<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 2000
REGISTRATION NO. 333-41040
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
GABRIEL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
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
</TABLE>
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
John P. Denneen, Esq.
Executive Vice President, Corporate Development and Legal Affairs, and Secretary
Gabriel Communications, Inc.
16090 Swingley Ridge Road, Suite 500
Chesterfield, Missouri 63017
(636) 537-5700
(636) 757-0000 (fax)
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C> <C>
Nick H. Varsam, Esq. Riley M. Murphy, Esq. Thomas R. Brome, Esq.
Bryan Cave LLP Senior Vice President, Cravath, Swaine & Moore
One Metropolitan Square General Counsel and Secretary Worldwide Plaza
211 North Broadway, State Communications, Inc. 825 Eighth Avenue
Suite 3600 301 North Main Street New York, New York 10019
St. Louis, Missouri 63102 Suite 2000 (212) 474-1000
(314) 259-2000 Greenville, South Carolina 29601 (212) 474-3700 (fax)
(314) 259-2020 (fax) (864) 331-7318
(864) 331-7146 (fax)
</TABLE>
------------------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement is declared
effective and all other conditions to the proposed merger of State
Communications, Inc. with and into a subsidiary of the Registrant pursuant to
the Agreement and Plan of Merger described in the enclosed information
statement/prospectus have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statements number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED(1) BE REGISTERED(1) PER UNIT OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common stock, par value $0.01................ 13,364,317(2) N/A (9) (9)
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Series C-1 convertible preferred stock, par
value $0.01................................. 5,384,204(3) N/A (9) (9)
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Series C-2 convertible preferred stock, par
value $0.01................................. 15,815,274(4) N/A (9) (9)
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Series C-3 convertible preferred stock, par
value $0.01................................. 17,767,792(5) N/A (9) (9)
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Warrants to purchase common stock............ 14,201,791(6) N/A (9) (9)
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Options to purchase common stock............. 11,036,371(7) N/A (9) (9)
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SUBTOTAL.................................. $1,575(9) $5(9)
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Common stock, par value $0.01................ 13,000,000(8) N/A $99,250,000(8) $26,202(8)
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TOTAL..................................... $99,251,575 $26,203(10)
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</TABLE>
(footnotes appear on following page)
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
(footnotes from previous page)
(1) This Registration Statement relates to the issuance of the following
securities of Gabriel Communications, Inc. in the merger of State
Communications, Inc. with and into a wholly owned subsidiary of Gabriel:
(i) common stock, par value $0.01 per share; (ii) Series C-1, C-2 and C-3
convertible preferred stock, par value $0.01 per share; (iii) warrants to
purchase Gabriel common stock; and (iv) options to purchase Gabriel common
stock. Gabriel hereby also registers (x) such additional securities as may
be issuable in the Merger as a result of an adjustment of the exchange
ratio pursuant to Section 1.3(e) of the merger agreement, and (y) such
additional shares of Gabriel common stock as may be issuable upon
conversion of the Series C-1, C-2 and C-3 convertible preferred stock.
(2) Based upon the product of 12,061, 658 shares of State Communications common
stock, par value $0.0001 per share, issued and outstanding as of September
30, 2000, the date of the merger agreement and an assumed merger exchange
ratio of 1.1080.
(3) Based upon the product of (i) the sum of (x) 4,711,672 shares of State
Communications Series A Convertible Preferred Stock, par value $0.0001 per
share, issued and outstanding as of September 30, 2000 plus (y) 147,718
shares of State Communications Series A Convertible Preferred stock to be
issued to holders of shares of State Communications preferred stock in lieu
of cash dividends, and (ii) as assumed merger exchange ratio of 1.1080.
(4) Based upon the product of (i) the sum of (x) 13,866,663 shares of State
Communications Series B Convertible Preferred Stock, par value $0.0001 per
share, issued and outstanding as of September 30, 2000 plus (y) 407,050
shares of State Communications Series B Convertible Preferred stock to be
issued to holders of shares of State Communications preferred stock in lieu
of cash dividends, and (ii) an assumed merger exchange ratio of 1.1080.
(5) Based upon the product of (i) the sum of (x) 15,776,471 shares of State
Communications Series C Convertible Preferred Stock, par value $0.0001 per
share, issued and outstanding as of September 30, 2000 plus (y) 259,442
shares of State Communications Series C Convertible Preferred stock to be
issued to holders of shares of State Communications preferred stock in lieu
of cash dividends, and (ii) the merger exchange ratio of 1.1080.
(6) Based upon the sum of (i) the product of (x) 1,084,649 shares of State
Communications common stock issuable upon exercise of outstanding warrants
and (y) an assumed merger exchange ratio of 1.1080, plus (ii) an additional
13,000,000 shares of Gabriel common stock issuable to holders of shares of
State Communications preferred stock and to holders of shares of Gabriel
preferred stock in connection with the merger.
(7) In connection with the merger, holders of options to purchase 9,960,624
shares of State Communications common stock will receive in exchange
therefor options to purchase 11,036,371 shares of Gabriel common stock.
(8) Shares of Gabriel common stock issuable upon exercise of the warrants to be
issued to holders of Gabriel preferred stock and State Communications
preferred stock in connection with the merger. The proposed maximum
offering price and registration fee have been computed in accordance with
Rule 457(g)(1).
(9) The proposed maximum offering price and amount of registration fee have
been calculated in accordance with Rule 457(f)(2). As there is no market
for the State Communications securities to be received by Gabriel, and as
State Communications has an accumulated capital deficit, the proposed
maximum aggregate offering price is calculated as the sum of: (i) $402,
one-third of the par value of 12,061,658 shares of State Communications
common stock outstanding as of September 30, 2000, (ii) $162, one-third of
the par value of 4,859,390 shares of State Communications Series A
convertible preferred stock, (iii) $476, one-third of the par value of
14,273,713 shares of State Communications Series B convertible preferred
stock, and (iv) $535, one-third of the par value of 16,035,913 shares of
State Communications Series C convertible preferred stock.
(10) A total of $26,235 in registration fees was previously paid.
<PAGE> 3
INFORMATION STATEMENT/PROSPECTUS
<TABLE>
<S> <C>
[TRIVERGENT LOGO] [GABRIEL LOGO]
301 North Main Street, Suite 2000 16090 Swingley Ridge Road, Suite 500
Greenville, South Carolina 29601 Chesterfield, Missouri 63017
</TABLE>
13,364,317 SHARES OF COMMON STOCK
5,384,204 SHARES OF SERIES C-1 CONVERTIBLE PREFERRED STOCK
15,815,274 SHARES OF SERIES C-2 CONVERTIBLE PREFERRED STOCK
17,767,792 SHARES OF SERIES C-3 CONVERTIBLE PREFERRED STOCK
OPTIONS AND WARRANTS TO PURCHASE 25,238,162 SHARES OF COMMON STOCK
Dear State Communications, Inc. and Gabriel Communications, Inc. Security
Holders:
We are pleased to inform you that the boards of directors of each of State
Communications, Inc., which we refer to in this information statement/prospectus
as "TriVergent," and Gabriel Communications, Inc. have unanimously approved the
merger of our two companies. In the merger, TriVergent stockholders will receive
1.1071 shares of Gabriel common stock or preferred stock for each share of
TriVergent common stock or preferred stock that they own. Holders of outstanding
options and warrants to purchase TriVergent common stock will receive options or
warrants to acquire Gabriel common stock based on the same exchange ratio.
Holders of TriVergent preferred stock and holders of Gabriel preferred stock
will receive additional consideration consisting of one-year and two-year
warrants to purchase a total of 7,999,950 shares and 4,999,971 shares,
respectively, of Gabriel common stock at an exercise price of $6.00 per share
and $10.25 per share, respectively. These warrants will be distributed to
holders based upon the amount of their respective invested capital in TriVergent
and Gabriel. Based on the above exchange ratio, following the merger, former
holders of TriVergent stock, options and warrants would own approximately 46.1%
of the voting power of the combined company. This assumes the exercise of all
options and warrants that will be outstanding at the effective time of the
merger.
Holders of outstanding shares of TriVergent preferred stock and common stock
sufficient to approve the merger under Delaware law and TriVergent's charter
have agreed to vote their shares to approve or consent to the merger. Similarly,
holders of a sufficient number of the outstanding shares of Gabriel common and
preferred stock also have agreed to vote their shares to approve or consent to
the merger and the amended and restated certificate of incorporation of Gabriel
provided for in the merger agreement. Therefore, we are not asking you for a
proxy or consent and you are requested not to send us one.
The boards of directors of TriVergent and Gabriel are furnishing this
document to you to provide you with important information about the merger, the
merger consideration and the appraisal rights of TriVergent stockholders under
Delaware law. This document is also a prospectus relating to the shares of
Gabriel common stock, preferred stock, warrants and options to be issued in the
merger.
<TABLE>
<S> <C>
[/s/ Charles S. Houser] [/s/ David L. Solomon]
Charles S. Houser David L. Solomon
Chairman and Chief Executive Officer Chairman and Chief Executive Officer
State Communications, Inc. Gabriel Communications, Inc.
</TABLE>
THE PROPOSED MERGER IS A COMPLEX TRANSACTION. GABRIEL AND TRIVERGENT STRONGLY
URGE YOU TO READ AND CONSIDER THIS INFORMATION STATEMENT/PROSPECTUS IN ITS
ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER "RISK FACTORS" BEGINNING ON
PAGE 7. THERE IS NO ESTABLISHED PUBLIC TRADING MARKET FOR ANY OF THE GABRIEL
SECURITIES OFFERED IN THE MERGER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE GABRIEL SECURITIES TO BE ISSUED AS
DESCRIBED IN THIS INFORMATION STATEMENT/PROSPECTUS OR HAS DETERMINED IF THIS
INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This information statement/prospectus is dated , 2000.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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<S> <C>
SUMMARY..................................................... 1
The Companies............................................. 1
Gabriel................................................... 1
TriVergent................................................ 1
What TriVergent Stockholders Will Receive in the Merger... 2
Issuance of TriVergent Preferred Stock in Lieu of Accrued
Dividends.............................................. 2
Additional Gabriel Warrants............................... 2
Options and Warrants...................................... 3
Voting and Other Agreements............................... 3
Ownership of Gabriel Following the Merger................. 3
Appraisal Rights.......................................... 3
Material U.S. Federal Income Tax Consequences of the
Merger................................................. 4
Board Approvals........................................... 4
Fairness Opinions of Financial Advisors................... 4
Interests of TriVergent Directors and Executive Officers
in the Merger.......................................... 4
Consents; No Further Stockholder Approval Required........ 4
The Merger Agreement...................................... 5
Conditions to Completion of the Merger.................... 5
Termination of the Merger Agreement....................... 5
Regulatory Matters........................................ 5
Accounting Treatment...................................... 5
No Trading Market for Gabriel Securities.................. 5
No Dividends on Gabriel Securities........................ 6
Comparison of Stockholder Rights.......................... 6
RISK FACTORS................................................ 7
Risks Relating to the Merger.............................. 7
Risks Relating to the Business and Operations of the
Combined Company....................................... 7
Risks Relating to the Communications Industry............. 13
FORWARD-LOOKING STATEMENTS.................................. 14
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA............. 16
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF GABRIEL AND TRIVERGENT................................. 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF GABRIEL, TRIVERGENT AND THE
COMBINED COMPANY.......................................... 27
Gabriel................................................... 27
TriVergent................................................ 33
The Combined Company...................................... 42
THE MERGER.................................................. 45
Background of the Merger.................................. 45
The Boards' Reasons for the Merger........................ 47
Approval of Board and Stockholders........................ 48
Opinion of TriVergent's Financial Advisor................. 49
Opinion of Gabriel's Financial Advisor.................... 53
Interests of TriVergent Directors and Executive Officers
in the Merger.......................................... 59
Interests of Gabriel Directors and Executive Officers in
the Merger............................................. 61
Accounting Treatment...................................... 61
U.S. Federal Income Tax Consequences...................... 61
Regulatory Matters........................................ 65
Appraisal Rights.......................................... 65
</TABLE>
i
<PAGE> 5
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PAGE
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Resale of Gabriel Common Stock and Gabriel Preferred
Stock.................................................. 66
Ownership of Gabriel Following the Merger................. 66
Material Relationships Between Gabriel and TriVergent..... 67
THE MERGER AGREEMENT........................................ 68
Structure of the Merger................................... 68
Effective Time of the Merger.............................. 68
Issuance of TriVergent Stock in Lieu of Payment of Accrued
and Unpaid Dividends Immediately Prior To The Merger... 68
What Securityholders Will Receive in the Merger........... 69
Amendment of Gabriel Charter.............................. 71
Exchange of TriVergent Stock Certificates; Other
Agreements............................................. 71
Voting and Consent Agreements............................. 72
Employees and Employee Benefit Plans...................... 73
Representations and Warranties............................ 73
Covenants................................................. 74
Conditions to Completion of the Merger.................... 74
Termination............................................... 75
Waiver and Amendment...................................... 75
Expenses; Governing Law................................... 75
THE GABRIEL BUSINESS........................................ 76
Business Strategy......................................... 77
Gabriel's Network Architecture and Technology............. 80
How Gabriel Deploys Its Networks.......................... 82
Gabriel's Products and Services........................... 83
Gabriel's Current Markets................................. 85
Gabriel's Operations Support Systems...................... 86
Sales and Marketing....................................... 87
Employees................................................. 88
Legal Proceedings......................................... 88
Facilities................................................ 88
THE TRIVERGENT BUSINESS..................................... 90
Business Strategy......................................... 91
Recent Acquisitions....................................... 93
Products and Services..................................... 93
Sales and Marketing....................................... 94
TriVergent's Current Markets.............................. 95
Network Infrastructure.................................... 96
Information Systems....................................... 96
Intellectual Property..................................... 97
Employees................................................. 98
Legal Proceedings......................................... 98
Facilities................................................ 98
COMPETITION................................................. 100
REGULATION.................................................. 103
MANAGEMENT OF GABRIEL FOLLOWING THE MERGER.................. 110
Executive Officers........................................ 110
Non-Management Directors.................................. 112
Executive Compensation.................................... 113
Gabriel Stock Plan........................................ 115
TriVergent Stock Plan..................................... 116
Employment Agreements..................................... 117
</TABLE>
ii
<PAGE> 6
<TABLE>
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PAGE
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<S> <C>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 120
ACTION BY STOCKHOLDERS TO APPROVE THE MERGER................ 123
VOTING SECURITIES OF GABRIEL................................ 125
VOTING SECURITIES OF TRIVERGENT............................. 128
VOTING SECURITIES OF THE COMBINED COMPANY................... 131
DESCRIPTION OF GABRIEL CAPITAL STOCK........................ 134
General................................................... 134
Amendments to Existing Provisions of Certificate of
Incorporation.......................................... 134
Common Stock.............................................. 134
Preferred Stock........................................... 135
Outstanding Options and Warrants.......................... 137
Stockholders' Agreement................................... 138
Registration Rights Agreement............................. 139
Employee Shareholders Agreement........................... 140
Classified Board of Directors and Other Anti-Takeover
Considerations......................................... 141
COMPARISON OF RIGHTS OF STOCKHOLDERS OF GABRIEL AND
TRIVERGENT................................................ 142
Capitalization............................................ 142
Voting Rights............................................. 142
Number and Election of Directors.......................... 142
Vacancies on the Board of Directors....................... 143
Removal of Directors...................................... 143
Amendments to Charter..................................... 144
Amendments to By-laws..................................... 144
Shareholder Action........................................ 144
Special Stockholder Meetings.............................. 145
Limitation of Personal Liability of Directors............. 145
Indemnification of Directors.............................. 145
Dividends................................................. 146
Appraisal Rights.......................................... 146
Preemptive Rights......................................... 147
Conversion................................................ 147
Preferred Stock........................................... 147
Shareholder Suits......................................... 147
Vote on Extraordinary Corporate Transactions.............. 148
Business Combination Restrictions......................... 148
EXPERTS..................................................... 150
LEGAL MATTERS............................................... 150
AVAILABLE INFORMATION....................................... 151
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
<TABLE>
<S> <C>
ANNEXES
Annex A Agreement and Plan of Merger
Annex B Form of Amended and Restated Certificate of Incorporation of
Gabriel
Annex C Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation
Annex D Opinion of Salomon Smith Barney Inc.
Annex E Section 262 of the General Corporation Law of the State of
Delaware -- Appraisal Rights
</TABLE>
iii
<PAGE> 7
GABRIEL AND TRIVERGENT NETWORKS IN OPERATION AND UNDER CONSTRUCTION
(AS OF SEPTEMBER 30, 2000)
[MAP]
iv
<PAGE> 8
SUMMARY
This summary highlights selected information contained in this information
statement/prospectus. Gabriel and TriVergent encourage you to carefully read
this entire document and the documents referred to in this information
statement/prospectus for a complete understanding of the merger. Page references
are included in parentheses to direct you to a more complete description of the
items presented in this summary.
THE COMPANIES
GABRIEL (page 76)
Gabriel Communications, Inc. is a rapidly growing, integrated
communications and applications services provider. Gabriel provides services
over its own network facilities and equipment. Gabriel commenced commercial
operations in its first market, St. Louis, Missouri, in June 1999. As of
September 30, 2000, Gabriel had
- 15 markets in operation or under construction in nine midwestern states,
- 131 sites secured in these markets at which it installs and connects its
own data and voice telecommunications equipment with that of the
incumbent telephone company, like Southwestern Bell or Ameritech,
- 201 sales employees,
- 16,126 access lines installed on its networks, and
- 1,266 customers served by its networks.
Gabriel offers its customers integrated communications products and
services, including
- local voice and data services,
- domestic and international long distance services,
- dedicated high speed Internet access, web page hosting and domain name
services,
- a comprehensive suite of web-enabled business applications that allows
businesses to outsource their administrative and information technology
functions over the Internet without the need for a dedicated, in-house
information technology staff and infrastructure, and
- unified voice, e-mail and fax messaging and other advanced data services.
Gabriel targets its services primarily to small to mid-sized businesses in
second and third tier cities, i.e., cities with populations ranging from 250,000
to two million. Gabriel offers its customers the convenience of meeting all of
their communications needs through one provider, with a single consolidated
monthly bill.
Gabriel began operations in June 1999. As of June 30, 2000, Gabriel had an
accumulated deficit of $38.4 million. Operations during the six months ended
June 30, 2000 resulted in an operating loss of $21.2 million. Gabriel expects to
incur increasing operating losses as it expands its operations, constructs and
deploys its networks, and grows its customer base.
Gabriel is a privately held company incorporated in Delaware, and its
principal executive offices are located at 16090 Swingley Ridge Road, Suite 500,
Chesterfield, Missouri 63017. Its telephone number is (636) 537-5700.
TRIVERGENT (page 90)
TriVergent is a broadband telecommunications company offering automated web
site design and web hosting, high-speed data and voice services. TriVergent
commenced providing services over its own network facilities during the first
quarter of 2000. As of September 30, 2000, TriVergent had
- 15 markets in operation or under construction in five southeastern
states,
- 152 sites secured in these markets at which it installs and connects its
own data and voice telecommunications equipment with that of the
incumbent telephone company, like BellSouth,
- 212 sales employees,
- 5,152 access lines installed on its networks, and
- 583 customers served by its networks.
TriVergent's principal product is its Broadband Bundle, which provides
automated web site design and web hosting, high-speed data and
1
<PAGE> 9
Internet access and local and long distance voice services, at a single price
based on the customer's selected bandwidth capacity and number of access lines.
An important component of TriVergent's Broadband Bundle is its web site design
software, which allows a customer to design and maintain a fully functional web
site integrated with its broadband Internet access and telephone services.
TriVergent believes it is the only company providing this all-inclusive bundle
in its markets.
TriVergent has a limited operating history and, from its inception in 1997
through June 30, 2000, incurred an accumulated deficit of $65.5 million.
Operations during the six months ended June 30, 2000 resulted in an operating
loss of $25.4 million. TriVergent expects to incur increasing operating losses
as it expands its operations, constructs and deploys its networks, and grows its
customer base.
TriVergent is a privately held company initially incorporated in South
Carolina and recently re-incorporated in Delaware, and its principal executive
offices are located at 301 North Main Street, Suite 2000, Greenville, South
Carolina 29601. Its telephone number is (864) 271-6335.
WHAT TRIVERGENT STOCKHOLDERS WILL RECEIVE IN THE MERGER (page 69)
COMMON STOCKHOLDERS. Based on the number of shares of common and preferred
stock, options and warrants of Gabriel and TriVergent outstanding as of
September 30, 2000, TriVergent common stockholders will be entitled to receive
1.1071 shares of Gabriel common stock for each share of TriVergent common stock.
TriVergent common stockholders will receive an amount of cash for any fractional
shares of Gabriel stock which they would otherwise receive in the merger equal
to the product of that fraction multiplied by $7.00.
PREFERRED STOCKHOLDERS. Based on the number of shares of common and
preferred stock, options and warrants of Gabriel and TriVergent outstanding as
of September 30, 2000, TriVergent convertible preferred stockholders will be
entitled to receive
- 1.1071 shares of Series C-1 convertible preferred stock of Gabriel for
each share of Series A convertible preferred stock of TriVergent,
- 1.1071 shares of Series C-2 convertible preferred stock of Gabriel for
each share of Series B convertible preferred stock of TriVergent, and
- 1.1071 shares of Series C-3 convertible preferred stock of Gabriel for
each share of Series C convertible preferred stock of TriVergent,
The Series C-1, C-2 and C-3 preferred stock will each be a new series of
Gabriel preferred stock and will have terms which are substantially identical to
the existing convertible preferred stock of Gabriel, except as to the respective
conversion prices and liquidation preferences for each series. The liquidation
preferences for all series of Gabriel preferred stock will include a preferred
return of 8.0% per annum from their original issuance dates, in the case of
existing Gabriel preferred stock, or the date on which preferred dividends no
longer accrue on TriVergent preferred stock, in the case of Gabriel Series C-1,
C-2 and C-3 preferred stock. TriVergent preferred stockholders will be entitled
to receive cash in lieu of any fractional shares of Gabriel preferred stock at
the $7.00 per share price.
STOCK CERTIFICATES. After the merger is completed, you will receive written
instructions for surrendering your TriVergent stock certificates and TriVergent
options and warrants in exchange for Gabriel stock certificates and Gabriel
options and warrants, respectively. You should not send in your stock
certificates, options or warrants now.
ISSUANCE OF TRIVERGENT PREFERRED STOCK IN LIEU OF ACCRUED DIVIDENDS (page 68)
Immediately prior to the effective time of the merger, TriVergent will
issue 814,210 additional shares of TriVergent preferred stock, representing
payment in full, at a value of $7.6776 per share, of all accrued and unpaid
dividends on each series of TriVergent preferred stock as of August 31, 2000.
These shares have been deemed outstanding for purposes of determining the
exchange ratio in accordance with the merger agreement.
ADDITIONAL GABRIEL WARRANTS (page 69)
The holders of TriVergent and Gabriel preferred stock will receive one-year
warrants to purchase a total of 7,999,950 shares of Gabriel common stock at an
exercise price of $6.00 per
2
<PAGE> 10
share and two-year warrants to purchase a total of
4,999,971 shares of Gabriel common stock at an exercise price of $10.25 per
share. A total of 3,882,827 and 9,117,094 of these warrants will be distributed
to holders of TriVergent and Gabriel preferred stock, respectively, based upon
each holder's total invested capital.
OPTIONS AND WARRANTS (page 70)
Holders of outstanding warrants and options exercisable for shares of
TriVergent common stock will be entitled to receive warrants or options, as the
case may be, to acquire on the same terms and conditions, except as each holder
of options may otherwise agree with respect to vesting provisions, to purchase
shares of Gabriel common stock. The number of shares will be determined by
multiplying the number of shares of TriVergent common stock subject to
TriVergent warrants or options by the exchange ratio, at an exercise price per
share of Gabriel common stock equal to the exercise price per share of
TriVergent warrants or options, as the case may be, divided by the exchange
ratio. For example, a holder of an option to purchase 10,000 shares of
TriVergent common stock at $2.40 per share would receive in exchange for this
option, at the 1.1071 exchange ratio, an option to purchase 11,071 shares of
Gabriel common stock at $2.17 per share.
The Gabriel options issued to any TriVergent employee who agrees that the
merger will not be treated as an event resulting in acceleration of the exercise
rights of the employee's options will vest over a period of three years from the
date of original grant, versus the five years to which TriVergent options
currently are subject. These options may fully vest and become fully exercisable
in accordance with their terms if any of the events specified in the employee's
agreement occur within one year following the effective time.
VOTING AND OTHER AGREEMENTS (page 72)
Concurrently with the execution and delivery of the merger agreement,
holders of a number of shares of TriVergent preferred stock and common stock and
Gabriel preferred stock and common stock legally sufficient to approve the
merger and the related transactions entered into voting agreements. These
stockholders agreed to consent to or vote their shares of common stock and
preferred stock of either TriVergent or Gabriel, as the case may be, in favor of
the merger agreement and the transactions contemplated by the merger agreement.
The merger agreement provides that, by execution and delivery of a letter
of transmittal, each TriVergent stockholder will agree to become a party to
Gabriel's stockholders' and registration rights agreements. In addition, most of
the senior management of TriVergent have agreed and acknowledged concurrently
with the execution of the merger agreement that the merger will not be treated
as an event constituting a "change in control" resulting in the acceleration of
vesting of their options or within the meaning of their respective employment
agreements.
OWNERSHIP OF GABRIEL FOLLOWING THE MERGER (page 66)
Based on the capitalization of TriVergent and Gabriel on September 30, 2000
and the 1.1071 exchange ratio, holders of TriVergent common and preferred stock
would receive an aggregate of 13,353,461 shares of Gabriel common stock and
38,935,618 shares of Gabriel preferred stock and holders of TriVergent options
and warrants would receive Gabriel options and warrants exercisable for
12,228,221 shares of Gabriel common stock in the merger. Based on those numbers,
at the effective time of the merger former holders of TriVergent common and
preferred stock, options and warrants would own approximately 47.7% of the
shares of Gabriel stock, on a fully diluted basis, without regard to the
additional Gabriel warrants described above. Assuming those additional warrants
are exercised in full, TriVergent stock and option and warrant holders would own
approximately 46.1% of the shares of Gabriel stock, on a fully diluted basis.
APPRAISAL RIGHTS (page 65)
Under Delaware law, holders of shares of TriVergent common stock and
preferred stock are entitled to exercise appraisal rights if they
- are holders of issued and outstanding shares of common stock or preferred
stock immediately prior to the effective time of the merger,
- have not voted in favor of the merger nor consented thereto in writing
and
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- have properly demanded their appraisal rights.
Shares to which appraisal rights are applicable will not be converted into the
right to receive the merger consideration unless and until such time as those
shares become ineligible for appraisal.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (page 61)
Gabriel and TriVergent have each received an opinion of tax counsel that
the merger will qualify as a tax-free reorganization for U.S. federal income tax
purposes. Accordingly, holders of TriVergent common and preferred stock will not
recognize gain or loss for U.S. federal income tax purposes as a result of the
exchange of their TriVergent common and preferred stock for Gabriel common and
preferred stock and warrants in the merger, except to the extent of any cash
received in lieu of fractional shares of Gabriel common and preferred stock.
Gabriel preferred stockholders also will not recognize any gain or loss on the
receipt of Gabriel common stock warrants issuable in connection with the merger.
TAX MATTERS ARE VERY COMPLICATED. THE TAX CONSEQUENCES OF THE MERGER TO YOU WILL
DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR OWN TAX
ADVISORS FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO YOU.
BOARD APPROVALS (page 48)
The TriVergent board of directors believes that the merger is fair to and
in the best interests of TriVergent and its stockholders and has unanimously
approved the merger. The Gabriel board of directors believes that the merger is
fair to and in the best interests of Gabriel and also has unanimously approved
the merger.
In reaching their decisions to approve the merger, the boards of directors
of TriVergent and Gabriel consulted with their management teams and outside
financial and legal advisors and carefully considered a variety of factors in
relation to the proposed merger.
To review the background and reasons for the merger in greater detail, as
well as risks related to the merger, see pages 45-48 and 7, respectively.
FAIRNESS OPINIONS OF FINANCIAL ADVISORS (page 49)
In deciding to approve the merger, the TriVergent board of directors
considered the opinion, as of the date of the merger agreement, of TriVergent's
financial advisor, Donaldson, Lufkin & Jenrette Securities Corporation, as to
the fairness of the consideration to be received by TriVergent stockholders as a
whole in the merger from a financial point of view. This opinion is attached as
Annex C to this document. TRIVERGENT ENCOURAGES TRIVERGENT STOCKHOLDERS TO READ
THIS OPINION CAREFULLY.
In deciding to approve the merger, the Gabriel board of directors
considered the opinion of Gabriel's financial advisor, Salomon Smith Barney
Inc., as to the fairness to Gabriel, as of the date of the merger agreement, of
the consideration to be paid in the merger from a financial point of view to
Gabriel. This opinion is attached as Annex D to this document. GABRIEL
ENCOURAGES GABRIEL STOCKHOLDERS TO READ THIS OPINION CAREFULLY.
INTERESTS OF TRIVERGENT DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER (page 59)
Some of the directors and executive officers of TriVergent have employment
or severance agreements and stock options that provide them with interests in
the merger that may be different from, or in addition to, the interests of
TriVergent stockholders generally. You should consider these interests in
assessing the merger and the approval of the TriVergent board.
CONSENTS; NO FURTHER STOCKHOLDER APPROVAL REQUIRED (page 72)
We are not asking you to vote on or consent to the merger. On June 9, 2000,
holders of more than ninety percent of the outstanding shares of TriVergent
Series A and Series B preferred stock and more than two-thirds of the
outstanding shares of TriVergent Series C preferred stock and common stock and
Gabriel preferred stock and common stock agreed to vote in favor of or consent
to the merger and the transactions contemplated by the merger agreement. Under
Delaware law and the terms of TriVergent's and Gabriel's respective certificates
of incorporation, these approvals are sufficient to approve the merger and the
related transactions.
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THE MERGER AGREEMENT (page 68)
THE MERGER AGREEMENT IN ITS ENTIRETY IS ATTACHED AS ANNEX A TO THIS
DOCUMENT. WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT IN ITS ENTIRETY, AS IT
IS THE PRINCIPAL DOCUMENT GOVERNING THE MERGER.
CONDITIONS TO COMPLETION OF THE MERGER
(page 74)
Each party's obligation to complete the merger is subject to the
satisfaction or waiver of several closing conditions, including the following:
- Stockholder approvals for the merger and the amended and restated
certificate of incorporation of Gabriel attached as Annex B hereto.
- No action by either the United States Department of Justice or the FTC to
prohibit or materially modify the merger or the related transactions.
- The continued effectiveness of Gabriel's registration statement on Form
S-4, of which this information statement/prospectus is a part, and
Gabriel's receipt of all state securities law authorizations necessary
for the merger.
- Gabriel's receipt of agreements of holders of TriVergent options, in
addition to those held by the officers who executed these agreements on
or before the date of the merger agreement, representing not less than
85% of the options held by holders of TriVergent options who hold options
to purchase 7,500 or more shares of TriVergent common stock, that the
merger will not be treated as a change in control resulting in
acceleration of the vesting of these holders' options.
- The accuracy of each company's representations and warranties at the
effective time, including the absence of any events or changes that would
have a material adverse effect on either company.
TERMINATION OF THE MERGER AGREEMENT (page 75)
The merger agreement may be terminated, whether before or after approval by
the stockholders of TriVergent or of Gabriel:
- by mutual written consent or
- by either TriVergent or Gabriel if
- the merger is not completed on or before October 31, 2000 (or such
other date as may be agreed), or
- if the other party's closing conditions become incapable of
satisfaction prior to October 31, 2000, or
- the other party has breached or failed to perform, in any material
respect, any of its covenants or agreements contained in the merger
agreement, subject to applicable cure periods.
REGULATORY MATTERS (page 65)
United States antitrust laws prohibit Gabriel and TriVergent from
completing the merger until after they have furnished information to the
Antitrust Division of the Department of Justice and the FTC and a required
waiting period has ended. Gabriel, TriVergent and stockholders of TriVergent who
will own in excess of $15 million in voting securities of Gabriel as a result of
the merger each filed the required notification and report forms with the
Antitrust Division and the FTC, and all waiting periods have expired.
TriVergent has also received the required approvals of the FCC and state
public utility commissions.
ACCOUNTING TREATMENT (page 61)
Gabriel and TriVergent intend to account for the merger using the purchase
method of accounting.
NO TRADING MARKET FOR GABRIEL SECURITIES (page 66)
There is no established public trading market for either the Gabriel or the
TriVergent common or preferred stock. Gabriel has not applied and does not
intend to apply for listing or authorization for quotation of its common or
preferred stock on any securities exchange or on The Nasdaq Stock Market or any
other quotation
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system in connection with the merger. As of September 30, 2000, there were
6,048,200 shares of Gabriel common stock and 39,905,294 shares of Gabriel
preferred stock outstanding held of record by approximately 51 holders and 35
holders, respectively. Holders of Series B preferred stock have subscription
obligations to purchase an additional 19,289,160 shares of Series B preferred
stock. As of September 30, 2000, there were 12,061,658 shares of TriVergent
common stock and 34,354,806 shares of TriVergent preferred stock outstanding and
held of record by approximately 151 holders and 54 holders, respectively.
TriVergent Series A, B and C preferred stock accrue dividends at the rate of
5.5% per annum. Accrued and unpaid dividends on TriVergent preferred stock will
be converted into an aggregate of 814,210 shares of TriVergent preferred stock
immediately prior to the merger.
NO DIVIDENDS ON GABRIEL SECURITIES (page 146)
Gabriel has never paid any dividends on its common or preferred stock and
does not anticipate paying dividends in the foreseeable future.
COMPARISON OF STOCKHOLDER RIGHTS (page 142)
The rights of TriVergent stockholders are currently governed by Delaware
law, the TriVergent certificate of incorporation and the certificates of
designation thereunder of its Series A, B and C preferred stock, the TriVergent
by-laws and the TriVergent stockholders' and registration rights agreements.
Upon consummation of the merger, the security holders of TriVergent will become
security holders of Gabriel, which is also a Delaware corporation, and their
rights as stockholders of Gabriel will be governed by Delaware law, the amended
and restated certificate of incorporation of Gabriel attached as Annex B hereto,
the Gabriel by-laws, Gabriel's stockholders' agreement, Gabriel's registration
rights agreement and, in the case of TriVergent's shareholders who will be
employees of the combined company, Gabriel's shareholders' agreement.
PERSONS WHOM YOU MAY CONTACT WITH ANY QUESTIONS
If you have any questions about the merger or if you need additional copies of
this information statement/prospectus, you should contact:
TriVergent stockholders:
Riley M. Murphy
Secretary
State Communications, Inc.
301 North Main Street
Suite 2000
Greenville, South Carolina 29601
Telephone: (864) 331-7318
Gabriel stockholders:
John P. Denneen
Secretary
Gabriel Communications, Inc.
16090 Swingley Ridge Rd.
Suite 500
Chesterfield, Missouri 63107
Telephone: (636) 537-5700
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RISK FACTORS
RISKS RELATING TO THE MERGER
GABRIEL AND TRIVERGENT MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THEIR
BUSINESSES.
This successful integration of Gabriel's and TriVergent's businesses will
require management of the combined company to
- define the responsibilities and align the strategic plans of two
previously independent management teams and coordinate geographically
separate organizations in St. Louis, Missouri, and Greenville, South
Carolina,
- identify and make any changes required to insure that both companies'
existing telecommunications network architectures can function together
to provide their current and planned products and services,
- determine the extent to which their respective operations support systems
are compatible and implement any modifications necessary to avoid delays
or problems in processing customer orders, providing customer care,
billing their customers and interacting with other telephone companies,
- reassess and take actions necessary to realize the benefits expected from
the deployment of more advanced network technologies, and
- effect savings in general, administrative and operating expenses and
network equipment costs.
Management may not be able to successfully accomplish this integration. Neither
company has been involved in a strategic transaction of this size. The effective
integration of corporate cultures and the maintenance of uniform standards,
controls, procedures and compatible technologies will be especially important
over the long term to achieve the expected benefits of the merger. The combined
company's integration efforts will require the dedication of management and
other personnel and may distract management's attention from the day-to-day
operations of the combined company and the pursuit of its business strategies.
If the combined company fails to integrate the businesses quickly and
efficiently, it may incur unanticipated costs or be unable to successfully
advance its business objectives.
THERE WILL BE NO ESTABLISHED TRADING MARKET FOR ANY OF THE GABRIEL SECURITIES TO
BE ISSUED IN THE MERGER AND THESE SECURITIES MAY REMAIN AN ILLIQUID INVESTMENT
FOR AN INDETERMINATE PERIOD OF TIME.
There is no established trading market for any of the Gabriel common stock,
preferred stock, options or warrants, and management of the combined company
does not intend to list any of these securities on any securities exchange or to
apply for authorization for the quotation of any of these securities on The
Nasdaq Stock Market or any other quotation system in connection with the merger.
Moreover, these securities are subject to significant transfer restrictions
under Gabriel's stockholder agreements. See the description of these agreements
on pages 138 and 139. Accordingly, your investment in the combined company will
be illiquid for an indeterminate period of time.
RISKS RELATING TO THE BUSINESS AND OPERATIONS OF THE COMBINED COMPANY
GABRIEL AND TRIVERGENT HAVE RECENTLY COMMENCED THEIR EXISTING OPERATIONS, AND
THE COMBINED COMPANY ANTICIPATES INCREASING OPERATING LOSSES AND NEGATIVE CASH
FLOWS.
Gabriel commenced operations in June 1999 and is providing services over
its own network facilities in nine markets. TriVergent began operating as a
telecommunications services provider in October 1997 by reselling BellSouth's
local telephone service. TriVergent changed its business strategy from reselling
local and long distance services to providing a broadband bundle of services
over its own network facilities in February 1999 and is providing these services
in seven markets. As neither Gabriel nor TriVergent has been offering these
services for a significant period of time, you have very little operating data
about Gabriel and TriVergent upon which to base an evaluation of the future
performance of the combined company and an investment in shares of Gabriel
stock.
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For the six months ended June 30, 2000 Gabriel and TriVergent had operating
losses of $16.7 million and $20.6 million, respectively, and, as of June 30,
2000, had accumulated deficits of $38.4 million and $65.5 million, respectively.
Both Gabriel and TriVergent expect the combined company to continue to
experience increasing consolidated operating losses and negative earnings before
interest, income taxes, depreciation and amortization, or EBITDA, as it expands
its operations, constructs and deploys its networks, and grows its customer
base. The combined company may not generate sufficient revenues, achieve or
sustain positive EBITDA or profitability, or generate sufficient positive
consolidated cash flow to meet its working capital and debt service
requirements.
THE COMBINED COMPANY EXPECTS TO INCUR SIGNIFICANT INDEBTEDNESS, WHICH COULD
IMPAIR ITS ABILITY TO OPERATE AND FINANCE ITS BUSINESS.
The combined company expects to incur significant indebtedness to finance
the construction of its networks. The existing senior secured credit facilities
of Gabriel and TriVergent contain, and future debt financings likely will
contain, covenants that will require the combined company to maintain specified
financial ratios and satisfy financial tests, as well as limitations on its
ability to incur indebtedness, create liens, make investments, make capital
expenditures, pay dividends and effect other specified transactions and
payments.
In addition, a high level of indebtedness could affect the future prospects
of the combined company by
- limiting its ability to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements and
other purposes,
- causing the combined company to delay or modify substantially its market
expansion plans,
- requiring that it dedicate a substantial portion of its cash flow from
operations, if any, to the payment of principal of and interest on its
indebtedness,
- limiting its flexibility in planning for, or reacting to changes in, its
business,
- making it more highly leveraged than some of its competitors, which may
place it at a competitive disadvantage, and
- increasing its vulnerability in the event of a downturn in its business.
TO EXPAND TO ITS TARGETED 40 MARKETS, THE COMBINED COMPANY WILL REQUIRE
SIGNIFICANT ADDITIONAL CAPITAL, WHICH IT MIGHT NOT BE ABLE TO OBTAIN.
Management estimates that expansion to its targeted 40 markets would
require at least $175 million of additional capital. The combined company will
also require additional financing, or require additional financing sooner than
anticipated, if
- current development plans or projections change or prove to be
inaccurate,
- the combined company has underestimated its cost projections,
- the schedule or target markets of its development plans change,
- necessary to respond to changes in demand for its services, and
regulatory and technological developments,
- the combined company identifies attractive additional market
opportunities, or
- the combined company effects any additional acquisitions or joint
ventures.
Additional capital may not be available to the combined company,
particularly in light of the significant reduction in the availability of
capital to comparable companies in the telecommunications industry that has
occurred during the past several months and the significant decline in
comparable public company valuations that management believes has resulted from
this reduction of available capital.
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Furthermore, its operations may not produce positive consolidated cash flow in
amounts sufficient to meet its additional capital requirements. If the combined
company is unable to raise and generate sufficient funds, it may be required to
modify, delay or abandon some of its planned market construction or
expenditures, which could delay or limit its growth.
THE SUCCESS OF THE COMBINED COMPANY WILL DEPEND ON ITS ABILITY TO DEVELOP AND
EXPAND ITS OPERATIONS.
In order for the combined company to be successful, it will need to
continue to develop and expand its operations by
- installing its network platforms and related equipment,
- obtaining needed interconnections, transmission capacity, access
facilities, equipment installation sites and operations support system
connections from the incumbent telephone companies in its markets,
- obtaining required governmental authorizations,
- implementing and integrating advanced, scalable operations support
systems and electronic links to incumbent telephone companies and other
business partners, and
- provisioning, servicing and billing customers.
If the combined company cannot effectively perform any of the above actions, it
may not be able to develop and expand its operations to meet its business
objectives.
THE COMBINED COMPANY INTENDS, AS PART OF ITS BUSINESS STRATEGY, TO CONTINUE TO
EXPAND THROUGH ACQUISITIONS AND OTHER STRATEGIC INVESTMENTS, WHICH INVOLVES
SUBSTANTIAL RISKS.
Growth through acquisitions and other strategic investments involves
substantial risks. The combined company may not be able to identify and
negotiate additional acquisitions on satisfactory terms, finance or obtain
financing needed to complete any acquisitions and, if any acquisition is made,
management may not be able to successfully integrate the acquired business into
the combined company's operations and/or the acquired business may not perform
as expected. Other risks involved in acquisitions are
- possible incurrence of unanticipated costs of the acquired businesses,
- possible loss of key personnel,
- the potential disruption of the combined company's ongoing business and
diversion of resources and management time,
- the possible inability of management to maintain uniform standards,
controls, procedures and policies,
- the risks of entering markets in which management may have little or no
prior direct experience, and
- the potential impairment of relationships with employees, suppliers and
customers as a result of changes in management.
The combined company may also enter into joint ventures and other strategic
investment transactions, which involves the risk that the combined company will
not have control over the joint venture or other strategic partnership and that
a joint venture or strategic partner may have economic, business or legal
interests or objectives that are inconsistent with those of the combined
company. These business partners may also be unable to meet their economic or
other obligations, which could force the combined company to fulfill those
obligations or abandon or curtail the venture.
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THE SUCCESSFUL IMPLEMENTATION OF THE BUSINESS PLAN OF THE COMBINED COMPANY WILL
DEPEND IN PART UPON GROWTH IN THE DEMAND FOR INTERNET ACCESS AND HIGH-SPEED DATA
PRODUCTS AND SERVICES BY SMALL TO MEDIUM-SIZED BUSINESSES.
The combined company will offer high speed Internet access and data
transmission and other enhanced data products and services primarily to small
and medium-sized businesses. The success of its Internet and data services
business will depend upon the demand for these products and services by its
target customers. If demand for Internet access and high speed data products and
services does not grow as anticipated, the combined company may not be able to
achieve its business objectives. The demand for dedicated, high-speed Internet
access and other high-speed data products and services by small to medium-sized
businesses is evolving and depends on a number of factors, including growth in
consumer and business use of new interactive technologies, further development
of technologies that facilitate interactive communications between organizations
and targeted audiences, security concerns and increases in transmission
capacity. Furthermore, the combined company's ability to accommodate growth in
demand, if any, for these products and services will depend on the ability of
the combined company to hire, train and retain qualified personnel and to
further enhance its products and services to adapt to technological and
competitive changes. In addition, the market for high-speed data transmission
via digital subscriber line, or DSL, and other technologies is relatively new
and evolving. DSL is a technology enabling high speed data access across
existing telephone lines. Providers of high-speed data services are testing
products from various suppliers for a multitude of applications, and industry
standards are still being developed.
THE SUCCESS OF THE COMBINED COMPANY'S NETWORK DEPLOYMENT STRATEGY IS HIGHLY
DEPENDENT UPON THE COMBINED COMPANY'S ABILITY TO ESTABLISH AND MANAGE ITS
RELATIONSHIPS WITH THE INCUMBENT TELEPHONE COMPANIES.
The combined company will depend upon the technology, cooperation and
capabilities of the incumbent telephone companies in order to properly provision
and service its customers. The success of the combined company's network
deployment strategy is highly dependent on its ability to interconnect with, and
obtain facilities from, the incumbent telephone companies in its target markets
on a timely basis and on satisfactory terms. Federal law requires most of the
incumbent telephone companies to lease or "unbundle" elements of their networks
and permit competitive providers, like Gabriel and TriVergent, to purchase the
call origination and call termination services they need. However, incumbents
may not provide these unbundled network elements in a timely manner and prices
or other terms and conditions for these elements may not be favorable to the
combined company.
Despite the adoption of the Telecommunications Act of 1996 and related FCC
regulations that are designed to allow new competitive telephone companies like
Gabriel and TriVergent, to compete with the incumbent telephone companies,
Gabriel and TriVergent, like many other competitive providers, have experienced
difficulties in working with the incumbent telephone companies in their initial
markets. This has interfered with the ability of both Gabriel and TriVergent to
provision and service their customers and has increased their costs. Court and
regulatory decisions have created some uncertainty about the FCC's rules
governing the pricing, terms and conditions of agreements needed to obtain
interconnections and network facilities and could make negotiating and enforcing
these agreements more difficult and protracted in the future. If the combined
company is unable to obtain high quality, reliable and reasonably priced
services from the incumbent telephone companies, its cost of providing services
may increase and customers may not subscribe for its services.
THE COMBINED COMPANY'S FAILURE TO EFFECTIVELY PROVIDE ADVANCED INTERNET SERVICES
TO ITS CUSTOMERS COULD HARM ITS BUSINESS.
In addition to providing voice and data services, the combined company will
act as an Internet service provider to its customers. The Internet is comprised
of many Internet service providers that operate their own networks and
interconnect with each other at various points. Both Gabriel and TriVergent are
in the process of developing relationships to permit them to exchange traffic
with these providers. However, the combined company may not be able to develop
or maintain relationships with providers with adequate
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network infrastructure or expand or adapt its network infrastructure to meet the
Internet service requirements of its customers. Because Internet access, web
hosting and applications services are critical to many of the combined company's
customers' businesses, the inability to meet customer requirements and any
significant interruption in the combined company's services could result in lost
profits or other indirect or consequential damages to customers, which could
cause them to switch to another service provider.
THE COMBINED COMPANY MAY NOT BE ABLE TO PROVISION AND SERVICE ITS CUSTOMERS IF
IT CANNOT SECURE SUFFICIENT TRANSMISSION CAPACITY TO MEET ITS FUTURE NEEDS.
The combined company may not be able to lease adequate transmission
capacity in markets it plans to enter or renew its lease arrangements or obtain
comparable arrangements from other carriers in its existing markets. Because it
initially plans to lease rather than build local transmission capacity in each
of its markets, the combined company would be unable to service its customers if
it could not obtain adequate transmission capacity. Insufficient capacity could
result in the loss of customers and the inability to add new customers and could
limit the combined company's ability to enter new markets.
THE OPERATIONS AND GROWTH OF THE COMBINED COMPANY DEPEND UPON THE ABILITY OF
THIRD PARTY SUPPLIERS TO PROVIDE ADVANCED, RELIABLE NETWORK EQUIPMENT ON A
TIMELY BASIS.
The suppliers of the combined company's network equipment may not be able
to meet its equipment requirements on a timely basis, and equipment may not
perform as expected. The following factors could disrupt the combined company's
operations, jeopardize service to its customers, delay its expansion into new
markets and limit its ability to introduce new services and obtain and retain
customers:
- extended interruption in the supply of network equipment;
- material increase in prices;
- significant delay by suppliers in their shipment of products, their
release of new products or the failure of their products to perform as
expected; and
- extended delay in transitioning to the products of an alternative
supplier, if necessary.
As an example, during the fourth quarter of 1999, Gabriel experienced
problems with some advanced customer premise equipment, which did not perform as
expected, causing delays in its sales and installation efforts. To address these
problems, Gabriel installed alternative equipment utilizing traditional
telephone technologies, which did not have some of the capabilities that the
more advanced equipment was designed to provide. Similar problems may arise in
the future.
THE ADVANCED EQUIPMENT THAT THE COMBINED COMPANY PLANS TO USE IN ITS NETWORKS
MAY NOT BECOME COMMERCIALLY AVAILABLE ON A TIMELY BASIS OR PERFORM AS
ANTICIPATED, WHICH WOULD LIMIT THE COMBINED COMPANY'S ABILITY TO REALIZE ANY
COST SAVINGS ASSOCIATED WITH THIS EQUIPMENT.
The combined company plans to incorporate more economical, advanced
equipment in its networks when it becomes commercially available that should
provide more capabilities and efficiencies than its current network platforms.
Management expects this equipment will fully integrate data and voice
transmissions using a single switch instead of using separate switches for voice
and data traffic. A switch is electronic equipment that interconnects
transmission paths, or circuits, to allow telecommunications service providers
to connect calls or data transmissions directly to their destination. The
combined company must rely on third-party equipment vendors to develop this
advanced network equipment. Equipment with all of the required features and
functionality may not perform as expected or become available to the combined
company on a timely basis or on satisfactory terms. In the interim, the combined
company will be required to continue to deploy more costly voice switches to
provide its local and long distance voice services.
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THE FAILURE OF THE COMBINED COMPANY TO SUCCESSFULLY IMPLEMENT, INTEGRATE AND
MAINTAIN SOPHISTICATED OPERATIONS SUPPORT SYSTEMS WOULD ADVERSELY AFFECT ITS
ABILITY TO REALIZE ANTICIPATED OPERATIONAL EFFICIENCIES AND TO PROVISION,
SERVICE AND BILL ITS CUSTOMERS.
Sophisticated back office information and processing systems will be vital
to the combined company's ability to monitor costs, render single monthly
invoices for bundled services, provision customer orders, provide timely
customer service and achieve operating efficiencies. Gabriel and TriVergent have
each developed, with third-party vendors, scalable operations support systems
that are designed to handle all of their customer service, order management,
provisioning, billing, collection and trouble management processing. They also
automate many of the functions for which carriers have historically required
multiple manual entries of customer information. However, management of the
combined company may not be able to integrate Gabriel's and TriVergent's
operations support systems to produce the anticipated operational efficiencies.
The failure of the combined company's operations support systems to perform as
expected or to interface with incumbent telephone companies and other providers,
or the failure to adequately identify all of the information and processing
needs and to upgrade the systems as necessary, will adversely affect the
combined company's ability to provision, service and bill its customers.
THE SUCCESS OF THE COMBINED BUSINESS DEPENDS ON ITS ABILITY TO HIRE AND RETAIN
QUALIFIED MANAGEMENT, TECHNICAL AND SALES PERSONNEL.
The combined company will be managed by its key executive officers, most
notably Mr. David L. Solomon, its chairman and chief executive officer, Mr. G.
Michael Cassity, its president and chief operating officer and Mr. Gerard J.
Howe, its president -- strategic initiatives. The combined company will not
maintain key person life insurance for any of its executive officers. The loss
of the services of one or more of these key executive officers could have a
material adverse effect on the ability of the combined company to achieve its
strategic objectives.
The success of the combined company also will depend in large part on its
ability to attract and retain a large and effective sales force and other highly
skilled and qualified management and technical personnel. The competition for
qualified personnel in the telecommunications industry is intense. The combined
company may not be able to attract and retain the qualified management,
technical and sales personnel necessary to achieve its objectives.
THE COMBINED COMPANY'S RELIANCE ON OTHER CARRIERS TO PROVIDE LONG DISTANCE
TRANSMISSION SERVICES COULD ADVERSELY AFFECT THE PROFITABILITY OF ITS LONG
DISTANCE SERVICES.
The combined company will provide long distance services to its customers
as part of its offering of bundled telecommunications services. The combined
company will rely on other carriers to provide it with long distance
transmission services. Agreements with these carriers typically provide for the
resale of long distance services on a per-minute basis and may contain minimum
volume commitments. If the combined company were to fail to meet any minimum
volume commitments, it would have to pay under-utilization charges, and if it
underestimates its transmission capacity needs, it may be required to obtain
additional capacity through more expensive means, each of which could adversely
affect its ability to offer long distance services profitably. In addition, the
long distance business is extremely competitive and prices have declined
substantially in recent years and are expected to continue to decline. The long
distance business is also characterized by a high average customer churn rate,
meaning that customers frequently change long distance providers in response to
the offering of lower rates or promotional incentives by competitors.
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<PAGE> 20
RISKS RELATING TO THE COMMUNICATIONS INDUSTRY
INCUMBENT TELEPHONE COMPANIES HAVE A DOMINANT MARKET SHARE IN EACH OF THE
COMBINED COMPANY'S TARGET MARKETS AND MAY TAKE ACTIONS THAT WILL ADVERSELY
AFFECT THE COMBINED COMPANY'S ABILITY TO ATTRACT AND RETAIN CUSTOMERS AND
OPERATE PROFITABLY.
In each of the combined company's markets, it competes principally with the
incumbent telephone companies serving that market, which initially has been
Southwestern Bell and Ameritech, in the case of Gabriel, and BellSouth, in the
case of TriVergent. The incumbent telephone companies have long-standing
relationships and name recognition with their customers, financial, technical
and marketing resources substantially greater than Gabriel and TriVergent, and
the potential to fund competitive services with cash flows from a variety of
businesses. Incumbent telephone companies presently have approximately a 95%
market share in each of the target markets of the combined company. For these
reasons, the combined company faces a significant threat to its ability to
attract and retain customers. In addition, recent regulatory initiatives
designed to promote competition with the incumbent telephone companies have also
been accompanied by increased pricing flexibility for, and relaxation of
regulatory oversight of, the incumbent telephone companies. This may present
incumbent telephone companies with an opportunity to subsidize services that
compete with the combined company's services with revenues generated from non-
competitive services, which would allow incumbent telephone companies to offer
competitive services at lower prices. If the incumbent telephone companies
engage in discount pricing practices, the combined company may not be able to
achieve or maintain adequate market share or margins or compete effectively with
the incumbent telephone companies in its target markets.
INCREASING COMPETITION FROM A NUMBER OF OTHER PROVIDERS IN EACH OF ITS TARGET
MARKETS ALSO COULD ADVERSELY AFFECT THE COMBINED COMPANY'S ABILITY TO ACHIEVE OR
MAINTAIN ADEQUATE MARKET SHARE AND OPERATE PROFITABLY.
Each of Gabriel and TriVergent believes that second and third tier markets
will support only a limited number of competitors and that operations in markets
with multiple competitive providers are likely to be unprofitable for one or
more of these providers. Gabriel and TriVergent consider second tier markets as
metropolitan areas with populations ranging from 950,000 to two million and
third tier markets as metropolitan areas with populations ranging from 250,000
to 950,000. The combined company expects to experience increasing competition in
each of its target markets from other providers of integrated communications
services, which are
- large long distance companies, such as AT&T, WorldCom and Sprint, which
offer integrated local, long distance and data telecommunications
services,
- the regional Bell operating companies, such as Southwestern Bell,
Ameritech and BellSouth, which have gained or are aggressively seeking
regulatory authority under the Telecommunications Act to offer bundled
local and long distance telecommunications services in their own local
regions, and
- other competitive providers.
Many of the combined company's competitors have financial, technical,
marketing, personnel and other resources, including brand name recognition,
substantially greater than the combined company's. These competitors also may
offer lower prices than the combined company's. As a result, the combined
company may not be able to achieve or maintain adequate market share or margins,
or compete effectively, in its target markets.
A GROWING NUMBER OF COMPETITORS ARE DEPLOYING ALTERNATIVE TECHNOLOGIES TO
PROVIDE VOICE AND DATA TRANSMISSION SERVICES WHICH MAY BE MORE ATTRACTIVE TO
POTENTIAL CUSTOMERS OF THE COMBINED COMPANY.
The construction of networks utilizing new technologies such as Internet
telephony, cable modem service and wireless networks might also create
significant new competitors that may have lower costs or alternative products
which may be more attractive to potential customers of the combined company. For
example, Qwest Communications International Inc., Level 3 Communications Inc.
and Williams
13
<PAGE> 21
Communications Group have deployed extensive fiber optic communications networks
utilizing Internet-based technologies. In addition, Sprint and AT&T have
announced that they intend to transition their respective network
infrastructures to Internet protocol platforms in order to offer their customers
integrated voice and data solutions. Teligent, Inc. and Winstar Communications,
Inc. are using wireless technologies to provide high speed integrated local,
long distance and data telecommunications services.
Other potential competitors in the combined company's markets include
electric utilities, cable television companies, resellers, and microwave,
satellite and other wireless telecommunications providers. Some electric
utilities can transmit Internet and data services over their power lines at
speeds comparable to those achievable by telephone companies with traditional
transmission technologies. With the recent acquisitions of TCI and Media One by
AT&T, the announced merger of Time Warner with America Online, and continuing
consolidation in the cable television industry, cable television companies have
emerged as a significant new threat to more traditional providers of
telecommunications services. Other new competitors are utilizing alternative
transmission facilities, including satellite transmission, which can also be
used to provide high capacity voice, data and Internet access and interactive
services. These companies may offer alternative products at competitive prices
which may negatively impact the combined company's ability to obtain and retain
customers.
