services and the opinion expressed herein are
provided for the information of the Board of Directors of Gabriel in its
evaluation of the Merger and our opinion is not intended to be and does not
constitute a recommendation of the Merger to Gabriel or a recommendation to any
stockholder as to how such stockholder should vote on any matters relating to
the Merger.
Based upon and subject to the foregoing, our experience as
investment bankers, our work as described above and other factors we deemed
relevant, we are of the opinion that, as of the date hereof, the consideration
to be paid in the Merger is fair, from a financial point of view, to Gabriel.
Very truly yours,
/s/ Solomon Smith Barney Inc.
SOLOMON SMITH BARNEY INC.
3
<PAGE> 302
ANNEX E
Delaware General Corporation Law Section 262 - Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to Section 251 (other than a merger effected pursuant to Section 251(g)
of this title), Section 252, Section 254, Section 257, Section 258, Section 263
or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the record
date fixed to determine the stockholders entitled to receive notice of
and to vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) 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. or (ii) held of record by more than 2,000
holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation
pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of this title
to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in
respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or
<PAGE> 303
depository receipts at the effective date of the merger or
consolidation will be either 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. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of
this paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and
c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior
to the meeting, shall notify each of its stockholders who was such on
the record date for such meeting with respect to shares for which
appraisal rights are available pursuant to subsection (b) or (c) hereof
that appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of
this section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the
taking of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
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(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten
days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or consolidation and
that appraisal rights are available for any or all shares of such class
or series of stock of such constituent corporation, and shall include
in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to
all such holders of any class or series of stock of a constituent
corporation that are entitled to appraisal rights. Such notice may,
and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation
the appraisal of such holder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation,
either (i) each such constituent corporation shall send a second notice
before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective date
of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or
within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection.
An affidavit of the secretary or assistant secretary or of the transfer
agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining
the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more
than 10 days prior to the date the notice is given, provided, that if
the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective
date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective
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date of the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in
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Chancery, if such is required, may participate fully in all proceedings until it
is finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