GOVERNMENT REGULATIONS MIGHT RESTRICT THE COMBINED COMPANY'S OPERATIONS OR
IMPROVE THE COMPETITIVE POSITION OF THE COMBINED COMPANY'S PRINCIPAL
COMPETITORS.
Unlike some competitors of the combined company, particularly the incumbent
telephone companies, TriVergent and Gabriel are not currently subject to some of
the more burdensome requirements of federal regulations. However, the combined
company's ability to compete in the communications industry will depend upon a
continued favorable, pro-competitive regulatory environment. New regulations or
legislation affording greater flexibility and regulatory relief to the combined
company's larger competitors or imposing greater restrictions on the combined
company's operations may significantly harm its ability to compete.
FORWARD-LOOKING STATEMENTS
This document contains a number of forward-looking statements relating to
Gabriel, TriVergent and the combined company with respect to business
strategies, anticipated operating efficiencies, competitive positions, growth
opportunities for existing products and services, and other matters. We consider
any statements that are not historical facts as forward-looking statements.
These forward-looking statements, including those relating to the Gabriel and
TriVergent business plans and future prospects, revenues and income, including
those referenced under the caption "The Merger," are necessarily estimates
reflecting the best judgment of the senior management of Gabriel and TriVergent.
They involve a number of risks and uncertainties that could cause actual results
to differ materially from those suggested by the forward-looking statements.
These differences could be material; therefore, you should evaluate
forward-looking statements in light of various important factors, including
those set forth or incorporated by reference in this document.
Important factors that could cause actual results to differ materially from
estimates or forecasts contained in the forward-looking statements include
- the ability to integrate the operations of the combined company and its
acquired businesses, including their respective product lines and
technologies,
- the combined company's degree of financial leverage and its ability to
expand to its targeted 40 markets,
- the combined company's dependence on growth in demand for its products
and services,
- the ability to establish and maintain relationships with incumbent local
telephone companies and to secure included transmission capacity,
14
<PAGE> 22
- the impact of competitive services and pricing, alternative technologies
and new entrants in the combined company's markets,
- regulatory risks, including the impact of the Telecommunications Act of
1996, and
- other risks referenced from time to time in the combined company's
filings with the SEC.
Words such as "estimate," "project," "plan," "intend," "expect," "believe"
and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are found at various places throughout this
document and the other documents incorporated by reference. You should not place
undue reliance on these forward-looking statements, which speak only as of the
date of this document.
15
<PAGE> 23
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following selected consolidated historical financial data of Gabriel
and TriVergent has been derived from their respective historical financial
statements, which are included in this information statement/prospectus. The
following data should be read in conjunction with the historical consolidated
financial statements of Gabriel and TriVergent, respectively, and the related
notes, the unaudited pro forma condensed consolidated financial statements, and
the related notes, and Gabriel's and TriVergent's respective "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this information statement/prospectus.
Basic and diluted loss per share for each of Gabriel and TriVergent have
been computed using the number of shares of common stock and common stock
options and warrants outstanding. The weighted average number of shares was
based on common stock outstanding for basic loss per share and common stock
outstanding and common stock options and warrants outstanding for diluted loss
per share in periods when such common stock options and warrants are not
antidilutive.
Included in "Other Financial Data" of Gabriel and TriVergent's historical
financial data below are adjusted EBITDA amounts. EBITDA consists of earnings
(loss) before net interest, income taxes, depreciation and amortization, and
amounts reported as adjusted EBITDA have been adjusted to exclude minority
interests and extraordinary items. Management believes EBITDA is a measure
commonly used in the telecommunications industry in assessing companies'
operating performance, leverage and ability to incur and service debt. Adjusted
EBITDA is presented to enhance an understanding of each company's operating
results and is not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles. Gabriel's proposed
senior secured credit facility and Gabriel and TriVergent's existing credit
facilities contain covenants based on EBITDA that require the borrower to
maintain interest coverage and leverage ratios. EBITDA is not a measure of
financial performance under generally accepted accounting principles and should
not be considered an alternative to earnings (loss) from operations and net
income (loss) as a measure of performance or an alternative to cash flow as a
measure of liquidity. Nether EBITDA nor adjusted EBITDA is necessarily
comparable to similarly titled measures of other companies. Each is thus
susceptible to varying calculations. The consolidated statements of cash flows
used in and provided by operating, investing and financing activities, as
calculated under generally accepted accounting principles, of each of TriVergent
and Gabriel are included with the respective company's consolidated financial
statements contained elsewhere in this information statement/prospectus.
16
<PAGE> 24
GABRIEL CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------- ----------------------
1998(1) 1999 1999 2000
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue......................................... -- $ 452 $ 4 $ 3,268
Costs and expenses:
Cost of communications services............... -- 496 4 2,634
Selling, general and administrative........... $ 693 16,559 4,674 17,077
Depreciation and amortization................. 6 1,955 113 4,362
--------- --------- --------- ---------
Total costs and expenses................... 699 19,010 4,791 24,073
--------- --------- --------- ---------
Loss from operations....................... (699) (18,558) (4,787) (20,805)
Other income (expense):
Equity in loss of affiliate................... -- -- -- (179)
Interest income............................... 132 1,477 549 1,844
Interest expense.............................. -- (215) -- (1,440)
--------- --------- --------- ---------
Total other income (expense)............... 132 1,262 549 225
Minority interest............................... -- -- -- 49
--------- --------- --------- ---------
Net loss................................... $ (567) $ (17,296) $ (4,238) $ (20,531)
========= ========= ========= =========
Basic and diluted loss per share................ $ (0.16) $ (3.25) $ (0.81) $ (3.54)
========= ========= ========= =========
Weighted average common shares outstanding...... 3,550,755 5,322,409 5,225,022 5,800,670
OTHER FINANCIAL DATA:
Capital expenditures............................ $ 153 $ 35,564 $ 13,277 $ 42,117
Adjusted EBITDA................................. (693) (16,602) (4,675) (16,443)
Cash flows from operating activities............ (425) (14,858) (3,009) (11,760)
Cash flows from investing activities............ (153) (37,564) (13,277) (45,367)
Cash flows from financing activities............ 29,261 86,819 27,193 71,955
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------- ----------------------
1998 1999 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................... $28,682 $ 63,080 $35,890 $ 77,908
Property and equipment, net..................... 148 33,806 13,312 71,721
Total assets.................................... 28,833 102,712 55,052 160,972
Long-term debt, less current maturities......... -- 20,000 -- 20,000
Stockholders equity............................. 28,694 78,217 51,649 127,961
</TABLE>
-------------------------
(1) Gabriel was organized on June 15, 1998.
17
<PAGE> 25
TRIVERGENT CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------ ------------------------
1997(1) 1998 1999 1999 2000
--------- --------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues........................... $ -- $ 5,261 $ 25,037 $ 13,818 $ 8,627
Cost of services................... -- 3,802 17,704 9,648 8,731
Operating expenses:
Selling, general and
administrative................ 40 12,166 23,523 13,440 20,210
Provision for uncollectible
accounts...................... -- 1,976 7,285 5,816 382
Depreciation and amortization... -- 150 1,318 518 4,725
--------- --------- ---------- ---------- ----------
Total operating expenses........ 40 14,292 32,126 19,774 25,317
--------- --------- ---------- ---------- ----------
Operating loss..................... (40) (12,833) (24,793) (15,604) (25,421)
Interest income................. -- 123 816 70 986
Interest expense................ -- (13) (1,469) (571) (1,873)
--------- --------- ---------- ---------- ----------
Loss before extraordinary
item.......................... (40) (12,723) (25,446) (16,105) (26,308)
Extraordinary item -- early
extinguishment of debt........ -- -- (218) -- (725)
Net loss........................ (40) (12,723) (25,664) (16,105) (27,033)
Preferred stock accretion....... -- (58) (2,603) (300) (9,737)
--------- --------- ---------- ---------- ----------
Net loss to common
stockholders.................. $ (40) $ (12,781) $ (28,267) $ (16,405) $ (36,770)
========= ========= ========== ========== ==========
Basic and diluted loss per
share......................... $ (.01) $ (1.37) $ (2.60) $ (1.54) $ (3.12)
Weighted average shares
outstanding................... 6,390,476 9,308,771 10,868,729 10,645,897 11,773,102
OTHER FINANCIAL DATA:
Net cash used in operating
activities...................... $ (56) $ (11,072) $ (19,956) $ (15,757) $ (29,973)
Net cash used in investing
activities...................... -- (1,465) (38,764) (2,182) (49,822)
Net cash provided by financing
activities...................... 110 13,883 72,558 16,791 76,853
Capital expenditures............... -- 1,465 34,966 1,688 49,487
Adjusted EBITDA.................... (40) (12,683) (23,475) (15,086) (20,697)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------- ------------------------
1998 1999 1999 2000
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments....... $ 1,399 $ 15,237 $ 251 $ 12,295
Net property and equipment................... 1,314 44,057 2,658 89,507
Total assets................................. 9,942 67,277 8,524 119,980
Long-term debt............................... 83 18,200 2,000 33,776
Redeemable preferred stock................... 11,295 65,780 11,595 141,460
Stockholders' deficit........................ (5,941) (31,158) (21,021) (63,317)
</TABLE>
-------------------------
(1) TriVergent was organized on October 29, 1997.
18
<PAGE> 26
COMPARATIVE PER SHARE DATA
The following table sets forth for Gabriel common stock and TriVergent
common stock, for the periods indicated, selected historical per share data and
the corresponding unaudited pro forma combined and pro forma equivalent per
share amounts, calculated assuming an exchange ratio, as of September 30, 2000,
of 1.1071 shares of Gabriel common stock and giving effect to the proposed
merger. The data presented are based upon the historical consolidated financial
statements and related notes of each of Gabriel and TriVergent. This information
should be read in conjunction with, and is qualified in its entirety by
reference to, the historical financial statements of Gabriel and TriVergent and
related notes and the pro forma condensed combined financial statements and
related notes included elsewhere in this information statement/prospectus. The
data presented is not necessarily indicative of the future results of operations
of the consolidated companies or the actual results that would have occurred if
the merger had been consummated prior to the periods indicated. Neither Gabriel
nor TriVergent has ever paid dividends on its common stock.
<TABLE>
<CAPTION>
GABRIEL/
TRIVERGENT
GABRIEL TRIVERGENT PRO FORMA
HISTORICAL HISTORICAL COMBINED
---------- ---------- -----------
<S> <C> <C> <C>
Book value per common share equivalent(1):
December 31, 1999......................................... $ 2.21 $(1.05) $ 3.93
June 30, 2000............................................. 2.79 (1.36) 3.70
Income (loss) per weighted average common share outstanding
from continuing operations (after preferred dividend
requirement):
Basic and diluted:
Year ended December 31, 1997(2)...................... -- $(0.01) --
Year ended December 31, 1998(3)...................... $(0.16) (1.37) $(2.01)
Year ended December 31, 1999(4)...................... (3.25) (2.58) (3.44)
Six months ended June 30, 1999....................... (0.81) (1.54) (1.66)
Six months ended June 30, 2000(4).................... (3.54) (3.06) (3.30)
</TABLE>
-------------------------
(1) The book value per common share equivalent data is calculated by dividing
stockholders' equity by the aggregate of the common stock outstanding at the
end of the period plus the assumed shares upon conversion of the preferred
stock outstanding at the end of the period.
(2) TriVergent was organized on October 29, 1997.
(3) Gabriel was organized on June 15, 1998.
(4) Before extraordinary item.
19
<PAGE> 27
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF GABRIEL AND TRIVERGENT
The following unaudited pro forma condensed combined financial statements
have been derived from the application of pro forma adjustments to the
historical financial statements of Gabriel and TriVergent. The unaudited pro
forma condensed combined balance sheet as of June 30, 2000, gives effect to the
merger as if it occurred on June 30, 2000. The unaudited pro forma condensed
combined statements of operations for the year ended December 31, 1999 and the
six months ended June 30, 2000, give effect to the merger as if it had occurred
on January 1, 1999. The unaudited pro forma condensed combined financial
statements should be read in conjunction with the financial statements of
Gabriel and TriVergent which are included in this information
statement/prospectus.
The pro forma adjustments are described in the notes to the unaudited pro
forma condensed combined financial statements and are based on available
information and assumptions that management believes are reasonable. The
unaudited pro forma condensed combined financial statements do not purport to
present the financial position or results of operations of Gabriel had the
merger occurred on the date specified, nor are they necessarily indicative of
the results of operations that may be achieved in the future. The unaudited pro
forma condensed combined financial statements do not reflect any adjustments for
the benefits that management expects to realize in connection with the merger.
No assurances can be made as to the amount or timing of the benefits, if any,
that may be realized.
The merger will be accounted for using the purchase method of accounting.
Under this method, tangible and identifiable intangible assets acquired and
liabilities assumed are recorded at their estimated fair values. The excess of
the purchase price, including estimated fees and expenses related to the merger,
over the fair value of the assets acquired is classified as goodwill on the
accompanying unaudited pro forma condensed combined balance sheet. The
allocation of the purchase price, estimated fair values and useful lives of
assets acquired and liabilities assumed are subject to final valuation
adjustments. The final allocation of the purchase price will give consideration
to identifiable intangible assets, if any are determined in the valuation
process, as well as the fair value per share of Gabriel stock. Gabriel
management does not believe the purchase price allocation and the related
amortization will be materially different than the allocation presented herein.
20
<PAGE> 28
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
GABRIEL TRIVERGENT ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 77,908 $ 12,295 $ (8,000)(2) $ 82,203
Accounts receivable, net.................... 1,749 840 -- 2,589
Other current assets........................ 1,964 1,383 -- 3,347
--------- -------- --------- ---------
Total current assets..................... 81,621 14,518 (8,000) 88,139
Property, plant and equipment, net............ 71,721 89,507 5,574(2) 166,802
Other noncurrent assets:
Goodwill, net............................... -- 8,575 (8,575)(5e) 163,801
163,801(2)
Other long-term assets, net................. 7,630 7,380 -- 15,010
--------- -------- --------- ---------
Total assets............................. 160,972 119,980 152,800 433,752
========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 2,968 $ 2,200 $ -- $ 5,168
Accrued and other current liabilities....... 8,412 5,860 -- 14,272
--------- -------- --------- ---------
Total current liabilities................ 11,380 8,060 -- 19,440
Term loan..................................... 20,000 32,832 -- 52,832
Long-term portion of capital lease
obligation.................................. -- 945 -- 945
--------- -------- --------- ---------
Total liabilities........................ 31,380 41,837 -- 73,217
--------- -------- --------- ---------
Minority Interest............................. 1,631 -- -- 1,631
Redeemable preferred stock.................... -- 141,460 (142,359)(5a) (899)
Stockholders' equity:
Preferred stock............................. 592 -- 389(3) 981
Common stock................................ 60 12 134(3) 194
(12)(5a)
Additional paid-in capital.................. 301,128 2,340 234,957(5b) 538,425
Accumulated deficit......................... (38,395) (65,460) 65,460(5a) (38,395)
Unearned compensation....................... -- -- (5,978)(2) (5,978)
Treasury stock.............................. (400) (209) 209(5a) (400)
Preferred stock subscriptions receivable.... (135,024) -- -- (135,024)
--------- -------- --------- ---------
Total stockholders' equity............... 127,961 (63,317) 295,159 359,803
--------- -------- --------- ---------
Total liabilities and stockholders' equity.... $ 160,972 $119,980 $ 152,800 $ 433,752
========= ======== ========= =========
</TABLE>
21
<PAGE> 29
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
GABRIEL TRIVERGENT ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenue.................................. $ 452 $ 25,037 $ -- $ 25,489
Operating expenses:
Cost of communication services......... 496 17,704 -- 18,200
Selling, general and administrative.... 16,559 23,523 3,605(5c) 43,687
Provision for uncollectible accounts... -- 7,285 -- 7,285
Depreciation and amortization.......... 1,955 1,318 10,920(5d) 14,030
(163)(5e)
--------- ---------- -------- ----------
Total operating expenses............ 19,010 49,830 14,362 83,202
--------- ---------- -------- ----------
Loss from operations................ (18,558) (24,793) (14,362) (57,713)
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) (14,362) (57,104)
--------- ---------- -------- ----------
Adjustments for the determination of loss
applicable to common stockholders:
Preferred stock accretion................ -- (2,603) -- (2,603)
--------- ---------- -------- ----------
Loss applicable to common stockholders... $ (17,296) $ (28,049) $(14,362) $ (59,707)
========= ========== ======== ==========
Loss per common share (basic and
diluted)(4)............................ $ (3.25) $ (2.58) $ (3.44)
========= ========== ==========
Shares used in computation of loss per
common share........................... 5,322,409 10,868,729 17,355,179
========= ========== ==========
</TABLE>
22
<PAGE> 30
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PRO
HISTORICAL HISTORICAL PRO FORMA FORMA
GABRIEL TRIVERGENT ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenue..................................... $ 3,268 $ 8,627 $ -- $ 11,895
Operating expenses:
Cost of communication services............ 2,634 8,731 -- 11,365
Selling, general and administrative....... 17,077 20,592 570(5c) 38,239
Depreciation and amortization............. 4,362 4,725 5,460(5d) 14,092
(455)(5e)
--------- ---------- -------- ----------
Total operating expenses............. 24,073 34,048 5,575 63,696
--------- ---------- -------- ----------
Loss from operations................. (20,805) (25,421) (5,575) (51,801)
Other income (expense):
Equity in loss of affiliate............... (179) -- -- (179)
Interest income........................... 1,844 986 -- 2,830
Interest expense.......................... (1,440) (1,873) -- (3,313)
--------- ---------- -------- ----------
Loss before minority interest and
extraordinary item................ (20,580) (26,308) (5,575) (52,463)
Minority Interest........................... 49 -- -- 49
--------- ---------- -------- ----------
Loss before extraordinary item....... (20,531) (26,308) (5,575) (52,414)
--------- ---------- -------- ----------
Adjustments for the determination of loss
applicable to common stockholders:
Preferred stock accretion................... -- (9,737) -- (9,737)
--------- ---------- -------- ----------
Loss applicable to common stockholders...... $ (20,531) $ (36,045) $ (5,575) $ (62,151)
========= ========== ======== ==========
Loss per common share (basic and
diluted)(5)............................... $ (3.54) $ (3.06) $ (3.30)
========= ========== ==========
Shares used in computation of loss per
common share.............................. 5,800,670 11,773,102 18,834,671
========= ========== ==========
</TABLE>
23
<PAGE> 31
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined balance sheet as of June 30,
2000, gives effect to the merger as if it had occurred on June 30, 2000. The
unaudited pro forma condensed combined statements of operations for the year
ended December 31, 1999 and for the six months ended June 30, 2000 give effect
to the merger as if it had occurred on January 1, 1999. These statements are
prepared on the basis of accounting for the merger as a purchase business
combination.
NOTE 2. PURCHASE PRICE AND PURCHASE PRICE ALLOCATION
The merger will be accounted for as a purchase of TriVergent by Gabriel.
The merger will therefore result in an allocation of purchase price to the
tangible and intangible assets of TriVergent. This allocation reflects an
estimate of the fair value of assets to be acquired by Gabriel based upon
available information. This allocation will be adjusted based on the final
purchase price and the final determination of asset values.
Holders of outstanding warrants and options exercisable for shares of
TriVergent common stock will be entitled to receive warrants or options, as the
case may be, to acquire on the same terms and conditions, except as each holder
of options may otherwise agree with respect to vesting provisions, to purchase
the number of shares of Gabriel common stock determined by multiplying the
number of shares of TriVergent common stock subject to TriVergent warrants or
options by the exchange ratio, 1.1071, at an exercise price per share of Gabriel
common stock equal to the exercise price per share of TriVergent warrants or
options, as the case may be, divided by the exchange ratio. The Gabriel options
issued to any TriVergent employee who acknowledges that the merger will not be
treated as an event resulting in acceleration of the exercise rights of such
employee's options will vest over a period of three years from the date of
original grant, versus the five years currently provided for in the TriVergent
options. These options may fully vest and become fully exercisable in accordance
with their terms if certain events occur within one year following the effective
time.
TriVergent's common and preferred stock outstanding was based on shares
outstanding on September 30, 2000. Gabriel's fair value per share used to
calculate the purchase price and to reflect current market conditions was a
weighted average fair value of approximately $4.30 per share for the exchange of
the outstanding common and preferred shares of TriVergent. The final purchase
price will be determined as of the date of closing of the merger based on the
fair value of the shares to be issued in the merger as of that date.
For pro forma purposes, the estimated fair value of these options and
warrants has been included in the purchase price. The intrinsic value of the
unvested options has been allocated to unearned compensation based on unvested
options as of September 30, 2000 and will be finalized as of the closing and
determination of such value. The fair value of the options and warrants to
purchase shares of Gabriel has been calculated based on the number of options
and warrants outstanding as of September 30, 2000.
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<PAGE> 32
The aggregate purchase price was determined as follows (in thousands,
except exchange ratio and per share information):
<TABLE>
<S> <C>
TriVergent common and preferred stock outstanding at
September 30, 2000........................................ 46,417
TriVergent preferred stock issued in lieu of accrued
dividends................................................. 814
--------
47,231
Exchange ratio.............................................. 1.1071
Equivalent Gabriel stock exchanged.......................... 52,289
Weighted average fair value per share of common and
preferred stock issued.................................... $ 4.2978
--------
Fair value of common and preferred stock issued............. $224,731
Fair value of TriVergent options assumed.................... $ 16,003
Intrinsic value of unvested options......................... $ (5,978)
Fair value of TriVergent warrants assumed................... $ 3,064
Estimated transaction costs................................. $ 8,000
--------
Total consideration.................................... $245,820
========
</TABLE>
The purchase price was allocated to the fair value of the net assets
acquired and to goodwill as follows (in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 12,295
Property and equipment...................................... 95,081
Other assets................................................ 9,603
Long term debt.............................................. (32,832)
Other liabilities........................................... (9,005)
Note receivable from officers............................... 899
Unearned compensation....................................... 5,978
Goodwill.................................................... 163,801
--------
Aggregate purchase price.................................. 245,820
========
</TABLE>
NOTE 3. GABRIEL STOCK ISSUED
The pro forma adjustments reflect TriVergent stock exchanged for Gabriel
stock, with a par value of $.01, as follows:
<TABLE>
<S> <C>
Common stock................................................ 13,353,462
Preferred stock............................................. 38,935,618
----------
Total shares issued....................................... 52,289,080
==========
</TABLE>
NOTE 4. LOSS PER COMMON SHARE (BASIC AND DILUTED)
Pro forma loss per common share has been computed using the shares of stock
outstanding as if the merger had occurred on January 1, 1999. The common shares
used in the computation of loss per common share was based on common stock
outstanding for basic loss per share and, for diluted loss per share, common
stock outstanding and assuming conversion of preferred stock and the exercise of
common stock options and warrants in periods when such conversion of preferred
stock, and the exercise of common stock options and warrants are not
antidilutive. The shares used in the computation of loss per common share for
the combined company is calculated as the shares used in the computation of
historical loss per common share for Gabriel plus the Gabriel common stock
exchanged for TriVergent common stock as calculated and set forth in Note 3
above.
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<PAGE> 33
NOTE 5. OTHER PRO FORMA ADJUSTMENTS
(a) The pro forma adjustments reflect the elimination of TriVergent's
historical common stock, preferred stock, accumulated deficit, and treasury
stock as of June 30, 2000.
(b) The pro forma adjustments record the net effect of the following
adjustments on capital in excess of par value (in thousands):
<TABLE>
<S> <C>
Issuance of shares for acquisition.......................... $224,208
Issuance of options and warrants for acquisition............ 13,089
Elimination of TriVergent additional paid in capital........ (2,340)
--------
$234,957
========
</TABLE>
(c) The intrinsic value of unvested options results in the amortization of
unearned compensation of $3.6 million and $.6 million for the years ended
December 31, 1999 and the six months ended June 30, 2000, respectively. The
unearned compensation is amortized over the remaining vesting period.
(d) The effect of allocating the aggregate purchase price to goodwill
results in additional amortization expense of $10.9 million and $5.5 million for
the year ended December 31, 1999 and the six months ended June 30, 2000,
respectively. For amortization purposes, goodwill has been assigned a 15 year
life.
(e) As a result of the merger, historical goodwill carried on the balance
sheet and associated amortization recorded on the statement of operations of
TriVergent are eliminated.
26
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
GABRIEL, TRIVERGENT AND THE COMBINED COMPANY
GABRIEL
OVERVIEW
Gabriel was organized in June 1998 and commenced commercial operations in
June 1999. Prior to commencing commercial operations, Gabriel devoted
substantial efforts to
- developing business plans,
- pursuing applications for governmental authorizations,
- hiring management and other key personnel,
- designing and developing its networks,
- developing, acquiring and integrating its operations support systems,
- acquiring equipment and facilities, and
- negotiating interconnection agreements with incumbent telephone
companies.
Gabriel has experienced significant operating losses and negative cash flow
since its inception and expects to continue to experience significant operating
losses and negative cash flow as it expands its operations, constructs and
develops its networks and grows its customer base.
In contrast to carriers that install their own telecommunications switch in
each market and construct their own fiber optic transmission facilities to reach
customers, Gabriel does not build its own network connections to each individual
customer. Instead, it installs its own voice and data switches but then leases
transmission facilities from incumbent telephone companies and other providers.
It also installs and connects its own access equipment in incumbent telephone
companies' central offices, a process which is commonly referred to in the
telecommunications industry as "collocation." This network deployment strategy
enables Gabriel to reach its entire targeted customer base in its markets
without having to build its own fiber optic transmission facilities from the
incumbent telephone companies' central offices to its switches in order to
establish network connections to each customer.
The level of up-front capital that Gabriel requires to construct a network
varies depending on a number of factors. These factors are
- the size and geography of the market,
- the cost of construction of its network in each market, and
- the degree of penetration of the market, and its ability to negotiate
favorable prices for purchases of equipment.
The cost to build a network is also affected by the number of central office
collocations and potentially may be reduced if and when more economical,
advanced switching equipment becomes available.
Gabriel was operating in 12 markets in six states as of September 30, 2000,
with three additional markets in two states under construction. As of September
30, 2000, Gabriel had 16,126 access lines installed on its networks serving
1,266 customers. All of Gabriel's customers have signed contracts, approximately
70% of which have three-year terms.
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<PAGE> 35
FACTORS AFFECTING RESULTS OF OPERATIONS
REVENUES
Gabriel generates revenues from
- local calling services, including basic voice calling services and
advanced local features such as call waiting and call forwarding,
- long distance services, which include a full range of domestic,
international and toll-free long distance services,
- dedicated, high speed Internet access services, including DSL Internet
access,
- advanced data services, such as high speed data transmission and unified
voice mail, e-mail and fax messaging services, and
- access charges, which Gabriel earns by connecting its customers to their
selected long distance carrier for outbound calls or by delivering
inbound long distance traffic to Gabriel's local service customers.
Gabriel prices its services competitively with those of the incumbent
telephone companies and offers its customers combined service discounts designed
to give them incentives to purchase a bundled suite of services.
COST OF COMMUNICATION SERVICES
Gabriel's cost of communication services includes recurring costs
associated with
- leasing the high capacity transmission facilities that connect its
switching equipment to incumbent telephone companies' central offices,
- leasing the local loop lines that connect its customers to its networks,
- leasing space used to collocate its customer access equipment in
incumbent telephone companies' central offices,
- providing Internet access, and
- purchasing long distance services for resale to its customers.
Gabriel has interconnection agreements with Southwestern Bell, Ameritech,
BellSouth, GTE and Cincinnati Bell for its network and collocation facilities.
Except for some initial nonrecurring charges, Gabriel pays for these facilities
on a monthly basis. Gabriel also has agreements with WorldCom, Inc. and Qwest
Communications to provide it with long distance transmission services. These
agreements provide for the resale of long distance services on a per-minute
basis.
The primary expense associated with providing Internet access to Gabriel's
customers is the cost of interconnecting its network with national Internet
service providers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Gabriel's selling, general and administrative expenses include costs
incurred for technical, selling and marketing, corporate administration, human
resources, network maintenance, operations support and professional and
consulting fees. Gabriel expects that its selling, general and administrative
expenses will increase significantly as it expands its operations and hires
additional employees. Gabriel employs a direct local sales force in each of its
markets. Gabriel uses quota-based commission plans and incentive programs to
compensate its sales personnel. Gabriel supplements its direct sales force
through the use of agents such as value-added resellers and equipment
integrators. Gabriel also uses print and other media advertising campaigns to
create brand awareness.
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<PAGE> 36
DEPRECIATION AND AMORTIZATION
Gabriel's depreciation and amortization expenses include depreciation of
switching and other network equipment, operations support systems, furniture and
fixtures, and amortization of initial nonrecurring charges from the incumbent
telephone companies for their collocation facilities. Gabriel expects its
depreciation and amortization expense to increase as it continues to make
capital expenditures as it expands its networks.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Gabriel's operations for the six months ended June 30, 2000 have generated
$3.3 million of revenue compared to $4,000 for the same period in 1999. Gabriel
became operational in June 1999. As of June 30, 2000, approximately 68% of
Gabriel's customers had contracted to take the full package of local, long
distance and Internet access. Approximately 82% and 92% of Gabriel's customers
have contracted for long distance and Internet services, respectively. During
the first six months of 2000, an additional 6,665 lines were installed for 686
new customers.
Cost of communication services amounted to $2.6 million for the six months
ended June 30, 2000 compared to $5,000 for the same period in 1999. Cost of
communication services in 1999 includes costs incurred only from the time the
company became operational.
Selling, general and administrative expenses increased by $12.4 million for
the six months ended June 30, 2000 compared to the same period in 1999.
Technical expenses for the six months ended June 30, 2000 were $3.8 million
compared with $900,000 for the six months ended June 30, 1999. Sales and
marketing expenses for the six months ended June 30, 2000 were $5.0 million
compared with $900,000 for the six months ended June 30, 1999. General
administrative expenses for the six months ended June 30, 2000 were $8.3 million
compared to $2.8 million for the six months ended June 30, 1999. The increase in
selling, general and administrative expenses are primarily due to the increase
of 165 employees, including an additional 54 sales employees, between June 30,
1999 and June 30, 2000 as Gabriel's first nine markets became operational during
the same period. During the remainder of 2000, Gabriel expects the number of its
sales personnel to continue to grow significantly.
Depreciation and amortization expense increased to $4.4 million for the
first six months of 2000 from $100,000 for the same period in 1999, consistent
with the completion of Gabriel's networks and initiation of services in
Gabriel's first nine markets by June 30, 2000.
Interest expense for the six months ended June 30, 2000 was $1.4 million.
The expense relates to borrowings and commitment fees under Gabriel's existing
senior secured credit facility. Interest income for the six months ended June
30, 2000 was $1.8 million compared to $500,000 for the six months ended June 30,
1999. Interest income is earned on the short-term investment of available cash.
Gabriel had an operating loss of $20.8 million and negative adjusted EBITDA
of $16.4 million for the six months ended June 30, 2000 compared to $4.8 million
and $4.7 million, respectively, for the six months ended June 30, 1999. Gabriel
expects to continue to experience increasing operating losses and negative
adjusted EBITDA as a result of its development activities as it expands its
operations. Gabriel does not expect to achieve positive adjusted EBITDA in any
market until after approximately two and one half years of operation in that
market.
Gabriel's net loss for the six months ended June 30, 2000 was $20.5 million
compared to $4.2 million for the six months ended June 30, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Gabriel's operations through December 31, 1999 generated $453,000 of
revenue. As of December 31, 1999, approximately 79% of Gabriel's customers had
contracted to take the full package of local, long
29
<PAGE> 37
distance and Internet access. Approximately 90% of Gabriel's customers had
contracted for long distance and Internet services.
Cost of communications services amounted to $496,000 for the year ended
December 31, 1999. The negative gross margin Gabriel experienced during its
initial start-up period was primarily attributable to the fact that Gabriel had
recurring costs associated with underutilized leased transmission facilities
until it had built a sufficient customer base in its initial markets.
Selling, general and administrative expenses were $16.6 million for the
year ended December 31, 1999 compared to $693,000 for the period from inception
to December 31, 1998. The number of employees increased to 247 as of December
31, 1999, from 15 as of December 31, 1998. The sales force, including sales
managers, account executives and sales engineers and administrators, had grown
to 95 as of year end.
Depreciation expense increased from $5,600 in 1998 to $2.0 million for the
year ended December 31, 1999, consistent with the completion of networks and
initiation of services in Gabriel's first five markets by December 31, 1999.
Gabriel had an operating loss of $18.6 million and negative EBITDA of $16.6
million for the year ended December 31, 1999 compared to $699,000 and $693,000,
respectively, for the period ended December 31, 1998.
Gabriel's net loss for the year ended December 31, 1999, was $17.3 million
compared to $567,000 for the period from inception to December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Gabriel's financing plan is predicated on obtaining the funding required
for each market to reach positive free cash flow prior to committing to the
development of that market. By using this approach, Gabriel seeks to avoid being
in the position of seeking additional capital to fund a market after Gabriel has
already made significant capital investment in that market. Gabriel believes
that by raising all required capital prior to making any commitments in a
market, it can raise capital on more favorable terms and conditions.
Gabriel has raised $302.2 million of equity financing primarily from a
group of private equity investment funds with extensive experience in financing
telecommunications companies. Gabriel has also secured commitments from a group
of lenders to provide an expanded $225 million senior secured credit facility
which is predicated on the 28-market business plan of Gabriel and TriVergent as
a combined company. For a description of the intended use of proceeds and the
expected terms of this facility, see "-- The Combined Company -- Anticipated
Capital Requirements" on page 42. If the merger is not consummated, Gabriel may
have to scale back its development plans based on the amount of financing
available to it. Gabriel's existing equity financing and its existing $90
million senior secured credit facility would be sufficient to fully fund the
development of the 15 markets that Gabriel currently has in operation or under
development.
From its inception through June 30, 2000, Gabriel has made capital
expenditures totaling $78.0 million for network equipment, software, hardware
and other assets necessary for deploying the networks in its initial markets,
establishing its network operations control center and providing the operations
and other support systems necessary for its business. Gabriel has also used
capital to fund its operations and has used excess cash to purchase short-term
investments. Gabriel estimates that its capital expenditures during the third
and fourth quarters of 2000 will be $35.8 million, including $16.8 million for
collocation and other incremental expenditures for its first nine networks,
$13.6 million for the six additional networks it currently has under
construction and $5.4 million related to its operations support systems and
certain corporate expenditures.
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<PAGE> 38
The actual amount and timing of Gabriel's future capital requirements may
differ materially from its estimates as a result of, among other things
- the cost of the construction of its networks,
- a change in or inaccuracy of its development plans or projections that
leads to an alteration in the schedule or targets of its roll-out plans,
- the demand for its services,
- regulatory and technological developments, including new opportunities in
the telecommunications industry,
- an inability to access credit markets, and
- the consummation of acquisitions.
Gabriel's costs of deploying its networks and operating its business, as
well as its revenues, will depend on a variety of factors, including
- its ability to meet its roll-out schedules,
- the extent of price and service competition for telecommunications
services in its markets,
- its ability to develop, acquire and integrate the necessary operations
support systems,
- the number of customers and the services for which they subscribe and the
time required to provision those customers,
- the nature and penetration of new services that it may offer, and
- the impact of changes in technology and telecommunication regulations.
As such, actual costs and revenues may vary from expected amounts, possibly to a
material degree, and such variations may affect Gabriel's future capital
requirements.
As of June 30, 2000, Gabriel had approximately $78.9 million of cash and
short-term investments, $70.0 million of undrawn financing available under its
existing senior secured credit facility and $135.0 million of Series B preferred
stock subscriptions receivable. Giving pro forma effect to the $225 million
commitment discussed above, Gabriel would have $205 million of undrawn financing
available under the proposed expanded facility. As of June 30, 2000, the
borrower under Gabriel's existing facility, a wholly owned finance subsidiary of
Gabriel, had borrowed $20 million at an interest rate of 10.12% per annum.
Since June 30, 2000, Gabriel has collected a total of approximately $67.5
million of its Series B preferred stock subscriptions receivable and expects to
receive the remaining $67.5 million prior to the end of 2000. Gabriel also
expects to receive an additional $8.5 million from two lender participants in
Gabriel's proposed $225 million senior secured credit facility who have
committed to purchase a total of 1,214,285 shares of Series B preferred stock
upon the closing of this facility.
Gabriel's operations resulted in a net loss for the period from inception
in June 1998 through December 31, 1998 and for the year ended December 31, 1999
and, accordingly, were insufficient to cover expenses by $567,000 and $17.3
million, respectively. Gabriel's operations resulted in a net loss for the six
months ended June 30, 1999 and for the six months ended June 30, 2000 and
accordingly, were insufficient to cover expenses by $11.3 million and $20.5
million, respectively.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999 and June 30, 2000, the carrying value of Gabriel's
debt obligations was $20.0 million and the weighted average interest rate on its
debt obligations was 10.12% and 10.96%, respectively. Because the interest rates
on Gabriel's senior credit facility are at floating rates, it is exposed to
interest rate risks. If market interest rates had been 1% higher, Gabriel's
interest expenses for 1999 and the first six months of 2000 would have been
increased by $8,000 and $118,000, respectively. The annualized effect on
interest expense in 2000 would be $236,000.
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<PAGE> 39
Gabriel has not, in the past, used financial instruments in any material
respect as hedges against financial and currency risks or for trading. However,
as Gabriel expands its operations, it may begin to use various financial
instruments, including derivative financial instruments, in the ordinary course
of business, for purposes other than trading. These instruments could include
letters of credit, guarantees of debt and interest rate swap agreements. Gabriel
does not intend to use derivative financial instruments for speculative
purposes.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, as subsequently amended by
SFAS No. 138, is effective on a prospective basis for interim periods and fiscal
years beginning January 1, 2001. This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging securities. Gabriel does not
anticipate that adoption of this standard will have a material effect on its
financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101. This bulletin provides interpretive guidance on the
recognition, presentation and disclosure of revenue that must be applied to
financial statements no later than the second fiscal quarter of 2000. Gabriel
does not believe that adoption of this bulletin will have a material impact on
its consolidated financial position or results of operations.
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<PAGE> 40
TRIVERGENT
OVERVIEW
From its inception in October 1997 through April 1999, TriVergent's
business strategy was to target residential customers for the resale of local
and long distance voice services. These customers were solicited largely through
direct mail using an incentive check, generally for $20, to switch to
TriVergent's resold services. This check (when cashed) served as authorization
for transferring the service from their existing telecommunications service
providers to TriVergent. In March 1999, TriVergent changed its business strategy
to become a single source, web-based communications company serving small and
medium-sized businesses in the southeastern United States. As a result, in April
1999, with the exception of its prepaid business, TriVergent discontinued
marketing its resale voice services and began to implement its new business
strategy. To implement this new strategy, TriVergent began to
- acquire a significant number of BellSouth central office collocations,
- deploy voice and data switches,
- build data centers,
- develop electronic operations support systems and
- acquire data management expertise through the acquisition of
Internet-related companies.
TriVergent's historical financial statements for the period ended June 30,
2000 reflect its financial and operating performance under its former business
strategy and reflect minimal revenues from its new business strategy.
TriVergent expects its revenues from resale services to decline to
immaterial amounts by 2002. TriVergent anticipates that, in the future, the
majority of its revenues will come from the sale of its Broadband Bundle, which
includes high-speed Internet access, web site design, web hosting, and local and
long distance voice services. The Broadband Bundle is sold for a single price
based on the customer selected bandwidth capacity and number of access lines.
TriVergent will also continue to sell prepaid local telephone services,
primarily through local check cashing businesses. TriVergent expects this
business to continue but not to grow.
To date, TriVergent has experienced significant operating losses and
negative cash flow, substantially from the resale business. Under TriVergent's
new business strategy, it does not anticipate achieving positive cash flow in
any of its target markets during the initial development, construction and
expansion of its telecommunications services until it establishes a sufficient
revenue-generating customer base. TriVergent estimates that it will take
approximately 24 months before a typical target market becomes cash flow
positive. As a result, TriVergent expects to experience significant operating
losses and negative cash flow as it expands operations into its initial markets.
TriVergent's business plan provides for five Nortel DMS 100/500 switch
sites and 18 asynchronous transfer mode switch sites to cover its initial 15
markets. TriVergent estimates that the total cost to build out a typical market
is approximately $10 million. Fixed costs associated with the buildout of a
particular market include:
- securing collocation facilities. TriVergent anticipates fixed costs of a
typical collocation facility will be approximately $440,000. This
includes nonrecurring initial set up fees payable to BellSouth and the
costs associated with the switching and ancillary equipment located
there, including a small asynchronous transfer mode switch, which would
cost approximately $50,000.
- purchasing necessary voice and data switching equipment. Switch costs
associated with each Nortel DMS 100/500 switch site are approximately
$4.5 million and include approximately $3.5 million for the cost of a
Nortel DMS 100/500 switch and the related equipment. An asynchronous
transfer mode switch site costs approximately $1.5 million, which
includes $750,000 for the cost of the switch and related equipment.
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<PAGE> 41
- leasehold improvements to switch sites. These costs are approximately
$1.0 million for each of the Nortel DMS 100/500 switches and $750,000 for
asynchronous transfer mode switches.
TriVergent acquires local telephone services on a wholesale basis from
BellSouth and other incumbent telephone companies, both for the resale and
prepaid businesses. To provide its Broadband Bundle, TriVergent has an
interconnection agreement with BellSouth for its network and collocation
facilities. Except for some initial nonrecurring charges, TriVergent pays for
these facilities on a monthly basis. TriVergent also has agreements with Global
Crossing, a long haul telecommunications provider, to provide it with long
distance services both for the resale business and Broadband Bundle service
offering. TriVergent is charged for long distance services as used but has
annual minimum usage commitments which could result in underutilization charges
if TriVergent fails to meet these commitments. TriVergent also has an agreement
with Global Crossing for the purchase of transmission capacity to connect its
switches, for which TriVergent paid $14 million in March 2000. TriVergent will
amortize this cost over the 20-year life of the contract. It will also pay
monthly maintenance charges related to this capacity agreement.
To accelerate its new business strategy, TriVergent has acquired five data
communications and Internet companies in two of its target markets, with
customer bases that TriVergent hopes to migrate to its Broadband Bundle, which
are
- Carolina Online, Inc., a Greenville, South Carolina provider of Internet
access to 7,000 customers, acquired in March 1999, for a total purchase
price of $1.8 million, consisting of $490,000 in cash and 545,833 shares
of common stock,
- DCS, Inc., a Greenville, South Carolina data integrator and equipment
provider, acquired in July 1999, for a total purchase price of $1.0
million, consisting of $368,898 in cash and assumption of debt, and
262,959 shares of common stock,
- Ester Communications, Inc., a Wilmington, North Carolina provider of
voice and data equipment and services to 3,000 small business customers,
acquired in February 2000, for a total purchase price of $4.5 million,
consisting of $2.3 million in cash and 587,755 shares of common stock,
- Information Services and Advertising Corporation, a Wilmington, North
Carolina provider of Internet services to 1,200 customers, acquired in
February 2000, for a total purchase price of $800,000, consisting of
$300,000 in cash and 117,647 shares of common stock, and
- Internet/MCR Corporation, a Greensboro, North Carolina based Internet
service provider which serves approximately 2,800 businesses and
consumers, acquired in June 2000, for a total purchase price of $1.66
million, consisting of $460,000 in cash and 196,000 shares of common
stock.
While there were no significant revenues from these Internet and equipment
services in 1999 or in the six months ended June 30, 2000, TriVergent expects to
have revenue in future periods from these businesses.
FACTORS AFFECTING RESULTS OF OPERATIONS
REVENUES
TriVergent's revenues through June 30, 2000 consisted primarily of revenues
from the resale of local and long distance voice services to residential
customers and to a lesser extent from prepaid local telephone services. There
were minimal revenues in this period from the sale of TriVergent's Broadband
Bundle or data center services. Through June 30, 2000, TriVergent's revenues
were derived from
- resale of local and long distance telephone services to residential
customers,
- prepaid local telephone services,
- dial-up Internet access services from Carolina Online, and
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<PAGE> 42
- small amounts of cabling equipment revenues from the local area and wide
area network equipment business of DCS.
In the future, TriVergent expects to continue to receive revenue from these
sources, although revenues associated with the residential resale business will
decline substantially.
With the change in business strategy, TriVergent expects to generate most
of its future revenues from sales of its services over its own network
facilities to small and medium-sized businesses. TriVergent expects the
increasing portion of its revenues will come from
- the Broadband Bundle product, which includes high-speed Internet access,
web site design, web hosting and maintenance, and local and long distance
telephone voice services,
- long distance services in excess of the 100 minutes per month included in
the Broadband Bundle,
- renting space for customer servers at the data centers,
- compensation for terminating calls of other providers' customers to
TriVergent's customers over its network, and
- installation, equipment sale and cabling services.
COST OF SERVICES
The cost of services for the residential resale business consists primarily
of the purchase of wholesale local telephone services from BellSouth and the
purchase of wholesale long distance services from Global Crossing.
As TriVergent deploys its network and begins selling its Broadband Bundle,
it will incur additional costs of services, primarily for
- the lease of transmission capacity and customer connections,
- the recurring costs of transmission capacity purchased from Global
Crossing,
- operating costs, such as rent and personnel costs, associated with the
collocation facilities, data centers and TriVergent's own switching
sites, and
- payments to other carriers to terminate TriVergent's customers' calls on
their networks.
TriVergent leases lines from the incumbent telephone company in each market
to connect its customers with its collocation and switching facilities.
TriVergent also leases transmission lines from other communications companies,
including incumbent telephone companies, to connect its switching and
collocation facilities.
TriVergent has an agreement with Global Crossing for the resale and
transmission of long distance services on a per minute basis which contains
minimum volume commitments. In the event it fails to meet these minimum volume
commitments, TriVergent may be obligated to pay under-utilization charges.
Similarly, in the event TriVergent underestimates its need for transmission
capacity, it may be required to obtain capacity through more expensive means.
Transmission capacity costs will increase as customers' long distance calling
volume increases, and TriVergent expects these costs to be a significant portion
of the cost of long distance services.
TriVergent expects switch site lease costs and collocation costs to be a
significant part of the ongoing cost of services. BellSouth and other incumbent
telephone companies typically charge both a start-up fee and a monthly recurring
fee for use of collocation sites in their central offices. The primary expense
associated with providing Internet access to TriVergent's customers is the cost
of interconnecting its network with a national Internet service provider.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
TriVergent's selling, general and administrative expenses include selling
and marketing costs, billing, corporate administration, human resources and
network maintenance.
For the residential resale business, TriVergent incurred costs associated
with its direct mailing and direct marketing agency commissions. TriVergent will
no longer incur these costs since it is no longer marketing these services. The
incentive checks used to solicit the residential customer resale business were
recognized as a marketing expense as service was initiated and will no longer be
incurred in the future. For the remaining resale customers and the new
businesses, TriVergent will continue to incur costs associated with
provisioning, customer care, information technology, regulatory and facilities
rental costs.
For TriVergent's Broadband Bundle services it will incur additional
selling, general and administrative costs related to
- its direct sales force, as well as commissions for its independent sales
agents,
- increased provisioning, customer care, information technology and other
personnel costs,
- the new network engineering department,
- outsourcing reciprocal compensation and access billings,
- increased general administrative overhead, and
- advertising and public relations.
TriVergent expects its selling and marketing costs to increase
significantly as it expands its operations. TriVergent will employ a large
direct sales force in most markets it enters with the Broadband Bundle. To
attract and retain a highly qualified sales force, TriVergent is offering its
sales personnel a compensation package emphasizing base salaries, commissions
and stock options. In addition to the direct sales force, TriVergent expects to
make significant use of independent sales agents in each market to sell its
broadband products. Sales agents are compensated with monthly residual payments
based upon the monthly billings of customers they service.
TriVergent is also developing an integrated information system and
procedures for operations support systems and other back office systems to
enter, schedule, provision and track a customer order from point of sale to the
installation and testing of service. This system will also include or interface
with trouble management, inventory, billing, collection and customer care
service systems. TriVergent also expects billing costs to increase as the number
of customers and call volume increase.
TriVergent expects that other costs and expenses, including the costs
associated with the maintenance of its network, administrative overhead and
office leases, will grow significantly as it expands its operations and that
administrative overhead will be a large portion of these expenses during the
development phase of its business. However, TriVergent expects these expenses to
decrease as a percentage of its revenue as it builds its customer base.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
TriVergent's provision for uncollectible accounts, particularly in 1999,
reflected the poor credit quality of its residential resale customers. The
direct mail solicitation, which offered local and long distance services at a
discount from BellSouth's rates, attracted a number of consumers who were poor
credit risks and about whom TriVergent had no credit information. In addition,
due to the lag time between the transfer of billing information from BellSouth
to TriVergent, many of its customers received their initial bill after several
months of service. As a result, customers received one large bill for several
months of service causing a decrease in customer satisfaction that resulted in
higher than anticipated defaults and loss of business. TriVergent believes that
its 1999 provision for uncollectible accounts has adequately reflected these
problems and that its remaining residential resale business will not require
unusual uncollectible provisions in future periods.
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DEPRECIATION AND AMORTIZATION
TriVergent's depreciation and amortization expense includes depreciation of
switch related equipment and equipment collocated in BellSouth's central
offices, network infrastructure equipment, information systems, furniture and
fixtures and amortization of initial nonrecurring charges from BellSouth for its
collocation facilities. It also includes, for a portion of 1999 and the six
months ended June 30, 2000, amortization of goodwill in connection with the
acquisitions of Carolina Online, Inc. and DCS, Inc. These acquisitions were
accounted for using the purchase method of accounting. The amount of the
purchase price in excess of the fair value of the net assets acquired will be
amortized over a 10-year period. TriVergent expects its depreciation and
amortization expense to increase as it continues to make capital expenditures
and consummate acquisitions which are accounted for using the purchase method of
accounting.
INCOME TAXES
TriVergent has not generated any taxable income to date and does not expect
to generate taxable income in the next few years. TriVergent's net operating
loss carryforwards will be available to offset future taxable income, if any,
through the year 2019, but its use may be limited by Section 382 of the Internal
Revenue Code. Therefore, TriVergent has not recorded a net deferred tax asset
relating to these net operating loss carryforwards.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES
Revenues for 2000 and 1999 consisted primarily of residential customer
billings for the resale of local and long distance voice services, Internet
access and sale of telecommunications equipment. These total revenues were $8.6
million for 2000 compared to $13.8 million for 1999, a decrease of $5.2 million.
This decrease was primarily due to a decline in the number of residential
customers, which was partially offset by the increase in revenue from Internet
access and sale of telecommunications equipment due to acquisitions.
COST OF SERVICES
Cost of services for 2000 and 1999 consisted primarily of the charges from
local and long distance providers for wholesale voice telephone services and
network operating expense. These costs were $8.7 million for 2000 compared to
$9.6 million for 1999, an decrease of $0.9 million. This decrease was primarily
due to the decreased number of residential customers subscribing to TriVergent's
services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $20.2 million for 2000
compared to $13.4 million for 1999, an increase of $6.8 million. This increase
was primarily due to additional personnel to support the broadband services
TriVergent is developing and sales and marketing expenses associated with
transitioning TriVergent's distribution channel to direct sales rather than
media and direct mail.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
Provision for uncollectible accounts was $0.4 million for 2000 compared to
$5.8 million for 1999, a decrease of $5.4 million. This decrease was primarily
due to a reduction in residential customers with poor credit quality.
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DEPRECIATION AND AMORTIZATION
TriVergent's depreciation and amortization expense was $4.7 million for
2000 compared to $0.5 million in 1999, an increase of $4.2 million. The increase
was primarily due to an increase in network equipment deployed in providing
broadband services to business customers.
INTEREST INCOME
Interest income, earned from the temporary investment of proceeds from the
sale of TriVergent preferred stock in investment grade securities, was $1.0
million for 2000 compared to $0.1 million in 1999.
INTEREST EXPENSE
Interest expense was $1.9 million for 2000 compared to $0.6 million in
1999, and was primarily interest on debt issued to finance purchases of network
equipment.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Revenues for 1999 and 1998 consisted primarily of residential customer
billings for the resale of local and long distance voice services. These total
revenues were $25.0 million for 1999 compared to $5.3 million for 1998, an
increase of $19.7 million. This increase was primarily due to the addition of
new residential customers and growth in sales to existing residential customers.
COST OF SERVICES
Cost of services for 1999 and 1998 consisted primarily of the charges from
local and long distance providers for wholesale voice telephone services. These
costs were $17.7 million for 1999 compared to $3.8 million for 1998, an increase
of $13.9 million. This increase was primarily due to the increased number of
residential customers subscribing to TriVergent's services and other increased
costs resulting from the addition of network operating personnel and the
expansion of our network.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $23.5 million for 1999
compared to $12.2 million for 1998, an increase of $11.3 million. This increase
was primarily due to expenses associated with sales growth and additional
personnel, including additional personnel to support the broadband services
TriVergent is developing.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
Provision for uncollectible accounts was $7.3 million for 1999 compared to
$2.0 million for 1998, an increase of $5.3 million. This increase was primarily
due to the relatively poor credit quality of TriVergent's initial residential
customers and to billing delays described above under the heading "Factors
Affecting Results of Operations of TriVergent -- Provision for Uncollectible
Accounts."
DEPRECIATION AND AMORTIZATION
TriVergent's depreciation and amortization expense was $1.3 million for
1999 compared to $0.2 million for 1998, an increase of $1.1 million. This
increase was primarily due to increased capital expenditures for leasehold
improvements and computers and other equipment related to increased personnel
and to the amortization of goodwill related to two acquisitions during 1999 for
a portion that year, plus depreciation for a full 12 months for equipment
acquired in 1998.
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INTEREST INCOME
Interest income, earned from the temporary investment of proceeds from the
sale of TriVergent preferred stock in investment grade securities, was $0.8
million for 1999 compared to $0.1 million in 1998.
INTEREST EXPENSE
Interest expense was $1.5 million for 1999 compared to $13,000 in 1998, and
was primarily interest on debt issued to finance purchases of network equipment
and interest on the Series 1999 Subordinated Notes.
INCEPTION THROUGH DECEMBER 31, 1997
During the period from TriVergent's inception at October 29, 1997 through
the end of 1997, it was in the development stage of operations and did not
generate any revenue. TriVergent's principal activities during this period
consisted of the following
- hiring management and other key personnel,
- raising capital,
- procuring governmental authorizations,
- acquiring equipment and facilities,
- developing, acquiring and integrating operations support and other back
office systems, and
- negotiating interconnection agreements.
This development stage continued through June 1998.
LIQUIDITY AND CAPITAL RESOURCES
The development of the Broadband Bundle business, the deployment and
start-up of switching facilities for that business and the establishment of
reliable operations support systems will require significant capital to fund the
following
- capital expenditures,
- the cash flow deficits generated by operating losses,
- working capital needs, and
- debt service.
TriVergent's principal capital expenditure requirements will include the
purchase and installation of switches and the development and integration of
operations support systems. To fund TriVergent's business strategy, it expects
to use a combination of stock, debt and funds from operations.
EQUITY AND PREFERRED FINANCING
TriVergent's equity and preferred financing has consisted of approximately
$137 million provided by institutional investors and management. Of this amount,
approximately $130 million was for preferred stock, including $67 million
received in February and March 2000. The remainder was for common stock.
CREDIT FACILITIES
In January 2000, TriVergent entered into a senior credit facility with a
group of commercial banks which permits it to borrow up to $120 million, subject
to various conditions, through December 31, 2007. The senior credit facility is
comprised of an $80 million term loan facility and a $40 million revolving
credit facility. Any borrowings under the term loan facility must be completed
by December 31, 2000. Under the revolving credit facility, $20 million will not
be available unless specified financial results are
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achieved for the third quarter of 2000. As of June 30, 2000, $25 million was
outstanding under the term loan facility at an effective interest rate of 11.28%
per annum.
TriVergent also has a credit facility with Nortel under which it may borrow
up to $45 million by March 31, 2001, subject to various conditions. Repayments
of principal will begin after March 31, 2001. As of June 30, 2000, $7.8 million
was outstanding under the Nortel credit facility at an effective interest rate
of 11.53% per annum. Borrowings under this facility require the consents of the
lenders under the senior credit facility.
CASH FLOWS
TriVergent has incurred significant operating and net losses since its
inception. TriVergent expects to experience increasing operating losses and
negative cash flow as it expands its operations and builds its customer base. As
of June 30, 2000, TriVergent had an accumulated deficit of $65.5 million. Net
cash used in operating activities was $30.0 million for the first six months of
2000. As of December 31, 1999, TriVergent had an accumulated deficit of $38.4
million. Net cash used in operating activities was $11.1 million for 1998 and
$20.0 million for 1999. The net cash used for operating activities during 1999
and the first six months of 2000 was primarily due to net losses.
Net cash provided by financing activities was $76.9 million in the first
six months of 2000. This included $66.3 million from issuances of preferred and
common stock and a net increase in the term loan of $15 million. Net cash
provided by financing activities was $13.9 million for 1998 and $72.6 million
for 1999. Net cash provided by financing activities for 1999 included $49.8
million from issuances of TriVergent's preferred stock, $17.8 million from a
term loan and warrants and $10.5 million from private placements of notes and
warrants.
Net cash used in investing activities was $49.8 million in the first six
months of 2000. Capital expenditures were $49.5 million and cash paid for
acquisitions amounted to $3.0 million, partially offset by proceeds of $2.7
million on sale of investments. Net cash used in investing activities was $1.5
million for 1998 and $38.8 million for 1999. Capital expenditures were $35.0
million, and cash paid for acquisitions and investments amounted to $3.8
million, for 1999. Capital expenditures were $1.5 million for 1998. TriVergent
expects that its capital expenditures will be substantially higher in future
periods in connection with the purchase of equipment necessary for the
construction and expansion of its network and the construction of new markets.
At June 30, 2000 and December 31, 1999, respectively, TriVergent had
purchased approximately $50 million and $25 million, respectively, of Nortel
switching equipment and services under a total current commitment of
approximately $100 million. In March 2000, TriVergent purchased transmission
capacity from Global Crossing for $14 million.
CAPITAL REQUIREMENTS
To expand and develop its business, TriVergent will need a significant
amount of additional financing. At June 30, 2000, TriVergent had cash and cash
equivalents of $12.3 million and available unused borrowing capacity under its
credit facilities of $132 million. TriVergent estimates that to finance
development of the 35 markets it targeted in its original business plan,
including future capital expenditures, operating losses associated with the roll
out of networks in those target markets by December 31, 2001 and working capital
needs, TriVergent would have required approximately $436 million, until the time
those markets would have become cash flow positive. Recent adverse developments
in the credit markets, which have reduced the amount of available financing,
have caused TriVergent to scale back its development plans.
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
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changing business conditions or unanticipated competitive pressures. Sources of
additional financing may include commercial bank borrowings, vendor financing
and the private or public sale of equity or debt securities. TriVergent's
ability to obtain additional financing is uncertain. It cannot assure you that
it will be able to raise sufficient debt or equity capital on terms that it
considers acceptable, if at all. If TriVergent is unable to obtain adequate
funds on acceptable terms, its ability to deploy and operate its network, fund
its future expansion plans or respond to competitive pressures would be
significantly impaired.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2000, the carrying value of TriVergent's debt obligations was
$32.8 million and TriVergent's capital lease obligations were $1.4 million. At
December 31, 1999, the carrying value of TriVergent's debt obligations was $17.2
million and capital lease obligations were $1.4 million. The weighted average
interest rate on its debt obligations at June 30, 2000 and December 31, 1999 was
11.4% and 10.95%, respectively. Because the interest rates on TriVergent's
senior credit facility are at floating rates, TriVergent is exposed to interest
rate risks. If market interest rates had been 1% higher in the first six months
of 2000 and 1999, TriVergent's interest expense for that period would have been
increased by $227,000 and $52,000, respectively.
TriVergent has not, in the past, used financial instruments in any material
respect as hedges against financial and currency risks or for trading. However,
as TriVergent expands its operations, it may begin to use various financial
instruments, including derivative financial instruments, in the ordinary course
of business, for purposes other than trading. These instruments could include
letters of credit, guarantees of debt and interest rate swap agreements.
TriVergent does not intend to use derivative financial instruments for
speculative purposes. Interest rate swap agreements would be used to reduce its
exposure to risks associated with interest rate fluctuations and are required by
the credit facility. In March 2000, TriVergent entered into an interest rate
collar agreement with a $60 million notional amount related to its borrowings
under the credit agreement. By their nature, these instruments involve risk,
including the risk of nonperformance by counterparties, and TriVergent's maximum
potential loss may exceed the amount recognized in its balance sheet. TriVergent
would attempt to control its exposure to counterparty credit risk through
monitoring procedures and by entering into multiple contracts.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement, as subsequently amended, is effective
on a prospective basis for interim periods and fiscal years beginning January 1,
2001. This statement establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging securities. TriVergent does not anticipate that
adoption of this standard will have a material effect on its financial
statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101. This bulletin provides interpretive guidance on the
recognition, presentation and disclosure of revenue that must be applied to
financial statements no later than the second fiscal quarter of 2000. TriVergent
does not believe that its adoption of this bulletin will have a material impact
on its consolidated financial position or results of operations.
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THE COMBINED COMPANY
OVERVIEW
As of September 30, 2000, on a pro forma basis giving effect to the merger,
the combined company
- was operating in 24 markets in 11 states,
- had four additional markets in three states under construction,
- had 21,278 access lines installed on its networks, and
- was serving 1,849 customers.
Management of the combined company expects that the combined company will
generate revenues primarily from the provision of local, long distance and
Internet access services, both separately and as part of bundled service
offerings. The combined company's cost of communication services will be
comprised primarily of the same components of the costs of services that Gabriel
and TriVergent have incurred in the provision of their services over their own
network facilities. Management of the combined company expects that its selling,
general and administrative expenses and depreciation and amortization expense
will increase as the combined company expands its networks. The combined
company's revenues and costs will also depend significantly on management's
ability to successfully integrate the businesses of Gabriel and TriVergent.
ANTICIPATED CAPITAL REQUIREMENTS
The combined company expects significant operating losses and negative cash
flow to continue as it expands its operations, constructs and develops its
networks and grows its customer base. Management estimates that expansion to its
targeted 40 markets would require at least $175 million of additional capital.
Collectively, as of June 30, 2000, Gabriel and TriVergent had made capital
expenditures of approximately $183 million and incurred operating losses of
approximately $91 million for the 28 markets which they currently have in
operation and under development. Management estimates that approximately $325
million in capital expenditures will be necessary to complete the build-out of
its targeted 40 markets and approximately $240 million will be necessary to fund
operations in these markets until they can generate positive free cash flow. The
combined company will have total invested and committed equity and debt capital
of approximately $680 million, consisting of
- equity capital of approximately $234.9 million invested by Gabriel
stockholders,
- equity capital of approximately $143.8 million invested by TriVergent
stockholders,
- committed equity capital of approximately $76.0 million, including
approximately $67.5 million from holders of Gabriel Series B preferred
stock as described above, and another $8.5 million from two lender
participants in Gabriel's $225 million senior secured credit facility who
have committed to purchase a total of 1,214,285 shares of Gabriel Series
B preferred stock upon the closing of the facility, and
- debt capital of up to $225 million under Gabriel's senior secured credit
facility, of which approximately $140 million is expected to be available
for future borrowings following the merger.
The combined company's available equity and debt capital is more than sufficient
to provide all the necessary capital for the combined company's initial 28
markets currently in operation and under development, including capital to fund
initial operating losses of those markets. Management of the combined company
intends to continue Gabriel's financing plan of obtaining the funding required
for additional markets to reach positive free cash flow prior to committing to
the development of those markets. Management expects that a typical market will
begin to generate positive free cash flow, approximately 24 months after it
becomes operational.
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Gabriel is currently negotiating the terms of the definitive agreement for
its expanded $225 million secured credit facility referred to above with the
group of lenders that have committed to provide this facility. Gabriel and
TriVergent intend that the $225 million secured credit facility be in place at
or prior to the effective time of the merger. Management of the combined company
intends to use a portion of the proceeds of the new facility to repay all
outstanding borrowings under the existing secured credit facilities of Gabriel
and TriVergent.
The terms of the new senior secured credit facility provide for borrowings
by Gabriel Communications Finance Company, an indirect wholly owned subsidiary
of Gabriel, of up to $225 million, consisting of $165 million in term loans and
a $60 million revolving credit facility. The term loans may be borrowed during
an availability period that ends on the second anniversary of the closing date.
The revolving credit facility will be available on a revolving basis until the
eighth anniversary of the closing date. Outstanding borrowings under the term
loans will amortize, and commitments under the revolving credit facility will be
reduced, in consecutive quarterly installments beginning December 31, 2003 in
the following percentages of the initial amount of the term loan and revolving
credit facilities for the periods set forth below:
<TABLE>
<CAPTION>
FOUR QUARTERS FACILITIES
ENDING REDUCTION/AMORTIZATION
------------- ----------------------
<S> <C>
September 30, 2004.......................................... 10%
September 30, 2005.......................................... 15%
September 30, 2006.......................................... 20%
September 30, 2007.......................................... 25%
September 30, 2008.......................................... 30%
</TABLE>
The borrower also will be required to prepay outstanding loans with the proceeds
of any sale of a significant amount of assets of the borrower or its parent that
are not promptly reinvested in assets useful in the borrower's business and,
beginning in 2005, with any excess cash flow that the borrower generates for the
immediate preceding year.
Proceeds of the new facility may be used to
- repay existing indebtedness,
- finance capital expenditures,
- finance transaction fees and expenses incurred in connection with the
credit facility and the related transactions and
- finance working capital and other general corporate purposes, including
acquisitions.
Interest on outstanding borrowings under the senior secured credit facility
will be based generally on either the prime rate or the interbank eurodollar
rate, plus a margin. The applicable margin will vary based on the borrower's
leverage and generation of positive EBITDA, if any. Until the borrower generates
positive EBITDA or its annualized gross quarterly revenues generated from at
least 21 operational markets exceeds $175 million, the prime rate margin will be
3.25% and the eurodollar rate margin will be 4.25%. As of September 29, 2000,
the applicable interest rates would have been 12.75% for prime rate loans and
10.87% for eurodollar loans. The borrower will also be required to pay a
commitment fee ranging from 0.75% to 1.50% of the total term loan and revolving
credit facilities, based upon the total usage of the facilities.
Obligations under the senior secured credit facility will be guaranteed by
the combined company, its direct wholly owned subsidiary, Gabriel Communications
Properties, Inc., and all of the existing and subsequently acquired subsidiaries
of the borrower. The facility will be secured by a pledge of all of the capital
stock of Gabriel Communications Properties, Inc., the borrower and each of the
borrower's subsidiaries and a security interest in the assets of Gabriel
Communications Properties, Inc., other than any of its unrestricted
subsidiaries, the borrower and each of the borrower's subsidiaries. Immediately
after the effective time of the merger, TriVergent will become a direct wholly
owned subsidiary of the borrower.
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The combined company is expected to make a total equity contribution to the
borrower of not less than $409 million.
The senior secured credit facility will contain limitations on
indebtedness, liens, investments, capital expenditures, dividends and other
specified transactions and payments. The facility's financial covenants, which
will generally be tested on a quarterly basis, initially will measure the
borrower's performance, on a consolidated basis, against standards set for the
ratio of indebtedness to capitalization, minimum revenues and access lines,
maximum capital expenditures, EBITDA and the ratio of indebtedness to property,
plant and equipment. After October 1, 2003, the financial covenants will measure
the borrower's performance, on a consolidated basis, against standards set for
leverage, EBITDA coverage of cash interest expense, fixed charge coverage and
debt service coverage. The financial covenants will also measure the combined
company's performance, on a consolidated basis, against standards set for ratios
of indebtedness to capitalization, leverage, senior secured debt to
capitalization and senior secured leverage.
The senior secured credit facility will contain customary events of default
including nonpayment of principal, interest or fees, violation of covenants,
incorrectness of representations and warranties, and extraordinary events such
as a change of control or bankruptcy.
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THE MERGER
BACKGROUND OF THE MERGER
As part of its business strategy, Gabriel from time to time considers
opportunities to acquire other businesses and enter into strategic relationships
to accelerate its market penetration and expand the scope of its product and
service offerings. In early April 2000, Gabriel identified TriVergent as an
attractive acquisition candidate based on the comparable product and customer
focus of the two companies and their contiguous markets. At that time, Mr. David
L. Solomon, the chairman and chief executive officer of Gabriel, contacted Mr.
Charles S. Houser, the chairman and chief executive officer of TriVergent, to
initiate discussions regarding a possible strategic combination of the two
companies. Although in mid April 2000 TriVergent had recently filed a
registration statement with the SEC for an initial public offering of its common
stock, Mr. Houser thought that it was in the best interests of TriVergent to
discuss a possible business combination with Mr. Solomon.
On April 13, 2000, TriVergent and Gabriel entered into an agreement
pursuant to which each company agreed to make information available to the other
on a confidential basis. Representatives of each company then proceeded with
their due diligence and evaluation of the other's current operations and planned
future developments.
At a regular meeting of the Gabriel board of directors on April 18, 2000,
at which all of the directors were present, Mr. Solomon discussed with the
Gabriel board a possible combination of Gabriel with TriVergent. Mr. Solomon
reported that Gabriel had retained Salomon Smith Barney Inc. as Gabriel's
financial advisor in connection with any possible transaction with TriVergent.
At a regular meeting of the board of directors of TriVergent on April 19,
2000, at which a quorum was present, the board discussed various strategic
advantages relating to a possible business combination with Gabriel such as
expansion into contiguous geographic service territories with virtually little
market overlap between markets currently served by Gabriel and TriVergent. The
board reviewed a written analysis of Donaldson Lufkin & Jenrette Securities
Corporation, which TriVergent had engaged to represent it in the proposed
transaction, regarding the possible financial benefits of the possible
combination of the two companies, such as enhanced access to capital.
Between April 19, 2000 and May 10, 2000, Mr. Solomon and Mr. Houser
continued to discuss the possibility of a merger of the two companies and
considered various factors, including each company's market development plans
and financial projections, network architecture, management team, board
composition and outside investors.
On May 9, 2000 and May 10, 2000, Salomon Smith Barney reviewed with Gabriel
management certain financial information relating to Gabriel and the proposed
combined company. On May 10, 2000, Mr. Solomon and Mr. Houser reached an
agreement in principle that the two companies would enter into a stock-for-stock
merger with Gabriel's security holders holding 54% of the equity value of the
combined company on a fully diluted basis and TriVergent's security holders
holding 46% of the equity value of the combined company on a fully diluted
basis. On May 11, 2000, Gabriel delivered to TriVergent a proposed draft letter
of intent setting forth the proposed transaction structure and economic and
other terms of the proposed merger.
On May 9, 2000 and May 10, 2000, Donaldson Lufkin & Jenrette reviewed with
TriVergent management certain financial information relating to TriVergent and
the proposed combined company. The TriVergent board of directors met on May 11,
2000 to consider proceeding with the proposed merger based on the agreement in
principle reached by Mr. Houser and Mr. Solomon. At this meeting, Donaldson
Lufkin & Jenrette presented the benefits of the transaction, its preliminary due
diligence findings and the preliminary relative values of each company and the
combined entity. Mr. Houser addressed issues including the proposed board
composition, management, headquarters location, name, sales and product
strategy, target customers and implications to employees under TriVergent's
employee incentive plan. The TriVergent board unanimously voted to authorize
TriVergent management to proceed with the negotiation of a definitive agreement.
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On May 16, 2000, at a regular meeting of the board of directors of Gabriel,
at which all directors were present, the Gabriel board of directors met to
consider the proposed merger. At this meeting, the Gabriel board considered
presentations from management and Salomon Smith Barney regarding the proposed
transaction and the draft letter of intent. The Gabriel board authorized Mr.
Solomon to proceed with the negotiation of a definitive agreement consistent
with the proposed letter of intent and the agreement in principle reached with
Mr. Houser.
Concurrently with the due diligence process, representatives of Gabriel and
TriVergent engaged in several telephone conferences to discuss the proposed
letter of intent and, in the alternative, proceeding directly to the drafting
and negotiation of a definitive agreement. On May 23, 2000, Gabriel provided to
TriVergent a first draft agreement and plan of merger, and on May 24, 2000, May
25, 2000 and May 26, 2000, Gabriel delivered to TriVergent proposed drafts of
the Gabriel charter amendment and other documents relating to the merger. During
the period from May 23, 2000 through June 8, 2000, representatives of TriVergent
and Gabriel, including Cravath, Swaine & Moore and Bryan Cave LLP, counsel to
TriVergent and Gabriel, respectively, completed their due diligence reviews and
negotiated the remaining terms of the proposed merger documents.
On June 8, 2000, at a special meeting of the board of directors, at which
all of the directors were present, the Gabriel board met to consider the
proposed merger. At the meeting, Mr. Solomon reported on the discussions with
TriVergent, including the terms of the merger and the proposed exchange ratio.
Mr. John P. Denneen, the executive vice president - corporate development and
legal affairs, secretary and a director of Gabriel, presented a summary of the
terms of the merger agreement. Salomon Smith Barney advised the Gabriel board of
directors that, as of June 8, 2000, in the opinion of Gabriel's financial
advisor, the consideration to be paid in the merger was fair, from a financial
point of view, to Gabriel, subject to the assumptions and limitations set forth
in Salomon Smith Barney's written opinion. See "Opinion of Gabriel's Financial
Advisor" beginning on page 53. Following discussion, the Gabriel board of
directors, by unanimous vote, approved, and recommended that the stockholders of
Gabriel approve, the merger agreement, the Gabriel charter amendment and the
other transactions contemplated by the merger agreement.
On June 8, 2000, the board of directors of TriVergent held a special
meeting at which Mr. Charles S. Houser, chief executive officer of TriVergent,
reported on the discussions with Gabriel, including the terms of the merger, the
proposed exchange ratio and the 46% equity interest of the combined company, on
a fully diluted basis, to be received by the TriVergent stockholders. A
representative of Donaldson, Lufkin & Jenrette presented a summary of the terms
of the merger agreement and explained the calculation of the proposed exchange
ratio. Mr. Houser discussed the strategic and financial advantages of the merger
and answered questions regarding the terms of the merger. A representative of
Donaldson, Lufkin & Jenrette delivered its written opinion to the TriVergent
board of directors that as of June 8, 2000, in the opinion of Donaldson, Lufkin
& Jenrette, based on and subject to the assumptions, limitations and
qualifications included in the written opinion, the 46%, subject to adjustment
pursuant to the merger agreement, equity interest of the combined company, on a
fully diluted basis, to be received by the TriVergent stockholders was fair to
the stockholders as a whole from a financial point of view. See "Opinion of
TriVergent's Financial Advisor" beginning on page 49. Following this discussion,
the TriVergent board of directors, by unanimous vote, approved the merger
agreement and the other transactions contemplated thereby. At this time, the
board decided it was in the best interests of TriVergent to proceed with the
possible business combination with Gabriel instead of pursuing its initial
public offering. TriVergent also engaged First Union as a financial advisor in
connection with the transaction.
On June 9, 2000, representatives of Gabriel and TriVergent met in Atlanta,
Georgia and executed the merger agreement. On June 13, 2000, Gabriel and
TriVergent issued a joint press release announcing the execution of the merger
agreement.
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<PAGE> 54
THE BOARDS' REASONS FOR THE MERGER
The TriVergent board of directors believes that the merger is fair to and
in the best interests of TriVergent and its stockholders and has unanimously
approved the merger. The Gabriel board of directors believes that the merger is
fair to and in the best interests of Gabriel and also has unanimously approved
the merger.
In reaching its decision to approve the merger, the board of directors of
TriVergent consulted with its management team and outside financial and legal
advisors and carefully considered the following factors:
- the opportunity for TriVergent to expand into contiguous geographic
service territories creating, with Gabriel, a super regional competitor
in the changing telecommunications industry,
- the additional capital requirements for TriVergent's development plans,
totaling over $400 million,
- the belief that a merger with Gabriel would provide access to cash and
enhanced access to capital because of the larger size of the combined
company and through the additional relationships with lending
institutions and investors provided by Gabriel,
- the belief that the merger would provide significant reduction in
administrative and operating expenses,
- the belief that Gabriel and TriVergent share similar business strategies
of bundling local and long distance services with data and internet
services on a single monthly bill,
- the complementary network architectures and operational support systems
of Gabriel and TriVergent coupled with the belief that the two companies'
operations could be integrated efficiently and effectively.
- the similar network deployment strategies of the two companies to pursue
the cost effective delivery of telecommunications services,
- the similar business strategy of targeting small and medium-sized
business customers,
- the pursuit of similar customer support and sales strategies of employing
locally based direct sales teams and the opportunity to leverage
TriVergent's relationships with authorized agents in the Midwest,
- the various background data and analyses reviewed by TriVergent's outside
financial and legal advisors and management, as well as the opinion of
Donaldson, Lufkin & Jenrette that, as of the date of the opinion, based
on and subject to the assumptions, limitations and qualifications
included in the opinion the 46% equity interest of the combined company,
on a fully diluted basis, to be received by the TriVergent stockholders
is fair to the stockholders as a whole from a financial point of view,
- the terms and conditions of the merger agreement and the likelihood that
the conditions to the merger will be satisfied, and
- the willingness of TriVergent's management and institutional investors to
support the merger.
In reaching its decision to approve the merger, the board of directors of
Gabriel consulted with its management team and outside financial and legal
advisors and carefully considered a variety of factors including
- the businesses, operations, prospects and strategic direction of Gabriel
and TriVergent, including:
-- their shared focus on small to medium-sized business customers in
second and third tier markets,
-- their complementary markets and network architectures,
-- their pursuit of similar smart-built network deployment strategies,
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<PAGE> 55
-- their comparable bundled product and service offerings and focus on
meeting all the data and voice communications requirements of their
customers,
-- their similar sales and marketing strategies,
-- their highly complementary, advanced, automated billing, sales
management, inventory, electronic bonding and surveillance systems, and
-- the significant telecommunications industry experience and
entrepreneurial experience of their management teams,
- the total capital required for the successful implementation of the
combined company's 28 market development plan, estimated at approximately
$600 million, and the risks of obtaining additional capital required for
its targeted 40-market development plan, estimated at over $200 million,
- the belief that a merger of Gabriel with TriVergent could create
significant synergies for the combined company, including perceived
opportunities for savings in general, administrative and operating
expenses and network equipment costs,
- the belief that a merger with TriVergent would allow Gabriel to expand
its operations into the contiguous nine state BellSouth region with a
similar smart build strategy and product offerings and create a stronger
competitor in the changing telecommunications industry,
- the various background data and analyses reviewed by Gabriel's outside
financial and legal advisors and management, as well as the opinion of
Salomon Smith Barney that the consideration to be paid in the merger is
fair to Gabriel from a financial point of view,
- the terms and conditions of the merger agreement and the likelihood that
the conditions to the merger will be satisfied, and
- the willingness of Gabriel's management and institutional investors to
support the merger.
APPROVAL OF BOARD AND STOCKHOLDERS
GABRIEL
The Gabriel board of directors has unanimously approved the merger
agreement and believes that the terms of the merger agreement are fair to, and
that the merger is in the best interests of, Gabriel.
On June 9, 2000, the holders of more than two-thirds of the outstanding
shares of Gabriel common and preferred stock agreed to vote their shares to
approve or consent to the acquisition of TriVergent by Gabriel by means of the
merger and the amendment and restatement of the amended and restated certificate
of incorporation of Gabriel. Under Delaware law and the terms of Gabriel's
amended and restated certificate of incorporation, these approvals are
sufficient to approve the acquisition of TriVergent by Gabriel by means of the
merger and to approve the amendment and restatement of the amended and restated
certificate of incorporation of Gabriel. Accordingly, Gabriel is not soliciting
proxies or consents from the Gabriel stockholders in connection with the merger
or the charter amendment.
TRIVERGENT
The TriVergent board of directors has unanimously approved the merger
agreement and believes that the terms of the merger agreement are fair to, and
that the merger is in the best interests of, TriVergent and its stockholders.
On June 9, 2000, the holders of more than ninety percent of the outstanding
shares of TriVergent Series A and Series B preferred stock and more than
two-thirds of the outstanding shares of TriVergent Series C preferred stock and
common stock agreed to vote their shares in favor of or consent to the merger.
Under Delaware law and the terms of TriVergent's certificate of incorporation,
these approvals are sufficient to approve the merger agreement and the
transactions contemplated by the merger agreement.
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<PAGE> 56
Accordingly, TriVergent is not soliciting proxies or consents from TriVergent
stockholders in connection with the merger.
OPINION OF TRIVERGENT'S FINANCIAL ADVISOR
INTRODUCTION
TriVergent asked Donaldson, Lufkin & Jenrette Securities Corporation, in
its role as financial advisor to TriVergent, to render an opinion to the
TriVergent board as to the fairness to the stockholders of TriVergent as a
whole, from a financial point of view, of the percentage equity interest in the
combined entity that they will be entitled to at the effective time of the
merger -- 46% calculated on a fully diluted basis, using the treasury stock
method and including the $6.00 warrants and $10.25 warrants, subject to
adjustment pursuant to the merger agreement, which we refer to in this section
as the "fully diluted equity interest."
On June 8, 2000, Donaldson, Lufkin & Jenrette delivered to the TriVergent
board a written opinion to the effect that, as of such date, and subject to and
based on the assumptions, limitations and qualifications set forth in the
opinion, the fully diluted equity interest was fair to the stockholders of
TriVergent as a whole from a financial point of view. A copy of the June 8, 2000
Donaldson, Lufkin & Jenrette opinion is attached to this information
statement/prospectus as Annex C. You should read this opinion for the procedures
followed, the matters considered and the limits of the review made by Donaldson,
Lufkin & Jenrette. The opinion is based on economic, market, regulatory,
financial and other conditions as they existed on, and on the information made
available to Donaldson, Lufkin & Jenrette as of, June 8, 2000. Although later
events may affect the conclusion reached in its opinion, Donaldson, Lufkin &
Jenrette does not have any obligation to update, revise or reaffirm its opinion.
Donaldson, Lufkin & Jenrette prepared its opinion for the TriVergent board.
The opinion addresses only the fairness from a financial point of view of the
fully diluted equity interest to the stockholders of TriVergent as a whole.
Donaldson Lufkin & Jenrette has expressed no opinion as to
- the prices at which Gabriel common stock and preferred stock would
actually trade in the future,
- the merits of the merger relative to other business strategies considered
by the TriVergent board,
- the decision of the TriVergent board to proceed with the merger, or
- the fairness of the consideration to be received by an individual class
of securityholders of TriVergent.
The fully diluted equity interest was determined in arms length
negotiations between TriVergent and Gabriel in which Donaldson, Lufkin &
Jenrette advised TriVergent.
The TriVergent board selected Donaldson, Lufkin & Jenrette to act as its
financial advisor for the merger because Donaldson, Lufkin & Jenrette is an
internationally recognized investment banking firm with substantial expertise in
the telecommunications industry and in mergers and acquisitions. Donaldson,
Lufkin & Jenrette, as part of its investment banking services, is regularly
engaged in the valuation of businesses and securities in connection with
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
INFORMATION REVIEWED AND ASSUMPTIONS MADE
In arriving at its June 8, 2000 opinion, Donaldson, Lufkin & Jenrette
reviewed
- drafts of the merger agreement and exhibits to the merger agreement,
- financial and other information that was publicly available or furnished
to Donaldson, Lufkin & Jenrette by TriVergent and Gabriel, including
information provided during discussions with their managements,
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- certain financial projections for the years 2000 through 2009 of
TriVergent and Gabriel prepared by their managements,
- a comparison of various financial data of TriVergent and Gabriel with
other companies whose securities are traded in public markets, and
- the prices and premiums paid in certain other business combinations
and conducted such other financial studies, analyses and investigations as it
deemed appropriate for purposes of rendering its opinion.
Donaldson, Lufkin & Jenrette did not nor was it requested to solicit the
interest of any other party in acquiring TriVergent. For its opinion, Donaldson,
Lufkin & Jenrette relied upon and assumed the accuracy and completeness of all
of the financial and other information that was available to it from public
sources or that was provided to it by TriVergent or Gabriel or their respective
representatives, or that was otherwise reviewed by Donaldson, Lufkin & Jenrette.
Donaldson, Lufkin & Jenrette assumed that all financial projections were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the managements of TriVergent and Gabriel as to the future
operating and financial performance of TriVergent and Gabriel. Donaldson, Lufkin
& Jenrette did not make any independent evaluation of the assets or liabilities
of TriVergent or Gabriel, or an independent verification of the information
reviewed by Donaldson, Lufkin & Jenrette, respectively. Donaldson, Lufkin &
Jenrette did not consider the impact of regulatory changes on TriVergent and
Gabriel. Donaldson, Lufkin & Jenrette relied as to all legal matters, including
that the merger will qualify as a tax-free "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code, on advice of counsel to
TriVergent or Gabriel.
FINANCIAL ANALYSES
The following is a summary of the financial analyses made by Donaldson,
Lufkin & Jenrette in connection with its June 8, 2000 opinion and its
presentation to the TriVergent board on June 8, 2000. No company or transaction
used in the analyses described below is directly comparable to TriVergent or the
contemplated transaction. In addition, mathematical analysis such as determining
the mean or median is not in itself a meaningful method of using selected
company or transaction data. The analyses performed by Donaldson, Lufkin &
Jenrette are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by these
analyses.
Private Financings. Donaldson, Lufkin & Jenrette compared the valuations
implied by the prices at which TriVergent and Gabriel had completed recent
rounds of private financing. TriVergent's most recent round of private financing
took place during February and March 2000 when it raised approximately $67
million through the issuance of convertible preferred stock which, based on the
number of shares of common stock into which it is convertible, implied a
valuation of $4.25 per share for TriVergent common stock. Gabriel's most recent
round of private financing took place during April 2000 when it obtained
approximately $204.5 million of commitments to purchase its convertible
preferred stock which, based on the number of shares of common stock into which
it is convertible, implied a valuation of $7.00 per share for Gabriel common
stock. The implied exchange ratio based on each companies recent private round
of financing is shown in the table below:
<TABLE>
<CAPTION>
IMPLIED VALUATIONS FROM RECENT ROUNDS OF PRIVATE FINANCING
----------------------------------------------------------
TRIVERGENT GABRIEL IMPLIED EXCHANGE RATIO
---------------------------- ---------------------------- ----------------------
<S> <C> <C>
$4.25 per share $7.00 per share 0.6
</TABLE>
The ratio of these valuations would imply an exchange ratio of 0.6 compared to
the then proposed exchange ratio of 1.1005.
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Publicly Traded Comparable Competitive Local Telephone Company
Analysis. Donaldson, Lufkin & Jenrette analyzed selected historical and
projected operating information, stock market data and financial ratios for the
following publicly traded competitive local telephone companies:
- Allegiance Telecom, Inc.,
- Choice One Communications, Inc.,
- CoreComm Ltd.,
- CTC Communications Corp.,
- Focal Communications Corp.,
- Mpower Communications Corp.,
- Net2000 Communications Inc.,
- Network Plus Corp.,
- Pac-West Telecomm Inc. and
- US LEC Corp.
Donaldson, Lufkin & Jenrette chose the comparable competitive local telephone
companies based on their industry, "smart-build" strategy and growth
characteristics. Donaldson, Lufkin & Jenrette calculated the multiple of each
company's total enterprise value, based on its current market price, to the
selected research analysts' estimates of revenues for such company for 2001. The
enterprise value of a company is equal to the value of its fully-diluted common
equity plus debt and the liquidation value of outstanding preferred stock, if
any, minus cash and the value of certain other assets, including minority
interests in other entities. The table below sets forth the results of these
analyses:
RATIO OF ENTERPRISE
<TABLE>
<CAPTION>
VALUE TO: RANGE MEAN MEDIAN
---------------------- ------------ ---- ------
<S> <C> <C> <C>
2001 Estimated Revenue 2.2x - 12.4x 5.2x 3.6x
</TABLE>
Based on the median of 3.6x, Donaldson, Lufkin & Jenrette derived a range of
ratios to apply to TriVergent's estimated 2001 revenues of 2.5x to 3.5x. For
Gabriel, Donaldson, Lufkin & Jenrette derived a slightly higher range of ratios
to apply to Gabriel's estimated 2001 revenues of 3.0x to 4.0x. In determining
the appropriate revenue multiples, Donaldson, Lufkin & Jenrette considered each
of the following: each company's financial projections, current funding
position, and management reputation and experience in the public financial
markets. These ranges of enterprise value to 2001 revenue ratios implied equity
value per share ranges for both TriVergent and Gabriel as shown in the table
below:
<TABLE>
<CAPTION>
IMPLIED EQUITY VALUE PER SHARE RANGES
-------------------------------------
TRIVERGENT GABRIEL IMPLIED EXCHANGE RATIO
----------------- ----------------- ----------------------
<S> <C> <C>
$5.93 - $8.13 $6.03 - $6.86 1.0 - 1.2
</TABLE>
These implied equity values implied an exchange ratio of 1.0 to 1.2
compared to the then proposed exchange ratio of 1.1005.
Discounted Cash Flow Analysis. Donaldson, Lufkin & Jenrette performed a
discounted cash flow analysis of Gabriel and TriVergent using projections and
assumptions provided by the managements of Gabriel and TriVergent. In a
discounted cash flow analysis a valuation is determined based on the sum of the
present values of a business' projected cash flows for a period of years and the
present value of the business at the end of that period, which is referred to as
the terminal value. In its discounted cash flow analysis, Donaldson, Lufkin &
Jenrette took the projected cash flows for the next 9 1/2 years and estimated
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the value of TriVergent and Gabriel at the end of that period based on a
multiple of EBITDA at the end of the period. The following assumptions were used
in calculating discounted cash flow values:
- Discounted cash flow projection period from July 1, 2000 through December
31, 2009,
- Discount rate of 13.0% to 15.0% for each of TriVergent and Gabriel,
respectively, and
- Terminal value was computed by using ranges of 10.0x to 12.0x projected
2009 EBITDA for TriVergent and 9.5x to 11.5x projected 2009 EBITDA for
Gabriel.
These assumptions implied values which are summarized in the table below:
<TABLE>
<CAPTION>
IMPLIED EQUITY VALUE PER SHARE RANGES
-------------------------------------
TRIVERGENT GABRIEL IMPLIED EXCHANGE RATIO
------------------ ----------------- ----------------------
<S> <C> <C>
$16 - $19 $17 - $20 0.94 - 0.95
</TABLE>
The implied range of exchange ratios based on these implied equity values
was 0.94 to 0.95 compared to the then proposed exchange ratio of 1.1005.
Contribution Analysis. Donaldson, Lufkin & Jenrette analyzed the revenue
projections for TriVergent and Gabriel and the relative contribution of each to
the combined entity. This analysis indicated, among other things, that for the
years 2000 through 2004, TriVergent would contribute between 55.7% and 67.4% of
the combined entity's revenues. Donaldson, Lufkin & Jenrette took into
consideration TriVergent's and Gabriel's net cash to derive TriVergent's and
Gabriel's implied ownership percentages. The analysis is summarized in the table
below:
<TABLE>
<CAPTION>
CONTRIBUTION IMPLIED OWNERSHIP
--------------------- --------------------- IMPLIED
TRIVERGENT GABRIEL TRIVERGENT GABRIEL EXCHANGE RATIO
---------- ------- ---------- ------- --------------
<S> <C> <C> <C> <C> <C>
2000 Estimated Revenue...................... 58.5% 41.5% 43.1% 56.9% 0.9766
2001 Estimated Revenue...................... 67.4% 32.6% 51.5% 48.5% 1.3731
2002 Estimated Revenue...................... 67.0% 33.0% 51.1% 48.9% 1.3507
2003 Estimated Revenue...................... 60.7% 39.3% 45.1% 54.9% 1.0605
2004 Estimated Revenue...................... 55.7% 44.3% 40.7% 59.3% 0.8870
</TABLE>
The analysis implied an exchange ratio range of 0.9 to 1.4 compared to the
then proposed exchange ratio of 1.1005.
This summary is not a complete description of Donaldson, Lufkin &
Jenrette's analyses. Instead, it summarizes the material elements of the
presentation made by Donaldson, Lufkin & Jenrette to the TriVergent board on
June 8, 2000. The preparation of Donaldson, Lufkin & Jenrette's opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances. Therefore, Donaldson, Lufkin & Jenrette's opinion is not readily
susceptible to summary description.
Each of Donaldson, Lufkin & Jenrette's analyses was carried out in order to
provide a different perspective on the transaction and add to the total mix of
information available. Donaldson, Lufkin & Jenrette did not form a conclusion as
to whether any individual analysis, considered by itself, supported or failed to
support an opinion as to fairness from a financial point of view. Rather, in
reaching its conclusion, Donaldson, Lufkin & Jenrette considered the results of
the analyses in light of each other and ultimately reached its opinion based on
the results of all analyses taken as a whole. Donaldson, Lufkin & Jenrette did
not place particular reliance or weight on any individual analysis, but instead
concluded that its analyses, taken as a whole, supported its determination.
Furthermore, different professionals within Donaldson, Lufkin & Jenrette
involved in the delivery of the opinion may have given different weight to
different analyses. For this reason, Donaldson, Lufkin & Jenrette believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all analyses and
factors, could create an incomplete view of the evaluation process underlying
its opinion. The
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analyses performed by Donaldson, Lufkin & Jenrette are not necessarily
indicative of actual, past or future results or values, which may be
significantly more or less favorable than suggested by these analyses.
ENGAGEMENT LETTER
TriVergent engaged Donaldson, Lufkin & Jenrette to act as its principal
financial advisor in connection with the merger with Gabriel. Under the
engagement letter, TriVergent agreed to pay Donaldson, Lufkin & Jenrette a fee
of $500,000 at the time Donaldson, Lufkin & Jenrette notified the Board of
Directors of TriVergent that it was prepared to deliver Donaldson, Lufkin &
Jenrette's opinion. TriVergent agreed to pay Donaldson, Lufkin & Jenrette
additional cash compensation in an amount equal to $3.75 million less the amount
paid by TriVergent for Donaldson, Lufkin & Jenrette's opinion, payable in cash
at consummation of the merger.
TriVergent also agreed to reimburse Donaldson, Lufkin & Jenrette for
out-of-pocket expenses. TriVergent also agreed to indemnify Donaldson, Lufkin &
Jenrette and related persons against various liabilities in connection with its
engagement, including liabilities under federal securities laws. The SEC has
taken the position that indemnification under the federal securities laws may
not be enforceable if it is found to be against public policy.
Donaldson, Lufkin & Jenrette has performed investment banking and other
services for TriVergent in the past, including acting as lead manager of its
proposed initial public offering. Donaldson, Lufkin & Jenrette may also provide
investment banking services for TriVergent or Gabriel in the future.
OPINION OF GABRIEL'S FINANCIAL ADVISOR
Gabriel retained Salomon Smith Barney to act as its financial advisor in
connection with the merger. Pursuant to Salomon Smith Barney's engagement
letter, dated April 13, 2000, Salomon Smith Barney rendered an opinion to
Gabriel's board of directors on June 8, 2000 to the effect that, based upon and
subject to the considerations set forth in the opinion, as of such date, the
consideration to be paid in the merger was fair, from a financial point of view,
to Gabriel.
Annex D to this information statement/prospectus contains the full text of
Salomon Smith Barney's opinion, which sets forth the assumptions made, general
procedures followed, matters considered and limits on the review undertaken.
GABRIEL'S STOCKHOLDERS ARE URGED TO READ THE SALOMON SMITH BARNEY OPINION
CAREFULLY AND COMPLETELY.
Although Salomon Smith Barney evaluated the fairness, from a financial
point of view, of the consideration to be paid in the merger, the consideration
was determined by Gabriel and TriVergent through arms-length negotiations.
Neither Gabriel nor its board of directors imposed any limitations with respect
to the investigations made or procedures followed by Salomon Smith Barney in
rendering its opinion.
In the process of rendering its opinion, Salomon Smith Barney reviewed,
among other things:
- a draft of the merger agreement,
- publicly available business and financial information concerning
TriVergent, and
- internal information, including financial forecasts and other information
and data regarding Gabriel and TriVergent, provided to or otherwise
discussed with Salomon Smith Barney by the managements of Gabriel and
TriVergent.
Salomon Smith Barney reviewed the financial terms of the merger in relation
to, among other things, the historical and projected earnings and other
operating data of Gabriel and TriVergent and the historical and projected
capitalization and financial condition of Gabriel and TriVergent. Salomon Smith
Barney also evaluated the pro forma financial impact of the merger on Gabriel.
Salomon Smith Barney also conducted other analyses and examinations and
considered other information and financial, economic and market criteria as it
deemed appropriate.
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In rendering its opinion, Salomon Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Salomon Smith Barney. Salomon Smith Barney also
relied upon the assurances of management of both Gabriel and TriVergent that
they were not aware of any facts that would make any of the information reviewed
by Salomon Smith Barney inaccurate or misleading. Management of Gabriel and
TriVergent have advised Salomon Smith Barney that the financial forecasts and
other information and data provided to or otherwise reviewed by, or discussed
with, Salomon Smith Barney were reasonably prepared based on the best currently
available estimates and judgments of the managements of Gabriel and TriVergent
as to the future financial performance of Gabriel and TriVergent. Salomon Smith
Barney expressed no view with respect to these forecasts and other information
and data or the assumptions on which they were based. Salomon Smith Barney
assumed, with Gabriel's consent, that the merger will be treated as a tax-free
reorganization for U.S. federal income tax purposes. Salomon Smith Barney did
not make and was not provided with an independent evaluation or appraisal of the
assets or liabilities, contingent or otherwise, of Gabriel or TriVergent nor did
Salomon Smith Barney make any physical inspection of the properties or assets of
Gabriel or TriVergent. Salomon Smith Barney also assumed that the final terms of
the merger agreement would not vary materially from those in the draft reviewed
by Salomon Smith Barney and that the merger will be consummated in a timely
fashion and in accordance with the terms of the merger agreement without waiver
of any of the conditions precedent to the merger contained in the merger
agreement.
Salomon Smith Barney's opinion relates to the relative values of Gabriel
and TriVergent. Salomon Smith Barney did not express any opinion as to what the
value of any of the Gabriel common stock, Gabriel preferred stock or Gabriel
options or warrants actually will be when issued in the merger. Nor did Salomon
Smith Barney express any opinion with respect to the allocation of the
consideration to be paid in the merger. Salomon Smith Barney was not requested
to consider, and the Salomon Smith Barney opinion does not address, the relative
merits of the merger as compared to any alternative business strategies that
might exist for Gabriel or the effect of any other transaction in which Gabriel
might engage. Salomon Smith Barney's opinion necessarily was based upon
information available and disclosed to Salomon Smith Barney as of the time it
rendered its opinion.
SALOMON SMITH BARNEY'S ADVISORY SERVICES WERE PROVIDED FOR THE INFORMATION
OF, AND ITS OPINION WAS ADDRESSED TO, GABRIEL'S BOARD OF DIRECTORS IN ITS
EVALUATION OF THE PROPOSED MERGER AND DID NOT CONSTITUTE A RECOMMENDATION OF THE
MERGER TO GABRIEL OR A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW THAT
STOCKHOLDER SHOULD VOTE ON ANY MATTERS RELATING TO THE PROPOSED MERGER.
The following is a summary of analyses performed by Salomon Smith Barney in
the course of evaluating the fairness of the consideration to be paid in the
merger. The following quantitative information, to the extent it is based on
market data, is, except as otherwise indicated, based on market data as it
existed at or prior to June 2, 2000, and is not necessarily indicative of
current or future market conditions. The summary of certain of the financial
analyses includes information presented in tabular format. IN ORDER TO
UNDERSTAND FULLY THE FINANCIAL ANALYSES USED BY SALOMON SMITH BARNEY, THESE
TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY. THE TABLES ALONE ARE
NOT A COMPLETE DESCRIPTION OF THE FINANCIAL ANALYSES.
Contribution Analyses. Using annualized results for the month ended March
31, 2000 and management projections provided by TriVergent and Gabriel,
respectively, Salomon Smith Barney performed analyses of the relative
contribution of each of TriVergent and Gabriel to the combined company with
respect to certain financial and operating data. Based on the relative
contribution of TriVergent and Gabriel with respect to each category of data,
Salomon Smith Barney derived the implied ownership interest in the combined
company of the current common and preferred stockholders of each of TriVergent
and Gabriel. The purpose of this analysis was to draw a comparison between this
implied ownership interest and the percentage ownership of the combined company
that the current Gabriel stockholders are expected to have following the merger.
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<PAGE> 62
In the course of these analyses, certain information used by Salomon Smith
Barney with respect to TriVergent was on a pro forma basis to reflect pending
and recently completed transactions involving TriVergent. In performing these
analyses, Salomon Smith Barney did not take into account any anticipated cost
savings, revenue enhancements or other similar potential effects of the merger.
These analyses are set forth in the following table.
<TABLE>
<CAPTION>
TRIVERGENT GABRIEL
TRIVERGENT GABRIEL IMPLIED IMPLIED
CONTRIBUTION CONTRIBUTION OWNERSHIP OWNERSHIP
------------ ------------ ---------- ---------
<S> <C> <C> <C> <C>
ANNUAL REVENUES
Latest Month Annualized......................... 71.5% 28.5% 55.0% 45.0%
Estimated 2000.................................. 58.5 41.5 46.0 54.0
Estimated 2001.................................. 67.4 32.6 52.1 47.9
Estimated 2002.................................. 66.8 33.2 51.7 48.3
Estimated 2003.................................. 60.4 39.6 47.4 52.6
ON-NET ACCESS LINES
As of March 31, 2000............................ 2.9% 97.1% 7.9% 92.1%
Estimated as of December 31, 2000............... 49.8 50.2 40.0 60.0
Estimated as of December 31, 2001............... 67.4 32.6 52.1 47.9
Estimated as of December 31, 2002............... 65.7 34.3 51.0 49.0
Estimated as of December 31, 2003............... 63.3 36.7 49.3 50.7
NET PROPERTY, PLANT AND EQUIPMENT
As of March 31, 2000............................ 53.9% 46.1% 42.9% 57.1%
Estimated as of December 31, 2000............... 64.8 35.2 50.4 49.6
Estimated as of December 31, 2001............... 52.1 47.9 41.6 58.4
Estimated as of December 31, 2002............... 47.5 52.5 38.5 61.5
Estimated as of December 31, 2003............... 41.6 58.4 34.4 65.6
</TABLE>
Salomon Smith Barney derived a range for the implied ownership of the
Gabriel stockholders in the combined company of 49.6% to 55.6% based on the data
in the table above. Salomon Smith Barney noted that the expected pro forma fully
diluted equity interest in the combined company of the current common and
preferred stockholders of Gabriel expected to result from the merger is 54%,
which is within the derived range. This analysis therefore supported the
conclusion that the consideration to be paid in the merger was fair, from a
financial point of view, to Gabriel.
Comparable Company Analysis. Salomon Smith Barney reviewed publicly
available financial and operating information for nine competitive local
telephone companies:
- Allegiance Telecom, Inc.,
- Choice One Communications Inc.,
- CTC Communications Group, Inc.,
- Focal Communications Corporation,
- Mpower Holding Corporation,
- Net2000 Communications, Inc.,
- Network Plus Corp.,
- Pac-West Telecomm, Inc. and
- US LEC Corp.
Salomon Smith Barney considered the business segments in which these companies
operate to be reasonably similar to certain of the business segments in which
TriVergent and Gabriel operate, but noted that none of these companies has the
same management, makeup, size or combination of businesses as
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TriVergent or Gabriel. The purpose of this analysis was to use certain financial
and operating data of comparable competitive local telephone companies to derive
an implied value of the equity securities of each of Gabriel and TriVergent.
Based on those implied equity values, Salomon Smith Barney could derive the
implied ownership percentage of Gabriel's stockholders in the combined company
and compare that implied ownership percentage with the pro forma fully diluted
equity interest in the combined company of the current Gabriel stockholders
expected to result from the merger.
In performing this analysis, Salomon Smith Barney derived the adjusted firm
value of each of the comparable competitive local telephone companies. Adjusted
firm value was calculated as the sum of the value of:
- all shares of common stock assuming the exercise of all in-the-money
options, warrants and convertible securities, less the proceeds from such
exercise, plus
- non-convertible indebtedness, plus
- non-convertible preferred stock, plus
- minority interests, plus
- out-of-the-money convertible securities, minus
- certain assets not related to the company's core businesses, minus
- investments in unconsolidated affiliates and cash.
For each of the comparable competitive local telephone companies, Salomon
Smith Barney derived the ratio of adjusted firm value to each of:
- revenue for 2000, based on an annualization of revenue for the latest
quarter for which results were available,
- estimated revenue for 2000,
- estimated revenue for 2001,
- estimated revenue for 2002,
- estimated growth-adjusted revenue for 2000,
- estimated growth-adjusted revenue for 2001,
- estimated growth-adjusted revenue for 2002,
- net property, plant and equipment, and
- number of access lines.
Estimated growth-adjusted revenue for any year is the estimated revenue for that
year multiplied by the estimated compound annual growth rate over the next two
succeeding years. With respect to the comparable competitive local telephone
companies, Salomon Smith Barney used revenue estimates contained in publicly
available research reports published by various investment banks.
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The following tables set forth the results of these analyses:
<TABLE>
<CAPTION>
RATIO OF ADJUSTED
FIRM VALUE TO: RANGE MEAN MEDIAN
----------------- ---------------- ------- -------
<S> <C> <C> <C>
Revenue(1)............................................... 3.3x - 47.2x 18.7x 16.1x
2000 Estimated Revenue................................... 3.7x - 23.0x 11.7x 10.9x
2001 Estimated Revenue................................... 2.3x - 12.1x 5.5x 4.0x
2002 Estimated Revenue................................... 1.6x - 7.3x 3.3x 2.7x
2000 Estimated Growth-Adjusted Revenue................... 6.9x - 29.5x 13.6x 11.9x
2001 Estimated Growth-Adjusted Revenue................... 4.0x - 20.3x 10.0x 9.5x
2002 Estimated Growth-Adjusted Revenue................... 2.7x - 16.0x 7.6x 6.9x
Net Property, Plant and Equipment........................ 6.3x - 18.5x 10.5x 9.3x
Access Lines............................................. $3,701 - $35,576 $14,728 $12,839
</TABLE>
-------------------------
(1) Based on an annualization of revenue for the latest quarter for which
results were available.
Based upon this analysis and using projected financial information provided
by the management of TriVergent and Gabriel, respectively, Salomon Smith Barney
derived ranges of implied firm value and the implied value of the equity
securities of TriVergent and Gabriel as set forth in the following table.
Salomon Smith Barney derived the implied value of the equity securities of each
company by adjusting that company's implied firm value by subtracting debt and
minority interests and adding cash, marketable securities held by the company
and the proceeds expected to be received from the exercise of options and
warrants.
<TABLE>
<CAPTION>
TRIVERGENT GABRIEL
--------------- ---------------
(IN MILLIONS)
<S> <C> <C>
RANGE OF IMPLIED FIRM VALUE................... $450.0 - $550.0 $300.0 - $375.0
RANGE OF IMPLIED EQUITY VALUE................. $501.7 - $601.7 $523.0 - $598.0
</TABLE>
Based on the derived value of the equity securities of each company,
Salomon Smith Barney derived an implied range of the ownership of Gabriel's
stockholders in the combined company of 46.5% to 54.5%. Salomon Smith Barney
noted that the 54% equity interest in the combined company of the current
Gabriel stockholders expected to result from the merger is within that range,
which supported the conclusion that the consideration to be paid in the merger
was fair, from a financial point of view, to Gabriel.
Discounted Cash Flow Analysis. Salomon Smith Barney used a discounted cash
flow methodology to derive ranges of firm value and the implied value of the
equity securities of each of TriVergent and Gabriel. The purpose of this
analysis was to derive the value of each company's equity securities by
considering the value today of the company's expected future cash flows over a
certain number of years and the company's "terminal" value at the end of that
period. By doing that, Salomon Smith Barney could then compare the ownership
percentage of Gabriel's stockholders in the combined company implied by those
equity values with the expected pro forma fully diluted equity interest in the
combined company of the current Gabriel stockholders expected to result from the
merger.
In this analysis, Salomon Smith Barney assumed a weighted average cost of
capital ranging from 13.5% to 17.5% to derive for each of TriVergent and Gabriel
the present value as of June 30, 2000 of projected free cash flows for the ten
fiscal years from 2000 through 2009 plus each company's terminal value at the
end of fiscal 2009. Terminal values for each company were based on a range of
8.0x to 12.0x projected earnings before interest, taxes, depreciation and
amortization, or EBITDA, for 2009. In particular, Salomon Smith Barney focused
on the results obtained by utilizing a weighted average cost of capital ranging
from 14.5% to 16.5% and terminal values ranging from to 9.0x to 11.0x projected
EBITDA for 2009. Salomon Smith Barney derived the implied value of the equity
securities of each company by adjusting that company's implied firm value by
subtracting debt and minority interests and adding cash, marketable securities
held by the company and the proceeds expected to be received from the exercise
of options and warrants.
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In deriving ranges of firm value and equity value for TriVergent, Salomon
Smith Barney performed the discounted cash flow analysis using both management
projections provided by TriVergent and management projections adjusted to
reflect more conservative near-term growth of TriVergent's business, more
conservative access line growth and a more rapid shift away from resale revenues
than were reflected in TriVergent's management projections.
In deriving ranges of firm value and equity value for Gabriel, Salomon
Smith Barney performed the discounted cash flow analysis using both management
projections provided by Gabriel and management projections adjusted to reflect
more conservative near-term revenue growth, more rapidly declining prices and
lower margins than were reflected in Gabriel's management projections.
Based upon this analysis, Salomon Smith Barney derived the ranges of firm
value and the implied value of the equity securities of TriVergent and Gabriel
as set forth in the following table:
<TABLE>
<CAPTION>
TRIVERGENT GABRIEL
---------------------------- --------------------------------
MANAGEMENT ADJUSTED MANAGEMENT ADJUSTED
CASE CASE CASE CASE
------------- ----------- --------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
RANGE OF IMPLIED FIRM VALUE......... $710 - $1,078 $583 - $875 $ 885 - $1,320 $748 - $1,127
RANGE OF IMPLIED EQUITY VALUE....... $762 - $1,130 $635 - $927 $1,108 - $1,543 $971 - $1,350
</TABLE>
Based on the range of the implied equity value of each company, Salomon
Smith Barney derived ranges of the implied equity ownership of Gabriel's
stockholders in the combined company of 49.5% to 67.0% under the management case
and 51.2% to 68.0% under the adjusted case. Salomon Smith Barney noted that the
54% equity interest in the combined company of the current Gabriel stockholders
expected to result from the merger is within those ranges, which supported the
conclusion that the consideration to be paid in the merger was fair, from a
financial point of view, to Gabriel.
The preceding discussion is a summary of the material financial analyses
performed by Salomon Smith Barney in the course of evaluating the fairness of
the consideration to be paid in the merger. The preparation of financial
analyses and fairness opinions is a complex process involving subjective
judgments and is not necessarily susceptible to partial analysis or summary
description. Salomon Smith Barney made no attempt to assign specific weights to
particular analyses or factors considered, but rather made qualitative judgments
as to the significance and relevance of all the analyses and factors considered
and determined to give its fairness opinion as described above. Accordingly,
Salomon Smith Barney believes that its analyses, and the summary set forth
above, must be considered as a whole, and that selecting portions of the
analyses and of the factors considered by Salomon Smith Barney, without
considering all of the analyses and factors, could create a misleading or
incomplete view of the processes underlying the analyses conducted by Salomon
Smith Barney and its opinion. With regard to the comparable companies analyses
summarized above, Salomon Smith Barney selected comparable public companies on
the basis of various factors, including the size and similarity of the line of
business; however, no company utilized as a comparison in these analyses is
identical to TriVergent or Gabriel. As a result, these analyses are not purely
mathematical, but also take into account differences in financial and operating
characteristics of the subject companies and other factors that could affect the
transaction or public trading value of the subject companies to which TriVergent
and Gabriel are being compared. In its analyses, Salomon Smith Barney made
numerous assumptions with respect to TriVergent, Gabriel, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of TriVergent and Gabriel. Any estimates
contained in Salomon Smith Barney's analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by these analyses.
Estimates of values of companies do not purport to be appraisals or necessarily
to reflect the prices at which companies may actually be sold. Because these
estimates are inherently subject to uncertainty, none of TriVergent, Gabriel,
the Gabriel board of directors, Salomon Smith Barney or any other person assumes
responsibility if future results or actual values differ materially from the
estimates. Salomon Smith Barney's analyses were prepared solely as part of
Salomon Smith Barney's analysis of the fairness of the exchange ratio in the
merger. The opinion of Salomon Smith
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Barney was only one of the factors taken into consideration by Gabriel's board
of directors in making its determination to approve the merger agreement and the
merger.
Salomon Smith Barney is an internationally recognized investment banking
firm engaged in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions, restructurings,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Gabriel selected Salomon
Smith Barney to act as its financial advisor on the basis of Salomon Smith
Barney's international reputation and Salomon Smith Barney's familiarity with
Gabriel. In the ordinary course of its business, Salomon Smith Barney and its
affiliates may actively trade or hold the securities of both Gabriel and
TriVergent for its own account and for the account of customers and,
accordingly, may at any time hold a long or short position in those securities.
Salomon Smith Barney and its affiliates, including Citigroup Inc. and its
affiliates, may maintain relationships with Gabriel and TriVergent and their
respective affiliates.
Pursuant to Salomon Smith Barney's engagement letter, Gabriel agreed to pay
Salomon Smith Barney fees for its services rendered in connection with the
merger in the amounts of $250,000, which was payable when the merger agreement
was executed, and $3.0 million, which will become payable when the merger is
completed. Gabriel has also agreed to reimburse Salomon Smith Barney for its
reasonable travel and other out-of-pocket expenses incurred in connection with
its engagement, including the reasonable fees and disbursements of its counsel,
and to indemnify Salomon Smith Barney against specific liabilities and expenses
relating to or arising out of its engagement, including liabilities under the
federal securities laws.
INTERESTS OF TRIVERGENT DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
INTRODUCTION. Some of the members of TriVergent's board of directors and
executive officers may have interests in the merger that are different from or
in addition to the interests of stockholders of TriVergent generally. These
additional interests relate to, among other things, the effect of the merger on
employment and benefit arrangements to which directors and executive officers
are parties or under which they have rights. These interests, to the extent
material, are described below. The TriVergent board of directors was aware of
these interests and considered them, among other things, prior to approving the
merger agreement.
EMPLOYMENT AGREEMENTS. TriVergent has entered into employment agreements
with the following members of senior management of TriVergent that contain
vesting provisions that are triggered by a change in control of TriVergent:
<TABLE>
<CAPTION>
NAME POSITION
---- --------------------------------------------------------
<S> <C>
Charles S. Houser......................... Chief Executive Officer
G. Michael Cassity........................ President and Chief Operating Officer
J. W. Adams............................... Senior Vice President of Network Engineering
Shaler P. Houser.......................... Senior Vice President of Corporate Development and
Strategy
Ronald N. Kirby........................... Senior Vice President of Network Customer Operations
G. Randolph McDougald..................... Senior Vice President of Marketing
Clark H. Mizell........................... Senior Vice President and Chief Financial Officer
Riley M. Murphy........................... Senior Vice President of Law, General Counsel and
Secretary
Vincent M. Oddo........................... Senior Vice President and Chief Information Officer
Russell W. Powell......................... Senior Vice President of Sales
Judith C. Slaughter....................... Senior Vice President of Customer Operations
</TABLE>
Except for the agreement with Mr. Cassity, these agreements provide that:
- if employment is terminated by TriVergent, other than for cause, prior to
and in connection with a change in control, which would include the
merger, the employee is entitled to salary and benefits for the balance
of the term of the agreement;
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- if the employee is terminated after a change in control, the employee is
entitled to salary and benefits for periods ranging from 12 to 24 months
following the change in control; and
- the employee will receive an additional amount, on an after-tax basis, to
compensate for any taxes imposed by the U.S. federal income tax laws in
relation to the termination payments.
Mr. Cassity's employment agreement provides that if he resigns for "good
reason," as defined in the agreement, prior to a change in control, he is
entitled to salary, bonus and benefits for the greater of one year from
termination or two years after the date of the employment agreement. If he
resigns for good reason after a change in control, he is entitled to salary,
bonus, $50,000 in discretionary funds and benefits for the greater of one year
from termination or three years after the date of the employment agreement. In
addition, Mr. Cassity's employment agreement provides for a liquidity bonus upon
the sale of TriVergent equal to $500,000 if the consideration paid for
TriVergent is between $500 million and $750 million or $750,000 if the
consideration paid for TriVergent is at least $750 million. Based on the merger
consideration, Mr. Cassity will not be entitled to this liquidity bonus as
result of the merger.
By letter agreement, all but two members of TriVergent's senior management
with employment agreements have agreed that the merger shall not be treated as a
change of control under their employment agreements and that the merger shall
not be treated as an event resulting in the acceleration of exercise rights
under their options granted under the TriVergent employee incentive plan. In
exchange for this agreement, these persons will receive, in exchange for their
TriVergent options, Gabriel options with a three year, rather than a five year,
vesting schedule from the date of the original grant of their TriVergent
options. In addition, their options may fully vest and become fully exercisable
in accordance with their terms if any of the following occurs within one year
following the effective time of the merger:
- a diminution or reduction of such holder's responsibilities, position,
authority, duties or compensation from those in effect immediately prior
to the effective time of the merger,
- a relocation of 50 miles or more of such employee's work location or
- a termination of the employment of such employee without cause.
INDEMNIFICATION. All rights of indemnification from liabilities existing in
favor of the current and former directors, officers, employees and agents of
TriVergent and its subsidiaries as provided in their certificates of
incorporation and by-laws will be assumed by the surviving corporation in the
merger, and will continue in full force and effect in accordance with the terms
of the certificate of incorporation and by-laws of the surviving corporation.
EFFECTS OF THE MERGER ON EMPLOYEE INCENTIVE PLAN. Under the terms of
TriVergent's employee incentive plan, the merger would cause all options
outstanding under the plan to become fully vested and immediately exercisable.
However, as discussed above, by letter agreement, officers and employees of
TriVergent holding in the aggregate 73.31% of options outstanding as of the date
of the merger agreement have agreed that the merger shall not be treated as an
event resulting in an acceleration of exercise rights under the TriVergent
employee incentive plan.
OTHER MERGER AGREEMENT PROVISIONS. The merger agreement also contains the
following additional provisions applicable to TriVergent senior management,
including:
- following the effective time of the merger, Gabriel has agreed to
maintain existing TriVergent employee benefits or replace TriVergent
benefits with comparable Gabriel benefits provided that, in the
aggregate, the terms offered to the TriVergent employees are no less
favorable than the aggregate benefits provided to similarly situated
employees of Gabriel and all pre-existing condition limitations, to the
extent such limitations did not apply to a pre-existing condition under
the benefit plans of TriVergent, will be waived with respect to these
participants and their eligible dependents;
- Gabriel has agreed to recognize, for TriVergent employees, credit for
years of service with TriVergent or any of the TriVergent subsidiaries
prior to the merger for purposes of eligibility and vesting to the extent
that service was recognized under the benefit plans of TriVergent;
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- Gabriel has agreed to honor the employment agreements of TriVergent's
current executive officers and employees; and
- Gabriel or the surviving corporation in the merger will offer employment
on mutually agreeable terms to all employees of TriVergent employed as of
the effective time of the merger.
INTERESTS OF GABRIEL DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
No members of Gabriel's board of directors or executive officers of Gabriel
have any interests in the merger that are different from or in addition to the
interests of stockholders of Gabriel generally.
ACCOUNTING TREATMENT
Gabriel and TriVergent intend to account for the merger using the
"purchase" method of accounting for financial reporting and accounting purposes,
in accordance with generally accepted accounting principles. After the merger,
the consolidated results of operations of TriVergent will be included in the
consolidated financial statements of Gabriel. The aggregate merger consideration
will be allocated based on the fair values of the assets acquired and the
liabilities assumed. Any excess of cost over fair value of the net tangible
assets of TriVergent acquired will be recorded first as identifiable intangible
assets and then, to the extent unallocated, as an unidentified intangible asset
or "goodwill." A final determination of the intangible asset lives and required
purchase accounting adjustments, including the allocation of the purchase price
to the assets acquired and liabilities assumed based on their respective fair
values, has not yet been made. See "Unaudited Pro Forma Condensed Combined
Financial Statements of Gabriel and TriVergent" on page 20.
U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following is a description of the material U.S. federal income
tax consequences of the merger to holders of shares of TriVergent preferred
stock, common stock, options and warrants as well as the distribution of
warrants to purchase Gabriel common stock to holders of shares of Gabriel
preferred stock. To the extent indicated below, the following sets forth the
respective opinions of Bryan Cave LLP, counsel to Gabriel, and Cravath, Swaine &
Moore, counsel to TriVergent.
This description, including the respective opinions, is based upon current
law and is subject to the qualifications contained therein. The description
assumes that the holders hold their TriVergent stock, options or warrants or
Gabriel preferred stock as capital assets within the meaning of Section 1221 of
the Internal Revenue Code.
This description does not purport to address all aspects of U.S. federal
income taxation that may be relevant to a particular holder of TriVergent stock,
options or warrants or Gabriel preferred stock. In particular, it does not apply
to holders entitled to special treatment under U.S. federal income tax law,
including, without limitation, dealers in securities, tax-exempt organizations,
banks or other financial institutions, trusts, insurance companies, persons that
hold TriVergent stock, options or warrants or Gabriel preferred stock as part of
a straddle, a hedge against currency risk or as a constructive sale or
conversion transaction, persons that have a functional currency other than the
United States dollar, investors in pass-through entities and foreign persons,
including foreign individuals, partnerships and corporations. This description
also does not describe tax consequences arising out of the tax laws of any
state, local or foreign jurisdiction.
Further, this description does not purport to address the U.S. federal
income taxation of holders of TriVergent stock or Gabriel preferred stock who
acquired such securities as compensation or holders of TriVergent warrants who
acquired such warrants other than pursuant to the borrowing of money from such
holders by TriVergent.
HOLDERS OF TRIVERGENT STOCK, OPTIONS AND WARRANTS AND GABRIEL PREFERRED
STOCK ARE URGED TO CONSULT THEIR TAX ADVISOR AS TO SPECIFIC TAX CONSIDERATIONS
OF THE MERGER AND DISTRIBUTION OF THE GABRIEL WARRANTS,
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INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN TAX
LAWS IN THEIR PARTICULAR CIRCUMSTANCES.
CONSEQUENCES OF THE MERGER. In the opinions of Bryan Cave LLP, counsel to
Gabriel, and Cravath, Swaine & Moore, counsel to TriVergent, under current law
- the merger will qualify as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code,
- Gabriel, TriVergent and Triangle Acquisition, Inc. will each be a "party
to a reorganization" within the meaning of Section 368(b) of the Internal
Revenue Code, and
- no income, gain or loss will be recognized by Gabriel, TriVergent or
Triangle Acquisition, Inc. as a result of the merger.
The opinions of Bryan Cave LLP and Cravath, Swaine & Moore are on file with
the SEC as exhibits to the registration statement of which this information
statement/prospectus is a part. These opinions are subject to qualifications set
forth herein and assume that the merger is consummated in accordance with the
terms of the merger agreement and as described in this information
statement/prospectus. These opinions also assume that the representations and
assumptions set forth in certificates of officers of Gabriel and TriVergent are
true, correct and complete as of the date hereof and will be true, correct and
complete at the effective time of the merger. These opinions are based on the
Internal Revenue Code, Treasury regulations promulgated thereunder and in effect
as of the date hereof, current administrative rulings and practice, and judicial
precedent, all of which are subject to change, possibly with retroactive effect.
Any change in law or failure of the factual representations and assumptions to
be true, correct and complete in all material respects could alter the tax
consequences discussed herein.
The parties will not request and the merger is not conditioned upon a
ruling from the Internal Revenue Service as to any of the U.S. federal income
tax consequences of the merger or the distribution of the Gabriel warrants. As a
result, there can be no assurance that the Internal Revenue Service will not
disagree with or challenge any of the conclusions set forth in this discussion.
CONSEQUENCES TO HOLDERS OF TRIVERGENT STOCK, OPTIONS AND WARRANTS. This
section sets forth the opinion of Cravath, Swaine & Moore, counsel to
TriVergent, as to the U.S. federal income tax consequences of the merger to
holders of TriVergent stock, options and warrants.
Exchange of TriVergent Common Stock. Holders of TriVergent common stock who
exchange their TriVergent common stock for Gabriel common stock in the merger
will not recognize gain or loss, except with respect to cash, if any, they
receive instead of a fractional share of Gabriel common stock. Each holder's
aggregate tax basis in the Gabriel common stock received in the merger will be
the same as his or her aggregate tax basis in the TriVergent common stock
surrendered in the merger, decreased by the amount of any tax basis allocable to
any fractional share interest in Gabriel common stock for which cash is
received. The holding period of the Gabriel common stock received in the merger
will include the holding period of the TriVergent common stock surrendered in
the merger.
Exchange of TriVergent Compensatory Options. Holders of options to acquire
TriVergent common stock who acquired such options pursuant to the TriVergent
Corporation Employee Incentive Plan will not recognize income, gain or loss on
the exchange of such options for options to acquire Gabriel common stock.
Exchange of TriVergent Warrants. Holders of warrants to acquire TriVergent
common stock who acquired such warrants pursuant to the borrowing of money from
such holder by TriVergent will not recognize income, gain or loss on the
exchange of such warrants for warrants to acquire Gabriel common stock. Holders
who otherwise acquired warrants to acquire TriVergent common stock should
consult their tax advisor as to specific tax considerations of the exchange for
warrants to acquire Gabriel common stock.
Exchange of TriVergent Preferred Stock. Holders of TriVergent preferred
stock who exchange their TriVergent preferred stock for Gabriel preferred stock
and Gabriel warrants in the merger will not
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recognize gain or loss, except with respect to cash, if any, they receive
instead of a fractional share of Gabriel preferred stock. Each holder's
aggregate tax basis in the Gabriel preferred stock and Gabriel warrants received
in the merger will be the same as his or her aggregate tax basis in the
TriVergent preferred stock surrendered in the merger, decreased by the amount of
any tax basis allocable to any fractional share interest in Gabriel preferred
stock for which cash is received. The aggregate tax basis will be allocated
between the Gabriel preferred stock and the Gabriel warrants in proportion to
the respective fair market values of the preferred stock and warrants. The
holding period of the Gabriel preferred stock and Gabriel warrants received in
the merger will include the holding period of the TriVergent preferred stock
surrendered in the merger. If the Gabriel warrants lapse unexercised, the holder
will recognize capital loss with respect to the warrants to the extent of the
tax basis allocated thereto.
Assuming the fair market value of the Gabriel warrants distributed is less
than 15% of the fair market value of the Gabriel preferred stock, it is possible
that no basis would be allocated to the Gabriel warrants unless the holder files
an election to so allocate under applicable regulations, as discussed below. In
that event, even if the election is made, if the Gabriel warrants were to lapse
unexercised, the holder would not recognize any loss with respect to the
warrants. Rather, any tax basis would be allocated back to the Gabriel preferred
stock.
Distribution of Additional Shares of TriVergent Preferred Stock or
TriVergent Common Stock As Payment of Preferred Holders' Accrued and Unpaid
Dividends. The distribution by TriVergent prior to the effective time of the
merger of shares of TriVergent preferred stock or TriVergent common stock to
holders of TriVergent preferred stock as payment of accrued and unpaid dividends
may be a taxable dividend to the extent of TriVergent's or Gabriel's current or
accumulated earnings and profits. It is expected that neither TriVergent nor
Gabriel will have earnings and profits at the time of the distribution or for
the taxable year.
Cash in Lieu of Fractional Shares; Dissenter's Rights. Each holder of
TriVergent common stock or TriVergent preferred stock who receives cash
- in lieu of a fractional share of Gabriel common or Gabriel preferred
stock or
- as a result of the exercise of the right to dissent from the merger,
assuming thereafter that, directly or indirectly, the holder owns no
Gabriel capital stock,
will recognize gain or loss equal to the difference between the amount of cash
received and the holder's allocable tax basis in stock exchanged for cash. That
gain or loss generally will constitute capital gain or loss. It will constitute
long-term gain or loss if the holder has held the TriVergent common stock or
TriVergent preferred stock for more than 12 months at the effective time of the
merger.
Backup withholding. Noncorporate holders of TriVergent common stock or
TriVergent preferred stock may be subject to backup withholding at a rate of 31%
on cash payments received upon exercise of dissenter's rights or received in
lieu of fractional shares of Gabriel common stock or Gabriel preferred stock.
Backup withholding will not apply, however, to a holder of TriVergent common
stock or TriVergent preferred stock who
- furnishes a correct taxpayer identification number and certifies under
penalty of perjury that he or she is not subject to backup withholding on
the substitute Form W-9 or any successor form included in the letter of
transmittal to be delivered to holders of TriVergent common stock or
TriVergent preferred stock following consummation of the merger,
- provides a certification of foreign status on Form W-8 or any successor
form, or
- is otherwise exempt from backup withholding.
Any amount withheld under these rules will be credited against the holder's U.S.
federal income tax liability.
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CONSEQUENCES TO HOLDERS OF GABRIEL PREFERRED STOCK. This section sets forth
the opinion of Bryan Cave LLP, counsel to Gabriel, as to the material U.S.
federal income tax consequences of the distribution of the Gabriel warrants to
the holders of Gabriel preferred stock.
The distribution of the Gabriel warrants should be treated as a nontaxable
distribution made in connection with a recapitalization reorganization. The
amendment to the Gabriel articles of incorporation which increases the per share
liquidation preference of the Gabriel preferred stock and adds an 8% accrual
thereto should constitute such a recapitalization. A warrant distribution in
connection with a recapitalization reorganization is not taxable unless the
distribution is pursuant to a plan to periodically increase a shareholder's
proportionate interest in the assets or earnings and profits of the corporation.
Because the distribution of warrants to holders of Gabriel preferred stock is
calculated according to such holder's proportion of invested capital in Gabriel
and TriVergent as of the effective time, the distribution should not be pursuant
to such a plan. Each holder's aggregate tax basis should be allocated between
the Gabriel preferred stock and the Gabriel warrants in proportion to the
respective fair market values of the preferred stock and warrants. The holding
period of the Gabriel warrants will include the holding period of the Gabriel
preferred stock on which such warrants are distributed. If the warrants lapse
unexercised, the holder will recognize capital loss with respect to the warrants
to the extent of the tax basis allocated thereto.
It is possible, assuming the fair market value of the Gabriel warrants
distributed is less than 15% of the fair market value of the Gabriel preferred
stock, that no basis would be allocated to the Gabriel warrants. However, the
holder may file an election to so allocate under applicable regulations. If this
election were made, such electing holder's tax basis would be allocated between
the Gabriel preferred stock and warrants in proportion to their respective fair
market values. In the event of such an election, if the Gabriel warrants were to
lapse unexercised, the holder will not recognize any loss with respect to such
warrants. Rather, any tax basis will be allocated back to the Gabriel preferred
stock.
The Internal Revenue Service might take the position that the distribution
of the Gabriel warrants constituted a taxable distribution or was pursuant to a
plan to periodically increase a shareholder's proportionate interest in the
assets or earnings and profits of Gabriel. In such case, a recipient of the
Gabriel warrants would recognize a dividend, taxable as ordinary income, in an
amount equal to the fair market value of the Gabriel warrants. The amount
recognized as a dividend would be limited to the extent of the current or
accumulated earnings and profits of Gabriel. To the extent that the amount of
the distribution exceeds the earnings and profits of Gabriel, the distribution
of the Gabriel warrants would be treated first as a tax-free return of capital
to the extent of the holder's tax basis in the Gabriel preferred stock, and
thereafter as capital gain. Gabriel does not anticipate having any current or
accumulated earnings and profits at the time of the distribution or for the
taxable year. Each holder would have a tax basis in the warrants received equal
to the fair market value of the warrants on the date of their distribution and a
holding period that begins on the day following the date of distribution of the
Gabriel warrants. If the Gabriel warrants lapse unexercised, the holder will
recognize capital loss with respect to the warrants to the extent of the tax
basis allocated thereto.
Upon a sale of the Gabriel warrants, the holder will recognize gain or
loss, if any, in an amount equal to the difference between the proceeds of such
sale and the tax basis, if any, allocated to such warrants. If the warrants are
exercised, the tax basis allocated to the warrants will be added to the tax
basis in the Gabriel common stock that the holder will receive as a result of
exercising the warrants. Upon exercise of the warrants, the holder would have a
holding period for the Gabriel common stock that begins on the day following the
date of exercise.
Adjustment of Conversion Price of Gabriel Preferred Stock. Section 305 of
the Internal Revenue Code treats as a distribution, taxable as a dividend to the
extent of the issuing corporation's current or accumulated earnings and profits,
certain actual or constructive distributions of stock with respect to stock,
stock rights or convertible securities. Certain adjustments in the conversion
ratio of stock, stock rights or convertible securities are considered
distributions of stock. For example, Treasury regulations treat holders of
preferred stock or stock rights as having received such a constructive
distribution where the conversion
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price of such preferred stock or stock rights is adjusted to reflect certain
taxable distributions with respect to the stock into which such preferred stock
or stock rights is convertible or exercisable. Adjustment of the conversion
rates at which the Gabriel preferred stock can be converted could cause the
holders thereof to be viewed as having received a deemed distribution taxable as
a dividend whether or not such holders exercise their conversion rights. An
adjustment to the number of shares of Gabriel common stock to be issued on the
exercise of a warrant may also be deemed to be a constructive distribution from
Gabriel.
THE TAX LAWS ARE COMPLEX, AND THE TAX CONSEQUENCES TO ANY PARTICULAR HOLDER
OF TRIVERGENT STOCK, OPTIONS OR WARRANTS OR GABRIEL PREFERRED STOCK MAY BE
AFFECTED BY MATTERS NOT DISCUSSED HEREIN. ACCORDINGLY, HOLDERS OF TRIVERGENT
STOCK, OPTIONS AND WARRANTS AND GABRIEL PREFERRED STOCK ARE URGED TO CONSULT
THEIR PERSONAL TAX ADVISOR CONCERNING THE APPLICABILITY TO THEM OF THE FOREGOING
DISCUSSION, AS WELL AS OF ANY OTHER TAX CONSEQUENCES OF THE MERGER.
REGULATORY MATTERS
UNITED STATES ANTITRUST. Under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 and related rules, the merger may not be completed unless waiting
period requirements have been satisfied. On June 15, 2000, Gabriel and
TriVergent each filed a Notification and Report Form with the Antitrust Division
of the Department of Justice and the FTC. The required waiting period under the
Hart-Scott-Rodino Act expired on July 10, 2000. In addition, stockholders of
TriVergent who will own in excess of $15 million in voting securities of Gabriel
as a result of the merger were required to furnish information to the Antitrust
Division and the FTC. These stockholders have each filed the required
notification and report forms with the Antitrust Division and the FTC, and their
respective waiting periods have expired. However, at any time before or after
the effective time of the merger, the Antitrust Division, the FTC or others
could take action under the antitrust laws. These parties may take action
seeking to prevent the merger, to rescind the merger or to conditionally approve
the merger upon the divestiture of substantial assets of Gabriel or TriVergent.
There can be no assurance that a challenge to the merger on antitrust grounds
will not be made or, if such a challenge is made, that it would not be
successful.
FCC. TriVergent also must receive the approval from the FCC for transfer of
control of its Section 214 international long distance authorization. TriVergent
has already filed an application seeking this approval.
STATE PUBLIC UTILITY COMMISSIONS. TriVergent also must receive the approval
of the merger from various state public utility commissions. TriVergent has
already received all material approvals.
GENERAL. It is possible that any of the governmental entities with which
filings are made may seek, as conditions for granting approval of the merger,
various regulatory concessions. We cannot assure you that
- Gabriel or TriVergent will be able to satisfy or comply with such
conditions,
- compliance or non-compliance will not have adverse consequences for
Gabriel or TriVergent after completion of the merger, or
- the required regulatory approvals will be obtained within the time frame
contemplated by Gabriel or TriVergent and referred to in this document or
on terms that will be satisfactory to Gabriel and TriVergent.
See "The Merger Agreement -- Conditions to Completion of the Merger."
APPRAISAL RIGHTS
Under Delaware law, holders of shares of TriVergent common stock and
preferred stock are entitled to exercise appraisal rights if they
- are holders of issued and outstanding shares of common stock or preferred
stock immediately prior to the effective time of the merger,
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- have not voted in favor of the merger nor consented thereto in writing
and
- have properly demanded their appraisal rights.
Shares to which appraisal rights are applicable will not be converted into the
right to receive the merger consideration unless and until such time as these
shares become ineligible for appraisal.
TriVergent stockholders who have not consented to the merger in writing
will receive, within 10 days of the effective date of the merger, notice that
the merger has been approved by written consent and that he or she is entitled
to appraisal rights. The notice will attach a copy of Section 262 of the General
Corporation Law of the State of Delaware pertaining to the appraisal rights of
TriVergent stockholders and will include the effective date of the merger.
Within 20 days of the mailing of the notice, any TriVergent stockholder who
is entitled to appraisal rights must notify the surviving corporation of the
merger in writing if he or she is demanding appraisal of his or her shares.
Within 120 days of the effective date of the merger, any TriVergent stockholder
who has not consented to the merger and who has made a written demand for
appraisal may file a petition with the Delaware Court of Chancery demanding a
determination of the value of the stock of all TriVergent stockholders entitled
to appraisal.
Also within 120 days of the effective date of the merger and upon written
request, any TriVergent stockholder demanding appraisal rights may request a
statement from the combined company setting forth the aggregate number of shares
not voted in favor of or consenting to the merger and with respect to which
demands for appraisal have been received and the aggregate numbers of holders of
these shares. This statement will be mailed within 10 days of the combined
company's receipt of the request for the statement or within 10 days after
expiration of the period for delivery of demands, whichever is later.
Within 60 days of the effective date of the merger, any TriVergent
stockholder may withdraw his or her demand for appraisal and accept the merger
consideration and other terms of the merger by providing written notice to the
combined company.
RESALE OF GABRIEL COMMON STOCK AND GABRIEL PREFERRED STOCK
This information statement/prospectus does not cover resales of Gabriel
common stock or preferred stock received by any person upon completion of the
merger or upon conversion of Gabriel preferred stock or exercise of any Gabriel
warrants or options issued in connection with the merger. No person is
authorized to make any use of this information statement/prospectus in
connection with any such resale. There is no established public trading market
for either the Gabriel or the TriVergent common or preferred stock. Gabriel has
not applied and does not intend to apply for listing or authorization for
quotation of its common or preferred stock on any securities exchange or any
quotation system in connection with the merger.
OWNERSHIP OF GABRIEL FOLLOWING THE MERGER
Based on the exchange ratio of 1.1071, TriVergent common and preferred
stockholders will receive 13,353,461 shares of Gabriel common stock and
38,935,617 shares of Gabriel preferred stock, respectively. This will represent
44.0% of all of the outstanding and committed shares of common and preferred
stock of the combined company. Holders of TriVergent options and warrants will
receive Gabriel options and warrants exercisable for 12,228,221 shares of
Gabriel common stock in the merger at the exchange ratio of 1.1071. Based on
those numbers, following the merger, former holders of TriVergent common and
preferred stock, options and warrants would beneficially own approximately 46.1%
of the shares of Gabriel stock, assuming all options and warrants outstanding
and issuable in connection with the merger, including the Gabriel $6.00 warrants
and $10.25 warrants, are fully exercised. Assuming the Gabriel $6.00 warrants
and $10.25 warrants were not issued in the merger and assuming full conversion
of all options and warrants, former TriVergent securityholders would have
beneficially owned approximately 47.7% of Gabriel stock following the merger.
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MATERIAL RELATIONSHIPS BETWEEN GABRIEL AND TRIVERGENT
As of the date of this information statement/prospectus, neither Gabriel
nor TriVergent is aware of any past, present or proposed material relationship
between Gabriel or any of its directors, executive officers or affiliates, on
the one hand, and TriVergent or any of its directors, executive officers or
affiliates, on the other hand, except as contemplated by the merger agreement
and except that some of the same financial institutions that are lenders to
TriVergent are also lenders to Gabriel.
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THE MERGER AGREEMENT
The following is a description of the material terms of the merger
agreement, a copy of which is attached as Annex A to this information
statement/prospectus. Gabriel and TriVergent encourage you to read the entire
merger agreement for details of the merger and the terms and conditions of the
merger agreement. The merger agreement is a legal document governing the merger
and related transactions, and in the event of any discrepancy between the terms
of the merger agreement and the following description, the merger agreement will
control.
STRUCTURE OF THE MERGER
Gabriel and TriVergent entered into the merger agreement on June 9, 2000.
Under the terms of the merger agreement, at the closing, TriVergent will be
merged with and into Triangle Acquisition, Inc., a newly formed Delaware
corporation and wholly owned subsidiary of Gabriel. Triangle will survive the
merger as a wholly owned subsidiary of Gabriel and be renamed TriVergent
Corporation. The merger will take place pursuant to the General Corporation Law
of the State of Delaware. Upon completion of the merger, TriVergent will cease
to exist, but the business of TriVergent will then be continued by Triangle as a
wholly owned subsidiary of Gabriel. In connection with the merger, the
certificate of incorporation and by-laws of the surviving corporation will be
amended. The directors and executive officers of Gabriel and the surviving
corporation will be those provided for in the merger agreement.
If the merger is completed, holders of TriVergent common stock, preferred
stock, warrants or options will no longer hold any interest in TriVergent other
than through their interest in shares of Gabriel common stock, preferred stock,
warrants or options, respectively. They will become stockholders or option or
warrant holders of Gabriel and their rights will be governed by Gabriel's
amended and restated certificate of incorporation and by-laws and by the laws of
the State of Delaware. See "Comparison of Rights of Stockholders of Gabriel and
TriVergent" beginning on page 142 for information about the relative rights of
stockholders of Gabriel and TriVergent.
EFFECTIVE TIME OF THE MERGER
The merger will become effective upon the filing of the signed certificate
of merger with the Secretary of State of Delaware, or at a later time as may be
specified in that document, in accordance with the laws of Delaware. The merger
agreement provides that the contracting parties will cause the certificate of
merger to be filed as soon as practicable after
- all required regulatory approvals have been obtained or taken and
- all other conditions to the consummation of the merger have been
satisfied or waived.
There can be no assurance that the conditions to the merger will be
satisfied. Moreover, the merger agreement may be terminated by either Gabriel or
TriVergent under various conditions as specified in the merger agreement.
Therefore, there can be no assurance as to whether or when the merger will
become effective.
ISSUANCE OF TRIVERGENT STOCK IN LIEU OF PAYMENT OF ACCRUED AND UNPAID DIVIDENDS
IMMEDIATELY PRIOR TO THE MERGER
The merger agreement provides that immediately prior to the effective time
of the merger, TriVergent will issue 814,210 additional shares of TriVergent
preferred stock, or to the extent there are not sufficient authorized shares of
TriVergent preferred stock, TriVergent common stock, at a price of $7.6776 per
share, in payment in full of all accrued and unpaid dividends on each series of
TriVergent preferred stock as of August 31, 2000, as set forth in the merger
agreement. These additional shares will be deemed outstanding for purposes of
determining the exchange ratio at the effective time of the merger in accordance
with the merger agreement. Holders of TriVergent preferred stock will not be
entitled to any dividends, and no dividends on any series of TriVergent
preferred stock will be deemed to have accrued during or been payable for any
period of time after August 31, 2000.
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WHAT SECURITYHOLDERS WILL RECEIVE IN THE MERGER
COMMON STOCK. TriVergent common stockholders will be entitled to receive
1.1071 shares of Gabriel common stock for each share of TriVergent common stock.
We refer to the number of shares of Gabriel stock into which one share of
TriVergent stock is converted as the "exchange ratio." The exchange ratio is
subject to appropriate adjustment in the event of any stock changes and
issuances prior to the effective time of the merger, as discussed below.
PREFERRED STOCK. TriVergent preferred stockholders will be entitled to
receive Gabriel preferred stock in exchange for shares of TriVergent preferred
stock. TriVergent preferred stockholders will be entitled to receive Gabriel
preferred stock as follows
- 1.1071 shares of Gabriel Series C-1 preferred stock for each share of
TriVergent Series A preferred stock,
- 1.1071 shares of Gabriel Series C-2 preferred stock for each share of
TriVergent Series B preferred stock, and
- 1.1071 shares of Gabriel Series C-3 preferred stock for each share of
TriVergent Series C preferred stock.
The Series C-1, C-2 and C-3 preferred stock will each be a new series of Gabriel
preferred stock and will have terms which are substantially identical to the
Series A, A-1 and B preferred stock, respectively, except as to the respective
conversion prices and liquidation preferences for each series, which liquidation
preferences will include a preferred return of 8% per annum from the date as of
which the accrued dividends on the TriVergent preferred stock will have been
paid.
GABRIEL $6.00 AND $10.25 WARRANTS. Each of the holders of TriVergent
preferred stock and each of the holders of Gabriel preferred stock will receive
warrants to purchase Gabriel common stock as follows. A holder of Gabriel or
TriVergent preferred stock will receive
- warrants to purchase Gabriel common stock at an exercise price of $6.00
per share for a period of one year following the effective time of the
merger. We refer to these warrants as the "one-year warrants," and
- warrants to purchase Gabriel common stock at an exercise price of $10.25
per share for a period of two years following the effective time of the
merger. We refer to these warrants as the "two-year warrants."
The number of one-year warrants that a particular holder of Gabriel or
TriVergent preferred stock will be entitled to receive will be calculated based
upon that investor's total invested capital as follows:
- the number 8,000,000 will be multiplied by a fraction
- the numerator of the fraction will equal the "total invested capital" of
the holder immediately prior to the effective time of the merger. "Total
invested capital" means the total dollar amount invested in shares of
TriVergent preferred stock or Gabriel preferred stock as of the
effective time of the merger, as shown on the books and records of
TriVergent or Gabriel, as the case may be, not including any accrued and
unpaid dividends which were invested in shares of TriVergent stock
immediately prior to the effective time of the merger as provided in the
merger agreement, and
- the denominator of the fraction will equal the sum of the total invested
capital of all holders of preferred stock in both TriVergent and Gabriel
at the effective time of the merger and the "total committed capital" of
all holders of shares of Series B preferred stock of Gabriel as of the
effective time of the merger. "Total committed capital" means the total
dollar amount committed to be invested in shares of Gabriel Series B
preferred stock as of the effective time of the merger as provided in
the "Gabriel Series B Purchase Agreement," as defined in the merger
agreement.
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The number of two-year warrants that a particular holder of Gabriel or
TriVergent preferred stock will be entitled to receive will be calculated based
upon that investor's total invested capital by multiplying 5,000,000 by the same
fraction.
After the effective time of the merger and at the time that a holder of
Gabriel Series B preferred stock that has committed to make a further investment
in additional shares of Gabriel Series B preferred stock purchases these shares,
that holder will receive additional Gabriel warrants allocated to the additional
dollar amount invested as determined in accordance with the formula described
above.
The exercise of any one-year warrants by a holder thereof is deemed to be
an exercise of all of the one-year warrants and two-year warrants held by that
holder. Gabriel, however, will not be obligated to issue any of the shares of
common stock that may be purchased upon such deemed exercise of the one-year and
two-year warrants until the holder has fully complied with the terms and
conditions of the warrant agreement, including, but not limited to, the full
payment of the purchase price prior to the expiration date of the warrants.
FRACTIONAL SHARES. No fractional shares of Gabriel common stock or Gabriel
preferred stock will be issued in the merger. Instead, if you would otherwise be
entitled to receive a fraction of a share, you will receive cash equal to the
product of the fraction multiplied by $7.00.
OPTIONS AND WARRANTS. Holders of outstanding and unexercised warrants and
options exercisable for shares of TriVergent common stock will be entitled to
receive warrants or options, as the case may be, to acquire on the same terms
and conditions, warrants or options, as the case may be, to purchase the number
of shares of Gabriel common stock determined by multiplying the number of shares
of TriVergent common stock subject to the warrants or options by the exchange
ratio, at an exercise price per share of Gabriel common stock equal to the
exercise price per share of the warrants or options divided by the exchange
ratio. For example, a holder of an option to purchase 10,000 shares of
TriVergent common stock at $2.40 per share would receive in exchange for this
option, at the 1.1071 exchange ratio, an option to purchase 11,071 shares of
Gabriel common stock at $2.17 per share.
The merger agreement provides additional terms relating to the conversion
of options including:
- The Gabriel options issued to any TriVergent employee holding TriVergent
options constituting "incentive stock options," as defined by Section 422
of the Internal Revenue Code, or nonqualified stock options granted
pursuant to the TriVergent Corporation Employee Incentive Plan who
acknowledges that the merger and the other transactions contemplated by
the merger agreement shall not be treated as an event resulting in an
acceleration of the exercise rights of the employee's options will
contain a three year vesting schedule from the date of original grant,
versus the five years currently provided for in the TriVergent options,
and the employee's options may fully vest and become fully exercisable in
accordance with their terms if one of the following three events occurs
within one year of the merger:
- a diminution or reduction of the employee's responsibilities, position,
authority, duties or compensation from those in effect immediately prior
to the effective time of the merger;
- a relocation of 50 miles or more of the employee's work location; or
- a termination of the employment of the employee without cause.
- Gabriel will take all corporate action necessary to assume and adopt, at
the effective time, the relevant plan under which the TriVergent options
were granted and to make sufficient reservation for issuance of Gabriel
common stock; and
- Gabriel and TriVergent will deliver, to those who should receive these
items, this information statement/prospectus and a form of agreement
providing for the acknowledgment by the option holder that the merger
shall not result in the acceleration of exercise rights under any
TriVergent option.
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POSSIBLE ADJUSTMENT OF THE EXCHANGE RATIO
In the event of any other changes in the outstanding equity securities of
either company during the period from September 30, 2000 to the effective time
of the merger, the exchange ratio will be adjusted so that Gabriel and
TriVergent security holders will own securities representing 54% and 46%,
respectively, of the fully diluted equity value of the combined company at the
effective time of the merger. By fully diluted equity value, we mean that all
shares of common stock and preferred stock, and all shares of common stock
issuable upon exercise of all in-the-money options and warrants, except for the
additional Gabriel warrants to be issued to TriVergent and Gabriel preferred
stockholders described below, outstanding at the effective time of the merger
are used to calculate the final exchange ratio. This fully diluted equity value
and in-the-money options and warrants have been calculated on the basis of the
$7.00 per share price.
In addition to shares, and options and warrants to purchase shares, of
Gabriel and TriVergent stock outstanding as of September 30, 2000, the exchange
ratio of 1.1071 assumes the following shares are outstanding for purposes of
calculating the exchange ratio:
- 814,210 shares of TriVergent preferred stock representing payment of
accrued and unpaid dividends as of August 31, 2000;
- 19,289,160 shares of Gabriel Series B preferred stock purchased and
committed to be purchased by holders of Gabriel Series B preferred stock;
and
- 1,214,285 shares of Gabriel Series B preferred stock committed to be
purchased by two lender participants in Gabriel's expanded senior secured
credit facility.
The number of shares of Gabriel common stock, preferred stock, warrants or
options to be issued in the merger will not increase or decrease due to
fluctuations in the value of these securities. In the event that the value of
Gabriel common stock decreases or increases prior to the effective time of the
merger, the value of Gabriel common stock to be received by TriVergent
stockholders in the merger would correspondingly decrease or increase.
TriVergent does not have "walk-away" rights and cannot terminate the merger
agreement because the value of Gabriel stock declines.
AMENDMENT OF GABRIEL CHARTER
At the effective time, Gabriel's amended and restated certificate of
incorporation will be amended to, among other things, state the terms of the new
Series C-1, C-2 and C-3 preferred stock, increase the authorized shares of
common stock and preferred stock to 400,000,000 and 200,000,000, respectively,
and to add a preferred return to the liquidation preferences of each series of
Gabriel preferred stock from the original issue date of the Series A, A-1 and B
preferred stock and from the date as of which dividends cease to accrue on the
TriVergent preferred stock, in the case of the Series C-1, C-2 and C-3 preferred
stock.
The proposed amended and restated certificate of incorporation of Gabriel
reduces the per share initial public offering price that will trigger automatic
conversion of the Gabriel preferred stock from $20.00 per share to $12.00 per
share, in each case, with aggregate proceeds of at least $50 million.
EXCHANGE OF TRIVERGENT STOCK CERTIFICATES; OTHER AGREEMENTS
Upon consummation of the merger, certificates representing outstanding
shares of TriVergent common stock or TriVergent preferred stock will no longer
represent any rights with respect to such stock but will be deemed to represent
only the right to receive the merger consideration into which such certificates
are convertible. No dividends, distributions or voting rights will apply to
outstanding certificates until the certificates and the applicable letters of
transmittal are surrendered and delivered.
However, under Delaware law if a holder of shares of TriVergent common or
TriVergent preferred stock has not voted for or consented to adoption of the
merger agreement and if appraisal rights have been properly demanded, then such
shares will not be converted into the right to receive the merger consideration
until such time as the holder of such shares becomes ineligible for such
appraisal.
As soon as practicable after the effective time, Gabriel will mail to each
holder of record of a certificate representing outstanding shares of TriVergent
common stock or preferred stock a letter of
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transmittal with instructions to be used by the stockholder in exchanging
certificates which, prior to the merger, represented shares of TriVergent common
or preferred stock.
The merger agreement provides that, by execution and delivery of a letter
of transmittal, each TriVergent stockholder will agree to become a party to
Gabriel's stockholders' agreement and registration rights agreement. In
addition, by such execution, delivery, surrender and exchange, persons
identified to Gabriel as employees of TriVergent will agree to acquire the
Gabriel securities subject to the restrictions contained in, and such person
will become a party to, the shareholders agreement by and among Gabriel and its
employee stockholders. These agreements are described in "Description of Gabriel
Capital Stock" beginning on page 134 below.
Upon the surrender of a TriVergent common or preferred stock certificate
together with a duly executed letter of transmittal and the other documents that
may be reasonably required, the holder of such certificate will be entitled to
receive a certificate representing the number of whole shares of Gabriel common
stock, or preferred stock and warrants, as the case may be. Moreover, after such
surrender and exchange, such record holder of the Gabriel securities will be
entitled to receive any dividends or other distributions declared on such
securities following the effective time of the merger, without interest.
VOTING AND CONSENT AGREEMENTS
On June 9, 2000, concurrently with the execution and delivery of the merger
agreement, holders of the TriVergent and Gabriel preferred stock and common
stock entered into voting agreements, pursuant to which they agreed, among other
things, to consent to or vote their shares of preferred stock and common stock
of either TriVergent or Gabriel, as the case may be, in favor of the merger
agreement and the transactions contemplated by the merger agreement.
Adoption of the merger agreement requires the affirmative vote or consent
of the holders of at least two-thirds of the total votes entitled to be cast by
holders of TriVergent common stock and TriVergent preferred stock, voting
together as a single class. In addition, adoption of the merger agreement
requires the affirmative vote or consent of
- holders of at least 75% of the outstanding shares of TriVergent Series A
preferred stock and the consent of Richland Ventures II, L.P. and First
Union Capital Partners, Inc.,
- holders of a majority of the outstanding shares of TriVergent Series B
preferred stock, and
- holders of a majority of the outstanding shares of TriVergent Series C
preferred stock if the consideration to be received by them in the merger
is valued at greater than $7.00 per share or consent of the holders of
more than two-thirds of the shares of TriVergent Series C preferred stock
if the consideration to be received by them in the merger is valued at
less than or equal to $7.00 per share.
Holders of more than ninety percent of the outstanding shares of TriVergent
Series A and Series B preferred stock and more than two-thirds of the
outstanding shares of TriVergent common and Series C preferred stock have agreed
to vote in favor of or consent to the adoption of the merger agreement.
Approval and adoption of the Gabriel charter amendment requires the
affirmative vote or consent of the holders of
- at least two-thirds of the outstanding shares of Gabriel common stock,
Gabriel Series A preferred stock, Gabriel Series A-1 preferred stock and
Gabriel Series B preferred stock, voting together as a class, and
- at least two-thirds of each series of Gabriel preferred stock, voting as
separate classes.
Approval of the acquisition of TriVergent by Gabriel pursuant to the merger
agreement requires the affirmative vote or consent of the holders of at least a
majority of the outstanding shares of Gabriel common and preferred stock, voting
together as a class.
Holders of a sufficient number of shares of each class of Gabriel stock
have agreed to vote in favor of or consent to the adoption of the Gabriel
charter amendment and the acquisition of TriVergent by Gabriel pursuant to the
merger agreement.
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EMPLOYEES AND EMPLOYEE BENEFIT PLANS
Gabriel has agreed that, after the effective time of the merger, it will
- maintain existing TriVergent employee benefits or replace TriVergent
benefits with comparable Gabriel benefits provided that, in the
aggregate, the terms offered to the TriVergent employees are no less
favorable than the aggregate benefits provided to similarly situated
employees of Gabriel and all pre-existing condition limitations, to the
extent these limitations did not apply to a pre-existing condition under
the benefit plans of TriVergent, shall be waived with respect to
TriVergent benefit plan participants and their eligible dependents,
- recognize, for TriVergent employees, credit for years of service with
TriVergent or any of the TriVergent subsidiaries prior to the merger for
purposes of eligibility and vesting to the extent their prior service was
recognized under the benefit plans of TriVergent,
- honor the employment agreements of TriVergent's current executive
officers and employees, and
- offer or cause the surviving corporation to offer employment on mutually
agreeable terms to all employees of TriVergent employed as of the
effective time of the merger.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains a number of representations and warranties
with respect to the past and current conduct of each of the respective
businesses of TriVergent and Gabriel. The representations and warranties of
Gabriel and TriVergent are parallel in all material respects and terminate at
the effective time of the merger. These representations and warranties relate to
- the corporate organization and good standing of Gabriel, TriVergent and
their respective subsidiaries,
- the capital structure of Gabriel and TriVergent and their respective
subsidiaries,
- the authorization, execution, delivery, performance and enforceability of
the merger agreement and related transactions,
- the absence of conflicts under articles or certificates of incorporation
or by-laws, contracts and laws,
- the receipt of required consents or approvals and the absence of
violations of any instruments or law,
- the absence of material litigation,
- the provision and preparation and accuracy of financial statements,
- the absence of events or changes that would have a material adverse
effect or other specified events or changes,
- compliance with laws,
- holding of all material permits and other authorizations required in
connection with the operation of the businesses of Gabriel and
TriVergent,
- the provision of a complete list of material contracts and the validity,
binding nature and absence of material breaches of such contracts,
- tax, employee benefit and labor matters,
- the absence of material undisclosed liabilities,
- compliance with all applicable environmental laws and absence of events
which may give rise to environmental liability,
- intellectual property matters,
- title to and condition of material personal property,
- the inapplicability of anti-takeover or business combination statutes to
TriVergent, and
- receipt by Gabriel and TriVergent of fairness opinions from its financial
advisors.
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COVENANTS
TriVergent and Gabriel also have agreed not to take actions specified in
the merger agreement without the prior written consent of the other party during
the interim between signing the merger agreement and effective time of the
merger. These actions are
- the conduct of their respective businesses outside the ordinary course of
business,
- the issuance of additional equity securities other than under specified
exceptions,
- the incurrence of additional debt or other obligations not provided for
in the current business plan of each company, other than, in each case,
liabilities or obligations which are not in excess of $1 million in the
aggregate, and
- the solicitation, initiation, encouragement or recommendation of any
other acquisition proposal.
In addition, in accordance with the merger agreement, Gabriel has called
for the purchasers of its Series B preferred stock to satisfy the second tranche
of their remaining Series B preferred stock subscription obligations in
accordance with the Series B preferred stock purchase agreement. Gabriel has
received approximately 67.5 million pursuant to this call in early October 2000.
Gabriel has also agreed that, no later than November 30, 2000, it will call for
these subscribers to satisfy the balance of their respective Series B preferred
stock subscription obligations. Pursuant to the terms of the Gabriel Series B
preferred stock purchase agreement, each purchaser is required to satisfy its
subscription obligation within 35 days after receiving these requests from
Gabriel, and in any event no later than December 31, 2000. In determining the
exchange ratio of 1.1071, Gabriel and TriVergent agreed that the remaining
unissued shares of Series B preferred stock subject to these subscription
obligations would be treated as if they were fully issued and outstanding.
CONDITIONS TO COMPLETION OF THE MERGER
Each party's obligations to effect the merger is subject to the
satisfaction or waiver of the following material conditions:
- Stockholder Approval. The requisite stockholder approvals necessary to
effect the merger and the amendment to the Gabriel charter will have been
obtained.
- No Injunction or Action. No legal action will have been taken and
remained effective by any court or other governmental authority, which
prohibits or prevents the consummation of the merger.
- Third-Party Consents and Governmental Approvals. All consents, as set
forth on schedules to the merger agreement, of any governmental authority
required for the consummation of the merger and the transactions
contemplated by the merger agreement will have been obtained. In
addition, each of Gabriel and TriVergent will have received consents for
the consummation of the transactions contemplated by the merger agreement
from third parties who have contractual rights to consent to the merger,
including TriVergent's bank lenders.
- Hart-Scott-Rodino Act. The waiting period applicable to the merger under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 will have
expired or earlier termination thereof will have been granted without any
material legal action that remained effective by applicable governmental
authorities. All waiting periods have expired.
- Securities laws. The registration statement on Form S-4, of which this
information statement/prospectus is part, will have been declared
effective, no stop order or proceeding suspending the effectiveness of
the registration statement will have been issued or threatened, and
Gabriel will have received all state securities law authorizations
necessary to consummate the transactions contemplated by the merger
agreement.
- Representations, Warranties and Performance. There will have been no
material breaches in the representations or warranties of the other party
set forth in the merger agreement. In addition, the other party to the
merger agreement will have performed and complied with all of its
covenants and agreements in the merger agreement in all material respects
and satisfied in all material respects all of the conditions required by
the merger agreement.
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- Tax Opinions. Each party will have received an opinion of counsel, based
on customary representations contained in certificates, to the effect
that, if conducted as indicated in the merger agreement, the merger will
qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code.
- Option Holder Agreements. TriVergent will have delivered, or cause to be
delivered, to Gabriel, agreements, that have been duly executed and
delivered in accordance with the merger agreement and any supporting
documentation as may be reasonably requested by Gabriel. These documents
will evidence the acknowledgment and agreement of holders of TriVergent
options representing not less than 85% of all TriVergent options held by
holders of TriVergent options to purchase at least 7,500 shares of
TriVergent common stock, excluding holders identified on a schedule to
the merger agreement, that the merger will not be treated as a change of
control resulting in the acceleration of exercise rights under their
options.
Gabriel and TriVergent cannot assure you that all of the conditions to the
merger will be satisfied or waived by the party permitted to do so.
TERMINATION
The merger agreement may be terminated, whether before or after approval by
the stockholders of TriVergent or Gabriel, by notice as provided in the merger
agreement, at any time prior to the effective time of the merger,
- by mutual written consent of TriVergent and Gabriel, duly authorized by
the board of directors of each,
- by either TriVergent or Gabriel if
- the merger shall not have been consummated on or before October 31,
2000, or any other date as may be agreed to by TriVergent and Gabriel;
provided, that, no party may terminate the merger agreement for this
reason if that party's breach of the agreement has caused or resulted in
the failure of the merger to occur on or before that date,
- any of the conditions specified in the merger agreement to both parties'
or that party's obligations under the merger agreement becomes incapable
of satisfaction prior to October 31, 2000, or
- the other party has breached or failed to perform, in any material
respect, any of its material covenants or agreements contained in the
merger agreement, subject to cure periods contained in the agreement.
In the event the merger agreement is terminated as described above, the
merger will be deemed abandoned and no party will be liable to another in
connection with the termination, except for liability for breach of the merger
agreement and except for any provisions relating to confidentiality, fees and
expenses and termination, which will survive any termination.
WAIVER AND AMENDMENT
The merger agreement may be amended, modified or supplemented only by a
written agreement among TriVergent, Gabriel and Triangle.
EXPENSES; GOVERNING LAW
Each of Gabriel and TriVergent will bear its own expenses it incurs in
connection with the merger whether or not the merger and the transactions
contemplated by the merger agreement are consummated. The merger agreement is
governed by the laws of the State of Delaware.
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THE GABRIEL BUSINESS
Gabriel Communications, Inc. is a rapidly growing integrated communications
and applications services provider. Gabriel offers its services through its own
facilities. Gabriel offers integrated communications products and services,
including
- local voice and data services,
- domestic and international long distance services,
- dedicated, high speed Internet access, web page hosting and domain name
services, and
- unified voice, e-mail and fax messaging and other advanced data services.
Gabriel targets its services primarily to small to mid-sized businesses, which
it believes represent approximately two-thirds of the business market for
telecommunications services and are generally underserved by the incumbent
telephone company.
Gabriel's mission is to be the leading integrated communications solutions
provider in selected U.S. markets, continuously redefining the way Gabriel's
customers communicate. In order to accomplish its objective, Gabriel is
deploying advanced, data-focused networks that enable it to provide its
customers with customized solutions for all of their voice, data, fax and video
communications requirements.
Gabriel offers its customers the convenience of meeting all of their
communications needs through one provider, with a single consolidated monthly
bill. Gabriel intends to distinguish itself as the leading provider of
integrated business communications solutions and services in selected U.S.
markets by providing
- a comprehensive suite of integrated voice, data, DSL, Internet and
browser-based products, services and applications,
- timely customer service initiation and changes, customized, accurate
billing and 24/7 network surveillance through its advanced, integrated
operations support systems, and
- personalized, responsive customer service through its locally based sales
forces and customer support personnel.
Gabriel was founded in June 1998 by a management team led by the late
Robert A. Brooks, a founder of several successful telecommunications companies,
including, most recently, Brooks Fiber Properties and CenCom Cable. Gabriel's
chairman and chief executive officer, David L. Solomon, is an experienced
telecommunications entrepreneur who most recently has served as a board member
and advisor to Diginet Americas, Inc. and executive vice president and chief
financial officer of Brooks Fiber. Gabriel's president and chief operating
officer and co-founder, Gerard J. Howe, has over 20 years of experience in the
telecommunications industry, including, most recently, Brooks Fiber and SBC
CableComms, U.K.
Since its inception in June 1998, Gabriel's principal activities have
consisted of
- developing its business plans,
- hiring management and other key personnel,
- designing its network architecture, operations support systems and other
back office systems,
- raising capital,
- acquiring equipment and facilities and deploying its network operations
control center,
- negotiating interconnection agreements,
- securing regulatory authorizations,
- commencing operations in its initial markets and
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- rolling out its bundled product offerings.
BUSINESS STRATEGY
Gabriel's strategic business plan includes the following components:
OFFER A COMPREHENSIVE, BUNDLED SUITE OF VOICE AND DATA PRODUCTS AND
SERVICES. Gabriel's integrated network platforms allow for the delivery of a
wide range of integrated telecommunications products and services. Gabriel
markets a comprehensive set of local and long distance voice services, as well
as dedicated, high speed Internet access and other basic and enhanced data
services supporting its customers' external and internal communications needs.
Gabriel bundles its local, long distance and Internet services to meet all of
the communications needs of its customers and provides its customers a single,
consolidated monthly bill. Gabriel's network technology also allows it to offer
innovative ways, such as its unified messaging and remote access services, for
customers to better manage their telecommunications requirements.
PRIMARILY TARGET SMALL TO MEDIUM-SIZED BUSINESS CUSTOMERS IN SECOND AND
THIRD TIER MARKETS. Gabriel is primarily targeting small to medium-sized
business customers because it believes these customers are increasingly seeking
integrated, cost-effective communications solutions delivered by a single
service provider. Gabriel believes these businesses generally are underserved by
the incumbent telephone companies largely because the incumbent providers devote
greater marketing focus on more profitable, larger businesses. In addition,
under the current regulatory environment, the incumbent providers generally
cannot offer long distance service in their regions and, thus, cannot bundle
local, long distance, data and Internet services. Gabriel also believes that
these providers often choose not to cannibalize their revenue bases with new
products and services that competitive providers are offering. Gabriel believes
that its targeted business customers are subjected to the cost and complexity of
utilizing multiple service providers, including local dial tone providers, long
distance carriers, Internet service providers and equipment integrators. Gabriel
also believes that small and medium-sized businesses are increasingly demanding
high-speed data and Internet services that provide them with access to critical
business information and enable them to communicate more effectively with
employees, customers, vendors and business partners. Gabriel is primarily
targeting second and third tier markets because it believes these markets are
also generally underserved by the incumbent telephone companies, who devote
greater marketing focus to larger markets. While competition from other
facilities-based competitive local telephone companies and integrated
communications providers is growing in many of these markets, Gabriel believes
that its ability to provide a comprehensive bundled suite of voice and data
products and services over its advanced, data-focused networks helps distinguish
Gabriel from many of the other competitive local telephone companies and
integrated communications providers in its markets.
DEPLOY NETWORKS IN A CAPITAL EFFICIENT MANNER. The recent significant
advancements in technology, coupled with changes in regulations, permit Gabriel
to more efficiently deploy the strategic elements of its networks and lease
those elements which are not essential or cost-effective for it to own or
control. Gabriel takes advantage of these opportunities in two ways:
DEPLOY PACKET-SWITCHED NETWORKS THAT ACCOMMODATE INTEGRATED HIGH SPEED
DATA AND VOICE TRANSMISSIONS. Gabriel's networks currently utilize both
asynchronous transfer mode packet-switching and traditional Class 5
voice-switching platforms at their core. Circuit-based switches, which
traditionally have been used in the public telephone network, establish a
dedicated channel for each communication, such as a telephone call for
voice or fax, maintain the channel for the duration of the call, and
disconnect the channel at the conclusion of the call. Packet-based
switches, on the other hand, format the information to be transmitted into
a series of shorter digital messages called "packets," consisting of a
portion of the complete message plus the addressing information to identify
the destination and return address. Packet switch-based networks can
commingle packets from several communications sources together
simultaneously onto a single channel, which allows for more efficient
network utilization and the transmission of more information through a
given communications channel. Asynchronous transfer mode, or "ATM," is a
packet-switching technology that was
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specifically developed to allow simultaneous switching and transmission of
integrated voice and data traffic at varying rates of transmission.
Gabriel's network architecture allows it to efficiently use various
transmission access elements to provide integrated voice and data services
over a single network platform.
Gabriel has initially deployed Class 5 voice switches to support a
complete range of voice services and the interfaces to the public switched
telephone network necessary for voice transmission. The public switched
telephone network is the worldwide voice telephone network accessible to
all persons with telephones and access privileges. Electronic interfaces
are hardware and software links connecting different equipment and
technologies that facilitate the transfer of voice or data transmissions to
and from the public switched telephone network. Gabriel has been working
closely with equipment vendors to support their efforts to develop more
advanced equipment that will allow Gabriel to offer a complete range of
voice services without the need for voice switches. Gabriel's network
architecture, which is designed to accommodate the high-speed transmission
of data with packet-switching technology at its core, allows it to
efficiently accommodate the increasing demands placed on telecommunications
networks by Internet and other data-focused applications without the
congestion and bottlenecking that the incumbent telephone companies are
experiencing on their circuit-switched networks. Gabriel's data-focused,
packet-switched networks also allow it to use network capacity more
efficiently by handling peak demand more effectively and avoiding network
congestion, and provide it the flexibility to deliver new and advanced,
integrated voice and data services that meet Gabriel's customers' changing
communications and business applications needs.
OBTAIN ACCESS TO ALL TARGETED BUSINESS CUSTOMERS IN EACH
MARKET. Initially, Gabriel has leased unbundled network and customer access
elements and various dedicated circuits from the incumbent telephone
company in each of its markets to provide access to its customers. This has
allowed Gabriel to
- avoid the time-consuming and costly process of overbuilding the
incumbent telephone company's network,
- reduce time to market, and
- provide access to the total addressable targeted customer base
in each market.
To further reduce its transmission costs and enable it to
cost-effectively address smaller business customers, Gabriel is
constructing approximately 175 collocation sites within incumbent telephone
company central offices in its initial 13 markets. The equipment in
Gabriel's collocation sites enables Gabriel to provide its voice and data
products and services over unbundled loops, DSL and other customer access
facilities, which it believes are less costly than leased dedicated
transmission facilities. Leased dedicated transmission facilities are
non-switched, point-to-point telecommunications lines leased from a
telecommunications provider and dedicated to, or reserved for use by, a
particular user along predetermined routes, in contrast to links which are
temporarily established.
ADD MARKETS ON A REGION BY REGION BASIS. Gabriel is rolling out its
networks and services in selected markets on a region by region basis, to enable
it to focus on compliance with the procedures of the incumbent telephone company
serving each region for order processing and provisioning of facilities. Gabriel
has entered into interconnection agreements with Southwestern Bell in Missouri,
Kansas, Oklahoma and Arkansas, with Ameritech in Illinois, Indiana and Ohio,
with Cincinnati Bell in Ohio and Kentucky, and with GTE and BellSouth in
Kentucky. Gabriel is currently negotiating additional interconnection agreements
with BellSouth in Tennessee and GTE in Oklahoma. Gabriel is certified as a
competitive local telephone company in Missouri, Kansas, Arkansas, Oklahoma,
Illinois, Indiana, Ohio, and Kentucky, and has applied for certification in
Tennessee and Texas.
PURSUE STRATEGIC BUSINESS RELATIONSHIPS AND ACQUISITIONS. In order to
capitalize on the increasing convergence of telecommunications technologies and
services and the competitive dynamics in the evolving telecommunications
industry, Gabriel intends to continue to pursue relationships with potential
strategic business partners to complement its business and allow it to
accelerate its market penetration, expand the
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scope of its product and service offerings and acquire additional experienced
personnel. In December 1999, Gabriel invested $2 million in convertible
preferred stock of Tachion Networks, Inc., and agreed to cooperate with Tachion
in the design and testing of its advanced switching equipment. In March 2000,
Gabriel acquired a 50% interest in WebBizApps, a provider of outsourced
web-enabled business applications and information technology services to small
and medium-sized businesses. Gabriel has agreed to acquire Shared Telcom
Services, Inc., an Indianapolis-based reseller of telecommunications voice and
data services, for $9.9 million in cash and assumption of approximately $750,000
of liabilities. Closing of the transaction is subject to receipt of Indiana
regulatory approval. Gabriel plans to serve the customers of Shared Telcom
Services from its Indianapolis network. Other potential strategic partners
include telecommunications providers in other markets, other applications
service providers, suppliers of database hosting services, Internet service
providers, cable operators, electric utilities and other complementary service
providers. Gabriel believes these relationships can help it in various ways,
including expanding the product and geographic scope of its business, obtaining
access to needed transmission capacity and equipment, leveraging its sales
channels and expanding its customer base.
USE DIRECT, LOCAL SALES AND MARKETING PERSONNEL. Gabriel has assembled an
experienced direct sales force to market to its targeted customer base through
face-to-face, personal interaction. Gabriel also has established agency
relationships with value added resellers to support the marketing efforts of its
direct sales force in each of its markets. Gabriel believes this approach gives
it a competitive advantage over the incumbent telephone companies in smaller
markets, where the incumbent telephone companies generally do not have a
significant local presence. Gabriel believes that its sales force's personal,
local interaction with its customers helps it establish strong customer
relationships, grow its customer base and reduce churn. Gabriel also supports
its sales force through local promotions and advertising.
LEVERAGE ADVANCED OPERATIONS SUPPORT SYSTEMS. Gabriel's advanced, automated
operations support systems and procedures are designed to provide rapid and high
quality throughput of customer and service order activity, customized accurate
billing and a superior level of customer service. Operations support systems are
systems required to enter, schedule, provision and track a customer's order from
the point of sale to the installation and testing of service and include trouble
management, inventory, billing, collection and customer service systems.
Throughput means the actual amount of useful and non-redundant information that
is transmitted to or processed by an automated system. Gabriel's operations
support systems provide it with complete business automation with the
scalability to permit it to leverage its investment as Gabriel grows its
business. Gabriel's management team has extensive experience in the design and
management of operations support systems. Gabriel has established relationships
with key third-party vendors, who have helped Gabriel to implement critical
portions of its operations support system modules developed to its
specifications. These critical information systems not only automate Gabriel's
customer care, provisioning and billing processes but also serve as critical
operational and reporting tools designed to highlight the status of all of its
network facilities, service order activity and customer account activity. The
databases created by these information systems are designed to allow Gabriel to
track its performance on all key operational standards. Gabriel believes its
operations support systems, by allowing it to provide superior, timely customer
service, customized, accurate billing and real-time system monitoring and
reporting, is critical to its business success.
ESTABLISH ELECTRONIC BONDING WITH THE INCUMBENT TELEPHONE COMPANIES IN EACH
MARKET. To improve the efficiency of its customer service initiation processes,
Gabriel is aggressively pursuing electronic bonding with the incumbent telephone
companies in each of its markets. Electronic bonding refers to the on-line and
real-time connection of Gabriel's operations support systems with those of
another carrier. Gabriel believes electronic bonding allows it to reduce its
costs, efficiently process customer orders and improve its customer care because
it is able to more readily identify any problems with a customer's service
order. Without electronic bonding with the incumbent telephone companies, the
service initiation process must be accomplished via fax and e-mail to the
incumbent telephone companies. This process creates numerous opportunities for
errors and delays in provisioning. Electronic bonding reduces errors and
decreases the time required to install and initiate customer service. Gabriel
established electronic bonding with Southwestern Bell, Ameritech and NeuStar's
local number portability database during the first half of
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2000 and expects to commence electronic bonding with additional incumbent
telephone companies and other trading partners during the second half of 2000.
AGGRESSIVELY IMPLEMENT NEW PRODUCTS AND SERVICES. Gabriel leverages the
flexible capabilities of its networks to deliver to its customers a wide range
of innovative products and services that provide comprehensive business
solutions that complement their communications requirements. Gabriel currently
provides a comprehensive bundled suite of local voice and data services,
domestic and international long distance services, dedicated, high-speed
Internet access, web page hosting, domain name services, unified voice, e-mail
and fax messaging, and other advanced data services. During 2000, Gabriel is
rolling out a variety of new products and services, including digital subscriber
line, or "DSL," Internet access, web design, remote access, e-commerce solutions
and voice conferencing. Gabriel also offers other business applications services
which may be hosted on servers in its data center to complement its product and
service offerings, including a variety of browser-based business applications
and enterprise planning solutions for human resources, sales, corporate
communications, project and accounting management, and other business functions.
LEVERAGE THE SIGNIFICANT TELECOMMUNICATIONS INDUSTRY EXPERIENCE OF THE
GABRIEL MANAGEMENT TEAM. Gabriel's management team has significant
telecommunications industry and entrepreneurial experience in emerging
telecommunications companies. Gabriel's Chairman and Chief Executive Officer,
David L. Solomon, was instrumental in the business development and success of
Brooks Fiber as its chief financial officer and executive vice president. Gerard
J. Howe, president and chief operating officer, has more than 20 years of
operational and financial experience in the telecommunications industry. The
members of Gabriel's management team have extensive experience in
telecommunications network management, provisioning, billing, customer service,
operations support system design and implementation, sales, marketing, finance,
and legal and regulatory affairs, including significant entrepreneurial
experience in emerging telecommunications companies.
GABRIEL'S NETWORK ARCHITECTURE AND TECHNOLOGY
Telecommunications technology has evolved considerably in the past several
years as a result of the increased demand for data services, which has been
driven in large part by the significant growth in Internet usage. The incumbent
telephone companies' traditional circuit-switched networks are becoming
increasingly congested as they try to cope with traffic demands for data
transmission services which often exceed the capacity of their networks. Gabriel
believes that the transmission of data places significant pressure on
traditional circuit-switched infrastructures, which were designed primarily to
handle voice transmissions. This creates significant business opportunities for
competitive providers who deploy networks specifically designed to handle both
voice and data transmissions and can accommodate the increasing demand for high
speed data transmission services, make more efficient use of their network
capacity, and enable them to provide packaged solutions to their customers.
Gabriel's network architecture provides a flexible platform on which to
offer basic and enhanced services. Gabriel's broadband network platforms allow
it to provide its customers with customized solutions for all of their voice,
data, fax and video communications requirements, including dedicated high speed
access to the Internet and other enhanced services applications. Gabriel
installs advanced ATM and traditional Class 5 circuit switching platforms and
related equipment in each of its markets in a Gabriel-leased hub facility.
Gabriel's voice switches are connected to the incumbent telephone company tandem
switch and long distance carriers' points of presence through leased fiber
trunks to provide voice services. Points of presence typically refer to the
physical locations where a long distance telephone company electronically
communicates and exchanges traffic with the network of a local telephone
company. High speed, fiber-based connections are placed between its ATM switches
and Internet service providers for Internet data traffic.
Gabriel's networks are designed to be transmission agnostic, meaning
Gabriel can utilize a variety of transmission facilities to reach its customers
through leased or owned transmission capacity, including dedicated access
facilities, unbundled loops and wireless transmission. Initially, Gabriel has
been leasing
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dedicated transmission capacity from incumbent telephone companies and
competitive local telephone companies in order to connect customers to its
switching platforms. With this leased transmission capacity, Gabriel was able to
quickly enter its initial markets, reduce its up-front investments in facilities
and cost-effectively access the entire customer base in each of its markets.
Gabriel is now collocating its access equipment within incumbent telephone
company central offices to allow it to deliver its services over unbundled
loops, DSL and other customer access facilities.
At its customer sites, Gabriel connects its leased transmission facilities
to a customer premise device that Gabriel owns, which allows for added features
and functionality and the efficient use of its leased facilities for the
transmission of voice and data traffic. This customer premise equipment is
purchased as needed to provision individual customers who have contracted for
its services.
The following diagram represents Gabriel's current network layout,
including equipment in incumbent telephone company central offices and at
customer premises.
GABRIEL NETWORK ARCHITECTURE
[GRAPH]
Gabriel's Class 5 voice switches provide the functionality to support basic
voice services as well as advanced features such as call forwarding, caller ID,
etc. The Class 5 switches also provide the needed interfaces to the public
switched telephone network using standard interfaces such as the SS7 signaling
network, as well as interfaces to other telecommunications service providers
such as 911 emergency agencies and operator services providers. As of September
30, 2000, Gabriel had installed 13 ATM data switches and nine voice switches in
its initial 13 networks.
Gabriel expects that, by the end of 2000, more advanced equipment will be
available that will include fully integrated data and voice routing in a single
switching platform. This platform will include asynchronous transfer mode
switching, complete voice functionality and signaling interfaces necessary to
switch traffic to and from the public switched telephone network. At that point,
Gabriel expects to be able to eliminate the need to install additional Class 5
circuit switches in its networks, further reducing its
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capital requirements and operating costs. The switching equipment developed by
Gabriel's strategic partner, Tachion Networks, known as the Fusion 5000(TM)
Collapsed Central Office, includes a signaling gateway that will allow
packet-switching network elements and service providers to interface directly to
the public switched telephone network. This switching equipment will also
support various legacy protocols without the need for separate circuit switches
and signaling interfaces. This equipment incorporates industry-standard
interfaces and combines the features of both asynchronous transfer mode packet-
switching and circuit switching networks in a single network platform.
The key components and characteristics of Gabriel's networks which utilize
the more advanced switching equipment will include
- a single switch installed in its hub site that combines transmission,
switching, routing and signaling technologies into the same network
platform,
- the capability to deliver a flexible range of high quality voice and data
services over a packet-switched network and add new services quickly and
efficiently,
- enhanced feature servers that support web-based access to services not
currently available from traditional circuit-switched telephone
companies, and
- integrated access devices that combine multiple service connections, such
as voice or local area network, into a single data stream connected to
the packet-switched network hub elements. A local area network is a
short-distance data communications network used to link computers and
peripheral devices under some form of standard control.
Gabriel believes this new network architecture will allow it to further
reduce its capital requirements and simplify its network operations by
delivering bundled voice and data services without deploying multiple overlay
networks. Gabriel is taking an active role in directing the development efforts
of Tachion Networks and other equipment suppliers to support this new network
architecture.
HOW GABRIEL DEPLOYS ITS NETWORKS
Gabriel is constructing its networks using what is generally referred to as
a "smart build" approach. In contrast to the traditional network build-out
strategy, under which carriers install their own telecommunications switch and
construct their own fiber optic networks in each market to reach customers,
Gabriel installs its own switch and then leases the transmission elements of the
network from the incumbent telephone companies or other providers. This strategy
specifically involves
- leasing existing incumbent telephone company connections throughout a
local market area, also called the "local loop," which connect customers
to the central offices or "hubs" of an incumbent telephone company
network, and
- leasing dedicated trunks or circuits from the incumbent telephone
companies or other fiber-based competitive local telephone companies.
This enables Gabriel to reach the entire customer base in its markets without
having to build network connections to each individual customer.
Initially, Gabriel has not constructed its own fiber optic networks.
Gabriel's network hubs are connected to a single incumbent telephone company
central office. From this central office, Gabriel leases dedicated transmission
facilities to connect to end user customers. At the customer site, the leased
facility is connected to customer premise equipment that is owned by Gabriel.
The customer premise equipment allows for added features and functionality, the
commingling of voice and data traffic and the efficient use of the leased
facilities.
To reduce its transmission costs and enable it to cost-effectively address
smaller business customers, Gabriel is constructing approximately 175
collocation sites within the incumbent telephone company central offices in its
initial 13 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,
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with the balance to be completed in 2001. In its initial markets, these
collocations will give it access to over 2.4 million business lines, or
approximately 75% of the business lines in these markets. Gabriel plans to build
additional collocation sites as it expands into additional markets. The
equipment in its collocation sites will enable it to provide its voice and data
products and services over unbundled loops, DSL and other customer access
facilities, which Gabriel believes are less costly than leased dedicated
transmission capacity. The equipment in its collocation sites will also
eliminate the need for customer premise equipment in some customer applications
because it will incorporate some of the features and functions of the customer
premise equipment Gabriel is currently using.
Once traffic volume justifies further investment, Gabriel may lease unused
fiber to which it can connect its electronic transmission equipment or construct
its own fiber networks. This unused fiber is known as "dark fiber" because it is
leased without the electronic equipment required to transmit traffic over the
fiber. Gabriel believes that dark fiber will be readily available in most of its
markets.
Gabriel believes that its smart-build approach offers a number of
advantages over the network build-out strategy of the fiber-based competitive
local telephone company by allowing Gabriel to
- accelerate its market entry by nine to 18 months through eliminating or
at least deferring the need for city franchises, rights-of-way and
building access permits,
- reduce its initial capital expenditures in each market, allowing Gabriel
to focus its capital resources on the critical areas of network
equipment, sales, marketing, and operations support systems, instead of
constructing extensive fiber optic transmission facilities to reach its
customers,
- improve its return on capital by generating revenue with a smaller
capital investment,
- defer capital expenditures for additional network assets until the time
when revenue generated by customer demand justifies such expenditures,
and
- address business customers throughout its target markets and not just in
those areas reachable by owned fiber transmission facilities.
GABRIEL'S PRODUCTS AND SERVICES
As each of its switching platforms becomes operational in a market, Gabriel
offers and provides customers in that market a broad array of integrated
telecommunications products and services. Gabriel currently offers the following
voice and data services on a stand-alone or bundled basis:
<TABLE>
<CAPTION>
TYPE OF SERVICE WHAT GABRIEL PROVIDES
--------------- ---------------------
<S> <C>
LOCAL SWITCHED....................... Gabriel offers a full complement of local switched services,
including local dial tone, 911, directory assistance and
operator-assisted calling. Gabriel also offers local number
portability and expanded local area calling plans that are
generally unavailable from the incumbent telephone company.
</TABLE>
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<TABLE>
<CAPTION>
TYPE OF SERVICE WHAT GABRIEL PROVIDES
--------------- ---------------------
<S> <C>
ADVANCED LOCAL FEATURES.............. The advanced software and equipment on its networks also
allows Gabriel to offer advanced local features to
supplement its local switched services, including
- three-way calling,
- speed dialing,
- call waiting,
- call forwarding,
- caller ID,
- last number redial,
- caller call-back,
- priority call,
- local and long distance account codes,
- 900 number blocking,
- hunting, which refers to a service that rolls over
calls to lines that are not busy,
- calling number delivery, also referred to as
automatic number identification and dialed number
identification service,
- direct inward dialing,
- voice conferencing,
- remote network access, and
- web-based account access.
LONG DISTANCE........................ Gabriel provides a full range of domestic, international and
toll-free long distance services, including
- "one-plus" outbound calling,
- inbound toll free,
- directory assistance,
- calling cards, and
- time-of-day routing and other enhanced features.
Gabriel purchases these services wholesale from long
distance carriers for resale to its customers.
DEDICATED ACCESS..................... Gabriel offers private line, dedicated access services to
customers who desire high capacity transmission connections
to interconnect multiple locations.
INTERNET............................. Gabriel offers dedicated, high speed Internet access
services, including DSL Internet access, as well as e-mail,
web page hosting and domain name services.
ADVANCED DATA SERVICES............... Gabriel offers high speed, digital packet-switched
transmission services, such as wide area network
interconnection and virtual private networks. Data services
include high-speed data file transfer, data network linking
and other enhanced services that use a variety of voice,
data and digital interface standards, including unified
voice mail, e-mail and fax messaging. Gabriel also offers
integrated services digital network and primary rate
interface services, which are services based on
international standards that allow two-way, simultaneous
voice and data transmission in digital formats over the same
transmission line and thereby reduce costs for end-users and
result in more efficient use of available facilities,
</TABLE>
Gabriel plans to introduce additional products and services during the
second half of 2000, including web design and e-commerce solutions.
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To complement its local, long distance and Internet services, Gabriel
offers comprehensive business solutions to customers interested in integrating
many of their critical business applications with their internal and external
communications capabilities. In March 2000, Gabriel invested $4.5 million in
WebBizApps, a joint venture with Solutech, Inc., a leading consulting and
training company specializing in building e-business solutions. WebBizApps
provides small and medium-sized businesses a comprehensive suite of tools to
unify their employees and streamline their company operations, all delivered via
an "any time, anywhere" Internet platform. Unlike traditional client-server
applications that are designed to run on a company's local area network, these
web-enabled tools run on Internet Information Server and Microsoft SQL7.0
databases. WebBizApps' products and features allow businesses to
cost-effectively lease commonly used business applications over the Internet
using the Microsoft Internet Explorer 5.0 browser or through the Palm VII
personal organizer or the Sprint PCS Wireless Internet Access telephone.
WebBizApps' applications include modules with associated management
reports, charts and features for:
- employee time and expense reporting,
- contact and sales channel management,
- employee database management,
- internal and external corporate communications,
- project tracking, and
- fixed asset accounting.
WebBizApps also offers templates for creating brochureware marketing web
sites and for basic business-to-consumer web sites. Gabriel believes these
business applications will further enhance its ability to leverage its broadband
network platforms and deliver its customers comprehensive solutions for all of
their data and voice communications requirements.
GABRIEL'S CURRENT MARKETS
The following table presents information concerning Gabriel's initial 15
markets:
<TABLE>
<CAPTION>
ESTIMATED BUSINESS
SWITCH AND ADDRESSABLE CUSTOMER
NETWORK BUSINESS ACCESS LINES APPROXIMATE INCUMBENT LOCAL
MSA(1) OPERATIONAL(2) LINES(3) IN SERVICE(4) POPULATION(5) EXCHANGE CARRIER
------ -------------- ----------- ------------- ------------- -------------------------------
<S> <C> <C> <C> <C> <C>
St. Louis, MO.......... 2Q99 554,315 4,722 2,548,238 Southwestern Bell
Springfield, MO........ 3Q99 57,000 2,263 296,345 Southwestern Bell
Kansas City, MO........ 3Q99 295,069 2,721 1,800,000 Southwestern Bell
Wichita, KS............ 3Q99 85,053 1,293 512,965 Southwestern Bell
Little Rock, AR........ 4Q99 89,376 1,415 548,352 Southwestern Bell
Tulsa, OK.............. 1Q00 120,268 1,687 756,493 Southwestern Bell
Oklahoma City, OK...... 1Q00 168,865 1,150 1,026,657 Southwestern Bell
Indianapolis, IN....... 2Q00 373,128 378 1,492,297 Ameritech
Akron, OH.............. 2Q00 164,271 417 680,142 Ameritech
Cincinnati, OH......... 3Q00 308,236 57 1,597,352 Cincinnati Bell; Sprint/United
</TABLE>
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<TABLE>
<CAPTION>
ESTIMATED BUSINESS
SWITCH AND ADDRESSABLE CUSTOMER
NETWORK BUSINESS ACCESS LINES APPROXIMATE INCUMBENT LOCAL
MSA(1) OPERATIONAL(2) LINES(3) IN SERVICE(4) POPULATION(5) EXCHANGE CARRIER
------ -------------- ----------- ------------- ------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Columbus, OH........... 3Q00 315,990 18 1,447,646 Ameritech
Dayton, OH............. 3Q00 147,087 5 950,661 Ameritech
Lexington, KY.......... 4Q00 77,209 -- 441,073 GTE
Louisville, KY(6)...... 4Q00 156,504 -- 991,765 BellSouth
Nashville, TN(6)....... 4Q00 186,091 -- 1,117,178 BellSouth
</TABLE>
-------------------------
(1) Metropolitan Statistical Areas.
(2) Quarter during which the network became or is planned to become commercially
operational, as the case may be.
(3) The addressable business lines referenced in the above table are Gabriel's
estimates based upon business line information obtained annually from PNR
and Associates, Inc., which maintains a database of the number of business
lines in the respective markets, and increased based on an assumed annual
growth rate of 7%, which is based on historical growth rate information
available from the FCC. Management considers addressable business lines an
indicator of the size of the market that Gabriel is capable of serving with
its networks.
(4) Customer lines installed on Gabriel networks as of September 30, 2000.
(5) Populations are based on 1996 U.S. Census Data.
(6) Market also targeted by TriVergent.
In total, these markets have approximately 3.1 million business lines which
will be addressable from Gabriel's initial 15 networks. As of September 30,
2000, Gabriel was serving a total of 1,266 customers with a total of 16,126
access lines connected to its own networks.
GABRIEL'S OPERATIONS SUPPORT SYSTEMS
To effectively serve its customers and manage its business, Gabriel is
implementing advanced operations support systems which have been designed to
automate its critical business functions. Gabriel has either acquired these
systems from, or developed them with, third party vendors with proven software
and extensive knowledge of these systems.
Gabriel's operations support system platforms
- are scalable,
- may be employed either centrally or in more than one location, and
- automate many of the functions that previously required multiple manual
entries of customer information to accomplish order entry, provisioning,
switch administration, customer care and billing.
The legacy systems previously used by incumbent telephone companies and other
providers were not only labor-intensive but also created numerous opportunities
for errors in provisioning services and billing, delays in installation, poor
customer service, and significant added expenses due to duplicated efforts and
the need to correct service and billing problems.
To initiate service for a customer, Gabriel must interface with the systems
of the incumbent telephone companies and wholesale long distance providers.
Gabriel is aggressively pursuing "electronic bonding," the online and real-time
connection of its operations support systems with those of other carriers, with
the incumbent telephone companies in each of its targeted markets. These
electronic interfaces allow Gabriel to create service requests online, leading
to faster installations of customer orders through a reduction in errors
associated with manually inputting orders received via fax or e-mail. Gabriel
expects electronic bonding to improve productivity by decreasing the period
between the time of sale and the time a
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customer's line is installed and provisioned over its network. Gabriel activated
electronic bonding with Southwestern Bell, Ameritech and NeuStar's local number
portability database during the first half of 2000. It expects to establish
electronic bonding with additional incumbent telephone companies and other
trading partners during the second half of 2000.
Gabriel's operations support system platforms are designed to integrate all
of its essential business applications, covering such functions as
- entering, scheduling, provisioning and tracking of customer service
orders,
- real-time trouble-shooting, 24/7 network surveillance and network
inventory,
- accurate, customized billing,
- customer "self-service" capabilities, including web-based bill payment
and customer service,
- electronic bonding with incumbent telephone companies and other business
partners,
- sales force management applications,
- customer relationship management,
- credit verification, electronic funds transfer, and credit and debit card
processing, and
- financial and operational reporting.
To date, Gabriel has implemented its billing, customer relationship
management, sales, network surveillance, service tracking, maintenance, trouble
ticketing, and financial and operational reporting systems. Gabriel expects to
complete implementation and integration of all of the principal elements of its
operations support systems by the end of the fourth quarter of 2000.
Gabriel's operations support system platforms allow it to issue a single
billing statement for all of its local, long distance and Internet services.
Gabriel's customized, "user friendly" billing statement provides its customers
with more enhanced billing detail and is easier to read and understand.
Gabriel's billing system has the ability to handle multiple hierarchies for
commercial accounts and accommodate a variety of output media, including paper,
electronic datafile, web site access and diskette. Gabriel's operations support
system platforms also allow it to access customer usage statistics on a
real-time basis and to make such usage data available to its customers through
its web site.
SALES AND MARKETING
To support its strategy of gaining early entry into its markets, Gabriel
establishes a local sales force in each market. Gabriel believes that rapidly
establishing a broad, local market presence and brand name recognition across
its customer base is critical to its success in its markets. Gabriel has
assembled an experienced direct sales force to market and sell its services
through face-to-face interaction with its targeted customers. Gabriel believes
this approach provides it with a competitive advantage over the incumbent
telephone companies in smaller markets, where the incumbent telephone companies
generally do not have a significant local presence, and reflects one of
Gabriel's core values: personalized, responsive customer service.
Gabriel believes that its sales force's personal, local interaction with
its customers helps it establish strong customer relationships, grow its
customer base and reduce churn. Gabriel also believes that a personalized,
responsive approach is more effective with smaller businesses, which typically
do not have management personnel focusing on their telecommunications
requirements. Gabriel targets small to medium-sized business customers who
typically have up to 250 employees and use up to 50 access lines. As of
September 30, 2000, Gabriel's average customer had approximately 12 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
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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.
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 September 30, 2000, Gabriel had 449 full-time employees, including
201 sales and sales support personnel, of whom 97 were quota-bearing direct
sales persons. None of Gabriel's employees is represented by a labor union or
subject to a collective bargaining agreement. Gabriel has not experienced any
work stoppages due to labor disputes and believes that its relations with its
employees are good.
LEGAL PROCEEDINGS
Gabriel is not a party to any pending legal proceedings that it believes
would, individually or in the aggregate, have a material adverse effect on its
financial condition or results of operations.
FACILITIES
Gabriel is headquartered in Chesterfield, Missouri, and leases offices and
space in a number of locations, primarily for sales offices and network
equipment installations. The table below lists its leased facilities and number
of collocation sites secured, as of September 30, 2000:
<TABLE>
<CAPTION>
APPROXIMATE SQUARE NUMBER OF COLLOCATION
LOCATION PURPOSE LEASE EXPIRATION FOOTAGE SITES SECURED
-------- ----------------- ---------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Chesterfield, Missouri....... Headquarters 3/31/2002 50,600 --
St. Louis, Missouri.......... Hub Site Facility 7/27/2009 6,143 16
Switch Location
Springfield, Missouri........ Hub Site Facility 4/15/2009 13,660 2
Switch Location
Kansas City (Lenexa),
Kansas..................... Hub Site Facility 3/31/2009 7,452 20
Switch Location
Wichita, Kansas.............. Hub Site Facility 2/18/2009 7,500 4
Switch Location
Little Rock, Arkansas........ Hub Site Facility 4/9/2009 7,200 6
Switch Location
Tulsa, Oklahoma.............. Hub Site Facility 8/28/2009 8,592 5
Switch Location
Oklahoma City, Oklahoma...... Hub Site Facility 10/31/2009 6,161 14
Switch Location
Akron, Ohio.................. Hub Site Facility 2/1/2010 7,261 8
Switch Location
Dayton, Ohio................. Hub Site Facility 1/17/2010 7,814 10
Switch Location
Cincinnati, Ohio............. Hub Site Facility 2/1/2010 7,980 16
Switch Location
</TABLE>
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<TABLE>
<CAPTION>
APPROXIMATE SQUARE NUMBER OF COLLOCATION
LOCATION PURPOSE LEASE EXPIRATION FOOTAGE SITES SECURED
-------- ----------------- ---------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Columbus, Ohio............... Hub Site Facility 5/30/2010 4,600 15
Switch Location
Lexington, Kentucky.......... Hub Site Facility 4/1/2010 8,438 3
Switch Location
Louisville, Kentucky......... Hub Site Facility 3/20/2010 7,690 0
Switch Location
Indianapolis, Indiana........ Hub Site Facility 1/1/2009 7,921 12
Switch Location
</TABLE>
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THE TRIVERGENT BUSINESS
TriVergent is a broadband telecommunications company offering automated web
site design and web hosting, high-speed data and voice services. TriVergent's
principal product is its Broadband Bundle, which provides automated web site
design and web hosting, high-speed data and Internet access and local and long
distance voice services. The Broadband Bundle is sold for a single price based
on the customer's selected bandwidth capacity and number of access lines.
TriVergent believes it is the only company providing this all-inclusive bundle
in its markets. To complement its Broadband Bundle, TriVergent is constructing
data centers for dedicated web hosting and bandwidth connectivity in many of its
target markets. TriVergent also offers network and data integration services,
such as dedicated server collocation, and local area network and wide area
network solutions, as well as on-premise voice and data equipment, hubs, routers
and cabling services.
As part of its Broadband Bundle, TriVergent offers a proprietary web site
design service that enables its customers to design and maintain their own web
sites. TriVergent's customers can edit their web sites and update e-mail
addresses through a secure on-line, interactive control panel 24 hours a day
without contacting TriVergent's customer care representatives. The Broadband
Bundle also includes high-speed Internet connectivity, unlimited local service
and 100 minutes of long distance usage per line, as well as web hosting.
TriVergent believes this affordable, scalable solution enables its small and
medium-sized business customers to take advantage of web related and
connectivity services more typically utilized by larger companies. TriVergent
also intends to release a new version of its web site design service in the
fourth quarter of 2000, which will allow customers to develop e-commerce
applications and conduct transactions using their web sites.
As of September 30, 2000, TriVergent had 15 markets in operation or under
construction in five southeastern states with 3.3 million addressable business
lines and 5,152 access lines in service. TriVergent believes its networks will
ultimately cover over 90% of the business access lines in its target markets.
At September 30, 2000, TriVergent had
- secured 152 central office collocation sites in its initial 15 markets,
- installed voice and data equipment in 53 of these collocation sites, with
99 others under construction, and
- deployed four Nortel DMS 100/500 digital switches and five Nortel
asynchronous transfer mode switches in its switching sites and 49
asynchronous transfer mode switches in its unified collocation
facilities.
TriVergent's network is designed to include five voice switches
complemented by asynchronous transfer mode switches in each market. TriVergent's
network design supports its Broadband Bundle, combining data and voice service
to its customers. As of September 30, 2000, TriVergent had four voice switches
installed and expects to install one more by the end of 2000, which will
complete the voice switch deployment necessary to cover all of its currently
planned markets. TriVergent anticipates migrating to a soft switch platform in
the future, which platform is designed to be compatible with its current
network. TriVergent's collocation facilities are connected using redundant
routes, which are multiple network routes or paths, to its asynchronous transfer
mode switches which then transmit the data to one of its host switches.
TriVergent believes this method of network deployment allows it to build its
target markets faster, use less capital and reduce ongoing circuit costs.
TriVergent believes the soft switch design, once implemented, will enhance
the functionality and efficiencies of its existing voice and data switches by
allowing it to
- effectively switch voice and data traffic on its asynchronous transfer
mode network,
- extend its network to reach additional customers, and
- lower transmission costs.
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TriVergent intends to construct data centers in many of its markets to
house its asynchronous transfer mode switches and provide dedicated and shared
web hosting services to its customers. Because many of the traditional data
service providers have targeted only the largest cities in the Southeast,
TriVergent believes the market for data centers in small and medium-sized cities
in this region is currently underserved. TriVergent expects to house its data
centers in 1,500 to 5,000 square foot facilities connected directly to its
asynchronous transfer mode switch. These carrier-grade data centers will include
auxiliary battery and diesel power restoration, fire suppression, security
clearance and access to customers' workstations. TriVergent's data centers will
provide access to its Internet backbone, allowing it to provide a complete
solution that includes web hosting and high-speed Internet connections.
TriVergent intends to be the first to market this service in many of its target
markets.
TriVergent is authorized to provide local and long distance services in
Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina,
South Carolina and Tennessee. It also is authorized to provide long distance
services in New York, New Jersey, Pennsylvania, Texas, Illinois, Indiana,
Minnesota, Colorado and California. TriVergent has a region-wide interconnection
agreement with BellSouth and one with GTE for Florida.
TriVergent's management team is led by Charles S. Houser, its chairman and
chief executive officer, who has had a distinguished career in the
telecommunications industry, including serving as
- chairman and chief executive officer of Corporate Telemanagement Group,
Inc., a switch-based long distance carrier that was acquired by LCI
International, Inc. in 1995,
- president and chief executive officer of Tel/Man, Inc., a switch-based
long distance carrier that was acquired by SouthernNet in 1988,
- chief operating officer of SouthernNet, Inc., a switch-based long
distance carrier that was acquired by MCI in 1989, and
- chairman and chief executive officer of Teleco, Inc.
Mr. Houser has also served on the board of directors of LDDS Communications,
CompTel, Corporate Telemanagement Group, Tel/Man, and Teleco and was chairman of
the Telecommunications Resellers Association. He also presently serves on the
board of directors of Ibasis.
BUSINESS STRATEGY
TriVergent's current business strategy is to:
OFFER A COMPLETE, BROADBAND BUNDLED INTERNET COMMUNICATIONS
SOLUTION. TriVergent's Broadband Bundle is a complete Internet communications
solution that includes automated web site design and web hosting, with local and
long distance telephone service for a single monthly price based upon the number
of access lines and transmission speed selected by the customer. When customers
purchase the Broadband Bundle, TriVergent becomes, in effect, their Internet and
telecommunications manager. TriVergent believes that bundling services in this
manner allows its customers to receive a high level of service and enables
TriVergent to leverage its sales force to generate higher revenues per account
executive. TriVergent believes it is the only company in its region that
provides a single bundle of Internet access, automated web site design and web
hosting, and local and long distance telephone services to its customers.
TARGET SMALL AND MEDIUM-SIZED BUSINESSES IN THE SOUTHEASTERN UNITED
STATES. TriVergent targets small and medium-sized businesses in the southeastern
United States that it believes have been underserved by the incumbent telephone
companies in these markets. In particular, TriVergent attempts to sell its
services to businesses that cannot afford to maintain a communications staff,
but that have increasingly complex telecommunications and Internet needs. When
targeting these businesses, TriVergent offers its customers a high bandwidth,
fixed price and flexible communications solution. With its Broadband Bundle,
TriVergent believes it is able to provide all of the services a typical small
and medium-sized business needs to have a presence on the worldwide web.
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CAPITALIZE ON FIRST-TO-MARKET ADVANTAGE IN BUNDLED SERVICES. TriVergent has
been the first communications service provider in its initial seven markets to
offer a full suite of data and telecommunications services as a single bundle.
This bundle includes automated web site design and web hosting, high-speed data
and Internet access and local and long distance voice services. TriVergent
believes it can maintain its first-to-market advantage by continuing to offer
product innovations. For example, TriVergent intends to release a new version of
its web site design service in the fourth quarter of 2000, which will allow
customers to develop e-commerce applications and conduct transactions using
their web sites. With a first-to-market advantage, TriVergent believes it will
be able to capture larger portions of its target markets before its competitors
can provide comparable services.
TriVergent intends to maintain a first-to-market advantage by providing
carrier-grade data center space in 12 of its initial 15 markets. These
carrier-grade data centers will include auxiliary battery and diesel power
restoration, fire suppression, security clearance and access to customers'
workstations. TriVergent will provide its customers with either dedicated or
shared data service and broadband connections. TriVergent data centers will
provide access to its Internet backbone allowing TriVergent to provide a
complete solution that includes web hosting and high-speed Internet
connectivity.
LEVERAGE DIRECT AND INDIRECT DISTRIBUTION CHANNELS. TriVergent uses both a
direct sales force and authorized agents to distribute its products and
services. TriVergent believes that the key to its success will be finding direct
sales people and authorized agents with strong community relationships and
technical backgrounds. In most markets, TriVergent will have a locally-based
direct sales force that uses a consultative approach to offer clients a full
range of sophisticated, cost-effective Internet, data and voice solutions. A
consultative approach means that a TriVergent sales person meets with a
prospective customer to discuss the telecommunications and data requirements for
the customer's particular business. The sales person then analyzes the
customer-specific information to recommend alternatives to address those
requirements. For example, the sales person may describe the trade off between
transmission speed and price, as well as explore the capabilities of the web
site design product for that customer's business applications.
CAPITALIZE ON THE NUMBER AND SIZE OF COLLOCATIONS. TriVergent believes the
number and size of its collocations will allow TriVergent to accommodate future
access line growth in its target markets both rapidly and cost-effectively. With
152 central office collocation sites secured in its initial 15 markets as of
September 30, 2000, TriVergent believes it will have one of the broadest
collocation service territories for converged voice and data services in its
five state region.
TriVergent is deploying integrated voice and data switches within each of
its collocation sites. By designing its collocations in this manner, TriVergent
is able to allocate the overhead costs associated with deploying collocations
across multiple products and revenue streams. This unified collocation
architecture can be extended to support emerging applications as customer
requirements dictate.
IMPLEMENT SCALABLE AND INTEGRATED BACK OFFICE SYSTEMS. TriVergent is
developing an integrated strategy for its operations support systems and other
back-office systems that it believes will implement more advanced technologies
and will provide superior customer service and significant competitive
advantages in terms of accuracy, efficiency, and capacity to process customer
orders. In December 1999, TriVergent initiated its back office system by
installing the Metasolv Total Business Solutions provisioning system and the
Daleen BillPlex billing system. These systems, which are integrated and readily
expandable, will enable TriVergent to reduce its operating costs and shorten its
provisioning times by minimizing data entries and the potential for errors.
TriVergent also plans to implement electronic bonding with BellSouth's and other
carriers' customer support and local service request systems using DSET's
gateway software.
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RECENT ACQUISITIONS
To accelerate its business strategy, TriVergent has acquired several
companies with a customer base to which it believes it can successfully market
its Broadband Bundle including:
- In March 1999, TriVergent acquired Carolina Online, Inc., a regional
Internet service provider headquartered in Greenville, South Carolina.
Carolina Online currently provides Internet access to approximately 7,000
business and residential customers.
- In July 1999, TriVergent acquired DCS, Inc., a data integrator and
equipment provider headquartered in Greenville, South Carolina.
- In February 2000, TriVergent acquired Ester Communications, Inc., a
provider of voice and data equipment and services. Ester has 3,000 small
business customers to which it provides equipment and services, including
local exchange and long distance services through agency arrangements
with various network providers.
- In February 2000, TriVergent also acquired Information Services and
Advertising Corporation, a regional Internet service provider
headquartered in Wilmington, North Carolina that currently has
approximately 1,200 Internet access customers.
- In June 2000, TriVergent acquired Internet/MCR Corporation, a Greensboro,
North Carolina based Internet service provider. Internet/MCR serves
approximately 2,800 businesses and consumers in the greater Greensboro,
North Carolina market.
TriVergent currently has no definitive understandings relating to any other
acquisitions.
PRODUCTS AND SERVICES
Through its Broadband Bundle, TriVergent offers a complete package of
communications services, including automated web design and web hosting,
high-speed data and Internet access and local and long distance voice services.
These services are offered for a single monthly price based on the number of
access lines and transmission speeds selected by the customer. Each Broadband
Bundle also includes ancillary features such as call waiting, hunting and
three-way calling, as well as 100 minutes per month of long distance usage per
telephone line.
BUNDLED SERVICES
TriVergent's Broadband Bundle includes the following:
Broadband Access -- TriVergent provides high speed Internet access at
speeds up to 1.544 megabits.
Web Page Design -- TriVergent's web site design software system allows its
customers to produce template-driven web pages. TriVergent's customers have
unlimited use of this software through its control panel function that enables
them to access their web site 24 hours a day to maintain and update information,
such as adding e-mail accounts.
Web Hosting -- TriVergent provides web hosting services for all customers
that sign up for the Broadband Bundle. TriVergent provides each customer with up
to 24 megabytes of storage for its web site. Customers have the ability to
utilize more storage capacity for an additional fee through TriVergent's control
panel.
Local Exchange Telephone Services -- TriVergent provides local exchange
telephone service and the ancillary services typically provided by incumbent
telephone companies, such as call waiting, caller ID and hunting.
Long Distance Telephone Service -- TriVergent provides traditional long
distance telephone services and the ancillary services, such as calling cards,
800 numbers, account codes, online billing and various management reports. For
the basic fee, TriVergent provides each customer with 100 minutes of long
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distance service per month. Customers who exceed the basic bundle are billed for
overage on a per-minute basis.
Data Centers -- During the third quarter of 2000, TriVergent began offering
managed server services in its initial data facilities. These services include
the provision and use of vertical rack space, cabinet units, and secure cages
for collocations and services on NT and UNIX platforms with guaranteed
bandwidth.
TriVergent offers its services on a bundled basis where its customers pay a
fixed price, based on the number of access lines and desired access speed, for
all of its services whether the customer takes one or all of the services
offered.
OTHER SERVICES
Network Equipment -- TriVergent also provides voice and data networking
design, equipment sales and installation, including routers and hubs from Cisco
Systems, BayStack, NetGear and 3Com. This equipment allows customers to
integrate digital subscriber line service with current or new local area
networks.
Cabling Services -- TriVergent also provides inside wiring services to
customers on a custom basis, including cable drops, telephone drops and other
wire-based installation services.
PLANNED SERVICES
TriVergent plans to release new versions of its software that will permit
greater utilization of the Internet. These services will revolve around customer
content, delivered over its high-speed platforms, as well as scalable e-commerce
initiatives for product transactions through TriVergent's web site design
software.
Web Page e-commerce -- TriVergent expects to release an update to its web
architecture software in the fourth quarter of 2000 that will have a catalogue
feature allowing customers to develop a catalogue of their products and services
on their web page, as well as e-commerce, shopping cart functions and credit
card billing, which will be enhanced to include online verification and
settlement capabilities by the second quarter of 2001.
Broadband Internet Portal -- TriVergent plans to release by the first
quarter of 2001 a custom Internet portal application with broadband
capabilities, including video streaming. This application will include local
news, sports and weather.
Remote Local Area Network Access Services -- TriVergent believes that the
desire of businesses to have their employees access e-mail and conduct business
electronically from outside their offices will increase the demand for
high-speed digital communications for remote local area network access.
TriVergent plans to offer these services by the first quarter of 2001.
Virtual Private Network Services -- TriVergent intends to combine its
broadband access services with its virtual private network equipment to provide
clients with high-speed and secure connections to their corporate local area
network and the Internet by the first quarter of 2001. Virtual private networks
enable customers to have a flexible, cost-effective solution that supports both
telecommuters and site-to-site connections. TriVergent's virtual private network
services will provide its clients with the convenience of an always-on high
speed connection and high speed Internet access.
SALES AND MARKETING
TriVergent uses both a direct sales force and authorized agents to
distribute its products and services. In most markets TriVergent will have a
locally-based sales force that uses a consultative selling approach to offer
clients a full range of sophisticated, cost-effective Internet and data and
voice solutions. Most of TriVergent's sales teams will be led by a sales manager
and will include from six to 40 account executives responsible for the
acquisition and retention of customers in those markets. To support its sales
force
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TriVergent has a central office staff that includes service order coordinators,
client development representatives and technical consultants. TriVergent's sales
staff is assisted by a support staff that maintains competitive pricing
information, develops proposals and assists in post sales account management. In
addition to TriVergent internal sales staff at September 30, 2000, TriVergent's
agent sales force consisted of 82 authorized agents.
TriVergent's authorized agents include interconnect dealers and data
integrators. TriVergent provides its agents with a training program and
marketing literature to help its agents become familiar with its Broadband
Bundle. Agents typically sell TriVergent's services into existing customer bases
using TriVergent's brand name. TriVergent provides the sales support, proposals,
customer care, billing and collection functions. Agents are compensated with
monthly residual commissions, based entirely on production. TriVergent intends
to capitalize on prior relationships with many of the agents formerly associated
with Corporate Telemanagement Group to sell its services. Corporate
Telemanagement Group, where a number of TriVergent's senior executives were
previously employed, achieved $100 million in aggregate revenues over
approximately five years largely through utilizing authorized agents, such as
telecommunications equipment vendors, consultants and systems integrators, to
sell its switched long distance services.
TRIVERGENT'S CURRENT MARKETS
The following tables list TriVergent's markets in operation and under
construction as of September 30, 2000 and related information, including the
number of secured collocation sites, the estimated number of addressable
business lines and the number of business customer access lines in service, for
each market:
<TABLE>
<CAPTION>
ESTIMATED BUSINESS DATA CENTERS
INITIAL ADDRESSABLE CUSTOMER COLLOCATION ----------------------
SERVICE BUSINESS ACCESS LINES SITES ESTIMATED OPENING
MARKET DATE LINES(1) IN SERVICE(2) SECURED SQUARE FEET DATE
------ ------- ----------- ------------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Greenville/Spartanburg, SC........ 1Q00 143,671 3,871 9 1,600 3Q00
Atlanta, GA....................... 1Q00 824,065 465 18 900 3Q00
Greensboro, NC.................... 1Q00 116,685 319 5 1,500 3Q00
Burlington, NC.................... 1Q00 22,710 72 2 -- --
Winston-Salem, NC................. 1Q00 90,621 44 4 -- --
Wilmington, NC.................... 2Q00 40,709 349 3 875 4Q00
Miami/Ft. Lauderdale, FL.......... 3Q00 724,849 30 36 1,500 4Q00
Charlotte, NC..................... 3Q00 278,152 2 11 900 4Q00
Jacksonville, FL.................. 3Q00 190,406 -- 16 1,500 4Q00
Raleigh, NC....................... 3Q00 233,186 -- 7 1,700 4Q00
Columbia, SC...................... 3Q00 84,282 -- 5 -- --
Knoxville, TN..................... 3Q00 110,734 -- 5 2,500 (4)
Nashville, TN(3).................. 4Q00 186,091 -- 13 1,250 4Q00
Charleston, SC.................... 4Q00 82,805 -- 7 1,300 4Q00
Louisville, KY(3)................. 4Q00 182,620 -- 11 1,300 4Q00
</TABLE>
-------------------------
(1) The addressable business lines referenced in the above table are
TriVergent's estimates based upon business line information obtained
annually from PNR and Associates, Inc., which maintains a database of the
number of business lines in the respective markets, and increased based on
an assumed annual growth rate of 7%, which is based on historical growth
rate information available from the FCC.
(2) Customer lines installed on TriVergent's networks as of September 30, 2000.
(3) Market also targeted by Gabriel.
(4) Not yet determined.
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NETWORK INFRASTRUCTURE
TriVergent is deploying a unified voice and data network that allows it to
provide all services included in the Broadband Bundle. The planned network will
consist of five 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 remaining switch by the end of 2000. The five Nortel
switches will provide the primary voice switching functions for all of
TriVergent's planned markets throughout the southeastern United States.
TriVergent is also deploying asynchronous transfer mode switch sites in most of
its markets. TriVergent plans to connect these switch sites with multiple
redundant routes from various long haul providers. The final step in
TriVergent's unified network is to connect its unified collocation facilities
with the small asynchronous transfer mode switch sites. This will be
accomplished through the lease of redundant DS-1 and DS-3 or OC-3 routes from
BellSouth or alternative fiber optic network providers. DS-1 and DS-3 or OC-3
circuits are standard North American telecommunications industry digital signal
formats, which are distinguishable by the information carrying capacity, or
"bandwidth," of the circuit, measured in millions of bits of information, or
megabits, per second. DS-1 service has bandwidth or capacity to carry 1.544
megabits per second and DS-3 or OC-3 service has bandwidth or capacity to carry
44.736 megabits per second.
TriVergent anticipates in the future migrating to the soft switch platform,
which it expects to be compatible with its current network. TriVergent's
collocation facilities are typically secured in caged-in areas which contain
both voice and data equipment. TriVergent believes these unified collocation
facilities will enable it to transmit integrated voice and data traffic over a
standard copper pair or leased unbundled network element, thus significantly
increasing the potential revenue per line in relation to voice-only or data-only
equipped collocations.
INFORMATION SYSTEMS
TriVergent is deploying its integrated operations support systems and other
back-office systems that it believes will provide superior customer service and
significant competitive advantages in terms of accuracy, efficiency, and
capacity to process customer orders. TriVergent has already installed the
Metasolv Total Business Solution provisioning system and the Daleen BillPlex
billing system. Once TriVergent successfully installs its seamless end-to-end
back office system, it expects that customer orders will be entered a single
time, with the information then shared between the various components of
TriVergent's information systems. TriVergent expects to have its operations
support systems and other back office systems fully integrated by the fourth
quarter of 2000.
TriVergent believes that its planned single entry system will be superior
to many existing systems, which generally require multiple entries of customer
information. Multiple information entry can result in billing problems, service
interruptions and delays in installation. TriVergent's single entry process
should be less labor intensive and reduce the margin for error. In addition, the
sales to billing interval should be significantly shortened.
ORDER ENTRY AND PROVISIONING
Order entry involves the initial loading of customer data into TriVergent's
information systems. TriVergent utilizes the Metasolv Total Business Solutions
provisioning system software for this purpose. TriVergent's sales executives are
able to take orders and upload them via the web to credit and provisioning
representatives who enter the initial customer information into the Total
Business Solutions system. When the Total Business Solutions system is fully
integrated with the capabilities of the DSET electronic bonding gateways, orders
can be submitted to business partners electronically, thereby minimizing
implementation time, coordination complexities and installation costs.
In addition to cost benefits associated with electronic installation of
access lines and inventory management system, the Metasolv system should improve
TriVergent's internal processes in various other ways through its "workflow"
management capabilities. The system routes tasks to the appropriate employee
groups, tracks order progress and is capable of alerting operations personnel of
any "jeopardy"
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situations. The system is designed to allow sales executives or customer care
coordinators to maintain installation schedules and notify customers of any
potential delays. Once an order has been completed, the Metasolv system
electronically updates its billing system to initiate billing of installed
services.
ELECTRONIC BONDING
TriVergent is implementing integrated interfaces with some BellSouth
systems for the electronic exchange of order information utilizing the DSET
gateway software. While it is currently necessary to submit local service
requests for a customer by sending the incumbent telephone company a fax or
e-mail or by remote data entry, the electronic interfaces which TriVergent is in
the process of implementing will link its operations support systems directly to
BellSouth's system, so that it will be able to process these requests on an
automated basis. Once fully installed and implemented, TriVergent will be able
to confirm receipt of service requests and the availability of facilities
on-line and in real-time. Due to issues relating to BellSouth's internal
operations support systems, TriVergent expects to experience some difficulties
with the electronic interfaces, which may require some manual intervention.
Other incumbent telephone companies in TriVergent's region are just beginning to
develop automated interfaces on a limited basis. TriVergent anticipates
establishing similar connections with other incumbent telephone companies.
BILLING SYSTEM
For billing, TriVergent utilizes the Daleen BillPlex system, which provides
its customers with a consolidated invoice for all of its services. Customer
telecommunications usage generates billing records that are automatically
transmitted from the switch to the billing systems. These records are then
processed by the billing software that calculates usage costs, integrates fixed
monthly charges and assembles bills. For those customers who request electronic
billing, TriVergent can provide the invoice and call detail records in
electronic form over the web. The Daleen system allows TriVergent to add
advanced features such as discounts based on call volume or number of lines or
amount of bandwidth ordered. It will also allow TriVergent to calculate complex
local, state and federal taxation and discrete billing options by type of
service ordered.
CUSTOMER CARE AND TROUBLE MANAGEMENT
TriVergent has entered into a service agreement with Nortel to assist it in
the continuous monitoring and operation of TriVergent's switch network. In the
fourth 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 September 30, 2000, TriVergent had 706 full-time employees, including
212 sales and sales support personnel. 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 September 30, 2000:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION PURPOSE LEASE EXPIRATION SQUARE FOOTAGE
-------- ------------------- ---------------- --------------
<S> <C> <C> <C>
Greenville, SC Ivey Square............... Office space
1st floor January 2004 9,600
3rd floor August 2003 13,075
Landmark................................. Office space
5th & 7th floors December 2010 75,839
8th floor August 2010 11,209
6th floor July 2009 11,209
20th floor December 2010 5,605
14th floor October 2010 11,209
Wachovia................................. Office space
4th floor October 2000 7,333
7th floor September 2000 12,858
Augusta Road............................. Equipment warehouse February 2003 9,000
Atlanta, GA.............................. Sales office December 2004 4,584
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 4,574
Switch site May 2010 5,000
Miami, FL................................ Sales office August 2005 6,989
Switch site July 2009 13,453
Charleston, SC........................... Sales office June 2005 3,706
Switch site August 2010 5,000
</TABLE>
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<TABLE>
<CAPTION>
APPROXIMATE
LOCATION PURPOSE LEASE EXPIRATION SQUARE FOOTAGE
-------- ------------------- ---------------- --------------
<S> <C> <C> <C>
Charlotte, NC............................ Sales office May 2005 4,363
Switch site April 2010 9,314
Wilmington, NC........................... Sales office July 2005 12,122
Switch site June 2010 5,000
Nashville, TN............................ Sales office August 2005 5,762
Switch site June 2010 8,645
Raleigh, NC.............................. Sales office July 2005 5,023
Switch site August 2010 6,745
Knoxville, TN............................ Sales office August 2005 4,582
Columbia, SC............................. Sales office August 2005 2,440
</TABLE>
TriVergent believes that its leased facilities are adequate to meet its
current needs and that additional facilities are available to meet its
development and expansion needs in existing markets and markets currently under
construction.
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COMPETITION
OVERVIEW
The combined company will operate in a highly competitive environment and
neither TriVergent nor Gabriel currently has a significant market share in any
of their respective markets. Further, the continuing trend toward business
alliances in the telecommunications industry and the further reduction of
regulatory and technological barriers to entry, will likely give rise to
significant new competition.
While there are many competitors in the broadly defined telecommunications
market, the combined company will focus its attention on actual and near-term
potential competitors in the geographic areas and market segments in which it
offers and plans to offer service. Current and potential competitors and their
strengths and weaknesses are summarized below. Gabriel and TriVergent perform
competitor analyses as part of its market evaluation process prior to entering
each of its targeted markets.
EXISTING COMPETITORS
INCUMBENT TELEPHONE COMPANIES. In each of the markets in which the combined
company will operate, the incumbent telephone company will be its principal
competitor. Incumbent telephone companies currently dominate the combined
company's targeted markets with an approximate 95% market share. Incumbent
telephone companies benefit from favorable regulations and have long standing
customer relationships, brand name recognition, significant financial, technical
and marketing resources and, subject to regulatory approval, the ability to
lower prices or engage in substantial volume or term discounts. In addition,
incumbent telephone companies have existing fiber optic networks and switches.
Management of the combined company believes it can compete with incumbent
telephone companies by focusing on the communications requirements of small and
medium-sized business customers and by providing high quality, market-driven
products and services with responsive customer service at prices below those
charged by the incumbent telephone companies.
Each of TriVergent and Gabriel believes that the incumbent telephone
company in each of its markets in operation and under construction controls more
than 90% of the business access lines in the central offices where TriVergent or
Gabriel, as the case may be, collocates its equipment. As a result, TriVergent
and Gabriel must purchase or lease a significant portion of their underlying
network from the incumbent telephone company, which is currently BellSouth in
TriVergent markets and Southwestern Bell or Ameritech in Gabriel markets. Some
of the network components that TriVergent and Gabriel purchase or lease from the
incumbent telephone company include unbundled network elements, inside wiring
and transmission services. This significant reliance on a primary competitor is
burdensome and typically time consuming. See "Regulation" beginning on page 103
for a discussion of the regulatory requirements that apply to the incumbent
telephone companies' provision of unbundled network elements and other services
to other providers such as TriVergent and Gabriel.
The combined company will face significant competition from Southwestern
Bell, Ameritech and BellSouth in the local services business in its markets.
These large, entrenched companies currently offer digital subscriber line and
other data services as well as Internet services. Each of these incumbent
companies competes aggressively to retain as much of its dominant market share
as possible. Each has significantly more capital, technological and management
resources and poses a significant competitive threat to the combined company's
success.
LONG DISTANCE TELEPHONE COMPANIES. AT&T, WorldCom and Sprint are among the
long distance telephone companies that are now offering bundled local and long
distance services to their existing and prospective customers. Some of these
long distance carriers have entered the local service market primarily through
acquisitions of local service providers, such as AT&T's purchase of Teleport
Communications Group and WorldCom's acquisitions of MFS Communications Company
and Brooks Fiber Properties. Management of the combined company believes that
although these long distance companies have acquired significant local markets,
they are not primarily focused on the provision of local services in second and
third tier markets. Instead, they have continued to focus on their primary
service offering, long
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distance, and are attempting to leverage their customer relationships to offer
basic local services. Management of the combined company believes that its
advanced network platforms, integrated product and service offerings and local
sales presence will position it to distinguish itself from the long distance
telephone companies in its targeted markets.
COMPETITIVE LOCAL TELEPHONE COMPANIES. The combined company will face
significant competition from facilities-based competitive local telephone
companies in markets in which it offers and plans to offer its products and
services. The principal facilities-based competitive local telephone company
competitors that provide local services in Gabriel's and TriVergent's existing
markets include
- Adelphia Business Solutions,
- Birch Telecom,
- Business Telecom, Inc.,
- e.spire Communications,
- ICG Communications,
- ITC DeltaCom,
- Intermedia Communications,
- KMC Telecom,
- Logix Communications,
- McLeodUSA,
- NewSouth Communications,
- NEXTLINK Communications,
- Time Warner Communications and
- US LEC.
Management of the combined company believes that additional competitors may
also develop plans to enter its existing and target markets in the future.
RECENT AND POTENTIAL NEW COMMUNICATIONS PROVIDERS
In addition to the incumbent telephone companies, long distance carriers
and competitive local telephone companies, the combined company will face
potential competition from other recent and potential entrants in local service
markets. These non-traditional providers include
- cable television operators,
- electric utilities,
- fixed and mobile wireless and PCS operators, and
- Internet service providers.
CABLE TV OPERATORS. Management of the combined company expects cable
television operators will attempt to leverage their broadband networks to deploy
local telecommunications services to their existing, largely residential,
customer base. In addition to technology and network architecture issues, cable
operators must overcome the public perception of historically poor levels of
customer service and high prices. Management of the combined company believes
that, because the strength of these entities is in the service territories of
their existing facilities, their primary focus is and will continue to be the
residential market and that they will position themselves as a low cost, high
bandwidth alternative to the incumbent telephone company with bundled local,
long distance, Internet access and cable television product offerings.
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ELECTRIC UTILITIES. Electric utilities have a large customer base, and many
have fiber networks that could be used to provide telecommunications services.
Many electric utilities have increased their installation of fiber optic cable
to augment their current core services. Unlike cable television operators,
electric utilities have extensive networks covering both business and
residential customers. Electric utilities also have the advantage of having
existing customer relations, access to rights of way, building access and, in
most cases, regional political influence. Disadvantages include inexperience in
telecommunications, a generally poor record in diversification investments,
little experience in competitive markets, and stringent regulatory and capital
market limitations on the use of rate base capital.
WIRELESS OPERATORS. Cellular and PCS operators may also be a source of
competitive local telephone service, using available bandwidth on their networks
to provide access in traditional landline applications. With the significant
capital outlays made by wireless operators for license fees as well as equipment
purchases to build their network infrastructures, management of the combined
company expects that, in the near term, these companies will continue to focus
their marketing and operational efforts on the wireless mobile market. Moreover,
management of the combined company believes that these wireless operators will
largely be users of competitive local telephone company services to transmit
their calls among radio/transmitter sites and generally avoid the traditional
local services market.
INTERNET SERVICE PROVIDERS. Management of the combined company believes
that Internet service providers may try to expand their scope of operations to
provide more traditional telecommunications services to complement their
Internet access services and leverage their subscriber bases. Management of the
combined company believes Internet service providers will initially focus on the
long distance market, in which it is easier to administer and provision quality
customer service, and eventually may vertically integrate to provide full
service local telecommunications or be acquired by existing local or long
distance telecommunications providers to allow the acquiring companies to
further their own vertical integration into the Internet access market.
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REGULATION
The combined company's telecommunications services business is subject to
federal, state and local regulation.
FEDERAL REGULATION
The FCC regulates interstate and international telecommunications services,
including the use of local telephone facilities to originate and terminate
interstate and international calls. Gabriel and TriVergent provide such services
on a common carrier basis. The FCC imposes extensive regulations on common
carriers that have some degree of market power, like the incumbent telephone
companies. However, the FCC to date has imposed less regulation on common
carriers, such as Gabriel and TriVergent, that lack significant market power.
The FCC requires Gabriel and TriVergent to receive and maintain authorizations
to provide and resell telecommunications services between the United States and
international points.
Under the Telecommunications Act of 1996, any entity, including cable
television companies and electric and gas utilities, may enter any
telecommunications market, subject to conditions in the Telecommunications Act
and reasonable state regulation of safety, quality and consumer protection.
Because implementation of the Telecommunications Act is subject to numerous
federal and state policy rulemaking proceedings, legislative initiatives and
judicial review, there is still uncertainty as to what impact the
Telecommunications Act and any additional legislation will have on the combined
company in the future.
The Telecommunications Act is intended to increase competition. The
Telecommunications Act opens the local services market by requiring incumbent
telephone companies to permit interconnection to their networks and imposing on
incumbent telephone companies or, in some areas, all local telephone companies
other obligations, including:
- INTERCONNECTION. All local telephone companies must permit their
competitors to interconnect with their facilities. Incumbent telephone
companies are required to permit interconnection at any technically
feasible point within their networks, on nondiscriminatory terms, and at
prices based on cost, which may include a reasonable profit. At the
option of the carrier seeking interconnection, the incumbent telephone
company must offer to collocate the requesting carrier's equipment in the
incumbent telephone company's premises, except where the incumbent
telephone company can demonstrate space limitations or other technical
impediments to collocation.
- UNBUNDLED ACCESS. All incumbent telephone companies are required to
provide nondiscriminatory unbundled access to FCC and state
telecommunications regulatory commission-defined network elements, which
include network facilities, equipment, features, functions, and
capabilities, at any technically feasible point within their networks, on
nondiscriminatory terms, and at prices based on cost, which may include a
reasonable profit.
- ACCESS TO RIGHTS-OF-WAY. All local telephone companies are required to
permit competing carriers access to poles, ducts, conduits and
rights-of-way at regulated prices.
- RECIPROCAL COMPENSATION. All local telephone companies are required to
complete calls originated by other local telephone companies under
reciprocal compensation arrangements at prices based on costs or
otherwise negotiated by the parties.
- RESALE. All local telephone companies must permit resale of their
telecommunications services without unreasonable restrictions or
conditions. In addition, incumbent telephone companies are required to
offer wholesale versions of all retail services to other
telecommunications carriers for resale at discounted rates, based on the
costs avoided by the incumbent telephone company in the wholesale
offering.
- NUMBER PORTABILITY. All local telephone companies must permit users of
telecommunications services to retain existing telephone numbers without
impairment of quality, reliability or convenience when switching from one
telecommunications carrier to another.
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- DIALING PARITY. All local telephone companies must provide equal access
to competing providers of telephone exchange service and toll service,
and they must also provide nondiscriminatory access to telephone numbers,
operator services, directory assistance, and directory listing, with no
unreasonable dialing delays.
Incumbent telephone companies are required to negotiate in good faith with
carriers requesting any or all of the above arrangements. If the negotiating
carriers cannot reach agreement within a prescribed time, either carrier may
request binding arbitration of the disputed issues by the state regulatory
commission. Where an agreement has not been reached, incumbent telephone
companies remain subject to interconnection obligations established by the FCC
and state telecommunication regulatory commissions.
INTERCONNECTION AND UNBUNDLED ACCESS
In August 1996, the FCC established rules implementing the incumbent
telephone company interconnection obligations described above. On July 18, 1997,
the Eighth Circuit vacated portions of the FCC's decision and narrowly
interpreted the FCC's power to prescribe and enforce rules implementing the
Telecommunications Act. On January 25, 1999, the United States Supreme Court
reversed the Eighth Circuit decision and reaffirmed the FCC's broad authority to
issue rules implementing the Telecommunications Act, although it did vacate a
rule determining which network elements the incumbent telephone companies must
provide to competitors on an unbundled basis.
On November 5, 1999, the FCC released a ruling in response to the Supreme
Court's decision that detailed three significant changes affecting the incumbent
telephone companies' obligations to provide unbundled network elements to
competitors. First, the FCC indicated that the incumbent telephone companies no
longer were required to provide access to operator and directory assistance
services. However, the FCC expanded the definitions of two previously defined
unbundled network elements so that the incumbent telephone companies are now
required to provide unbundled access to portions of local loops and dark fiber
optic loops and transport. The FCC also ruled that the incumbent telephone
companies are no longer required to provide access to unbundled local circuit
switching for customers with four or more lines that are located in the densest
parts of the top 50 metropolitan statistical areas in the country, provided that
they provide access to combinations of loop and transport network elements known
as "enhanced extended links." Neither TriVergent nor Gabriel has plans to
utilize the circuit switching network element but may incorporate the use of
enhanced electronic links in their affected networks to reduce costs. Fifteen of
the networks in operation or under construction by Gabriel or TriVergent are in
the top 50 metropolitan statistical areas. The United States Telecom Association
has appealed the FCC's November 5 order, and neither Gabriel, TriVergent nor the
combined company can predict the outcome of that appeal or other proceedings
that might arise from the FCC's 1999 orders on remand from the Supreme Court.
On July 18, 2000, the Eighth Circuit issued a decision on remand from the
Supreme Court's reversal of its 1997 decision. In the July 18 decision, the
Eighth Circuit vacated parts of the FCC's interconnection pricing standard
included in the local competition rules adopted in August 1996. Those rules had
required state commissions to base the rates that incumbent telephone companies
charge to competitive local telephone companies for interconnection and for the
use of unbundled network elements on the costs that would be incurred by the
incumbent carriers using the most efficient technology available, rather than
the technology actually used by the incumbent carrier and furnished to the
competitive carrier. The Eighth Circuit held that the FCC should have based such
rates on the cost of the incumbent carrier's actual facilities. On September 22,
2000, the Eighth Circuit stayed that part of its July 18 decision vacating the
FCC's pricing rule basing interconnection rates on the most efficient technology
available pending Supreme Court disposition of any appeal of that decision. If
the July 18 decision is upheld by the Supreme Court, it is not clear to what
extent, or how quickly, the pricing standard required by the Eighth Circuit
would be reflected in state commission-approved interconnection agreements.
Eventually, however, if upheld, such pricing standard could result in higher
interconnection and unbundled element rates, which could make it more difficult
for competitive carriers such as Gabriel and TriVergent to compete profitably
with the incumbent telephone companies.
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On December 9, 1999, the FCC released an order requiring the incumbent
carriers to offer "line sharing" arrangements that will permit competitors to
offer DSL service over the same copper wires used by the incumbent to provide
voice service, and several incumbent providers have entered into line sharing
agreements with DSL providers that will compete with the combined company. The
specific prices and terms of particular line sharing arrangements will be
determined by negotiation or by future decisions of state utility commissions,
and cannot be predicted at this time. The FCC's ruling also has been challenged
in court by the United States Telecom Association. The combined company expects,
however, that this order will allow competing carriers to offer DSL services at
a significantly lower cost than is now possible.
On March 31, 1999, the FCC established rules addressing how incumbent
telephone companies must allow competitive local telephone companies like
Gabriel and TriVergent to collocate in the incumbent carriers' central offices.
The FCC required the incumbent telephone companies to allow competitors to
collocate equipment that is "used or useful" for either interconnection or
access to unbundled network elements. In March 2000, the United States Court of
Appeals for the District of Columbia Circuit vacated portions of the FCC's March
1999 collocation ruling. The court concluded that, in requiring the incumbents
to provide collocation for equipment that is "used and useful" for
interconnection or access to unbundled elements, the FCC had applied an
overbroad interpretation of the relevant statutory language, which requires
incumbent carriers to provide collocation only for equipment that is "necessary
for interconnection or access." The appeals court did not identify the specific
types of equipment that would be considered necessary but remanded the portion
of the FCC's order as to the definition of "necessary" to the FCC for
reconsideration. Similarly, the court decided that the FCC must reconsider its
reasons for requiring incumbent telephone companies, under its collocation
rules, to give competitors the option of collocating equipment in any unused
space within the incumbent telephone company's premises, to the extent
technically feasible, and prohibiting incumbent telephone companies from
requiring competitors to collocate in isolated space separate from the incumbent
telephone company's own equipment. The appeals court did preserve portions of
the FCC's collocation rules, however, including "cageless" collocation and
collocation cost allocation provisions.
On August 10, 2000, the FCC released an order reconsidering its March 1999
collocation ruling that strengthened its collocation requirements in some
respects, including a new requirement that an incumbent carrier provide physical
collocation space within 90 calendar days of a competitor's request, with
exceptions, and allow competitors to construct "adjacent structures" on land
owned or controlled by the incumbent carrier if there is no space left inside
the central office. Competitive providers like TriVergent and Gabriel hope to
utilize these adjacent structures to collocate their equipment and interconnect
with remote terminals of the incumbent telephone companies, thereby increasing
the addressable market for their DSL services. The FCC also requested further
comment on the issues remanded by the D.C. Circuit's ruling. Until the remanded
issues are resolved, incumbent telephone companies may attempt to restrict the
scope of their collocation obligations, at least as to those matters that were
not explicitly addressed in the FCC's August 10 reconsideration order. This
could delay the implementation, or otherwise limit the scope, of the
functionality and equipment that the combined company and other competitive
local telephone companies plan to collocate in incumbent telephone company
premises. However, neither Gabriel nor TriVergent has experienced any
significant problems in obtaining and building out any collocation sites, as a
result of the uncertainties created by these rulings.
While these court and FCC proceedings were pending, Gabriel and TriVergent
have entered into interconnection agreements with a number of incumbent
telephone companies through negotiations or adoption of another competitive
local telephone company's approved agreements. These agreements remain in
effect, although in some cases one or both parties may be entitled to demand
renegotiation of particular provisions based on intervening changes in the law.
However, it is uncertain whether the combined company will be able to obtain
renewal or renegotiation of these agreements on favorable terms when they
expire, particularly with regard to the types of equipment it can collocate at
an incumbent's premises and the rates it will be charged for interconnection and
access to unbundled network elements.
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INCUMBENT TELEPHONE COMPANIES' PROVISION OF LONG DISTANCE SERVICES
The Telecommunications Act codifies the incumbent telephone companies'
equal access and nondiscrimination obligations and preempts inconsistent state
regulations. The Telecommunications Act also contains special provisions that
replace prior antitrust restrictions that prohibited the regional Bell operating
companies, including Southwestern Bell, Ameritech and BellSouth, from providing
long distance services and engaging in telecommunications equipment
manufacturing. The Telecommunications Act permits the regional Bell operating
companies to enter the long distance service market outside their local service
areas immediately upon its enactment. Further, the Telecommunications Act
permits a regional Bell operating company to enter the long distance market in
its in-region states upon FCC approval, if it satisfies several procedural and
substantive requirements, including:
- a showing that the regional Bell operating company has entered into
interconnection agreements or, under some circumstances, has offered to
enter into such agreements in those states in which it seeks long
distance relief,
- satisfaction by these interconnection agreements of a 14-point
"checklist" of competitive requirements, and
- a showing that the regional Bell operating company's entry into long
distance markets is in the public interest.
Verizon and Southwestern Bell recently received permission from the FCC to
begin providing in-region long distance services in New York and Texas,
respectively, and Verizon's approval for New York recently was upheld by the
D.C. Circuit. Southwestern Bell has recently filed petitions in Missouri and
Arkansas, two of Gabriel's markets, and it is likely that Southwestern Bell,
Ameritech and BellSouth will petition and receive approval to offer long
distance services in additional states. This may have an unfavorable effect on
the combined company's business. Gabriel and TriVergent are legally able to
offer their customers both long distance and local services, which the regional
Bell operating companies in the combined company's markets currently may not do.
This ability to offer "one-stop shopping" gives the combined company a marketing
advantage that it would no longer enjoy if Southwestern Bell, Ameritech and
BellSouth are permitted to offer in-region long distance services. The other
incumbent telephone companies, including Sprint and Cincinnati Bell, already may
do so.
INTERSTATE ACCESS CHARGES
In three orders released on December 24, 1996, May 16, 1997, and May 31,
2000, the FCC made major changes in the interstate access charge structure. In
the 1996 order, the FCC removed restrictions on incumbent telephone companies'
ability to lower access prices and relaxed the regulation of new switched access
services in those markets where there are other providers of access services. If
this increased pricing flexibility is not effectively monitored by federal
regulators, it could have a material adverse effect on the combined company's
ability to compete in providing interstate access services.
In the 1997 order, the FCC announced and began to implement its plan to
bring interstate access rate levels more in line with costs. Pursuant to this
plan, the FCC has adopted rules that grant incumbent telephone companies subject
to price cap regulation increased pricing flexibility upon demonstrations of
increased competition or potential competition in relevant markets. The FCC
elaborated on these access pricing flexibility rules in an order released on
August 27, 1999. The manner in which the FCC implements this approach to
lowering access charge levels could have a material effect on the combined
company's access charge revenues and on its ability to compete in providing
interstate access services. Several parties appealed the 1997 order and on
August 19, 1998, the 1997 order was affirmed by the U.S. Court of Appeals for
the Eighth Circuit.
In the 2000 order, the FCC adopted several proposals to further reform
access charge rate structures, relying heavily on a proposal submitted by a
coalition of long distance companies and incumbent telephone companies referred
to as "CALLS." These and related actions will result in significant changes to
access charge rate structures and rate levels. As incumbents' access rates are
reduced, the combined company
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may experience downward market pressure on its own access rates. The impact of
these new changes will not be fully known until they are fully implemented.
In August 1999, the FCC asked for comment on claims by some long distance
carriers that competitive local telephone companies were charging those carriers
excessively high rates for access to competitive local telephone company
customers. Specifically, the FCC asked whether it should regulate competitive
local telephone company access charges to ensure that these charges are not
unreasonable. More recently, two coalitions of competitive local telephone
companies asked the FCC to prevent AT&T from withdrawing its long distance
services from customers of those local telephone companies. These FCC
proceedings are pending. Although we are unable to predict the outcome of these
proceedings, a decision by the FCC to regulate the level of competitive local
telephone company access charges could result in lower competitive local
telephone company access charges and decrease the revenues some competitive
carriers, such as Gabriel and TriVergent, receive from providing access
services. Notably, AT&T and Sprint have disputed and refused payment of switched
access charges billed by certain competitive local telephone companies at rates
which exceed the incumbent telephone company tariffed rate levels. Since
TriVergent currently charges switched access rates which exceed the access rates
charged by incumbent telephone companies, it is possible that one or more long
distance carriers will dispute its charges as well.
RECIPROCAL COMPENSATION FOR CALLS TO INTERNET SERVICE PROVIDERS
A number of incumbent telephone companies throughout the country, including
Southwestern Bell, Ameritech and BellSouth, have been contesting whether the
obligation to pay reciprocal compensation should apply to telephone calls
received by end users who provide Internet access services. These end users are
commonly known as Internet service providers or "ISPs," who have large amounts
of incoming calls. As interpreted by the FCC, the Telecommunications Act
requires that, where a subscriber of one local telephone company places a local
call that must be handed off to a second local telephone company for delivery to
the called party, the first carrier must pay reciprocal compensation to the
second carrier for terminating the call. The incumbent telephone companies claim
that calls made to ISPs are interstate in nature and that calls to ISPs
therefore should be exempt from reciprocal compensation arrangements applicable
to local calls carried by two local telephone companies. Competitive local
telephone companies have contended that interconnection agreements providing for
reciprocal compensation contain no exception for local calls to ISPs and
reciprocal compensation is therefore applicable. In response to carriers'
requests for clarification, the FCC, on February 25, 1999, declared that, while
Internet traffic is jurisdictionally mixed, it is largely interstate in nature.
The FCC also found that the reciprocal compensation requirement in the
Telecommunications Act does not apply to calls to ISPs. The FCC did not,
however, determine whether calls to ISPs are subject to reciprocal compensation
in any particular instance. In this regard, the FCC concluded that carriers are
bound by their existing interconnection agreements, as interpreted by state
commissions, and thus are subject to reciprocal compensation obligations to the
extent provided in their interconnection agreements or as determined by state
commissions. Concurrent with its decision, the FCC opened a rulemaking
proceeding to adopt an appropriate prospective inter-carrier compensation
mechanism for calls to ISPs.
In March 2000, the U.S. Court of Appeals for the D.C. Circuit vacated the
FCC's February 1999 ruling, finding that the FCC order did not include a
satisfactory explanation for its holding that calls to ISPs are not subject to
the Telecommunications Act's reciprocal compensation provisions. The FCC
currently is seeking comment on the impact of the Court's ruling and then may
either clarify its former decision or adopt a new one. We are unable to predict
the outcome of that proceeding. In addition, Congress is considering draft
legislation that would, if enacted in its current form, eliminate mandatory
reciprocal compensation requirements not only for termination of calls to ISPs,
but also for all other local telecommunications traffic in favor of a so-called
"bill-and-keep" scheme that offsets or otherwise waives these termination
charges. Gabriel and TriVergent cannot predict whether the pending legislation
will be enacted or, if enacted, the impact on the business of the combined
company. Until the FCC or Congress finally acts on these measures, we expect
that incumbent telephone companies will continue to challenge
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reciprocal compensation payments in cases before state regulators. To the extent
that state commissions are persuaded to find that interconnected calls to ISPs
are not subject to reciprocal compensation obligations, the revenues of the
combined company could be negatively affected, since it would not receive
reciprocal compensation on calls terminated on its networks to its ISP customers
in those states. However, at present, no significant portion of Gabriel's or
TriVergent's revenues are attributable to calls terminated to ISPs and
TriVergent has signed an agreement with BellSouth that provides that BellSouth
will pay reciprocal compensation on ISP-bound traffic at agreed rates through
2002.
DETARIFFING
In November 1996, the FCC ordered non-dominant long distance carriers, like
Gabriel and TriVergent, to cease filing tariffs for domestic long distance
services. The FCC's order required mandatory detariffing for long distance
services and gave interstate long distance service providers nine months to
withdraw federal tariffs and move to contractual relationships with their
customers. This order subsequently was stayed by a federal appeals court.
In March 1999, the FCC adopted further rules that, while still maintaining
mandatory detariffing, required long distance carriers to make specific public
disclosures on the services providers' Internet web sites of their rates, terms
and conditions for domestic interstate services. The effective date of these
rules also was delayed until an appeals court could rule on the appeal of the
FCC's detariffing order. On April 8, 2000, the United States Court of Appeals
for the D.C. Circuit upheld the FCC's mandatory detariffing decision. The FCC
subsequently issued a notice establishing a nine-month transition to mandatory
detariffing. By January 31, 2001, carriers must cancel all tariffs for
interstate domestic long distance services. After that date, the prices, terms
and conditions pursuant to which domestic providers offer service to customers
will be governed by contract, and service providers will have to rely more
heavily on individually negotiated agreements with customers. The transition to
contracts contemplated by this FCC rule change may require significant resources
to implement. Manpower and cash expenditures associated with such a transition
may negatively impact the combined company.
In June 1997, the FCC allowed non-dominant local service providers to
withdraw their tariffs for interstate access services provided to long distance
carriers. More recently, the FCC initiated proceedings to consider whether such
local service providers, such as Gabriel and TriVergent, should be required to
withdraw their interstate access services tariffs. We are unable to predict the
outcome of this proceeding.
The FCC continues to require that service providers obtain authority to
provide services between the United States and foreign points and file tariffs
for international services.
UNIVERSAL SERVICE SUBSIDIES
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries. The FCC also expanded the federal
subsidies for local telephone services provided to low-income consumers.
Providers of interstate telecommunications service, such as Gabriel and
TriVergent, must pay for a portion of these programs. The combined company's
share of these federal subsidy funds will be based on its share of certain
defined telecommunications end user revenues. Currently, the FCC is assessing
such payments on the basis of a provider's revenue for the previous year. The
FCC recently adopted rules for subsidizing service provided to consumers in high
cost areas, which may result in further substantial increases in the overall
cost of the subsidy program. Gabriel and TriVergent estimate that their
contribution liability for 2000 will be immaterial. With respect to subsequent
periods, however, the combined company is currently unable to quantify the
amount of subsidy payments that it will be required to make or the effect that
these required payments will have on its financial condition.
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STATE REGULATION
To provide intrastate services, the operating subsidiaries of the combined
company will be required to have certificates of public convenience and
necessity from state regulatory agencies and to comply with state requirements
for telecommunications utilities, including state tariffing requirements.
State agencies will require the combined company to file periodic reports,
pay various fees and assessments, and comply with rules governing quality of
service, consumer protection and other issues. Although the specific
requirements vary from state to state, state regulations tend to be more
detailed than FCC regulations because of the strong public interest in the
quality of basic local service. The combined company intends to comply with all
applicable state regulations, and as a general matter does not expect that these
requirements of industry-wide applicability will have a material adverse effect
on its business. However, no assurance can be given that the imposition of new
regulatory burdens in a particular state will not affect the profitability of
the combined company's services in that state.
LOCAL REGULATION
Gabriel's and TriVergent's networks are subject to numerous local
regulations such as building codes and licensing. Such regulations often vary on
a city by city and county by county basis. If the combined company decides in
the future to install its own fiber optic transmission facilities, it will need
to obtain rights-of-way over private and publicly owned land.
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MANAGEMENT OF GABRIEL FOLLOWING THE MERGER
The following table sets forth the persons who will be the executive
officers and directors of Gabriel upon completion of the merger.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
------------------------------------------ --- ---------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS
David L. Solomon.......................... 41 Chief Executive Officer, Chairman and Director
G. Michael Cassity........................ 51 President and Chief Operating Officer and Director
Gerard J. Howe............................ 45 President -- Strategic Initiatives
John P. Denneen........................... 60 Executive Vice President -- Corporate Development
and Legal Affairs, Secretary and Director
Marguerite A. Forrest..................... 46 Senior Vice President -- Human Resources and
Administration and Assistant Secretary
Michael E. Gibson......................... 41 Senior Vice President and Chief Financial Officer
Shaler P. Houser.......................... 31 Senior Vice President -- Corporate Development and
Strategy
NON-MANAGEMENT DIRECTORS
Charles S. Houser......................... 57 Vice Chairman and Director
Watts Hamrick............................. 40 Director
Michael R. Hannon......................... 39 Director
William Laverack, Jr...................... 42 Director
Byron D. Trott............................ 40 Director
Jack Tyrrell.............................. 53 Director
</TABLE>
Gabriel's board of directors is classified into three classes of three
board seats each. The terms of Messrs. Cassity, Hamrick and Laverack will expire
in 2001, the terms of Messrs. Denneen, Trott and Tyrrell will expire in 2002 and
the terms of Messrs. Hannon, Houser and Solomon will expire in 2003.
The board of directors has an executive committee, a finance committee, an
audit committee and a compensation committee. Directors are not compensated for
their services as directors, but non-employee directors are reimbursed for
expenses incurred in connection with board and committee meetings attended. Upon
completion of the merger, the board of directors will reappoint committee
members and the chairmen of the finance, audit and compensation committees.
EXECUTIVE OFFICERS
DAVID L. SOLOMON, Chief Executive Officer, Chairman and a director of
Gabriel and the combined company, is an experienced telecommunications
entrepreneur. He served as Executive Vice President and Chief Financial Officer
of Brooks Fiber from 1994 until its acquisition by WorldCom in 1998. During this
period, he played a major role in its capital raising and growth activities,
raising more than $1.5 billion of debt and equity and completing numerous
acquisitions. Prior to joining Gabriel in December 1999, Mr. Solomon served as
an advisor to Diginet Americas, Inc., a competitive telecommunications provider
with operations throughout South America, and he also serves as a director of
that company. Mr. Solomon is also an investment director and founder of Meritage
Private Equity Fund, L.P., a private investment fund specializing in
communications network and services companies. Prior to joining Brooks Fiber, he
was a partner of KPMG LLP, where he gained more than 13 years' public company
accounting and financial experience. He is a member of the American Institute
and Tennessee Society of CPAs.
G. MICHAEL CASSITY, President and Chief Operating Officer and a director 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,
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human resources, strategic planning, financial management, corporate and
community affairs and regulatory vice president for Tennessee.
GERARD J. HOWE, President and Chief Operating Officer and a director and
co-founder of Gabriel and President -- Strategic Initiatives and of the combined
company, has more than 20 years of operational and management experience in the
telecommunications industry. Mr. Howe also currently serves as a director of
Gabriel. Prior to joining Gabriel, Mr. Howe was Senior Vice President of Finance
at Brooks Fiber, where he oversaw the company's financial operations. Prior to
joining Brooks Fiber, Mr. Howe spent 18 years with SBC Communications
(Southwestern Bell) and held a number of executive positions in operations,
finance, regulatory and information processing. From 1993 to 1995, Mr. Howe
served as an executive and director of SBC CableComms, U.K., a UK-based cable
television/telephony business in its formative stages of development. During his
tenure in the UK, Mr. Howe was responsible for all aspects of financial
operations, corporate development, human resources and regulatory and
legislative affairs. Prior to his assignment in the UK, Mr. Howe served as Vice
President, Chief Financial Officer and a director of Southwestern Bell Yellow
Pages.
JOHN P. DENNEEN, Executive Vice President -- Corporate Development and
Legal Affairs, Secretary and a director of Gabriel and the combined company, has
more than 30 years' experience in U.S. and international corporate and business
law with particular emphasis on securities transactions, mergers and
acquisitions, corporate finance and joint ventures. Mr. Denneen is also
currently a director of Gabriel. Prior to joining Gabriel in August 1999, Mr.
Denneen was a senior partner of Bryan Cave LLP, a leading international law
firm, for over 12 years, where he headed the legal teams that assisted Brooks
Fiber in issuing more than $1.5 billion of debt and equity securities and
completing numerous acquisitions, concluding with its $3 billion merger with
WorldCom, Inc. While at Bryan Cave LLP, Mr. Denneen also represented several
other competitive telecommunications providers in connection with their capital
raising activities.
MARGUERITE A. FORREST, Senior Vice President -- Human Resources and
Administration and Assistant Secretary of Gabriel and the combined company,
brings more than 20 years of professional management, operational and technical
experience in the communications industry. Most recently, Ms. Forrest served as
Vice President and Assistant Secretary for Brooks Fiber. She was a member of the
start-up management team since that corporation was founded in 1993, charged
with the responsibilities for human resources, corporate administration and
shareholder communication. Previous management and technical experience included
responsibility for drafting and system design activities for Cencom Cable
Associates, Group W Cablevision and Telcom Engineering, Inc.
MICHAEL E. GIBSON, Senior Vice President and Chief Financial Officer of the
combined company, is highly experienced in financial operations in the
telecommunications industry. Mr. Gibson is currently Senior Vice
President -- Finance and Corporate Development of Gabriel. Most recently, Mr.
Gibson has been employed as a financial advisor to telecommunications start-up
companies, playing a major role in negotiating and closing over $250 million of
debt/equity financing during 1999. He served as Vice President and Treasurer of
Brooks Fiber from that company's inception in 1993 until its acquisition by
WorldCom in 1998. Mr. Gibson oversaw all activities related to financial
operations, planning and analysis, including acquisitions, treasury, SEC
reporting and risk management. Prior to joining Brooks Fiber, Mr. Gibson served
as a finance director for Cencom Cable for five years, with responsibility for
budgeting, financial planning, accounting, payment processing and human
resources. Prior to joining Cencom Cable, Mr. Gibson was an audit manager at
Arthur Andersen & Co., gaining extensive experience in providing auditing and
business advisory services mainly to telecommunications and cable television
companies.
SHALER P. HOUSER, Senior Vice President -- Corporate Development and
Strategy of the combined company, is a co-founder, Senior Vice President of
Corporate Development and Strategy and director of TriVergent. Mr. Houser has
nine years of experience in the telecommunications industry. Prior to
co-founding TriVergent in 1997, Mr. Houser was Senior Vice President and
co-founder of Seruus Ventures, LLC. From 1991 to 1996, Mr. Houser served in
various capacities, including product
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development, business development, international development and carrier sales,
at Corporate Telemanagement Group and its successor parent company, LCI
International, both long distance companies. Shaler P. Houser is Charles S.
Houser's son.
NON-MANAGEMENT DIRECTORS
CHARLES S. HOUSER, vice chairman of the combined company and a co-founder
and chairman of the board of directors and chief executive officer of
TriVergent, has more than 17 years of experience in the telecommunications
industry as an investor and a senior manager. In 1996 and 1997, Mr. Houser was a
principal and co-founder of Seruus Ventures, LLC and Seruus Telecom Fund LP,
both venture capital firms specializing in telecommunications companies. From
1989 to 1996, Mr. Houser was chairman and chief executive officer of Corporate
Telemanagement Group, Inc., a long distance company that merged with LCI
International Inc. in 1995. From 1987 to 1989, Mr. Houser was president of The
Consilium Group, Inc., a venture capital firm. From 1983 to 1987, he was
president and in 1986 became chief executive officer of Tel/Man, Inc., a long
distance company that merged with SouthernNet, Inc., where he also served as
chief operating officer. Mr. Houser serves on the board of directors of Seruus
Ventures, LLC; Seruus Telecom Fund, L.P.; Teleco, Inc., a national
telecommunications equipment distributor and manufacturer; iBasis, Inc., an
Internet-based communications carrier; and from 1981 until March 2000, Summit
Financial Corporation, a Greenville, South Carolina-based bank holding company.
WATTS HAMRICK has been a director of TriVergent since October 1998. Mr.
Hamrick has been a senior vice president with First Union Capital Partners, an
equity and mezzanine capital investment group of First Union Corp., since March
1995. Mr. Hamrick joined First Union Capital Partners in 1988. Prior to joining
First Union Capital Partners, Mr. Hamrick was a senior tax consultant at Price
Waterhouse in New York. Mr. Hamrick was nominated to serve on TriVergent's board
by First Union Capital Partners, which is entitled to nominate one member of
TriVergent's board under TriVergent's stockholders' agreement.
MICHAEL R. HANNON, a director of Gabriel since May 2000, has been a general
partner of Chase Capital Partners, a general partnership with approximately $7.5
billion under management, since January 1988. Chase Capital Partners invests in
a wide variety of international private equity opportunities including
management buyouts, growth equity, and venture capital situations, and its chief
limited partner is The Chase Manhattan Corporation, one of the largest bank
holding companies in the United States. At Chase Capital Partners, he focuses on
the media/telecom and financial services industry. Mr. Hannon is currently a
director of Formus Communications, Entercom Communications, Financial Equity
Partners and Telecorp PCS, Inc.
WILLIAM LAVERACK, JR., a director of Gabriel since December 1998, has been
a general partner of Whitney & Co. since 1993. Previously, he was with Gleacher
& Co., Inc. and Morgan Stanley & Co., Incorporated. He is a director of TeleCorp
PCS, Inc., HOB Entertainment, Inc., PRAECIS Pharmaceuticals, Inc., NeuroMetrix,
Inc., and Ariat International, Inc.
BYRON D. TROTT, a director of Gabriel since October 1998, is a managing
director of Goldman, Sachs & Co. responsible for its Midwest Region and co-head
of its Chicago office. He joined Goldman, Sachs & Co. in 1982 and became vice
president in 1987 and a partner in 1994.
JACK TYRRELL has been a director on TriVergent's board since October 1998.
Currently a managing partner at Richland Ventures, Mr. Tyrrell has been a
founding partner of five venture capital funds since 1985. Mr. Tyrrell has
served on the boards of Regal Cinemas, Six Flags, Oxford Health Plans, Medaphis
and Regent Communications and currently serves on the boards of several private
companies. Mr. Tyrrell was nominated to serve on TriVergent's board by Richland
Ventures II, L.P., which is entitled to nominate one member of TriVergent's
board under TriVergent's stockholders' agreement.
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EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid
during fiscal 1999 to or by TriVergent and Gabriel's chief executive officers
and the persons whose fiscal 1999 salary and bonus exceeded $100,000 and who
would have constituted the four most highly compensated executive officers of
the combined company during 1999. We refer to these officers as the "named
executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND OPTIONS AND COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) WARRANTS(#)(4) ($)
------------------ ---- --------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Robert A. Brooks....................... 1999 200,000 100,000 150,000(3) --
Chief Executive Officer of Gabriel(1)
David L. Solomon....................... 1999 -- -- 1,550,000(3) --
Chief Executive Officer of Gabriel(1)
Charles S. Houser...................... 1999 62,188 7,500 480,000(5) --
Chief Executive Officer of
TriVergent(4)
Gerard J. Howe......................... 1999 175,000 35,000 125,000(3) --
President and Chief Operating Officer
Shaler P. Houser....................... 1999 156,380 18,000 50,000(5) 4,752(6)
Senior Vice President of Corporate
Development and Strategy
Marguerite A. Forrest.................. 1999 120,000 24,000 50,000(3) --
Senior Vice President-Human Resources
and Administration and Assistant
Secretary
</TABLE>
-------------------------
(1) Robert A. Brooks served as chief executive officer of Gabriel until December
13, 1999. David L. Solomon was elected vice chairman and chief executive
officer of Gabriel effective December 13, 1999.
(2) Represents bonuses earned in the reported year, which were paid in the
following year. The payment of bonuses is at the discretion of the
compensation committee of the board of directors.
(3) Represents shares of Gabriel common stock subject to compensatory stock
options and warrants granted during 1999.
(4) Charles S. Houser joined TriVergent as chief executive officer on May 13,
1999, and the compensation disclosed is for the period from that date
through December 31, 1999.
(5) Represents shares of TriVergent common stock subject to compensatory stock
options and warrants granted during 1999.
(6) Reflects matching contributions made under TriVergent's 401(k) plan on
behalf of Mr. Houser.
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The following table sets forth information regarding option grants with
respect to common stock made by TriVergent and Gabriel to the named executive
officers during the fiscal year ended December 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
OF THAT COMPANY GRANTED TO FOR OPTION/WARRANT
UNDERLYING EMPLOYEES OF EXERCISE TERM(3)
OPTIONS/WARRANTS THAT COMPANY BASE PRICE EXPIRATION ----------------------
NAME GRANTED(#) IN 1999 ($/SH)(1) DATE(2) 5% 10%
---- ---------------- ------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
GABRIEL
Robert A. Brooks........ 150,000(4) 5.50% 2.40 12/13/09 226,402 573,747
David L. Solomon........ 1,000,000(4) 36.66% 2.40 12/13/09 1,509,347 3,824,982
550,000(5) 20.16% 3.00 12/13/09 1,037,676 2,629,675
Gerard J. Howe.......... 125,000(4) 4.58% 2.40 12/13/09 113,201 286,874
Marguerite A. Forrest... 50,000(4) 1.83% 2.40 12/13/09 75,467 191,249
TRIVERGENT
Charles S. Houser....... 400,000(6) 15.0% 3.75 12/15/09 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 8/13/09 7,500 15,000
Shaler P. Houser........ 50,000(6) 1.9% 3.75 12/15/09 9,375 18,750
</TABLE>
-------------------------
(1) The exercise base price was set at the respective board's determination of
the fair market value of common stock of Gabriel or TriVergent, as the case
may be, on the date of grant.
(2) The plans pursuant to which the options were granted provide for earlier
expiration dates upon the option holder's termination of employment.
(3) The dollar amounts under the 5% and 10% columns were calculated as required
by the rules of the Securities and Exchange Commission and, therefore, are
not intended to forecast possible future appreciation, if any, of the price
of the common stock of Gabriel, TriVergent or the combined company. The
amounts shown reflect differences between the appreciation and the exercise
price at the assumed annual rates of appreciation through the tenth
anniversary of the dates of grant.
(4) All options vest in one-third increments on the first, second and third
anniversaries of the date of grant and expire on the tenth anniversary of
the date of grant.
(5) Warrants are fully vested.
(6) All options vest with respect to 20% of the underlying shares on each of the
first five anniversaries following the grant date and expire on the tenth
anniversary of the date of grant. Pursuant to letter agreements entered into
by such officers in connection with the merger, one-third of the underlying
shares will vest on each of the first three anniversaries of the grant date.
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<PAGE> 122
The following table sets forth information regarding aggregate option
exercises during the fiscal year ended December 31, 1999 and the number and
value of exercisable and unexercisable options to purchase Gabriel common stock
or TriVergent common stock, as the case may be, held by the named executive
officers as of December 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES OF
THAT COMPANY UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED ON ---------------------------- ----------------------------
NAME EXERCISE(#) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
GABRIEL(1)
Robert A. Brooks.................... -- -- 150,000 -- --
David L. Solomon.................... -- -- 1,000,000 -- --
Gerard J. Howe...................... -- -- 125,000 -- --
Marguerite A. Forrest............... -- -- 125,000 -- --
50,000 -- --
TRIVERGENT(2)
Charles S. Houser................... -- -- 480,000 -- --
Shaler P. Houser.................... -- 160,000 690,000 $216,000 $864,000
</TABLE>
-------------------------
(1) Based on the fair market value of Gabriel's common stock on December 31,
1999 of $2.40 per share, as determined by Gabriel's board of directors,
there were no in-the-money Gabriel options at December 31, 1999.
(2) Calculated based on a price of $3.75 per share, the fair market value of
TriVergent's common stock on December 31, 1999 as determined by TriVergent's
board of directors, minus the per share exercise price, multiplied by the
number of shares underlying the option.
GABRIEL STOCK PLAN
The Gabriel Communications, Inc. 1998 Stock Incentive Plan, as amended,
provides for grants to selected employees, outside directors, consultants and
advisers of up to 9,000,000 shares of common stock subject to awards in the form
of awards of
- incentive and nonqualified stock options,
- stock appreciation rights,
- restricted stock and restricted stock units,
- performance stock and performance units,
- phantom stock, and
- stock acquired through a stock purchase program or granted under merit
awards.
As of September 30, 2000, options to purchase a total of 3,342,680 shares
at exercise prices ranging from $2.40 to $5.60 per share were outstanding, of
which options to purchase a total of 366,510 shares at $2.40 per share are
exercisable within the next 60 days. All options vest in one-third increments on
the first, second and third anniversaries of the dates of grant.
The plan is administered by Gabriel's compensation committee of its board
of directors and will remain in effect until terminated by Gabriel's board of
directors. However, no incentive stock options may be granted under the plan
after November 15, 2007. Gabriel's board, in its sole discretion, has the
authority to determine the terms and provisions of all awards under the plan,
subject to specific limitations set forth in the plan and applicable law. In the
event that any options or awards granted under the plan
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<PAGE> 123
terminate, expire or are canceled, new options or awards may be granted with
respect to the shares covered by such options or awards. However, to the extent
that options or awards granted under the plan are exercised or become vested,
the stock available for grant under the plan is reduced.
The plan contains standard anti-dilution provisions to take into account
stock dividends, stock splits, recapitalizations, reorganizations, mergers,
split ups and similar matters. The plan also provides that in the event of a
change in control, as defined in the plan, outstanding awards may become
immediately exercisable. Moreover, the plan provides that each participant
granted an award shall sign a written agreement as set forth in the plan.
Generally, awards under the plan are not transferable except by will or by the
laws of descent and distribution. Awards under the plan are forfeited if the
participant's affiliation or employment is terminated for cause or for any
reason other than death, disability or retirement.
Incentive stock options granted under the plan are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code. These options are subject to the various provisions of the
Internal Revenue Code, including specific rules regarding the exercise price of
incentive stock options. Only employees of Gabriel may be granted incentive
stock options. Non-incentive stock options are not so limited.
Stock appreciation rights under the plan may be in tandem with an option or
may be limited stock appreciation rights that only entitle the participant to
receive a cash payment in connection with a change in control. Restricted stock
awards and units are subject to conditions, including vesting, as established by
Gabriel's board. Performance stock awards and performance units are subject to
the terms set forth by the board including the achievement of any goals
specified by the board. The plan also allows the board to establish one or more
stock purchase programs, to award stock in its discretion as a merit award and
to issue phantom stock awards in which an amount of stock or cash may be awarded
based on the value of the underlying shares, solely on earnings or appreciation,
or both.
TRIVERGENT STOCK PLAN
The TriVergent Corporation Amended and Restated Employee Incentive Plan was
most recently amended and restated on June 21, 2000. Under the plan, TriVergent
may issue stock options, bonus stock awards and restricted stock awards to its
employees and may issue non-qualified options, which are described below, to
other persons selected by the board. The plan is administered by the TriVergent
board of directors and terminates on January 12, 2008, subject to the board's
right to terminate it at an earlier date. The plan provides for a maximum of ten
million shares of TriVergent common stock to be issued thereunder. As of
September 30, 2000, TriVergent had granted options to purchase 9,960,624 shares
of common stock under the plan. No bonus stock or restricted stock awards have
been granted. In the event that any options or awards granted under the plan
terminate, expire or are canceled, new options or awards may be granted with
respect to the shares covered by these options or awards. However, to the extent
that options or awards granted under the plan are exercised or become vested,
the stock available for grant under the plan is reduced. The plan contains
standard antidilution provisions to account for stock dividends, stock splits,
recapitalizations, reorganizations, mergers, split ups and similar matters.
Options granted under the employee option plan may be either qualified
options or non-qualified options. Qualified options are options that meet the
requirements of Section 422 of the Internal Revenue Code and are also known as
"incentive stock options."
The exercise price of a qualified option granted to an individual who owns
shares possessing more than 10% of the total combined voting power of all
classes of TriVergent stock will be at least 110% of the fair market value of a
share of common stock on the date of grant. The exercise price of a qualified
option granted to an individual other than a 10% owner will be at least 100% of
the fair market value of a share of TriVergent common stock on the date of
grant, as determined by the most recent valuation of the common stock made for
general stock transaction purposes. The exercise price of a non-qualified option
will be 100% of the fair market value, determined as described above, of a share
of TriVergent common stock or, subject to the board's authority, either less or
more than fair market value, but not less than 85% of the fair market value.
Qualified options, bonus stock awards and restricted stock awards may be granted
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<PAGE> 124
only to TriVergent employees. Non-qualified options may be granted to employees
and other persons selected by the board. Of the total options granted through
September 30, 2000, 5,899,428 were qualified options and 4,061,196 were
non-qualified options.
Both qualified and non-qualified options are evidenced by written stock
option agreements in such form as may be determined by the board. The term,
vesting schedule and exercise price of stock options are determined by the
board, subject to the exercise price limitations discussed above; however,
substantially all options to date have a ten-year term and vest 20% per year
over the first five years of the term and have a fair market value exercise
price. In the event of a change in control, all outstanding options become
immediately exercisable. A change in control includes a sale of substantially
all of TriVergent's assets, a merger of TriVergent and another company where
TriVergent is not the surviving corporation, the acquisition of beneficial
ownership of more than 50% of the voting securities of TriVergent by any person
and a substantial change in board composition. However, a change in control does
not include any transactions contemplated by the merger agreement with respect
to any options or bonus or restricted stock awards granted on or after June 9,
2000. Therefore, the merger will not accelerate in the vesting of these options.
Prior to an initial public offering of TriVergent common stock, all shares
issued pursuant to the exercise of stock options are subject to TriVergent's
right to buy back such shares within six months after the optionee's employment
with TriVergent is terminated for any reason. The purchase price for the
repurchased shares is the most recent evaluation of TriVergent common stock
which has been made for general stock transaction purposes unless the board
determines that an appraisal by an independent appraiser should be made. All
shares issued pursuant to stock options are also subject to TriVergent's right
of first refusal and may not be sold, assigned or otherwise transferred unless
first offered to TriVergent on the same terms and conditions.
The TriVergent board may impose such conditions and restrictions upon the
exercise of options as it may deem advisable. However, special rules apply to
qualified options. The plan provides that if an employee dies while still a
TriVergent employee, qualified stock options granted under the plan may be
exercised after his death only to the extent that they were exercisable at death
and then for a period not to exceed the lesser of the remaining term of the
option and nine months after the employee's death. Except where employment is
terminated for reasons other than the death of the employee, qualified options
are exercisable after the employee ceases to be a TriVergent employee, for a
period that does not exceed the lesser of the remaining term of the qualified
option and 90 days following employee's termination.
Options are generally exercisable only by the employee to whom they are
granted and are not assignable other than by will or by the laws of descent and
distribution. Grants of tandem stock options are prohibited. Also, qualified and
non-qualified options may not be granted under any sort of arrangement where the
exercise of one affects the right to exercise the other.
EMPLOYMENT AGREEMENTS
GABRIEL EMPLOYMENT AGREEMENTS
Gabriel has entered into employment agreements with the following
individuals who will also serve as executive officers of the combined company:
- David L. Solomon, its Chairman and Chief Executive Officer;
- Gerard J. Howe, its President-Strategic Initiatives;
- John P. Denneen, its Executive Vice President -- Corporate Development
and Legal Affairs and Secretary;
- Marguerite A. Forrest, its Senior Vice President -- Human Resources and
Administration and Assistant Secretary; and
- Michael E. Gibson, its Senior Vice President and Chief Financial Officer.
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<PAGE> 125
The terms of these agreements will expire on December 31, 2002, with
respect to Mr. Solomon, and on varying dates ranging from August 15, 2002 to
August 15, 2003 for the other officers, unless sooner terminated or extended. As
compensation for their respective services, each officer will receive an annual
base salary at a rate determined by Gabriel's compensation committee, which may
be increased but not decreased. Each employee is also eligible for an annual
performance bonus at varying maximum percentages of his or her annual base
salary. These percentages are 100% for Mr. Solomon and range from 40% to 50% for
the other officers. During 2000, Mr. Solomon's annual bonus will be at least 50%
of his annual base salary and payable in shares of Gabriel common stock valued
at $3.00 per share. During subsequent years, his annual bonus may be paid, at
his option, in any combination of cash or shares of our common stock, provided
that the stock portion of the bonus does not exceed 50% of the bonus.
In addition, pursuant to his employment agreement, Mr. Solomon purchased
425,000 shares of our common stock at $2.40 per share. He was also granted a
warrant to purchase, at any time until December 12, 2009, 550,000 shares of
common stock at $3.00 per share and a ten year option to purchase 1,000,000
shares of common stock at $2.40 per share. Mr. Solomon's stock option vests
one-third on each of the first, second and third anniversaries of his
employment.
Mr. Solomon's employment agreement provides that, following a sale of
Gabriel or upon change of control or liquidation events during the term of his
employment and prior to December 13, 2001, in which the consideration received
by Gabriel stockholders is less than $6.00 per share, on an as-converted common
equivalent basis, Mr. Solomon may elect to terminate his employment and Gabriel
will, in such event, pay him $2,500,000. Upon termination of the employment of
any of the above-named employees, he or she will be eligible, depending on the
reason for termination, for the salary and lump sum payments, if any, described
below:
- if his or her employment is terminated by death or incapacity, the
employee will receive his or her then current annual base salary for the
remainder of the month and for an additional 12 months and a lump sum
payment of the maximum bonus for which he or she was eligible in the year
in which the termination occurred,
- if the employee is terminated without "good cause," as defined in the
agreements, he or she will receive his or her salary for the remainder of
the year and an amount equal to two times, in the case of Mr. Solomon,
Mr. Denneen and Mr. Howe, and one times in the case of the other
officers, of his or her then current annual base salary,
- if the employee is terminated upon a "change of control," as defined in
the agreements, he or she will receive an amount equal to three times, in
the case of Mr. Solomon, Mr. Denneen and Mr. Howe, and two times in the
case of the other officers, of his or her then current annual base salary
and the maximum bonus for which he or she was eligible for that year,
- if the employee is terminated with "good cause" or if the employee
resigns for serious personal reasons, he or she shall receive only the
salary and benefits accrued through the termination date,
If any such payment would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code or any interest or penalties with respect to
such tax, the employee would also be entitled to receive an additional payment,
net of income and excise taxes, to compensate him or her for such tax, interest
and penalties. In the event of a termination without "good cause" or upon a
"change of control," Gabriel would be obligated to continue the employee's
benefits for the remainder of the employment period then provided for in his or
her agreement.
TRIVERGENT EMPLOYMENT AGREEMENTS
TriVergent has entered into employment agreements with Charles S. Houser as
chief executive officer on September 17, 1999, with G. Michael Cassity as
president and chief operating officer on March 6, 2000, and with Shaler P.
Houser as senior vice president of corporate development on July 20, 1999.
Pursuant to these agreements, each employee is paid an initial annual base
salary, which may be increased but not decreased, a bonus at the board's
discretion and additional benefits. These agreements contain
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<PAGE> 126
standard confidentiality and non-disclosure provisions, and standard provisions
providing for assignment of any intellectual property created by each employee
in his or her capacity as an officer of TriVergent.
Messrs. C. Houser's and S. Houser's employment agreements have rolling
terms of two years. TriVergent may fix the term at any time. The agreement may
be terminated immediately if the employee is terminated for "cause," as defined
in the agreement. The definition of "cause" differs depending on whether it is
considered before or after a "change in control," as defined in the agreement.
After a "change in control," the standard for cause is more difficult to
achieve, and there are increased rights to cure. If the agreement is terminated
due to the employee's death or disability, he or she, or his or her estate, as
the case may be, is entitled to compensatory payments for the remainder of the
term. If TriVergent terminates the agreement prior to a "change in control" for
any reason other than for cause after it fixes the term, the employee is
entitled to receive the compensation and benefits payable under the agreement
for the remainder of the term. If the employee terminates the agreement because
TriVergent materially breaches the agreement or there is an "involuntary
termination," as defined in the agreement, he is entitled to severance payments
of 24 months, immediate vesting of his options, and other benefits. The employee
is entitled to have his severance payments grossed up for tax purposes if his
termination occurs after a "change in control."
Mr. Cassity's employment agreement will remain in effect until terminated
by
- death,
- disability,
- termination for cause, in which case TriVergent may terminate the
agreement immediately,
- resignation for "good reason," as defined in the agreement or
- termination without cause or resignation without good reason, in either
case, between 180 and 90 days prior to the third anniversary of the
agreement and each subsequent anniversary.
If the agreement is terminated due to Mr. Cassity's death or disability, he, or
his estate, is entitled to compensatory payments for one year. If Mr. Cassity
resigns for good reason before a change in control, he will receive compensatory
payments for the greater of one year or two years after the effective date. If
Mr. Cassity resigns for good reason after a change in control, he will receive
compensatory payments for the greater of one year or three years after the
effective date. In either case, he will be entitled to immediate vesting of his
options and other benefits. Mr. Cassity's employment agreement does not provide
for any tax "gross up" of severance payments if his employment is terminated
after a change in control.
Each of Messrs. C. Houser, S. Houser and Cassity has agreed that the merger
will not be treated as a "change in control" for purposes of his employment
agreement. Mr. Charles Houser has agreed to serve as Vice Chairman of the board
of directors of Gabriel following the effective time of the merger.
TRIVERGENT NONCOMPETITION AGREEMENTS
TriVergent has entered into substantially identical, standard
noncompetition agreements with substantially all of its executive officers that
preclude such officer from participating in, or in any respect being associated
with, any telecommunications business that competes with it within any
metropolitan statistical service area in which it provides services on the date
of the termination of the officer's employment. This period of noncompetition is
applicable during such officer's employment and for the two year period
following termination of his or her employment. The applicable officer may,
however, be a passive investor owning less than 5% of a competing business. The
agreement prohibits the solicitation of TriVergent's employees or customers and
contains standard confidentiality provisions with respect to proprietary and
confidential information. The agreement also contains provisions that treat as
TriVergent's property all property, including intellectual property, created by
the officer during his or her employment that relates to TriVergent's business.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GABRIEL
STOCK PURCHASES
Since Gabriel's inception, some of the executive officers and directors of
Gabriel who will serve as executive officers or directors of the combined
company have purchased shares of Gabriel's common and preferred stock. Gabriel
entered into a stockholders' agreement and a registration rights agreement with
each purchaser of Gabriel stock. In addition, each employee of Gabriel who
purchased Gabriel stock is also party to a shareholders agreement by and among
Gabriel and its employee stockholders. These agreements are described in
"Description of Gabriel Capital Stock" beginning on page 134 below
The executive officers of Gabriel have made the following investments in
Gabriel:
- David L. Solomon purchased 425,000 shares of Gabriel common stock for
$2.40 per share and receive ten-year warrants to purchase 550,000 shares
of Gabriel common stock for $3.00 per share in January 2000 and purchased
and committed to purchase an aggregate of 75,000 shares of Gabriel Series
B preferred stock for $7.00 per share in April 2000;
- Gerard J. Howe purchased 450,000 shares of Gabriel common stock for $0.50
per share and received ten-year warrants to purchase 70,000 shares of
Gabriel common stock for $3.00 per share in August 1998 and purchased and
committed to purchase an aggregate of 75,000 shares of Gabriel Series B
preferred stock for $7.00 per share in April 2000;
- John P. Denneen purchased 30,000 shares of Gabriel common stock for $0.50
per share in September 1999, purchased 100,000 shares of Gabriel common
stock for $2.40 per share and received ten-year warrants to purchase
70,000 shares of Gabriel common stock for $3.00 per share in October 1999
and purchased and committed to purchase an aggregate of 75,000 shares of
Gabriel Series B preferred stock for $7.00 per share in April 2000;
- Marguerite A. Forrest purchased 300,000 shares of Gabriel common stock
for $0.50 per share and received ten-year warrants to purchase 30,000
shares of Gabriel common stock for $3.00 per share in August 1998 and
purchased and committed to purchase an aggregate of 205,514 shares of
Gabriel Series B preferred stock for $7.00 per share in April 2000; and
- Michael E. Gibson purchased 100,000 shares of Gabriel common stock for
$2.40 per share and received ten-year warrants to purchase 50,000 shares
of Gabriel common stock for $3.00 per share in May 2000.
Institutions affiliated with non-management directors of Gabriel have made
the following investments in Gabriel:
- institutions affiliated with Goldman, Sachs & Co., of which Byron D.
Trott is a managing director, purchased 840,000 shares of Gabriel common
stock for $0.50 per share in August 1998 and 6,535,621 shares of Gabriel
Series A preferred stock for $3.00 per share pursuant to Gabriel's
November 1998 securities purchase agreement and purchased and committed
to purchase an aggregate of 7,500,000 shares of Gabriel Series B
preferred stock for $7.00 per share pursuant to Gabriel's March 2000
securities purchase agreement;
- institutions affiliated with Whitney & Co., of which William Laverack Jr.
is a general partner, purchased 5,000,000 shares of Gabriel Series A
preferred stock for $3.00 per share pursuant to Gabriel's November 1998
securities purchase agreement and purchased and committed to purchase an
aggregate of 6,107,143 shares of Gabriel Series B preferred stock for
$7.00 per share pursuant to Gabriel's March 2000 securities purchase
agreement; and
- institutions affiliated with Chase Capital Partners, of which Michael R.
Hannon is a general partner, purchased 1,666,667 shares of Gabriel Series
A preferred stock for $3.00 per share pursuant to Gabriel's November 1998
securities purchase agreement and purchased and committed
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to purchase an aggregate of 3,857,143 shares of Gabriel Series B
preferred stock for $7.00 per share pursuant to Gabriel's March 2000
securities purchase agreement.
TRIVERGENT
STOCK PURCHASES
Since TriVergent's inception, some of the executive officers and directors
of TriVergent who will serve as executive officers or directors of the combined
company have purchased shares of TriVergent's capital stock. Each purchase of
preferred stock was made pursuant to a preferred stock purchase agreement
containing representations, warranties and covenants typical of transactions of
this type. In these transactions, TriVergent and the purchasers entered into
registration rights agreements and a stockholders' agreement, the parties to
which have agreed to terminate these agreements upon completion of the merger.
In October 1997, Charles S. Houser and Shaler P. Houser purchased 1,200,000
and 1,900,000 shares of TriVergent's common stock, respectively, for $0.125 per
share. Janie P. Houser, Jennifer L. Houser, and Seruus Ventures, LLC purchased
600,000, 100,000 and 200,000 shares of TriVergent's common stock, respectively,
for $0.098 per share. Russell Powell purchased 800,000 shares of TriVergent's
common stock for $0.005 per share. Janie P. Houser is the wife of Charles S.
Houser and the mother of Shaler P. Houser. Jennifer L. Houser is the daughter of
Charles S. Houser and the sister of Shaler P. Houser. Seruus Ventures, LLC is a
Greenville, South Carolina-based venture capital firm of which Charles S. Houser
and Shaler P. Houser are principals.
In March 1998, Seruus Telecom Fund, L.P. purchased 750,000 shares of
TriVergent's common stock for $1.00 per share. Charles S. Houser and Shaler P.
Houser are principals of Seruus Capital Partners, LLC, which is the manager of
Seruus Telecom Fund, L.P.
In May 1998, Shaler P. Houser, Charles S. Houser, Seruus Telecom Fund,
L.P., the Houser Charitable Remainder Unitrust of which Charles S. Houser and
Janie P. Houser are trustees, and Jennifer L. Houser purchased 4,000, 55,114,
111,110, 44,444 and 44,446 shares of TriVergent's common stock, respectively,
for $2.25 per share.
In October 1998, TriVergent sold 2,083,334 shares of its Series A preferred
stock to each of Richland Ventures II, L.P. and First Union Capital Partners for
$2.40 per share. In December 1998, TriVergent sold Charles S. Houser, the Houser
Charitable Remainder Unitrust and Willou & Co. 41,667, 41,667 and 416,670 shares
of its Series A preferred stock, respectively, for $2.40 per share. Messrs. Jack
Tyrrell and Watts Hamrick, who will serve as directors of the combined company,
are a managing partner of Richland Ventures and a senior vice president with
First Union Capital Partners, respectively.
In July 1999, TriVergent sold Richland Ventures II, L.P., Richland Ventures
III, L.P., an affiliate of Richland Ventures II, L.P., First Union Capital
Partners, Inc., Jack Tyrrell, Charles S. Houser and the Houser Charitable
Remainder Unitrust 666,666, 2,666,667, 1,466,667, 20,000, 166,666 and 66,666
shares of its Series B preferred stock, respectively, at $3.75 per share.
In February 2000, TriVergent sold Richland Ventures II, L.P., Richland
Ventures III, L.P. and First Union Capital Partners, Inc., 588,235, 1,035,295
and 1,176,471 shares of its Series C preferred stock, respectively for $4.25 per
share.
In March 2000, TriVergent sold Jack Tyrrell and G. Michael Cassity 51,765
and 212,940 shares of its Series C preferred stock, respectively, for $4.25 per
share. Mr. Cassity will serve as president and chief operating officer of the
combined company.
In April 1998, TriVergent issued Charles S. Houser a warrant for 100,000
shares of its common stock with an exercise price of $2.25 per share as
consideration for a personal guaranty of a $1,000,000 line of credit from a
commercial bank.
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<PAGE> 129
In connection with the purchase of its Series 1999 notes, TriVergent issued
the following warrants:
- warrants for 9,000 shares of its common stock with an exercise price of
$2.00 per share to each of Charles S. Houser and the Houser Charitable
Remainder Unitrust in March 1999; and
- warrants for 18,000 shares of its common stock with an exercise price of
$2.00 per share to each of Richland Ventures II, L.P. and First Union
National Bank in April 1999.
Charles S. Houser, the Houser Charitable Remainder Unitrust, Richland
Ventures II, L.P. and First Union National Bank each purchased an aggregate
principal amount of its Series 1999 notes equal to $250,000, $250,000, $500,000
and $500,000 respectively.
RELATED PARTY TRANSACTIONS
On November 13, 1998, TriVergent entered into an arrangement with Seruus
Ventures, LLC, an investment services firm, to provide investment-related
services to TriVergent. During 1998 and 1999, TriVergent paid $13,788 and
$61,448, respectively, to Seruus Ventures under this arrangement. Charles S.
Houser and Shaler P. Houser are principals of Seruus Ventures, LLC.
In connection with G. Michael Cassity's employment, TriVergent loaned Mr.
Cassity $749,998 at an interest rate of 8.12% per year, with the principal on
such loan being due and payable on the earlier of March 6, 2003 and sixty days
after the termination of Mr. Cassity's employment with TriVergent. TriVergent,
in its sole discretion, may extend the maturity date of the note one or more
times by a period of one year. Interest is payable annually in arrears. The
proceeds of this loan were used to purchase TriVergent's preferred stock.
In June 2000, TriVergent engaged First Union Securities, Inc., an affiliate
of First Union Capital Partners, to provide financial advice in connection with
the merger. In connection therewith, at the closing of the merger, TriVergent
will pay First Union Securities, Inc. a fee of $400,000.
122
<PAGE> 130
ACTION BY STOCKHOLDERS TO APPROVE THE MERGER
The holders of more than ninety percent of the outstanding shares of
TriVergent Series A and Series B preferred stock and more than two-thirds of the
outstanding shares of TriVergent Series C preferred stock and common stock have
agreed to consent to or vote their shares in favor of the merger. The holders of
more than two-thirds of the outstanding shares of Gabriel common and preferred
stock also have agreed to consent to or vote their shares in favor of the merger
and the amended and restated certificate of incorporation of Gabriel provided
for in the merger agreement. Under Delaware law and the terms of TriVergent's
certificate of incorporation and Gabriel's amended and restated certificate of
incorporation, these approvals are sufficient to approve the merger and the
transactions contemplated by the merger agreement. As a result, no vote or
meeting will be held in order to consider the merger, but we will circulate
consents to approve the adoption of the merger by TriVergent and Gabriel
stockholders and adoption of the amended and restated certificate of
incorporation by Gabriel stockholders.
TRIVERGENT
As of September 30, 2000, there were 12,061,658 shares of TriVergent common
stock outstanding, 4,711,672 shares of TriVergent Series A preferred stock
outstanding, 13,866,663 shares of TriVergent Series B preferred stock
outstanding and 15,776,471 shares of TriVergent Series C preferred stock
outstanding.
Adoption of the merger agreement requires the affirmative vote or consent
of the holders of at least 2/3 of the total votes entitled to be cast by holders
of TriVergent common stock and TriVergent preferred stock, voting together as a
single class. In addition, adoption of the merger agreement requires the
affirmative vote or consent of
- holders of at least 75% of the outstanding shares of TriVergent Series A
preferred stock and the consent of Richland Ventures II, L.P. and First
Union Capital Partners, Inc.,
- holders of a majority of the outstanding shares of TriVergent Series B
preferred stock, and
- holders of a majority of the outstanding shares of TriVergent Series C
preferred stock if the consideration to be received by them in the merger
is valued at greater than $7.00 per share or by holders of more than
two-thirds of the shares of TriVergent Series C preferred stock if the
consideration to be received by them in the merger is valued at less than
or equal to $7.00 per share.
Each share of TriVergent common stock and each share of TriVergent
preferred stock is entitled to one vote. Each share of TriVergent preferred
stock is entitled to one vote when voting as a separate class and is entitled to
such number of votes equal to the number of shares of TriVergent common stock
into which the share of preferred stock is then convertible when voting together
with holders of common stock. Holders of TriVergent stock at the time TriVergent
circulates consents, or receives the requisite consents, will be entitled to
consent to the merger.
Holders of a sufficient number of shares of each class of TriVergent stock
have agreed to give their written consent in favor of the adoption of the merger
agreement. As a result, no vote will be held and TriVergent will circulate
consents in order to approve the merger. YOU ARE NOT BEING ASKED TO PROVIDE A
PROXY OR CONSENT AT THIS TIME, AND YOUR VOTE IS NOT NEEDED TO APPROVE THE
MERGER.
GABRIEL
As of September 30, 2000, there were 6,048,200 shares of Gabriel common
stock outstanding, 26,850,000 shares of Gabriel Series A preferred stock
outstanding, 3,125,000 shares of Gabriel Series A-1 preferred stock outstanding
and 9,930,294 shares of Gabriel Series B preferred stock outstanding.
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<PAGE> 131
Approval and adoption of the Gabriel charter amendment and the merger
agreement requires the affirmative vote or consent of the holders of
- at least two-thirds of the outstanding shares of Gabriel common stock,
Gabriel Series A preferred stock, Gabriel Series A-1 preferred stock and
Gabriel Series B preferred stock, voting together as a class, and
- at least two-thirds of each series of Gabriel preferred stock, voting as
separate classes.
Each share of Gabriel common stock and Gabriel preferred stock is entitled
to one vote per share, and holders of Gabriel common stock and each series of
Gabriel preferred stock vote together as one class. Holders of Gabriel stock at
the time Gabriel circulates consents, or receives the requisite consents, will
be entitled to consent to the merger.
Holders of a sufficient number of shares of each class of Gabriel stock
have agreed to consent to the adoption of the Gabriel charter amendment and to
the acquisition of TriVergent by Gabriel pursuant to the merger agreement. Under
Delaware law and the provisions of Gabriel's amended and restated certificate of
incorporation, these consents are sufficient to approve and adopt the Gabriel
charter amendment and to approve the acquisition of TriVergent by Gabriel
pursuant to the merger agreement. ACCORDINGLY, YOU ARE NOT BEING ASKED TO
PROVIDE A PROXY OR CONSENT AT THIS TIME, AND YOUR VOTE IS NOT NEEDED TO APPROVE
THE CHARTER AMENDMENT OR THE MERGER.
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<PAGE> 132
VOTING SECURITIES OF GABRIEL
The following table sets forth information regarding the beneficial
ownership of Gabriel's voting securities as of September 30, 2000 by
- each of Gabriel's directors who will serve as a director of the combined
company,
- each of the named executive officers of the combined company who are
Gabriel stockholders,
- each person or entity who is known by Gabriel to beneficially own 5% or
more of Gabriel's voting securities, and
- all of Gabriel's directors and executive officers as a group.
Unless otherwise indicated below, the individuals listed below maintain a
mailing address of c/o Gabriel Communications, Inc., 16090 Swingley Ridge Road,
Suite 500, Chesterfield, Missouri 63107. Unless otherwise indicated below, to
Gabriel's knowledge, each person or group identified possesses sole voting and
investment power with respect to the shares beneficially owned by that person or
group, subject to community property laws where applicable.
The number of shares and percentages are determined on the basis of
- 6,048,200 shares of common stock,
- 26,850,000 shares of Series A preferred stock,
- 3,125,000 shares of Series A-1 preferred stock,
- 9,930,294 shares of Series B preferred stock, all outstanding as of
September 30, 2000, and
- treating shares issuable pursuant to options or warrants that are
exercisable currently or within 60 days of September 30, 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.
None of the shares of Series B preferred stock purchased or committed to be
purchased after September 30, 2000 are included in the number of shares or in
determining the percentages set forth in the following table.
As of the date of this information statement/prospectus, all shares of preferred
stock are convertible into common stock on a one-for-one basis.
<TABLE>
<CAPTION>
PERCENTAGE OF
BENEFICIAL OWNER VOTING VOTING
(INCLUDES RELATED ENTITIES) SECURITIES SECURITIES
--------------------------- ---------- -------------
<S> <C> <C>
Goldman, Sachs & Co. affiliates(1).......................... 10,006,667 21.78%
Whitney & Co.(2)............................................ 7,035,714 15.31%
Brooks Investments, L.P.(3)................................. 4,500,000 9.79%
Meritage Private Equity Fund L.P.(6)........................ 4,257,857 9.27%
The Centennial Funds(4)..................................... 3,814,286 8.30%
Telecom Partners II, L.P.(5)................................ 3,571,428 7.77%
Chase Venture Capital Associates, L.P.(7)................... 2,952,381 6.42%
David L. Solomon(8)......................................... 1,000,000 2.15%
Gerard J. Howe(9)........................................... 586,667 1.27%
Marguerite A. Forrest(10)................................... 415,172 *
William Laverack, Jr.(11)................................... 7,035,714 15.31%
Byron D. Trott.............................................. -- --
Michael R. Hannon(12)....................................... 2,952,381 6.42%
Directors and executive officers, as a group(13)............ 13,487,675 28.69%
</TABLE>
-------------------------
* Less than 1%
(1) Includes (i) 572,260 shares of common stock, 4,541,748 shares of Series A
preferred stock and 1,703,155 shares of Series B preferred stock
beneficially owned by GS Capital Partners III, L.P.,
125
<PAGE> 133
(ii) 157,321 shares of common stock, 1,248,579 shares of Series A preferred
stock and 468,217 shares of Series B preferred stock beneficially owned by
GS Capital Partners III Offshore, L.P., (iii) 26,419 shares of common
stock, 209,674 shares of Series A preferred stock and 78,628 shares of
Series B preferred stock beneficially owned by Goldman, Sachs & Co.
Verwaltungs GmbH, (iv) 64,526 shares of common stock and 512,113 shares of
Series A preferred stock beneficially owned by Stone Street Fund 1998,
L.P., (v) 19,474 shares of common stock and 154,553 shares of Series A
preferred stock beneficially owned by Bridge Street Fund 1998, L.P., (vi)
150,000 shares of Series B preferred stock owned by Stone Street Fund 2000
LP; and (vii) 100,000 shares of Series B preferred stock beneficially owned
by Bridge Street Special Opportunities Fund 2000, LP. Goldman, Sachs & Co.
maintains a mailing address at 85 Broad Street, New York, NY 10004.
(2) Includes (i) 4,882,353 shares of Series A preferred stock and 2,035,714
shares of Series B preferred stock beneficially owned by J.H. Whitney III,
L.P., and (ii) and 117,647 shares of Series A preferred stock beneficially
owned by Whitney Strategic Partners III, L.P. Mr. William Laverack, Jr. is
a general partner of Whitney & Co. and shares but disclaims beneficial
ownership in these shares. Whitney & Co. and Mr. Laverack maintain a
mailing address at 177 Broad Street, Stamford, CT 06901.
(3) Includes (i) 2,000,000 shares of common stock, 1,333,333 shares of Series A
preferred stock and 761,905 shares of Series B preferred stock beneficially
owned by Brooks Investments, L.P., and (ii) 333,333 shares of Series A
preferred stock and 71,429 shares of Series B preferred stock beneficially
owned by RAB Partnership, L.P. Brooks Investments, L.P. and RAB
Partnership, L.P. maintain a mailing address at 16650 Chesterfield Grove
Road, S110, Chesterfield, MO 63005.
(4) Includes (i) 3,333,333 shares of Series A preferred stock beneficially
owned by Centennial Fund V, L.P., and (ii) 100,000 shares of Series A
preferred stock beneficially owned by Centennial Entrepreneurs Fund V, L.P.
and (iii) 380,943 shares of Series B preferred stock beneficially owned by
Centennial Fund V, L.P. The Centennial Funds maintains a mailing address at
1428 Fifteenth Street, Denver, Colorado 80202.
(5) Represents 3,333,333 shares of Series A preferred stock and 238,095 shares
of Series B preferred stock. Telecom Partners II, L.P. maintains a mailing
address at 4600 S. Syracuse Street, S 1000, Denver, Colorado 80237.
(6) Includes (i) 2,740,000 shares of Series A-1 preferred stock and 1,002,057
shares of Series B preferred stock beneficially owned by Meritage Private
Equity Fund L.P., (ii) 335,000 shares of Series A-1 preferred stock and
112,514 shares of Series B preferred stock beneficially owned by Meritage
Private Equity Parallel Fund L.P., and (iii) 50,000 shares of Series A-1
preferred stock and 18,286 shares of Series B preferred stock beneficially
owned by Meritage Entrepreneurs Fund, LP. Meritage Private Equity Fund,
L.P. maintains a mailing address at 1600 Wynkoop, S300, Denver, Colorado
80202. Mr. David L. Solomon is an investment director of Meritage Private
Equity Fund, L.P. and may share but disclaims beneficial ownership in these
shares.
(7) Includes (i) 1,666,667 shares of Series A preferred stock and (ii)
1,285,714 shares of Series B preferred stock. Mr. Michael R. Hannon is a
general partner of Chase Capital Partners and shares but disclaims
beneficial ownership in these shares. Chase Venture Capital Associates,
L.P. and Mr. Hannon maintain a mailing address at 380 Madison Avenue, 12th
floor, New York, NY 10017.
(8) Includes 425,000 shares of common stock and 25,000 shares of Series B
preferred stock beneficially owned by Mr. Solomon and 550,000 shares of
common stock issuable upon exercise of currently exercisable warrants. Does
not include the 3,125,000 shares of Series A-1 preferred stock or 112,514
shares of Series B preferred stock beneficially owned by Meritage Private
Equity Fund, L.P., a private investment fund for which Mr. Solomon serves
as an investment director and member of the general partner, or the
3,333,333 shares of Series A preferred stock or 761,905 shares of Series B
preferred stock beneficially owned by Brooks Investments, L.P., in which
Mr. Solomon is an investor.
(9) Includes (i) 25,000 shares of Series B preferred stock; (ii) 70,000 shares
of common stock issuable upon exercise of currently exercisable warrants;
(iii) 41,667 shares of common stock issuable upon
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<PAGE> 134
exercise of currently exercisable options; and (iv) 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.
(10) Includes shares owned by the MAF Revocable Trust and includes 30,000 shares
issuable upon exercise of currently exercisable warrants, 16,667 shares of
common stock issuable upon the exercise of currently exercisable options
and 68,505 shares of Series B preferred stock. Does not include the
3,333,333 shares of Series A preferred stock or the 761,905 shares of
Series B preferred stock beneficially owned by Brooks Investments, L.P., in
which Ms. Forrest is an investor, or the 333,333 shares of Series A
preferred stock or the 71,429 shares of Series B preferred stock owned by
RAB Partnership, in which Ms. Forrest has an interest.
(11) Includes all shares attributable to Whitney & Co on the basis that Mr.
Laverack is a general partner of Whitney & Co. See footnote 2. Mr. Laverack
disclaims beneficial ownership of those shares.
(12) Includes all shares attributable to Chase Venture Capital Associates, L.P.
on the basis that Mr. Hannon is a General Partner of Chase Capital
Partners. See footnote 7. Mr. Hannon disclaims beneficial ownership of
those shares.
(13) Includes (i) 203,333 shares of common stock issuable upon exercise of
currently exercisable options, (ii) 860,000 shares of common stock issuable
upon exercise of currently exercisable warrants, (iii) 2,270,000 shares of
common stock, (iv) 6,666,667 shares of Series A preferred stock, including
5,000,000 attributed to Mr. Laverack through Whitney & Co and 1,666,667
attributed to Mr. Hannon through Chase Venture Capital Associates, L.P.,
and (v) 3,487,675 shares of Series B preferred stock, including 2,035,714
shares attributed to Mr. Laverack through Whitney & Co. and 1,285,714
shares attributed to Mr. Hannon through Chase Venture Capital Associates,
L.P.
127
<PAGE> 135
VOTING SECURITIES OF TRIVERGENT
The following table sets forth information regarding the beneficial
ownership of TriVergent common stock, including preferred stock on an as
converted basis, as of September 30, 2000, by
- each of TriVergent's directors who will serve as a director of the
combined company,
- each of the named executive officers of the combined company who are
TriVergent stockholders,
- each person or entity who is known by TriVergent to beneficially own 5%
or more of TriVergent's voting securities, and
- all of TriVergent's directors and executive officers as a group.
Unless otherwise indicated below, each entity or person listed below
maintains a mailing address of c/o State Communications, Inc., 301 North Main
Street, Suite 2000, Greenville, SC 29601. Unless otherwise indicated below, to
TriVergent's knowledge, each person or group identified possesses sole voting
and investment power with respect to the shares beneficially owned by that
person or group, subject to community property laws where applicable.
The numbers of shares and percentages are determined on the basis of
- 12,061,658 shares of common stock,
- 4,711,672 shares of Series A preferred stock,
- 13,866,663 shares of Series B preferred stock,
- 15,776,471 shares of Series C preferred stock, all outstanding on
September 30, 2000 and
- treating shares issuable pursuant to options or warrants that are
exercisable currently or within 60 days of September 30, 2000, as owned
by the person holding those securities and as outstanding for computing
the percentage ownership of that person, but not the percentage ownership
of any other person.
<TABLE>
<CAPTION>
PERCENT OF
BENEFICIAL OWNER VOTING SECURITIES VOTING SECURITIES
---------------- ----------------- -----------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Charles S. Houser........................................... 7,527,280(1) 16.22%
G. Michael Cassity.......................................... 294,118 *
Shaler P. Houser............................................ 2,150,669(2) 4.63%
Jack Tyrrell................................................ 7,062,510(3) 15.22%
Watts Hamrick............................................... 4,744,472(4) 10.22%
ALL DIRECTORS & EXECUTIVE OFFICERS AS A GROUP (15 PEOPLE)... 23,950,318 51.60%
5% OWNERS (NOT INCLUDED ABOVE)
Houser Group................................................ 7,519,280(5) 16.20%
Moore Group................................................. 7,686,276(6) 16.56%
Richland Group.............................................. 7,062,510(7) 15.22%
First Union Group........................................... 4,744,472(8) 10.22%
Boston Millennia Group...................................... 2,760,785(9) 5.95%
Toronto Dominion Capital (USA), Inc......................... 2,352,941 5.07%
</TABLE>
-------------------------
* Denotes less than one percent.
(1) Includes shares directly owned by Charles S. Houser, 125,000 shares
issuable upon the exercise of options and warrants, and shares that might
be construed as beneficially owned by Mr. Houser. See note 5 for a
description of the latter of these shares. Mr. Houser disclaims beneficial
ownership of such shares.
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<PAGE> 136
(2) Includes only shares directly owned by Shaler P. Houser and 320,000 shares
issuable upon the exercise of options and warrants. See note 5 for a
description of other shares that might be construed as beneficially owned
by Mr. Houser.
(3) Includes 7,062,510 shares beneficially owned by the Richland Group. See
note 7 below. Mr. Tyrrell disclaims beneficial ownership of all of these
shares.
(4) Includes 2,083,334 shares beneficially owned by First Union Merchant
Banking, 1998-II, LLC and 2,661,138 shares beneficially owned by First
Union Merchant Banking, 1999-II, LLC. Mr. Hamrick disclaims beneficial
ownership of all of these shares. See note 8 below.
(5) The following table sets forth common stock beneficial ownership
information with respect to all members of the Houser family and entities
controlled by members of the Houser family:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY
NAME RELATIONSHIP OWNED
---- ---------------------------------------- ------------
<S> <C> <C>
Charles S. Houser....................... 1,165,349
Shaler P. Houser........................ Charles S. Houser's son 2,150,669
Charles L. Houser....................... Charles S. Houser's son 1,575,000
Seruus Telecom Fund, L.P................ Charles S. and Shaler P. Houser are
principals 861,110
Janie P. Houser......................... Charles S. Houser's wife 549,098
Houser Enterprises, L.P................. Family Limited Partnership
Shaler P. Houser, general partner 360,000
Melissa Houser.......................... Charles L. Houser's wife 240,000
Seruus Ventures, LLC.................... Charles S. and Shaler P. Houser are
principals 150,000
Jennifer L. Houser...................... Charles S. Houser's daughter 92,000
Houser Charitable Remainder Unitrust.... Charles S. and Janie P. Houser are
trustees 161,777(10)
Irrevocable Trust FBO Jennifer L.
Houser................................ Trust for Charles S. Houser's daughter 50,000
Investment Co. of Florida, FBO Charles
S. Houser............................. Trust for Charles S. Houser 44,446
Mr. & Mrs. Robert L. Sims............... Charles L. Houser's parents-in-law 35,000
Charles S. Houser Family Trust Agreement
I..................................... Estate Planning Trust 13,333.33
Charles S. Houser Family Trust Agreement
II.................................... Estate Planning Trust 13,333.33
Charles S. Houser Family Trust Agreement
III................................... Estate Planning Trust 13,333.33
Nicole Houser........................... Shaler P. Houser's wife 26,000
Charles Davis Houser.................... Shaler P. Houser's minor son 6,831
Charles Davis Houser Trust.............. Trust for Shaler P. Houser's son 4,000
David R. Houser......................... Charles S. Houser's brother 5,000
John R. Houser.......................... Charles S. Houser's brother 5,000
Morton Houser........................... Charles S. Houser's brother 5,000
Sue M. Houser........................... Charles S. Houser's mother 5,000
---------
Total................................... 7,519,280
=========
</TABLE>
-------------------------
* Denotes less than one percent.
Each person listed above disclaims beneficial ownership of all shares not
shown on the table as being directly owned by that person. The number of
shares shown as beneficially owned by the Houser Charitable Remainder
Unitrust includes 9,000 shares issuable upon exercise or warrants. The
numbers of shares shown as beneficially owned by Charles S. Houser, Shaler
P. Houser and
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<PAGE> 137
Charles L. Houser include 125,000, 320,000, and 80,000 shares,
respectively, issuable upon exercise of options.
(6) Includes 1,850,981 shares owned by Moore Overseas Technology Venture Fund,
LDC, 1,850,981 owned by Moore Technology Venture Fund, LLC, 1,992,157
shares owned by Moore Global Investments, Ltd., 1,992,157 shares owned by
Remington Investment Strategies, L.P. All of the foregoing entities are
affiliates.
(7) Includes 3,701,962 shares owned by Richland Ventures III, L.P., 3,204,901
shares owned by Richland Ventures II, L.P. and 18,000 shares issuable upon
exercise of warrants held by Richland Ventures II, L.P., 71,765 shares
owned by John R. Tyrrell, 28,236 shares owned by Portia B. Ortale, 11,765
shares owned by the Laura Farish Chadwick Management Trust, 11,765 shares
owned by The Chadwick 1998 Children's Trust, 5,882 shares owned by Patrick
S. Hale, 5,882 shares owned by Mark Eric Isaacs, 1,176 shares owned by
Linda Swafford and 1,176 shares owned by Beverly Ann Schrichte. All of the
foregoing entities and individuals are affiliates.
(8) Includes 18,000 shares issuable upon exercise of warrants held by First
Union Capital Partners, Inc.
(9) Includes 606,670 shares owned by Boston Millennia Partners, 37,448 shares
owned by Boston Millennia Associates I Partnership and 26,667 owned by Leon
Seynave.
(10) Includes 9,000 shares issuable upon exercise of warrants held by Houser
Charitable Remainder Unitrust.
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<PAGE> 138
VOTING SECURITIES OF THE COMBINED COMPANY
The following table sets forth information regarding the beneficial
ownership of the combined company's voting securities as of September 30, 2000
on a pro forma basis assuming that the merger had been completed as of that date
by
- each of the persons who will serve as directors of the combined company,
- the named executive officers,
- each person or entity, to the best of Gabriel's knowledge, who will
beneficially own 5% or more of the combined company's voting securities,
and
- all of combined company's directors and executive officers as a group.
The individuals listed below maintain the mailing addresses described in
the sections captioned "Voting Securities of Gabriel" or "Voting Securities of
TriVergent," as the case may be. Unless otherwise indicated below, to Gabriel's
knowledge, each person or group identified possesses sole voting and investment
power with respect to the shares beneficially owned by that person or group,
subject to community property laws where applicable.
The percentages set forth in the table below were determined on the basis
of
- 19,401,662 shares of common stock,
- 26,850,000 shares of Series A preferred stock,
- 3,125,000 shares of Series A-1 preferred stock,
- 30,433,739 shares of Series B preferred stock,
- 5,379,831 shares of Series C-1 preferred stock,
- 15,802,428 shares of Series C-2 preferred stock,
- 17,753,359 shares of Series C-3 preferred stock,
The foregoing numbers of shares reflect
- the shares of Gabriel common and preferred stock outstanding as of
September 30, 2000,
- the shares of TriVergent common and preferred stock outstanding as of
September 30, 2000 multiplied by the exchange ratio of 1.1071,
- the additional shares of Gabriel preferred stock issuable in exchange for
shares of TriVergent preferred stock deemed to have been issued in lieu
of accrued and unpaid dividends, which we refer to in the footnotes below
as "dividend shares,"
- the additional shares of Gabriel Series B preferred stock purchased and
committed to be purchased after September 30, 2000 under the Gabriel
Series B preferred stock purchase agreement, including shares committed
to be purchased by two of the lenders of the combined company's senior
secured credit facility, which shares we refer to in the footnotes below
as "additional Series B shares," and
- shares issuable pursuant to options or warrants, including the one-year
and two-year warrants issuable pursuant to the merger agreement which we
refer to in the footnotes below as "new warrants," that are exercisable
currently or within 60 days of September 30, 2000, as owned by the person
holding those securities and as outstanding for computing the percentage
ownership of that person, but not the percentage ownership of any other
person.
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As of the date of this information statement/prospectus, all shares of preferred
stock are convertible into common stock on a one-to-one basis.
<TABLE>
<CAPTION>
BENEFICIAL OWNER PERCENTAGE OF
(INCLUDES RELATED ENTITIES) VOTING SECURITIES VOTING SECURITIES
--------------------------- ----------------- -----------------
<S> <C> <C>
Goldman, Sachs & Co. affiliates(1).......................... 17,166,154 14.20%
Whitney & Co.(2)............................................ 12,827,291 10.65%
Richland Ventures III, L.P.(3).............................. 8,752,268 7.32%
Houser Group(4)............................................. 8,375,702 7.02%
Brooks Investments, L.P.(5)................................. 6,836,850 5.73%
Meritage Private Equity Fund L.P.(15)....................... 6,940,190 5.80%
Moore Group(16)............................................. 9,621,853 8.04%
Chase Venture Capital Associates, L.P.(17).................. 6,476,965 5.41%
Charles S. Houser(6)........................................ 8,375,702 7.02%
Watts Hamrick(7)............................................ 5,857,791 4.91%
Michael R. Hannon(8)........................................ 6,476,965 5.41%
William Laverack, Jr.(9).................................... 12,827,291 10.65%
Byron D. Trott.............................................. -- --
Jack Tyrrell(10)............................................ 8,752,268 7.32%
David L. Solomon(11)........................................ 1,065,637 *
Gerard J. Howe(12).......................................... 652,304 *
Shaler P. Houser(13)........................................ 2,381,006 2.0%
Marguerite A. Forrest(14)................................... 595,030 *
G. Michael Cassity(18)...................................... 355,798 *
Directors and executive officers, as a group(19)............ 47,847,095 38.39%
</TABLE>
-------------------------
* Less than 1%
(1) See note 1 on page 125. Also includes 2,159,487 new warrants and 5,000,000
additional Series B shares.
(2) See note 2 on page 126. Also includes 1,720,148 new warrants and 4,071,429
additional Series B shares.
(3) See note 7 on page 130. Also includes 722,450 new warrants and 210,914
dividend shares.
(4) See note 5 on page 129. Also includes 32,018 new warrants and 10,232
dividend shares.
(5) See note 3 on page 126. Also includes 670,184 new warrants and 1,666,666
additional Series B shares.
(6) See note 1 on page 128. Also includes 32,018 new warrants and 10,232
dividend shares.
(7) See note 4 on page 129. Also includes 461,683 new warrants and 143,503
dividend shares.
(8) See note 12 on page 127. Also includes 953,155 new warrants and 2,571,429
additional Series B shares.
(9) See note 11 on page 127. Also includes 1,720,148 new warrants and 4,071,429
additional Series B shares.
(10) See note 3 on page 129. Also includes 722,450 new warrants and 210,914
dividend shares.
(11) See note 8 on page 126. Also includes 15,637 new warrants and 50,000
additional Series B shares.
(12) See note 9 on page 126. Also includes 15,637 new warrants and 50,000
additional Series B shares.
(13) See note 2 on page 129.
(14) See note 10 on page 127. Also includes 42,849 new warrants and 137,009
additional Series B shares.
(15) See note 6 on page 126. Also includes 968,047 new warrants and 1,714,286
additional Series B shares.
(16) See note 6 on page 130. Also includes 893,576 new warrants and 218,801
dividend shares.
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<PAGE> 140
(17) See note 7 on page 126. Also includes 953,155 new warrants and 2,571,429
additional Series B shares.
(18) Also includes 26,955 new warrants and 3,225 dividend shares.
(19) See note 13 on page 127 and TriVergent directors and executive officers as
a group on page 128. Also includes 4,006,169 new warrants, 367,874 dividend
shares and 6,929,867 additional Series B shares.
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<PAGE> 141
DESCRIPTION OF GABRIEL CAPITAL STOCK
The following is a description of the material terms of the capital stock
of Gabriel under the amended and restated certificate of incorporation of
Gabriel which will be in effect immediately after the merger is completed. The
following also describes relevant provisions of Gabriel's by-laws and the
General Corporation Law of the State of Delaware, which we refer to as Delaware
law. The terms of Gabriel's amended and restated certificate of incorporation,
Gabriel's by-laws and Delaware law are more detailed than the general
information provided below. You should carefully consider the actual provisions
of those documents. If you would like to read Gabriel's existing amended and
restated certificate of incorporation or by-laws, these documents are on file
with the SEC as exhibits to the registration statement of which this information
statement/prospectus is a part. The amended and restated certificate of
incorporation of Gabriel, as proposed to be amended, is attached as Annex B to
this information statement/prospectus. Additional information regarding
Gabriel's capital stock is contained below under the heading "Comparison of
Rights of Stockholders of Gabriel and TriVergent."
GENERAL
Gabriel's authorized capital stock will consist of 400,000,000 shares of
common stock, par value $.01 per share, and 200,000,000 shares of preferred
stock, par value $0.01 per share. Of the preferred stock,
- 26,850,000 shares will be designated as Series A preferred stock,
- 3,125,000 shares will be designated as Series A-1 preferred stock,
- 32,500,000 shares will be designated as Series B preferred stock,
- 6,000,000 shares will be designated as Series C-1 preferred stock,
- 16,500,000 shares will be designated as Series C-2 preferred stock, and
- 18,500,000 shares will be designated as Series C-3 preferred stock.
As of September 30, 2000, there were 6,048,200 shares of common stock,
26,850,000 shares of Series A preferred stock, 3,125,000 shares of Series A-1
preferred stock and 9,930,294 shares of Series B preferred stock outstanding,
all of which were fully paid and nonassessable. Gabriel is issuing the Series
C-1, C-2 and C-3 preferred stock to holders of TriVergent Series A, B and C
preferred stock, respectively, in exchange for TriVergent preferred stock in
connection with the merger.
AMENDMENTS TO EXISTING PROVISIONS OF CERTIFICATE OF INCORPORATION
In addition to designating the new Series C-1, C-2 and C-3 preferred stock
to be issued to holders of TriVergent preferred stock, Gabriel is proposing to
amend its amended and restated certificate of incorporation to
- increase the authorized amount of common stock from 200,000,000 to
400,000,000 shares and the authorized amount of preferred stock from
100,000,000 to 200,000,000 shares,
- modify the liquidation preferences of the Series A, A-1 and B preferred
stock to provide for a preferred annual rate of return of 8.0% from the
dates of original issuance in the event of liquidation of Gabriel, as
more fully described below, and
- change the per share offering price triggering the automatic conversion
provisions of the Series A, Series A-1 and Series B preferred stock into
common stock in the event of firm commitment, underwritten public
offering of common stock from $20.00 per share to $12.00 per share, in
each case with aggregate proceeds of at least $50 million, as more fully
described below.
COMMON STOCK
VOTING RIGHTS. Each holder of common stock is entitled to cast one vote for
each share held of record on all matters submitted to a vote of stockholders.
The holders of the shares of common stock, along with
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the holders of any series of preferred stock entitled to vote with the holders
of common stock, will vote together as a single class on all matters as to which
such holders are entitled to vote.
DIVIDENDS. No cash dividends may be declared or paid upon the common stock
so long as any Series A, Series A-1, Series B, Series C-1, Series C-2 or Series
C-3 preferred stock is outstanding. At such point as there are no shares of
Series A, Series A-1, Series B, Series C-1, Series C-2 or Series C-3 preferred
stock outstanding, holders of common stock will be entitled to receive dividends
or other distributions declared by the board of directors. The right of the
board of directors to declare dividends, however, is subject to the availability
of sufficient funds under Delaware law to pay dividends.
LIQUIDATION RIGHTS. In the event of the dissolution of Gabriel, common
stockholders will share ratably in the distribution of all assets that remain
after Gabriel pays all of its liabilities and satisfies its obligations to the
holders of any preferred stock, as described below.
PREEMPTIVE AND OTHER RIGHTS. Except as provided under the stockholders'
agreement described below, holders of common stock have no preemptive rights to
purchase or subscribe for any stock or other securities of Gabriel. In addition,
there are no conversion rights or redemption or sinking fund provisions with
respect to the common stock.
PREFERRED STOCK
The board of directors is authorized to issue shares of preferred stock
from time to time, without stockholder approval, in one or more series. Subject
to the requirements under Delaware law, the board has the authority to fix the
designations, preferences and rights of additional preferred stock, including
the following
- the designation and number of shares up to the maximum authorized by the
amended and restated certificate of incorporation,
- dividend rates and preferences,
- voting rights,
- conversion and exchange rights,
- terms of redemption, including redemption prices,
- sinking fund provisions,
- liquidation rights and preferences, and
- any other relative powers, preferences and rights.
Any of these terms could have an adverse effect on the availability of earnings
for distribution to the holders of Gabriel stock or for other corporate
purposes. The voting rights of holders of any preferred shares could adversely
affect the voting power of Gabriel's other stockholders and could have the
effect of delaying, deferring or impeding a change of control of Gabriel.
VOTING RIGHTS. On all matters submitted to a vote of stockholders, each
holder of Series A, Series A-1, Series B, Series C-1, Series C-2 and Series C-3
preferred stock will be entitled to cast one vote per share of common stock into
which the shares of Series A, Series A-1, Series B, Series C-1, Series C-2 and
Series C-3 preferred stock held by the holder are then convertible. The holders
of the Series A, Series A-1, Series B, Series C-1, Series C-2 and Series C-3
preferred stock and common stock will vote together as a single class, unless
otherwise required by Delaware law.
DIVIDENDS. No cash dividends may be declared or paid upon the Series A,
Series A-1, Series B, Series C-1, Series C-2 or Series C-3 preferred stock.
CONVERSION RIGHTS. Each outstanding share of the Series A, Series A-1,
Series B, Series C-1, Series C-2 and Series C-3 preferred stock will be
convertible at any time at the option of the holder into
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that number of whole shares of common stock as is equal to the stated
liquidation preference for the particular series of preferred stock divided by
an initial conversion price of
- $3.00, with respect to the Series A preferred stock,
- $4.00 with respect to the Series A-1 preferred stock,
- $7.00, with respect to the Series B preferred stock,
- $2.17 with respect to the Series C-1 preferred stock,
- $3.39 with respect to the Series C-2 preferred stock and
- $3.84 with respect to the Series C-3 preferred stock, as the case may be.
We refer to the initial conversion price and the conversion price, as it
may be adjusted in accordance with anti-dilution provisions of the preferred
stock, as the conversion price. The Series A, Series A-1, Series B, Series C-1,
Series C-2 and Series C-3 preferred stock also will be automatically converted
into common stock at the then-effective applicable conversion price in the event
of a firm commitment, underwritten public offering of common stock registered
under the Securities Act of 1933, subject to limited exceptions and to the
following conditions:
- the public offering price per share of the common stock, prior to
underwriters' discounts and expenses, must be at least $12.00, as
adjusted for any common stock dividends, combinations or splits; and
- the offering must generate aggregate proceeds to Gabriel and any selling
stockholders, prior to underwriters' discounts and expenses, of at least
$50 million.
The conversion price is subject to customary adjustments for stock
dividends, for combinations or subdivisions of common stock and as a result of
any capital reorganization or reclassification. The conversion price is also
subject to adjustment for any issuance or sale of shares of common stock or any
securities convertible into or exchangeable for shares of common stock without
consideration or for consideration per share of less than the then-existing
conversion price, except for issuances
- upon conversion of shares of Series A, Series A-1, Series B, Series C-1,
Series C-2 or Series C-3 preferred stock,
- to officers, directors, employees, consultants or advisers of Gabriel
pursuant to stock option or stock purchase plans, warrants or agreements
from time to time approved by the board of directors,
- upon the issuance or exercise of the warrants issued or to be issued
under and pursuant to the terms of merger agreement and referred to as
the "$6.00 Warrants" and the "$10.25 Warrants," as a dividend or
distribution on Series A, Series A-1, Series B, Series C-1, Series C-2 or
Series C-3 preferred stock, or
- in connection with board-approved acquisitions.
REDEMPTION PROVISIONS. Gabriel may not redeem the Series A, Series A-1,
Series B, Series C-1, Series C-2 or Series C-3 preferred stock at any time,
except pursuant to the terms of an agreement between Gabriel and the holder or
holders of such stock.
LIQUIDATION RIGHTS. In the event of the liquidation, dissolution or winding
up of the business of Gabriel, the holders of Series A, Series A-1, Series B,
Series C-1, Series C-2 or Series C-3 preferred stock will be entitled to
receive, prior to and in preference to any distribution to the holders of common
stock, a liquidation preference for each share in an amount equal to $3.00,
$4.00, $7.00, $2.17, $3.39 and $3.84 per share, respectively. These liquidation
preference amounts will be adjusted for any stock
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dividends, combinations or splits with respect to Gabriel's capital stock. These
series of preferred stock will also be entitled to the greater of
- an amount equal to a preferred return, for each share of such series of
preferred stock, on the respective initial liquidation preference amount
of 8% per annum, with such return to begin accruing as of the original
issue date of the Series A, Series A-1 and Series B preferred stock and
as of September 1, 2000 for the Series C-1, Series C-2 and Series C-3
preferred stock, or
- an amount such holders would have received if they had converted their
preferred stock into common stock immediately prior to the liquidation.
After receiving the per share liquidation preference holders of the Series
A, Series A-1, Series B, Series C-1, Series C-2 or Series C-3 preferred stock
will have no right or claim to Gabriel's remaining assets and funds, if any.
OUTSTANDING OPTIONS AND WARRANTS
The Gabriel Communications, Inc. 1998 Stock Incentive Plan provides for
grants to selected employees, outside directors, consultants and advisers of
awards with respect to up to 10,000,000 shares of common stock in the form of
- incentive and nonqualified stock options,
- stock appreciation rights,
- restricted stock and restricted stock units,
- performance stock and performance units,
- phantom stock, and
- stock acquired through a stock purchase program or granted under merit
awards.
As of September 30, 2000, options to purchase a total of 3,342,680 shares of
common stock at exercise prices ranging from $2.40 per share to $5.60 per share
were outstanding, of which options to purchase a total of 366,510 shares at
$2.40 per share were exercisable within the next 60 days.
As of September 30, 2000, eight of Gabriel's senior executive officers held
warrants to purchase a total of 930,000 shares at an exercise price of $3.00 per
share, 670,000 of which were granted under the 1998 Stock Incentive Plan. A
total of 260,000 of these warrants expire on October 31, 2008, 70,000 of these
warrants expire on July 31, 2009, 550,000 of these warrants expire on December
12, 2009 and 50,000 of these warrants expire on May 16, 2010.
GABRIEL OPTIONS AND WARRANTS TO BE ISSUED IN THE MERGER
Gabriel will issue to each of the holders of TriVergent preferred stock,
including those converted, and each of the holders of Gabriel preferred stock
- one-year warrants to purchase shares of Gabriel common stock which will
be exercisable at an exercise price of $6.00 per share for a period of
one year following the effective time of the merger, and
- two-warrants to purchase shares of Gabriel common stock which will be
exercisable at an exercise price of $10.25 per share for a period of two
years following the effective time of the merger.
The number of one-year warrants that a particular holder of Gabriel or
TriVergent preferred stock will be entitled to receive will be calculated based
upon each investor's total invested capital as follows:
- The number 8,000,000 will be multiplied by a fraction
- 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
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invested in shares of TriVergent preferred stock or Gabriel preferred
stock as of the effective time of the merger, as shown on the books and
records of the TriVergent or Gabriel, as the case may be, not including
any accrued and unpaid dividends which were invested in shares of
TriVergent preferred stock immediately prior to the effective time of the
merger as provided in the merger agreement, and
- the denominator of the fraction will equal the sum of the total invested
capital of all holders of preferred stock in both TriVergent and Gabriel
at the effective time of the merger and the "total committed capital" of
all holders of shares of Series B preferred stock of Gabriel as of the
effective time of the merger. "Total committed capital" means the total
dollar amount committed to be invested in shares of Gabriel Series B
preferred stock as of the effective time of the merger as provided in the
"Gabriel Series B Purchase Agreement," as defined in the merger
agreement. Total committed capital will not exceed $135,024,120.
The number of two-year warrants that a particular holder of Gabriel or
TriVergent preferred stock will be entitled to receive will be calculated based
upon each investor's total invested capital by multiplying 5,000,000 by the same
fraction.
The exercise of any one-year warrants by a holder thereof is deemed to be
an exercise of all of the one-year warrants and two-year warrants held by that
holder. Gabriel, however, will not be obligated to issue any of the shares of
common stock that may be purchased upon such deemed exercise of the one-year and
two-year warrants until the holder has fully complied with the terms and
conditions of the warrant agreement, including, but not limited to, the full
payment of the purchase price prior to the expiration date of the warrants.
STOCKHOLDERS' AGREEMENT
All Gabriel stockholders are parties to, and all holders of TriVergent
stock who receive Gabriel stock in the merger will become parties to, a
stockholders' agreement by and among Gabriel and its stockholders. The
stockholders' agreement provides the holders rights and sets forth restrictions
on their shares. These rights and restrictions will exist until Gabriel
completes an initial public offering pursuant to which all shares of its
preferred stock are automatically converted into shares of Gabriel common stock
pursuant to the terms of its amended and restated certificate of incorporation.
A copy of the stockholders' agreement has been filed with the SEC as an exhibit
to the registration statement of which this information statement/prospectus is
a part.
PREEMPTIVE RIGHTS. The stockholders' agreement affords preemptive rights to
the holders of Gabriel's common stock and preferred stock. Subject to
exceptions, if Gabriel issues or sells any equity securities, or securities
convertible into or containing any options or rights to acquire any equity
securities, Gabriel will first offer to sell to the stockholders who are parties
to the agreement an aggregate of 80% of those securities. Within 35 days of
receiving notice of such offer from Gabriel, each stockholder may then purchase
an amount of the offered securities based on the percentage of all outstanding
stock of Gabriel then held by the stockholder, on a fully diluted basis. Each
stockholder will be entitled to purchase all or part of the offered securities
at the same price and on the same terms as the securities are offered to any
other person. If the stockholders do not fully subscribe to all of the offered
securities, then Gabriel will reoffer the unsubscribed securities to the
stockholders who have elected to purchase their full allotment and who elect to
purchase any of such securities within 10 days of receiving notice of such
reoffer. After the expiration of the 35-day period and, if applicable, the
10-day period, Gabriel may sell any 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
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offered to Gabriel and the other stockholders. Such restrictions will not apply
to transfers to "affiliates," transfers pursuant to a "public sale" or a
"capital transaction," as each of these terms is defined in the stockholders
agreement, or transfers pursuant to a distribution to a stockholder's partners,
members or stockholders.
In the event that any stockholder or group of stockholders elects to sell
51% or more of the stock then issued and outstanding and has received a bona
fide written offer for the purchase of such stock, the stockholder or group of
stockholders must notify Gabriel and the other stockholders in writing of its
intention to sell. Each other stockholder may elect to participate in the
intended sale by delivering written notice to the selling stockholder or group
of stockholders and Gabriel not more than 25 days after the original notice from
the selling stockholder(s). Each selling stockholder and participating
stockholder will be entitled to sell its pro rata portion of the number of
shares to be purchased, based upon the number of shares owned by all of the
selling and participating stockholders, on the same terms and at the same price
offered to the selling stockholder(s).
SUPERMAJORITY VOTE REQUIREMENT. The affirmative vote of the holders of
66 2/3% of the outstanding common stock and preferred stock of Gabriel, voting
as a single class, is required for the authorization of any additional class of
capital stock or an increase in the number of shares of authorized capital
stock. This supermajority vote is also required for approval of the sale of
Gabriel, whether by merger, consolidation, sale of stock or assets or otherwise.
REGISTRATION RIGHTS AGREEMENT
All Gabriel stockholders are parties to, and all holders of TriVergent
stock who receive Gabriel stock in the merger will become parties to, a
registration rights agreement by and among Gabriel and its stockholders.
Pursuant to the registration rights agreement, holders of common and preferred
stock have rights to register under the Securities Act the common stock they own
or which are issuable upon conversion of their shares of preferred stock. A copy
of the registration rights agreement has been filed with the SEC as an exhibit
to the registration statement of which this information statement/prospectus is
a part.
DEMAND REGISTRATION. Holders of not less than 20% of the total number of
outstanding shares of preferred stock or common stock, including common stock
issuable upon conversion of preferred stock or issuable upon the exercise of any
outstanding warrants or options, may demand that Gabriel register the resale of
the number of shares of stock that holders then desire to sell. Holders may make
this demand at any time after the earlier of November 18, 2002 or the effective
date of Gabriel's initial public offering of common stock. In any request for a
demand registration prior to Gabriel's initial public offering, the proposed
public offering price must be at least $15.00 per share and the proposed
aggregate proceeds to the stockholders and Gabriel must be at least $30,000,000.
In addition, at such time as we are eligible to utilize SEC Form S-3 or any
successor form thereto, holders of not less than 10% of the total number of
outstanding shares of Gabriel's preferred and common stock, including common
stock issuable upon conversion of preferred stock or issuable upon the exercise
of any outstanding warrants or options, may demand that Gabriel register the
resale of the number of shares of its common stock that such holders then desire
to sell on SEC Form S-3 or any successor form. In any request for a demand
registration on SEC Form S-3 or any successor form thereto, the proposed
aggregate public offering price must be at least $5 million.
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
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limited, the number of shares included by holders may be limited to the amount
determined by the managing underwriter. The registration rights agreement
contains provisions restricting sales of any equity securities of Gabriel,
except securities sold as part of the offering, during the period commencing on
the seventh day prior to, and ending on the ninetieth day, or later, if so
required by the managing underwriter, following the effective date of any
underwritten offering.
EXPENSES AND INDEMNIFICATION. The registration rights agreement requires
Gabriel, in connection with the first two demand registrations and each
piggyback registration, to pay all registration and filing fees and expenses,
printing expenses, fees and disbursements of counsel for Gabriel, one counsel
representing all of the holders of the stock included in the registration and
the accountants for Gabriel and some other expenses. The registration rights
agreement also contains customary cross-indemnification by Gabriel and the
holders of the stock included in the registration for liabilities arising under
the Securities Act of 1933 as a result of any registration.
EMPLOYEE SHAREHOLDERS AGREEMENT
All employees of Gabriel who own Gabriel common stock are parties to, and
TriVergent employees who receive Gabriel common stock in the merger will become
parties to, a shareholders agreement, by and between Gabriel and the
shareholders named therein. This agreement governs the transfer of the
shareholders' shares, the re-purchase by Gabriel of Gabriel shares and contains
confidentiality and non-solicitation provisions. A copy of the shareholders
agreement has been filed with the SEC as an exhibit to the registration
statement of which this information statement/prospectus is a part.
RESTRICTIONS ON TRANSFER. No shareholder who is party to the shareholders
agreement may voluntarily transfer shares of Gabriel common stock until Gabriel
has issued an aggregate of $10 million in shares of common stock. After this
threshold is met, to sell shares of common stock to a party other than Gabriel,
a shareholder must give 30 days written notice. Gabriel will then have a 60 day
option to purchase all of the shares, and after this period, the other common
shareholders will have a 90 day option to purchase a proportionate number of all
of the shares offered. The shareholders may transfer their shares to or for the
benefit of family members if the board of directors approves, the consideration
does not exceed the original payment for the shares, and other conditions are
met.
Upon an involuntary transfer of a shareholder's shares, i.e. property
division in divorce, distribution by bankruptcy trustee, etc., Gabriel and the
remaining shareholders will have a 70-day option to purchase all, but not less
than all, of the shares transferred. The purchase price for the shares pursuant
to an option granted upon an involuntary transfer will be the lesser of
- the fair market value,
- the latest price per share at which the shares were traded in an
arm's-length transaction, or
- the price at which the shares are being transferred.
If neither Gabriel nor the common shareholders choose to exercise their options
described above, the preferred shareholders will have a 10-day option to
purchase all of the shares subject to the option.
TERMINATION OF EMPLOYMENT. Upon the death of a shareholder, the
shareholder's estate has a 180 day option to sell, and Gabriel has a 180 day
option to buy, all of the deceased shareholder's shares. Upon the disability of
a shareholder, the shareholder has the option to sell, and Gabriel has the
option to buy, all of the disabled shareholder's shares. If the shareholder's
estate or the disabled shareholder exercises the option on the same day as
Gabriel, Gabriel's option controls.
The purchase price for the shares pursuant to an option granted upon death
or disability will be
- for the shareholder's or shareholder's estate's option to sell, the
greater of the fair market value, as determined by the board of
directors, or the latest price per share at which the shares were traded
in an arm's-length transaction, and
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- for Gabriel's option to purchase, the appraised value of Gabriel divided
by the number of issued and outstanding shares owned by the parties to
the agreement.
Upon the termination of an employee shareholder's employment for any reason
other than death or permanent disability, Gabriel will have the option to
purchase all of the shareholder's shares. The purchase price for the shares will
be
- upon termination for cause, the lesser of the fair market value, as
determined by the board of directors, or the book value per share of
Gabriel as determined as of the end of the prior fiscal year, and
- upon any other termination of employment, the greater of the fair market
value, as determined by the board of directors, or the latest price per
share at which shares were traded in an arm's length transaction.
CONFIDENTIALITY AND NONCOMPETITION PROVISIONS. During the period during
which a party to the shareholders agreement is a shareholder and for two years
following the date on which the shareholder ceases to own Gabriel stock, the
shareholder will not divulge any confidential information to anyone or use this
confidential information to compete with Gabriel. During this same period, no
shareholder may knowingly solicit any material client or customer of Gabriel for
the provision of competitive local communications services. In addition, no
shareholder may solicit for employment any Gabriel employee during the period
which the shareholder owns any Gabriel stock.
CLASSIFIED BOARD OF DIRECTORS AND OTHER ANTI-TAKEOVER CONSIDERATIONS
Gabriel's by-laws provide for a classified board of directors. One-third of
the directors will be elected at each annual meeting of stockholders to serve
for three-year terms. As a result, at least two annual meetings of shareholders
may be required for the shareholders to change a majority of Gabriel's board of
directors. Because the stockholders never elect a majority of the board members
at one time, the classified board could delay or prevent the change in control
or make removal of Gabriel's management more difficult. In addition, Gabriel's
amended and restated certificate of incorporation allows its board to issue,
without stockholder approval, preferred stock with terms set by the board. The
preferred stock could be issued quickly with terms that delay or prevent the
change in control or make removal of Gabriel's management more difficult.
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COMPARISON OF RIGHTS OF STOCKHOLDERS
OF GABRIEL AND TRIVERGENT
Upon completion of the merger, TriVergent stockholders will become holders
of Gabriel stock and their rights will be governed by the General Corporation
Law of the State of Delaware, which we refer to as Delaware law, and Gabriel's
amended and restated certificate of incorporation and by-laws. The rights of
TriVergent stockholders are now governed by Delaware law and TriVergent's
certificate of incorporation and by-laws.
The following is a description of the material differences between the
rights of stockholders of Gabriel and TriVergent. TriVergent stockholders should
read carefully the relevant provisions of Delaware law, Gabriel's amended and
restated certificate of incorporation and by-laws, and TriVergent's certificate
of incorporation and by-laws.
CAPITALIZATION
GABRIEL
Gabriel's authorized capital stock is described above under "Description of
Gabriel Capital Stock," beginning on page 134.
TRIVERGENT
As of August 30, 2000, the date on which TriVergent was reincorporated as a
Delaware corporation, and as of September 30, 2000, the total number of
authorized shares of capital stock of TriVergent consists of 100,000,000 shares
of common stock, par value $0.0001 per share, and 50,000,000 shares of preferred
stock, par value $0.0001 per share, of which 6,500,000 shares have been
designated as Series A convertible preferred stock, 15,000,000 shares have been
designated as Series B convertible preferred stock and 16,500,000 shares have
been designated as Series C convertible preferred stock.
VOTING RIGHTS
GABRIEL
Each holder of common stock is entitled to cast one vote for each share
held of record on all matters submitted to a vote of shareholders, including the
election of directors. Holders of common stock have no cumulative voting rights.
Each holder of preferred stock is entitled to cast one vote for each share of
common stock into which such holder's preferred stock may be converted.
TRIVERGENT
Each holder of common stock is entitled to cast one vote for each share
held of record on all matters submitted to a vote of stockholders, including the
election of directors. Holders of common stock have no cumulative voting rights.
Each holder of preferred stock is entitled to cast one vote for each share of
common stock into which such holder's preferred stock may be converted.
NUMBER AND ELECTION OF DIRECTORS
Under Delaware law, directors are elected at each annual meeting of
stockholders unless the certificate of incorporation or by-laws provide
otherwise, or if their terms are staggered. The certificate of incorporation may
authorize the election of directors by one or more classes or series of shares,
and the certificate of incorporation or by-laws may provide for staggered terms
for directors. Under Delaware law, stockholders do not have cumulative voting
rights for the election of directors unless the certificate of incorporation so
provides.
GABRIEL
Under Gabriel's by-laws, the number of members of the board of directors of
Gabriel is fixed at nine. Under Gabriel's certificate of incorporation and
by-laws, at each annual meeting of stockholders, the
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successors of the class of directors whose term expires at the meeting will be
elected to hold office for a term expiring at the annual meeting of stockholders
held in the third year following the year of their election.
Gabriel's certificate of incorporation does not provide for cumulative
voting. Gabriel's certificate of incorporation and by-laws provide for a
staggered board of directors consisting of three classes of directors
TRIVERGENT
Under TriVergent's certificate of incorporation, the number of members of
the board of directors of TriVergent is initially fixed at nine but may be
increased or decreased by a resolution adopted by a majority of the board,
provided that there must not be more than 24 nor less than three. Directors are
elected by a plurality of all votes voting as a single class at each annual
meeting of stockholders. TriVergent's certificate of incorporation does not
provide for cumulative voting.
VACANCIES ON THE BOARD OF DIRECTORS
Under Delaware law, unless the certificate of incorporation or by-laws
provide otherwise, vacancies on the board of directors may be filled by the
stockholders or the directors.
GABRIEL
Gabriel's certificate of incorporation and by-laws provide that vacancies
and newly created directorships resulting from an increase in the authorized
number of directors will be filled by the holders of the majority of stock
entitled to vote for the election of directors or by the affirmative vote of a
majority of the remaining directors then in office, even if less than a quorum,
or by a sole remaining director so elected, except as may be required by law. A
director elected to fill a vacancy or newly created directorship will serve
until the next annual meeting of stockholders and until such director's
successor has been elected and qualified.
TRIVERGENT
TriVergent's certificate of incorporation provides that, except as
otherwise provided by law, newly created directorships resulting from an
increase in the authorized number of directors or vacancies on the board may be
filled only with a majority of the directors then in office, though less than a
quorum, or by the sole remaining director.
REMOVAL OF DIRECTORS
Under Delaware law, any director may be removed with or without cause by
the affirmative vote of the holders of a majority of stock. But, if the board is
classified and the certificate of incorporation does not otherwise provide,
shareholders may remove directors only for cause. In addition, if the
corporation has cumulative voting and less than the entire board is to be
removed, no director may be removed without cause if the votes against the
director's removal would be enough to elect him if then cumulatively voted at an
election of the board.
GABRIEL
Gabriel's by-laws provide that any director may be removed from office with
or without cause by the affirmative vote of the holders of a majority of the
stock of Gabriel entitled to vote in the election of directors, voting together
as a single class.
TRIVERGENT
TriVergent's certificate of incorporation states that directors may only be
removed for cause by at least 66 2/3% of the outstanding stock of TriVergent
entitled to vote in the election of directors, voting together as a single
class.
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AMENDMENTS TO CHARTER
Under Delaware law, an amendment to the certificate of incorporation of a
corporation requires the approval of the board of directors and the approval of
the holders of a majority of the outstanding stock entitled to vote upon the
proposed amendment. The holders of the outstanding shares of a class are
entitled to vote as a separate class on a proposed amendment that would
- increase or decrease the aggregate number of authorized shares of such
class,
- increase or decrease the par value of the shares of such class, or
- alter or change the powers, preferences or special rights of the shares
of such class, so as to affect them adversely.
If any proposed amendment would alter or change the powers, preferences or
special rights of one or more series of any class so as to affect them
adversely, but would not so affect the entire class, then only the shares of the
series so affected by the amendment will be considered a separate class.
GABRIEL
Under Gabriel's certificate of incorporation, the affirmative vote of
66 2/3% of outstanding shares entitled to vote, voting together as a single
class, is required for any amendment of provisions of the certificate of
incorporation relating to the terms of the common and preferred stock which is
inconsistent with the current terms. In addition, Gabriel's certificate of
incorporation provides that the number of authorized shares of common stock may
be increased or decreased by the affirmative vote of the holders of a majority
of the outstanding shares entitled to vote, voting together as a single class.
TRIVERGENT
Under TriVergent's certificate of incorporation, the affirmative vote of
66 2/3% of outstanding shares entitled to vote, voting together as a single
class, is required to amend or repeal any provision of the certificate of
incorporation relating to the terms of the common and preferred stock which are
inconsistent with the current terms. Holders of common stock are not entitled to
vote on any amendment to the certificate of incorporation that relates solely to
the terms of the preferred stock.
AMENDMENTS TO BY-LAWS
Under Delaware law, unless a corporation's certificate of incorporation
provides otherwise, the stockholders have the power to adopt, amend or repeal
the by-laws.
GABRIEL
Gabriel's certificate of incorporation allows the directors and
stockholders to amend or repeal the by-laws, subject to the rights of the
stockholders to adopt by-laws and to amend or repeal by-laws made by the board
of directors.
TRIVERGENT
Under TriVergent's certificate of incorporation, the affirmative vote of
66 2/3% of outstanding shares entitled to vote, voting together as a single
class, and a majority of the directors, is required to amend or repeal the
by-laws, subject to the rights of the stockholders to adopt by-laws and to amend
or repeal by-laws made by the board of directors.
SHAREHOLDER ACTION
Delaware law provides that, unless otherwise provided in the certificate of
incorporation, any action that could be taken by the stockholders at a meeting
may be taken without a meeting if a consent or consents in writing, setting
forth the action taken, is signed by the holders of record of outstanding stock
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having at least the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote on the
matter were present and voted. Neither Gabriel's nor TriVergent's certificate of
incorporation provides otherwise.
SPECIAL STOCKHOLDER MEETINGS
Under Delaware law, a special meeting of the stockholders may be called by
the board of directors or by other persons authorized by the certificate of
incorporation or the by-laws.
GABRIEL
Gabriel's by-laws provide that special meetings of the stockholders may be
called by any two members of the board of directors or by the chairman of the
board of directors.
TRIVERGENT
TriVergent's certificate of incorporation provides that special meetings of
the stockholders of TriVergent may be called only by the board of directors
pursuant to a resolution approved by a majority of the total number of directors
which TriVergent would have if there were no vacancies.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
Delaware law provides that a certificate of incorporation may contain a
provision eliminating or limiting the personal liability of directors to the
corporation or its stockholders for monetary damages for breach of a fiduciary
duty as a director, except no provision in the certificate of incorporation can
eliminate or limit the liability of a director
- for any breach of a director's duty of loyalty to the corporation or its
stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- statutory liability for unlawful payment of dividends or unlawful stock
purchase or redemption, or
- for any transaction from which the director derived an improper personal
benefit.
GABRIEL AND TRIVERGENT
Each of Gabriel's amended and restated certificate of incorporation and
TriVergent's certificate of incorporation provides that, to the fullest extent
permitted by law, no director will be personally liable to the respective
company or its stockholders for or with respect to any acts or omissions in the
performance of his or her duties as a director of the company.
INDEMNIFICATION OF DIRECTORS
Under Delaware law, a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any proceeding, other than an
action by or on behalf of the corporation, because the person is or was a
director, against liability incurred in connection with the proceeding if
- the director acted in good faith and in a manner the director reasonably
believed to be in the best interests of the corporation, and
- with respect to any criminal action or proceeding, had no reasonable
cause to believe the director's conduct was unlawful.
Under Delaware law, a corporation may not indemnify a director in
connection with any proceeding in which the director has been adjudged to be
liable to the corporation unless and only to the extent that the court in which
the proceeding was brought determines that, in view of all the circumstances of
the case, the director is fairly and reasonably entitled to indemnity for such
expenses which the court deems proper.
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Delaware law provides that any indemnification for a director, unless
ordered by a court, is subject to a determination that the director has met the
applicable standard of conduct. The determination will be made
- by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum, or
- if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or
- by the stockholders.
Under Delaware law, a corporation may advance expenses before the final
disposition of a proceeding and the director undertakes to repay the amount if
it is ultimately determined that the director is not entitled to
indemnification. These expenses incurred by former directors may be paid upon
the terms and conditions, if any, as the corporation deems appropriate.
Under Delaware law, to the extent that a present or former director of a
corporation has been successful on the merits or otherwise in defense of the
proceeding, that person must be indemnified against expenses actually and
reasonably incurred in connection with any claim.
Delaware law gives a corporation the power to purchase and maintain
insurance on behalf of any director against any liability asserted against, and
incurred in his or her capacity as a director, whether or not the corporation
would have the power to indemnify the director against this liability under
Delaware law.
GABRIEL AND TRIVERGENT
Gabriel's amended and restated certificate of incorporation and
TriVergent's certificate of incorporation provide that each will indemnify their
directors to the fullest extent allowed by law. Gabriel's amended and restated
certificate of incorporation recognizes this right as a contract right that may
be enforced in any manner desired by the directors.
DIVIDENDS
Under Delaware law, dividends may be declared and paid upon stock so long
as the corporation's capital is not less than the capital represented by the
issued and outstanding stock of all classes with a distribution reference.
GABRIEL
No cash dividends may be declared and paid upon Gabriel common stock so
long as any Gabriel preferred stock is outstanding. Thereafter, cash dividends
may be declared and paid upon the common stock in such amounts and at such times
as the board of directors may determine subject to the availability of
sufficient funds under Delaware law to make distributions to its stockholders.
Holders of Gabriel preferred stock are not entitled to receive cash dividends.
Gabriel has never paid any dividends on its common or preferred stock and does
not anticipate paying dividends in the foreseeable future.
TRIVERGENT
Under TriVergent's certificate of incorporation, holders of common stock
are entitled to dividends payable in cash, capital stock or otherwise if
declared by the TriVergent board and subject to the availability of sufficient
funds as required under Delaware law to make distributions to its stockholders.
APPRAISAL RIGHTS
Under Delaware law, a stockholder of a Delaware corporation is generally
entitled to demand an appraisal and to obtain payment of the fair value of his
or her shares in the event of a merger or
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consolidation in which the corporation is to be a party. This right to demand an
appraisal does not apply to holders of shares of any class or series of stock
which are
- shares of a surviving corporation and if a vote of the stockholders of
that corporation is not necessary to authorize the merger or
consolidation,
- listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., such as The Nasdaq National
Market, or
- held of record by more than 2,000 holders.
Appraisal rights are available for holders of shares of any class or series
of stock of a Delaware corporation if the holders are required by the terms of
the merger or consolidation agreement to accept in exchange for their stock
anything except
- shares of stock of the corporation surviving or resulting from the merger
or consolidation,
- shares of stock of any other corporation which, at the effective time of
the merger or consolidation, will be listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, such as The Nasdaq National Market, or held of record by more
than 2,000 holders,
- cash instead of fractional shares of the corporations described above, or
- any combination of the shares of stock and cash instead of fractional
shares described above.
PREEMPTIVE RIGHTS
Delaware law does not provide for preemptive rights to acquire a
corporation's unissued stock, but preemptive rights may be provided to
stockholders in a corporation's certificate of incorporation.
GABRIEL AND TRIVERGENT
Neither Gabriel's amended and restated certificate of incorporation nor
TriVergent's certificate of incorporation provides for preemptive rights except
for those that may exist by agreement among stockholders of either company.
CONVERSION
Holders of Gabriel common stock and TriVergent common stock have no rights
to convert their shares into any other securities.
PREFERRED STOCK
Pursuant to the merger, shares of the TriVergent preferred stock will be
exchanged for shares of the Gabriel preferred stock. The terms of the Gabriel
shares of preferred stock will have terms substantially identical to those of
the other series of Gabriel preferred stock, except as to the respective
liquidation preferences and conversion prices of each such series. The terms of
the Gabriel preferred stock are summarized above under "Description of Gabriel
Capital Stock" beginning on page 134.
SHAREHOLDER SUITS
Under Delaware law and applicable court decisions, a stockholder may file a
lawsuit on behalf of the corporation. Delaware law provides that a stockholder
must state in the complaint that he or she was a stockholder of the corporation
at the time of the transaction of which he or she complains. However, no action
may be brought by a stockholder unless he first seeks remedial action on his
claim from the corporation's board of directors, unless the demand for redress
is excused.
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The board of directors may appoint an independent litigation committee to
review a stockholder's request for a derivative action, and the litigation
committee, acting reasonably and in good faith, can terminate the stockholder's
action subject to a court's review of the committee's independence, good faith
and reasonable investigation.
Under Delaware law, the court in a derivative action may apply a variety of
legal and equitable remedies on behalf of the corporation that vary depending on
the facts and circumstances of the case and the nature of the claim brought.
As noted above, Delaware law contains provisions allowing a corporation,
through a provision in its restated certificate of incorporation, to limit or
eliminate the personal liability of a director to the corporation or its
stockholders for breach of a fiduciary duty as a director, except that the
provision cannot eliminate or limit the liability of a director in some
circumstances, as described above under "-- Limitation of Personal Liability of
Directors" beginning on page 145.
VOTE ON EXTRAORDINARY CORPORATE TRANSACTIONS
Under Delaware law, mergers or consolidations or sales or exchanges of all
or substantially all of a corporation's assets, require the affirmative vote of
the board of directors, except in limited circumstances. In addition, the
affirmative vote of a majority of the outstanding stock of the corporation
entitled to vote on the matter may be required. Stockholder consent is not
required under the following circumstances:
- for a corporation which survives a merger and does not issue in the
merger more than 20% of its outstanding shares immediately prior to the
merger,
- the merger agreement does not amend in any respect the survivor's
certificate of incorporation,
- each share of the surviving corporation outstanding immediately prior to
the merger remains an identical outstanding share of the surviving
corporation after the merger, and
- stockholder approval is not required by the survivor's certificate of
incorporation; and
- for either corporation where one corporation owns 90% of each class of
outstanding stock of the other corporation.
BUSINESS COMBINATION RESTRICTIONS
Gabriel and TriVergent are subject to the anti-takeover provisions in
Delaware law. The anti-takeover provisions prohibit business combinations
between a Delaware corporation and an interested stockholder, as described
below, within three years of the time the interested stockholder became an
interested stockholder unless:
- before that time, the board of directors approved either the business
combination or the transaction in which the interested stockholder became
an interested stockholder;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the stockholder owned at least 85% of
the voting stock of the corporation, excluding shares held by directors
who are also officers of the corporation and by employee stock ownership
plans that do not permit employees to determine confidentially whether
shares held by the plan will be tendered in a tender or exchange offer;
or
- on or following that time, the business combination is approved by the
board of directors and the business combination transaction is approved
by the holders of at least 66 2/3% of the outstanding voting stock of the
corporation not owned by the interested stockholder.
The business combination restrictions described above do not apply if:
- the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by the antitakeover
provisions in Delaware law;
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- the holders of a majority of the voting stock of the corporation approve
an amendment to its certificate of incorporation or by-laws expressly
electing not to be governed by the antitakeover provisions, which
election will be effective 12 months after the amendment's adoption and
will not apply to any business combination with a person who was an
interested stockholder at or prior to the time the amendment was
approved; or
- the corporation does not have a class of voting stock that is listed on a
national securities exchange, authorized for quotation on The Nasdaq
National Market, or owned by more than 2,000 stockholders.
The anti-takeover provisions do not apply to a business combination that:
- is proposed after the public announcement of, and before the consummation
or abandonment of
- a merger or consolidation of the corporation,
- a sale of 50% or more of the aggregate market value of the assets of the
corporation and its subsidiaries determined on a consolidated basis or
the aggregate market value of all outstanding shares of the corporation,
or
- a tender or exchange offer for 50% or more of the outstanding shares of
the corporation; and
- is with a person who either was not an interested stockholder during the
previous three years or who became an interested stockholder with the
approval of the board of directors; and
- is approved by a majority of the current directors who were also
directors before any person became an interested stockholder during the
previous three years.
An "interested stockholder" generally is defined as a person that owns 15% or
more of the corporation's outstanding voting stock and the affiliates and
associates of that person.
The term "business combination" includes the following transactions with an
interested stockholder
- a merger or consolidation of the corporation with an interested
stockholder,
- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, except proportionately as a stockholder of the corporation,
of assets of the corporation or its subsidiaries having an aggregate
market value equal to 10% or more of either the aggregate market value of
all assets of the corporation and its subsidiaries determined on a
consolidated basis or the aggregate market value of all the outstanding
stock of the corporation,
- any transaction which results in the issuance or transfer by the
corporation or any of its subsidiaries of stock of the corporation or the
subsidiary to the interested stockholder, except for transactions
involving the exercise, conversion or exchange of securities outstanding
before the interested stockholder became an interested stockholder and
other transactions which do not increase the interested stockholder's
proportionate share of any class or series of the corporation's stock,
- any transaction involving the corporation or any of its subsidiaries
which increases the proportionate share of any class or series of stock,
or securities convertible into the stock of any class or series, of the
corporation or any subsidiary which is owned by the interested
stockholder, except as a result of immaterial changes due to fractional
share adjustments or as a result of any purchase or redemption of any
shares of stock not caused by the interested stockholder, or
- any receipt by the interested stockholder of the benefit, except
proportionately as a stockholder of the corporation, of any loans,
advances, guarantees, pledges or other financial benefits provided by the
corporation or its subsidiaries.
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EXPERTS
GABRIEL
The consolidated financial statements and schedule of Gabriel and
subsidiaries as of December 31, 1998 and 1999, and for the year ended December
31, 1999 and for the period from June 15, 1998 (inception) to December 31, 1998,
included in this information statement/prospectus have been included in this
information statement/prospectus in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
TRIVERGENT
The consolidated financial statements of State Communications, Inc. as of
December 31, 1998 and 1999, and for the period from October 29, 1997 (date of
inception) through December 31, 1997 and for the years ended December 31, 1998
and 1999, have been included in this information statement/prospectus in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
GABRIEL
Certain legal matters will be passed upon for Gabriel by Bryan Cave LLP,
St. Louis, Missouri. In April 2000, LeadingEdge Investors 2000, L.L.C., an
investment vehicle comprised of partners of Bryan Cave LLP, purchased and
currently beneficially owns approximately 10,714 shares of Series B Preferred
Stock of Gabriel through its investment in Brooks Investments, L.P., an existing
stockholder of Gabriel. Various regulatory matters in connection with the merger
are being passed upon for Gabriel by Morrison & Foerster LLP.
TRIVERGENT
Certain legal matters will be passed upon for TriVergent by Cravath, Swaine
& Moore, New York, New York. Various regulatory matters in connection with the
merger are being passed upon for TriVergent by Kelley Drye & Warren LLP,
Washington, D.C.
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AVAILABLE INFORMATION
This information statement/prospectus constitutes a part of a registration
statement on Form S-4 filed by Gabriel under the Securities Act of 1933, as
amended, with respect to the offering of Gabriel securities in connection with
the merger. As permitted by the rules and regulations of the SEC, this
information statement/prospectus omits some of the information contained in the
registration statement. Reference is made to the registration statement for
further information with respect to Gabriel and the Gabriel securities.
Statements contained in this information statement/prospectus as to the contents
of any contract or other document filed as an exhibit to the registration
statement are materially complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the registration
statement. Since the prospectus may not contain all the information that you
find important, you should review the full text of these documents. We have
included copies of these documents as exhibits to our registration statement.
The registration statement and the exhibits thereto filed with the SEC may be
inspected, without charge, and copies may be obtained at prescribed rates, at
the public reference facility maintained by the SEC at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
SEC located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
CitiCorp. Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-
2511. The Registration Statement and other information filed by us with the SEC
are also available at the SEC's World Wide Web site on the internet at
http://www.sec.gov.
All information contained in this information statement/prospectus relating
to TriVergent was provided by the management and board of directors of
TriVergent. Gabriel assumes no responsibility for the accuracy of this
information. All information contained in this information statement/prospectus
relating to Gabriel was provided by the management and board of directors of
Gabriel. TriVergent assumes no responsibility for the accuracy of this
information.
NO PERSON HAS BEEN AUTHORIZED BY GABRIEL OR TRIVERGENT TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, THIS INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY EITHER GABRIEL OR
TRIVERGENT. THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OR A SOLICITATION TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE GABRIEL SECURITIES TO WHICH IT RELATES OR AN OFFER OR
SOLICITATION TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS INFORMATION
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED HEREBY
SHALL, UNDER ANY CIRCUMSTANCES, IMPLY OR CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF GABRIEL OR TRIVERGENT OR IN THE INFORMATION SET
FORTH OR INCORPORATED BY REFERENCE HEREIN SUBSEQUENT TO THE DATE HEREOF.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
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<S> <C>
GABRIEL COMMUNICATIONS, INC.:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and as of June 30, 2000................................... F-3
Consolidated Statements of Operations for the period from
June 15, 1998 (inception) to December 31, 1998, for the
year ended December 31, 1999 and for the six months ended
June 30, 1999 and 2000.................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the period from June 15, 1998 (inception) to December
31, 1998, for the year ended December 31, 1999 and for the
six months ended June 30, 1999 and 2000................... F-5
Consolidated Statements of Cash Flows for the period from
June 15, 1998 (inception) to December 31, 1998, for the
year ended December 31, 1999 and for the six months ended
June 30, 1999 and 2000.................................... F-6
Notes to Consolidated Financial Statements.................. F-7
STATE COMMUNICATIONS, INC. (TRIVERGENT):
Independent Auditors' Report................................ F-16
Consolidated Balance Sheets as of December 31, 1998 and 1999
and as of June 30, 2000................................... F-17
Consolidated Statements of Operations for the period from
October 29, 1997 (date of inception) Through December 31,
1997, for the years ended December 31, 1998 and 1999 and
for the
six months ended June 30, 1999 and 2000................... F-18
Consolidated Statements of Stockholders' Equity for the
period from October 29, 1997 (date of inception) Through
December 31, 1997, for the years ended December 31, 1998
and 1999 and for the six months ended June 30, 1999 and
2000...................................................... F-19
Consolidated Statements of Cash Flows for the period from
October 29, 1997 (date of inception) Through December 31,
1997, for the years ended December 31, 1998 and 1999 and
for the six months ended June 30, 1999 and 2000........... F-20
Notes to Consolidated Financial Statements.................. F-21
</TABLE>
F-1
<PAGE> 160
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gabriel Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Gabriel
Communications, Inc. (a Delaware corporation) and subsidiaries (Gabriel) as of
December 31, 1998 and 1999 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the period from
June 15, 1998 (inception) to December 31, 1998 and for the year ended December
31, 1999. These consolidated financial statements are the responsibility of
Gabriel's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gabriel Communications, Inc.
and subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for the period from June 15, 1998 (inception) to
December 31, 1998 and for the year ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
February 4, 2000
F-2
<PAGE> 161
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- -------------
1998 1999 2000
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 28,682,294 $ 63,080,026 $ 77,907,990
Accounts receivable, net of allowance for
doubtful accounts of $15,602 and $74,258 in
1999 and 2000, respectively.................. -- 405,354 1,748,496
Prepaid expenses and other current assets....... 3,463 762,861 1,964,331
------------ ------------ -------------
Total current assets......................... 28,685,757 64,248,241 81,620,817
------------ ------------ -------------
Property and equipment, net....................... 147,697 33,805,919 71,721,411
Other noncurrent assets:
Investments..................................... -- 2,000,000 5,070,652
Other assets, net............................... -- 2,657,859 2,559,229
------------ ------------ -------------
Total other noncurrent assets................ -- 4,657,859 7,629,881
------------ ------------ -------------
Total assets................................. $ 28,833,454 $102,712,019 $ 160,972,109
============ ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 139,597 $ 1,306,127 $ 2,968,669
Accrued liabilities and other current
liabilities.................................. -- 3,188,697 8,411,748
------------ ------------ -------------
Total current liabilities.................... 139,597 4,494,824 11,380,417
Long-term debt.................................... -- 20,000,000 20,000,000
------------ ------------ -------------
Total liabilities............................ 139,597 24,494,824 31,380,417
------------ ------------ -------------
Minority interest................................. -- -- 1,630,684
Stockholders' equity:
Preferred stock -- Series A, $.01 par value,
30,200,000 shares authorized; 8,950,000;
26,850,000 and 26,850,000 issued and
outstanding in 1998, 1999 and 2000,
respectively................................. 89,500 268,500 268,500
Preferred stock -- Series A-1, $.01 par value,
3,125,000 shares authorized; 3,125,000 issued
and outstanding in 1999 and 2000............. -- 31,250 31,250
Preferred stock Series B, $.01 par value,
32,500,000 shares authorized; 9,930,294
issued and outstanding 2000; 19,289,160
subscribed................................... -- -- 292,194
Common stock, $.01 par value, 60,000,000 shares
authorized; 5,200,000; 5,469,200 and
6,008,200 issued and outstanding in 1998,
1999 and 2000, respectively.................. 52,000 54,692 60,082
Additional paid-in capital...................... 82,819,552 95,726,049 301,127,613
Treasury stock at cost, 100,000 shares in
2000......................................... -- -- (400,000)
Accumulated deficit............................. (567,199) (17,863,296) (38,394,516)
------------ ------------ -------------
82,393,853 78,217,195 262,985,123
Preferred stock subscriptions receivable........ (53,699,996) -- (135,024,115)
------------ ------------ -------------
Total stockholders' equity................... 28,693,857 78,217,195 127,961,008
------------ ------------ -------------
Total liabilities and stockholders' equity... $ 28,833,454 $102,712,019 $ 160,972,109
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 162
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM JUNE 15,
1998 (INCEPTION) YEAR ENDED SIX MONTHS
TO DECEMBER 31, DECEMBER 31, ENDED JUNE 30,
-------------------- ------------ ---------------------------
1998 1999 1999 2000
-------------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue............................. $ -- $ 452,597 $ 4,007 $ 3,267,599
Operating expenses:
Cost of communication services
(exclusive of depreciation and
amortization shown separately
below)......................... -- 495,808 4,581 2,634,251
Selling, general and
administrative................. 693,382 16,559,283 4,674,015 17,076,396
Depreciation and amortization..... 5,624 1,955,366 112,622 4,362,230
---------- ------------ ----------- ------------
Total operating expenses....... 699,006 19,010,457 4,791,218 24,072,277
---------- ------------ ----------- ------------
Loss from operations........... (699,006) (18,557,860) (4,787,211) (20,805,278)
---------- ------------ ----------- ------------
Other income (expense):
Interest income................... 131,807 1,476,940 549,187 1,843,791
Interest expense.................. -- (215,177) -- (1,439,701)
Equity in loss of affiliate....... -- -- -- (179,348)
---------- ------------ ----------- ------------
Total other income (expense)... 131,807 1,261,763 549,187 224,742
---------- ------------ ----------- ------------
Net loss before minority
interest..................... (567,199) (17,296,097) (4,238,024) (20,580,536)
Minority interest................... -- -- -- 49,316
---------- ------------ ----------- ------------
Net loss after minority
interest..................... $ (567,199) $(17,296,097) $(4,238,024) $(20,531,220)
========== ============ =========== ============
Basic and diluted loss per share.... $ (0.16) $ (3.25) $ (.81) $ (3.54)
========== ============ =========== ============
Weighted average common shares
outstanding....................... 3,550,755 5,322,409 5,225,022 5,800,670
========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 163
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK -- PREFERRED STOCK -- PREFERRED STOCK --
SERIES A SERIES A-1 SERIES B COMMON STOCK ADDITIONAL
--------------------- ------------------- --------------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- -------- --------- ------- ---------- -------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 15, 1998
(inception)............ -- $ -- -- $ -- -- $ -- -- $ -- $ --
Net loss for the period
ended December 31,
1998................... -- -- -- -- -- -- -- -- --
Issuance of stock........ 8,950,000 89,500 -- -- -- -- 5,200,000 52,000 82,819,552
---------- -------- --------- ------- ---------- -------- --------- ------- ------------
Balance, December 31,
1998................... 8,950,000 89,500 -- -- -- -- 5,200,000 52,000 82,819,552
Net loss for the year
ended December 31,
1999................... -- -- -- -- -- -- -- -- --
Issuance of stock........ 17,900,000 179,000 3,125,000 31,250 -- -- 269,200 2,692 12,906,497
---------- -------- --------- ------- ---------- -------- --------- ------- ------------
Balance, December 31,
1999................... 26,850,000 268,500 3,125,000 31,250 -- -- 5,469,200 54,692 95,726,049
Net loss for the six
months ended June 30,
2000 (unaudited)....... -- -- -- -- -- -- -- -- --
Issuance of stock
(unaudited)............ -- -- -- -- 29,219,454 292,194 539,000 5,390 205,401,564
Purchase of treasury
stock, at cost
(unaudited)............ -- -- -- -- -- -- -- -- --
---------- -------- --------- ------- ---------- -------- --------- ------- ------------
Balance, June 30, 2000
(unaudited)............ 26,850,000 $268,500 3,125,000 $31,250 29,219,454 $292,194 6,008,200 $60,082 $301,127,613
========== ======== ========= ======= ========== ======== ========= ======= ============
<CAPTION>
PREFERRED
STOCK TOTAL
TREASURY ACCUMULATED SUBSCRIPTIONS STOCKHOLDERS'
STOCK DEFICIT RECEIVABLE EQUITY
--------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance, June 15, 1998
(inception)............ $ -- $ -- $ -- $ --
Net loss for the period
ended December 31,
1998................... -- (567,199) -- (567,199)
Issuance of stock........ -- -- (53,699,996) 29,261,056
--------- ------------ ------------- ------------
Balance, December 31,
1998................... -- (567,199) (53,699,996) 28,693,857
Net loss for the year
ended December 31,
1999................... -- (17,296,097) -- (17,296,097)
Issuance of stock........ -- -- 53,699,996 66,819,435
--------- ------------ ------------- ------------
Balance, December 31,
1999................... -- (17,863,296) -- 78,217,195
Net loss for the six
months ended June 30,
2000 (unaudited)....... -- (20,531,220) -- (20,531,220)
Issuance of stock
(unaudited)............ -- -- (135,024,115) 70,675,033
Purchase of treasury
stock, at cost
(unaudited)............ (400,000) -- -- (400,000)
--------- ------------ ------------- ------------
Balance, June 30, 2000
(unaudited)............ $(400,000) $(38,394,516) $(135,024,115) $127,961,008
========= ============ ============= ============
</TABLE>
F-5
<PAGE> 164
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998
(INCEPTION) TO YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED JUNE 30,
-------------- ------------ ----------------------------
1998 1999 1999 2000
-------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss after minority interest..... $ (567,199) $(17,296,097) $ (4,238,024) $(20,531,220)
Adjustments to reconcile net loss
after minority interest to net
cash used in by operating
activities:
Depreciation and amortization..... 5,624 1,955,366 112,622 4,362,230
Minority interest................. -- -- -- (49,316)
Equity in loss of affiliate....... -- -- -- 179,348
Provision for doubtful accounts... -- 15,602 -- 58,656
Changes in assets and liabilities:
Increase in accounts
receivable................... -- (420,955) (4,007) (1,334,406)
Increase in prepaid expenses and
other assets................. (3,463) (3,467,002) (142,952) (1,330,654)
Increase in accounts payable.... 139,597 1,166,530 866,818 1,662,542
Increase in accrued liabilities
and other current
liabilities.................. -- 3,188,697 396,607 5,223,051
----------- ------------ ------------ ------------
Net cash provided by used in
operating activities....... (425,441) (14,857,859) (3,008,936) (11,759,769)
----------- ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and
equipment......................... (153,321) (35,563,844) (13,276,716) (42,117,300)
Purchase of investments.............. -- (2,000,000) -- (3,250,000)
----------- ------------ ------------ ------------
Net cash used in investing
activities................. (153,321) (37,563,844) (13,276,716) (45,367,300)
----------- ------------ ------------ ------------
Cash flows from financing activities:
Net distributions to (from) minority
interests......................... -- -- -- 1,680,000
Proceeds from long-term debt......... -- 20,000,000 -- --
Proceeds from issuance of stock...... 29,261,056 66,819,435 27,193,435 70,275,033
----------- ------------ ------------ ------------
Net cash provided by provided
by financing activities.... 29,261,056 86,819,435 27,193,435 71,955,033
----------- ------------ ------------ ------------
Net increase in cash......... 28,682,294 34,397,732 10,907,783 14,827,964
Cash, beginning of period.............. -- 28,682,294 28,682,294 63,080,026
----------- ------------ ------------ ------------
Cash, end of period.................... $28,682,294 $ 63,080,026 $ 39,590,077 $ 77,907,990
=========== ============ ============ ============
Supplemental disclosures of cash flow
information --
Cash paid during the period for
interest.......................... $ -- $ 141,944 $ -- $ 713,844
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 165
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
(1) NATURE OF BUSINESS
Gabriel Communications, Inc. (Gabriel) was incorporated as a Delaware
Corporation in June 1998 for the purpose of being a facilities based provider of
integrated voice and data telecommunications services in selected markets in the
United States. As of June 30, 2000, Gabriel was operational in seven markets:
St. Louis, Kansas City, Springfield, Wichita, Little Rock, Tulsa and Oklahoma
City. Gabriel was also in the process of deploying networks in seven other
markets: Akron, Indianapolis, Cincinnati, Columbus, Dayton, Louisville and
Lexington.
Until May 1999, Gabriel was in the development stage. From its inception in
June 1998 through May 1999, Gabriel's principal activities included developing
its business plan, hiring management and other key personnel, designing its
planned network architecture and operations support systems, and completing its
initial equity financings.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the accrual
basis of accounting in conformity with generally accepted accounting principles.
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The interim financial information as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 is unaudited and has been prepared on the
same basis as the audited consolidated financial statements. In the opinion of
management, such unaudited information includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
interim information. Operating results for the six months ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Gabriel Communications, Inc., its wholly owned subsidiaries and, for the period
ended June 30, 2000, affiliated companies in which Gabriel has a controlling
interest. Gabriel has a 50% interest in a joint venture which is accounted for
under the equity method. Affiliated companies in which Gabriel does not have a
significant influence are accounted for using the cost method. All significant
intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Excess cash totaling approximately $26.9 million and $46.4 million at
December 31, 1998 and 1999, respectively, is invested overnight in money market
accounts. Gabriel considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The cost of these
investments approximates fair value.
F-7
<PAGE> 166
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of prepaid rent, prepaid
insurance, prepaid software maintenance, and facility installation costs.
Prepayments are expensed on a straight-line basis over the life of the
underlying agreements. Facility installation costs are amortized on a
straight-line basis over the life of the customer contracts.
PROPERTY AND EQUIPMENT
Property and equipment includes network equipment, leasehold improvements,
computer software, computer hardware, office equipment, furniture and fixtures,
vehicles, and construction-in-progress. These assets are stated at cost. The
cost of construction, additions, and substantial betterments of property and
equipment is capitalized. The cost of maintenance and repairs is expensed as
incurred. Property and equipment are depreciated using the straight-line method
over estimated economic lives as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Network equipment........................................... 5-7
Leasehold improvements...................................... 5
Computer hardware and software.............................. 3-5
Furniture and office equipment.............................. 7
Vehicles.................................................... 5
</TABLE>
OTHER ASSETS
Other assets are stated at cost and include long-term debt origination
fees. These fees are being amortized on a straight-line basis over the term of
the credit facility.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
ASSET IMPAIRMENT
Gabriel management evaluates the recoverability of long-lived assets,
including investments, property, and equipment, on a periodic basis. Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. There have been no impairments through
June 30, 2000.
STOCK-BASED COMPENSATION
Gabriel applies the intrinsic value method in accounting for employee stock
options and warrants. The financial impact on the net loss as calculated under
the fair value method is disclosed in note 7.
F-8
<PAGE> 167
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
REVENUE RECOGNITION
Revenue is recognized in the month in which service is provided.
EARNINGS PER SHARE
Basic and diluted loss per share have been computed using the weighted
average number of shares of common stock outstanding. The weighted average
number of shares was based on common stock outstanding for basic loss per share
and common stock outstanding, assumption of preferred stock conversion and
common stock options and warrants for diluted loss per share in periods when
such preferred stock conversion, and the common stock options and warrants are
not antidilutive.
SEGMENT INFORMATION
In 1998, Gabriel adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
which requires a "management approach" to segment information. The management
approach designates the internal reporting that is used by management for making
operating decisions and assessing performance as the source of reportable
segments. Gabriel operates in a single industry segment, "Communication
Services." Operations are managed and financial performance is evaluated based
on the delivery of multiple communications services to customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires that every derivative be recorded as either an asset or liability
in the balance sheet and measured at its fair value. SFAS No. 133 also requires
that changes in the derivative's fair market value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate and assess the effectiveness of transactions that
require hedge accounting. Gabriel is required to adopt SFAS No. 133, as amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," and SFAS No. 138 "Accounting for Certain
Derivatives Instruments and Certain Hedging Activities -- an amendment to FASB
Statement No. 133" on a prospective basis for interim periods and fiscal years
beginning January 1, 2001. Gabriel does not anticipate that adoption SFAS No.
133 will have a material effect on its financial statements.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in financial statements. SAB 101 must be applied to financial statements no
later than the fourth fiscal quarter of 2000. Gabriel does not believe adoption
will have a material impact on the Company's consolidated financial position or
results of operations.
F-9
<PAGE> 168
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1998 1999 2000
-------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Network equipment........................................ $ -- $12,259,144 $24,100,063
Leasehold improvements................................... -- 3,949,354 4,648,344
Computer hardware........................................ 100,574 3,561,316 5,335,384
Computer software........................................ 34,033 4,371,879 7,273,723
Furniture and office equipment........................... 18,714 1,551,241 2,025,658
Vehicles................................................. -- 192,552 756,340
Other.................................................... -- 30,450 42,378
-------- ----------- -----------
Property and equipment, in service..................... 153,321 25,915,936 44,181,890
Less accumulated depreciation and amortization........... 5,624 1,909,495 6,111,303
-------- ----------- -----------
Property and equipment, in service, net............. 147,697 24,006,441 38,070,587
Construction-in-progress................................. -- 9,799,478 33,650,824
-------- ----------- -----------
Property and equipment, net............................ $147,697 $33,805,919 $71,721,411
======== =========== ===========
</TABLE>
During 1999, 17% of Gabriel's capital expenditures were from a single
vendor and were related to network equipment.
(4) INVESTMENTS
On December 2, 1999, Gabriel invested $2,000,000 to purchase 583,090 Series
B convertible preferred shares of Tachion Networks, Inc. (Tachion), a
privately-held "next generation" switch manufacturer. Conversion of such shares
would result in Gabriel owning approximately 2% of Tachion.
On March 21, 2000, Gabriel contributed $3,850,000 in exchange for a 70%
interest in a joint venture, GCI Transportation Company, LLC. Brooks
International Aviation, L.L.C. contributed cash of $1,650,000 in exchange for a
30% interest in the joint venture.
On March 22, 2000, Gabriel entered into a joint venture, WebBizApps, L.L.C.
Under the terms of the agreement, Gabriel must contribute $4,500,000 in exchange
for a 50% interest in the joint venture. Gabriel contributed $3,250,000 in
March. The joint venture partner contributed $4,500,000 in assets and received a
distribution of $2,000,000.
The pro forma effect of the above acquisitions on revenues and net loss
would be minimal.
(5) RELATED PARTY TRANSACTIONS
Gabriel rents office space and obtains certain other services from Brooks
Investments, L.P. and Brooks International Aviation, L.L.C. The Chairman of the
Board of Gabriel is a majority owner in Brooks Investments, L.P. and Brooks
International Aviation, L.L.C. For the period from June 15, 1998 (inception) to
December 31, 1998 and for the year ended December 31, 1999 and the six months
ended June 30, 2000, Gabriel incurred expenses totaling $25,780, $207,277 and
$31,389, respectively. Gabriel had $15,808 in accounts payable at December 31,
1998, no accounts payable at December 31, 1999 and $682 in accounts payable at
June 30, 2000 related to Brooks Investments, L.P. and Brooks International
Aviation, L.L.C.
F-10
<PAGE> 169
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
(6) LONG-TERM DEBT
As of October 28, 1999, Gabriel Communications Finance Company (Borrower),
a wholly owned subsidiary of the Company, entered into a $90,000,000 senior
secured credit facility primarily to finance capital expenditures and to provide
working capital. This facility consists of an $80,000,000 term loan facility and
a $10,000,000 revolving credit facility. The term loan facility may be borrowed
during an availability period which ends on September 30, 2001. The term loan
facility provides that principal payments commence on December 31, 2002 ending
with a final payment on September 30, 2007. The revolving credit facility is
available until November 9, 2007, subject to a $4,000,000 reduction in
availability on the revolving credit facility on June 30, 2007. The credit
facility is secured by a pledge of all of the capital stock of the Borrower and
Gabriel's other wholly-owned subsidiaries, a security interest in all of the
assets of the Borrower and Gabriel's other wholly-owned subsidiaries, and in
certain assets of the Company.
The credit facility contains certain restrictive covenants that, among
other things, require the maintenance of certain financial ratios, limit the
ability of the Borrower to incur indebtedness, make investments, and pay
dividends and limit Gabriel's ability to incur indebtedness. Gabriel and the
Borrower were in compliance with all such restrictive covenants at December 31,
1999.
At December 31, 1999 and June 30, 2000, the Borrower had borrowed
$20,000,000 under the term loan facility at an interest rate of 10.12% and
10.96%, respectively. The Borrower incurred $215,177 in interest expense during
1999 and $1,439,701 in interest expense for the six months ended June 30, 2000.
The carrying amount of the long-term debt approximates fair value.
(7) STOCK-BASED COMPENSATION
Pursuant to Gabriel's 1998 Stock Incentive Plan, Gabriel has granted
non-qualified stock options and warrants to employees. Gabriel has also
implemented a Stock Purchase Program under the Plan in which selected employees
have been afforded the opportunity to purchase shares of common stock at fair
market value. No compensation expense has been recognized under the intrinsic
method for the stock options and warrants issued. Had compensation expense been
determined based on the fair value at the grant date, Gabriel's net loss would
have been higher than reported by approximately $27,000, $612,000 and $1,067,800
in 1998, 1999 and 2000, respectively. The fair value of options and warrants
granted in 1998, 1999 and 2000 is estimated on the date of grant using the
Black-Scholes option-pricing model (excluding a volatility assumption) with the
following weighted average assumptions: risk-free interest rate of 5.0%,
expected life equal to the term of the respective option or warrant, and no
expected dividend yield.
The options issued under the 1998 Stock Incentive Plan have an exercise
price of $2.40, $3.20 or $5.60 per share and the warrants have an exercise price
of $3.00 per share. Each option and warrant enables the employee to purchase one
share of common stock at the exercise price, subject to applicable vesting
provisions. The nonqualified stock options and warrants have terms of 10 years
from the date of the grant. The nonqualified stock options vest equally upon
completion of the first, second, and third full year of service after the date
of grant. The warrants are fully vested on the date of issuance.
Gabriel has authorized the issuance of 10,000,000 shares of common stock
under the 1998 Stock Incentive Plan and Stock Purchase Program, of which
1,000,000 shares have been allocated for purchase under the Stock Purchase
Program.
F-11
<PAGE> 170
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
The following is a summary of activity with respect to stock options and
warrants under the 1998 Stock Incentive Plan:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998 SIX MONTHS
(INCEPTION) TO YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
-------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Options and warrants outstanding at beginning of
period................................................. -- 78,000 2,765,500
Granted.................................................. 78,000 2,697,950 1,262,450
Cancelled................................................ -- (10,450) 140,101
Exercised................................................ -- -- --
------ --------- ---------
Options and warrants outstanding at end of period........ 78,000 2,765,500 3,887,849
====== ========= =========
Options and warrants exercisable at end of period........ -- 645,500 736,616
====== ========= =========
</TABLE>
Gabriel's Stock Purchase Program is intended as an aid to hire and retain
management personnel. Only management is eligible to participate in this
program. Gabriel issued 269,200 and 539,000 shares of common stock at $2.40 and
$3.20 per share under this program during 1999 and the first six months of 2000,
respectively.
(8) STOCKHOLDERS' EQUITY
Gabriel's authorized common stock consists of 60,000,000 shares, of which
5,469,200 shares were issued and outstanding as of December 31, 1999. Gabriel's
authorized preferred stock consists of 82,500,000 shares of preferred stock of
which 30,200,000 shares are authorized for Series A Convertible Preferred Stock,
3,125,000 shares are authorized for Series A-1 Convertible Preferred Stock,
32,500,000 are authorized for Series B Convertible Preferred Stock and the
remaining 16,675,000 shares are undesignated. The preferred shares outstanding
consists of 26,850,000 shares of Series A Convertible Preferred Stock, 3,125,000
shares of Series A-1 Convertible Preferred Stock and 9,930,924 of Series B
Convertible Preferred Stock which were issued and outstanding as of June 30,
2000. During 1999, Gabriel received the proceeds from subscriptions for an
aggregate of 17,900,000 shares of Series A Convertible Preferred Stock at $3.00
per share, or $53,699,996, and 3,125,000 shares of Series A-1 Convertible
Preferred Stock at $4.00 per share, or $12,500,000. On April 19, 2000 Gabriel
closed a $204.5 million private placement of 29,219,454 shares of Series B
Convertible Preferred Stock. At June 30, 2000 9,930,924 shares were outstanding.
The remaining 19,289,160 subscribed shares will be called on or before November
30, 2000.
Each share of preferred stock may be converted into one share of common
stock at the option of the holder. Additionally, each share of preferred stock
automatically converts into one share of common stock upon consummation of a
public offering of the common stock at a price of at least $15 per share in
which the aggregate proceeds are at least $30 million. In the event of
liquidation, dissolution, or winding up Gabriel, holders of shares of the
preferred stock are entitled first to receive preferential distributions of
$3.00 per share of Series A Convertible Preferred Stock and $4.00 per share of
Series A-1 Convertible Preferred Stock and then holders of shares of the common
stock are entitled to receive preferential distributions of $0.50 per share;
thereafter, the holders of shares of the preferred stock and the common stock
share ratably in all distributions until the total amount paid is $175 million;
thereafter, the holders of the preferred stock have no right or claim to the
remaining assets and funds of Gabriel, if any.
F-12
<PAGE> 171
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
Holders of shares of the preferred stock are not entitled to receive cash
dividends. No cash dividends may be declared and paid to holders of shares of
the common stock so long as any shares of the preferred stock are outstanding.
The shares of the preferred stock are entitled to the number of votes for
each share held after taking into consideration conversion features and vote
together with shares of the common stock as a single class, except when a
separate class vote is required by Delaware law.
In 1998, Gabriel granted an aggregate of 260,000 founder's warrants with an
exercise price of $3.00. The warrants are exercisable for 10 years from the date
of grant. Each warrant enables the holder to purchase one share of common stock
at the exercise price. The warrants vested upon issuance.
(9) INCOME TAXES
No income tax expense or benefit has been recognized. The primary
differences between income tax benefit and the amount of tax benefit that would
be expected to result by applying the federal statutory rate of 34% to the loss
before income taxes for the period from June 15, 1998 (inception) to December
31, 1998 and for the year ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- ------------
<S> <C> <C>
Expected federal income tax benefit......................... $ 192,848 $ 5,880,673
State income tax benefit.................................... 17,016 518,521
Valuation allowance......................................... (209,864) (6,399,194)
--------- -----------
Income tax benefit........................................ $ -- $ --
========= ===========
</TABLE>
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets:
Start-up costs and other assets........................... $ 125,000 $ 771,633
Net operating loss carryforward........................... 84,864 6,806,777
--------- -----------
Gross deferred tax assets............................ 209,864 7,578,410
Less valuation allowance.................................... (209,864) (6,609,058)
--------- -----------
Total deferred tax assets............................ -- 969,352
--------- -----------
Deferred tax liabilities:
Depreciation and amortization............................. -- 874,081
Accrued liabilities....................................... -- 95,271
--------- -----------
Total deferred tax liabilities....................... -- 969,352
--------- -----------
Net deferred tax asset............................... $ -- $ --
========= ===========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of
F-13
<PAGE> 172
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers projected future taxable income and tax planning strategies
in making this assessment. Based upon the level of historical taxable losses and
projections for future losses over the periods which the deferred tax assets are
deductible, management does not believe it is more likely than not Gabriel will
realize the benefits of these deductible differences. Accordingly, a valuation
allowance has been established for the excess of the deferred tax assets over
deferred tax liabilities.
At December 31, 1999, Gabriel had net operating loss carryforwards for
federal income tax purposes of $18,396,694, which are available to offset future
federal taxable income, if any, through 2019.
(10) EARNINGS PER SHARE
A reconciliation of the number of shares used in the calculation of basic
and diluted earnings per share and the calculated amounts of earnings per share
follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1998 SIX MONTHS
(INCEPTION) TO YEAR ENDED ENDING
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
-------------- ------------ ----------
<S> <C> <C> <C>
Shares outstanding -- beginning of period................ -- 5,200,000 5,469,200
Weighted average number of common shares issued.......... 3,550,755 122,409 331,470
--------- --------- ---------
Weighted average number of common shares
outstanding -- end of period........................... 3,550,755 5,332,409 5,800,670
Dilutive effect of preferred stock conversion and
employee stock options and warrants.................... -- -- --
--------- --------- ---------
Diluted shares outstanding............................... 3,550,755 5,332,409 5,800,670
========= ========= =========
Net loss (in thousands).................................. $ (567) $ (17,296) $ (20,531)
========= ========= =========
Basic and diluted earnings per common share.............. $ (0.16) $ (3.25) $ (3.54)
========= ========= =========
</TABLE>
In calculating diluted earnings per share for the period ended December 31,
1998, the year ended December 31, 1999 and the six-month period ended June 30,
2000, employee stock options and warrants to purchase 338,000, 3,025,000 and
4,107,999 shares of common stock, respectively, and preferred stock convertible
into common shares of 8,950,000, 29,975,000 and 59,194,454, respectively, were
outstanding but were not included in the computation of diluted earnings per
share due to their antidilutive effect.
(11) COMMITMENTS AND CONTINGENCIES
Gabriel has entered into various operating lease agreements for office
space. Rent expense totaled $27,754 for the period from inception to December
31, 1998 and $824,977 for the year ended December 31, 1999. Gabriel has also
entered into software maintenance contracts. Future commitments
F-14
<PAGE> 173
GABRIEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
under the noncancelable operating leases and the software maintenance contracts
at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $1,782,624
2001........................................................ 1,707,468
2002........................................................ 975,869
2003........................................................ 680,569
2004........................................................ 669,222
Thereafter.................................................. 3,198,597
----------
Total.................................................. $9,014,349
==========
</TABLE>
Gabriel has also entered into various leases for network facilities. These
leases have expirations of one to five years. The network facilities lease
expense totaled $326,104 in 1999 and is recorded as cost of communication
services.
During the six months ended June 30, 2000, Gabriel entered into additional
noncancelable operating leases. The future minimum rental payments under all
leases as of June 30, 2000 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 2,602,161
2001........................................................ 3,849,594
2002........................................................ 2,026,005
2003........................................................ 1,644,927
2004........................................................ 1,295,090
Thereafter.................................................. 6,096,609
-----------
Total.................................................. $17,514,386
===========
</TABLE>
(12) CONTINUED OPERATIONS AND LIQUIDITY
Gabriel has experienced losses and negative operating cash flows since
inception and expects to continue to experience losses and negative operating
cash flows until such time as it develops a revenue-generating customer base
sufficient to fund expenses. Gabriel expects to achieve positive operating
margins over time by increasing the number of revenue-generating customers.
Gabriel intends to fund the negative operating cash flows through the debt and
equity markets until Gabriel develops a significant revenue-generating customer
base.
(13) SUBSEQUENT EVENTS
In May 2000, Gabriel secured underwritten commitments from a group of
financial institutions, including four of its existing five lenders, to provide
an expanded $200 million senior secured credit facility, consisting of a $60
million revolving credit facility and $140 million of term loan facilities.
Closing of the expanded credit facility is subject to certain conditions,
including completion of definitive documentation.
On June 9, 2000, the Company and State Communications, Inc. entered into an
Agreement and Plan of Merger to combine the two companies to form a regional,
facilities-based integrated communications provider. The merger has been
unanimously approved by the Boards of Directors of both companies and
stockholders holding more than two-thirds of the voting stock of both companies
have agreed to approve the merger. Further action regarding the registration
statement is pending the contemplated merger with State Communications, Inc.
F-15
<PAGE> 174
INDEPENDENT AUDITORS' REPORT
The Board of Directors
State Communications, Inc.:
We have audited the accompanying consolidated balance sheets of State
Communications, Inc. as of December 31, 1998 and 1999 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the period from October 29, 1997 (date of inception) through December
31, 1997 and for the years ended December 31, 1998 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
State Communications, Inc. as of December 31, 1998 and 1999, and the results of
their operations and their cash flows for the period from October 29, 1997 (date
of inception) through December 31, 1997 and for the years ended December 31,
1998 and 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Greenville, South Carolina
February 25, 2000
F-16
<PAGE> 175
STATE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,399,204 $ 15,236,706 $ 12,294,553
Investments held to maturity.............................. -- 2,691,377 --
Accounts receivable, net of allowance for uncollectible
accounts of $1,976,000 in 1998, $186,000 in 1999 and
$423,432 at June 30, 2000............................... 2,603,643 1,316,695 840,157
Stock subscriptions receivable............................ 4,208,002 -- --
Prepaid expenses and other current assets................. 222,933 694,829 1,383,014
------------ ------------ ------------
Total current assets.................................. 8,433,782 19,939,607 14,517,724
Property and equipment...................................... 1,464,939 45,362,889 95,083,288
Less accumulated depreciation............................. (150,595) (1,305,658) (5,576,253)
------------ ------------ ------------
Net property and equipment............................ 1,314,344 44,057,231 89,507,035
Goodwill, net of accumulated amortization of $163,214 in
1999 $263,380 in 2000 and $718,057 at June 30, 2000....... -- 2,283,087 8,575,480
Deferred financing costs and other assets................... 194,275 996,739 7,379,547
------------ ------------ ------------
Total assets.......................................... $ 9,942,401 $ 67,276,664 $119,979,786
============ ============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Accounts payable.......................................... $ 1,820,561 $ 10,564,550 $ 2,200,481
Accrued expenses.......................................... 2,684,205 3,498,294 5,369,852
Current portion of capital lease obligation............... -- 392,086 490,107
------------ ------------ ------------
Total current liabilities............................. 4,504,766 14,454,930 8,060,440
Term loans.................................................. -- 17,099,889 32,831,615
Long-term portion of capital lease obligation............... -- 1,042,632 944,611
Note payable to bank........................................ 83,382 57,396 --
------------ ------------ ------------
Total liabilities..................................... 4,588,148 32,654,847 41,836,666
------------ ------------ ------------
Redeemable preferred stock:
Series A 5.5% cumulative convertible preferred stock $.01
par value; 10,000,000 shares authorized; 4,711,672
shares issued and outstanding in 1998 and 1999;
(redemption value of $11,365,876, $18,282,174 and
$29,900,305 in 1998, 1999 and June 30, 2000)............ 11,295,468 12,685,163 14,881,229
Series B 5.5% cumulative convertible preferred stock $.01
par value; 14,133,329 shares authorized; 13,866,662
shares issued and outstanding in 1999; (redemption value
of $53,213,327 and $87,919,398 in 1999 and June 30,
2000)................................................... -- 53,094,446 58,119,950
Series C 5.5% cumulative convertible preferred stock $.01
par value; 15,776,471 shares authorized; 15,776,471
shares issued and outstanding at June 30, 2000;
(redemption value of $98,462,535 at June 30, 2000)...... -- -- 69,357,333
Notes receivable from officers............................ -- -- (898,750)
------------ ------------ ------------
Total redeemable preferred stock...................... 11,295,468 65,779,609 141,459,762
------------ ------------ ------------
Stockholders' deficit:
Common stock, $.001 par value, 50,000,000 shares
authorized in 1998 and 100,000,000 in 1999 and at June
30, 2000; 10,324,462, 11,147,920 and 12,061,160 shares
issued in 1998, 1999 and June 30, 2000, respectively.... 10,324 11,148 12,131
Additional paid-in-capital................................ 6,811,359 7,466,423 2,339,717
Accumulated deficit....................................... (12,762,898) (38,426,743) (65,459,870)
Treasury stock, 69,540 common shares in 1999 and June 30,
2000, at cost........................................... -- (208,620) (208,620)
------------ ------------ ------------
Total stockholders' deficit........................... (5,941,215) (31,157,792) (63,316,642)
------------ ------------ ------------
Total liabilities, redeemable preferred stock, and
stockholders' deficit.............................. $ 9,942,401 $ 67,276,664 $119,979,786
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 176
STATE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 29, 1997 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1997 AND THE YEARS ENDED DECEMBER 31, 1998 AND 1999
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
THROUGH YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
DECEMBER 31, ---------------------------- ----------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................. $ -- $ 5,261,146 $ 25,037,450 $ 13,818,441 $ 8,626,845
Cost of services.......... -- 3,802,036 17,703,754 9,648,183 8,730,835
--------- ------------ ------------ ------------ ------------
Gross profit
(loss).......... -- 1,459,110 7,333,696 4,170,258 (103,990)
--------- ------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative
expenses............. (39,851) (12,165,893) (23,523,165) (13,440,656) (20,210,473)
Provision for
uncollectible
accounts............. -- (1,976,000) (7,285,528) (5,815,916) (382,095)
Depreciation and
amortization......... -- (150,595) (1,318,277) (517,656) (4,725,273)
--------- ------------ ------------ ------------ ------------
Total operating
expenses........ (39,851) (14,292,488) (32,126,970) (19,774,228) (25,317,841)
--------- ------------ ------------ ------------ ------------
Operating loss..... (39,851) (12,833,378) (24,793,274) (15,603,970) (25,421,831)
Interest income (expense):
Interest income......... -- 123,233 816,057 70,452 986,195
Interest expense........ -- (12,902) (1,468,991) (571,436) (1,872,723)
Interest income
(expense),
net............. -- 110,331 (652,934) (500,984) (886,528)
--------- ------------ ------------ ------------ ------------
Loss before
extraordinary
item............ (39,851) (12,723,047) (25,446,208) (16,104,954) (26,308,359)
Extraordinary item-early
extinguishment of
debt.................... -- -- (217,637) -- (724,768)
--------- ------------ ------------ ------------ ------------
Net loss........... (39,851) (12,723,047) (25,663,845) (16,104,954) (27,033,127)
Preferred stock
accretion............... -- (57,863) (2,603,040) (299,877) (9,737,189)
--------- ------------ ------------ ------------ ------------
Net loss to common
stockholders............ $ (39,851) $(12,780,910) $(28,266,885) $(16,404,831) $(36,770,316)
========= ============ ============ ============ ============
Net loss per common share,
basic and dilutive...... $ (.01) $ (1.37) $ (2.60) $ (1.54) $ (3.12)
========= ============ ============ ============ ============
Weighted average common
shares outstanding,
basic and dilutive...... 6,390,476 9,308,771 10,868,729 10,645,897 11,773,102
========= ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 177
STATE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM OCTOBER 29, 1997 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1997 AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
AND SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN- TOTAL
COMMON CAPITAL ACCUMULATED TREASURY STOCKHOLDERS'
STOCK AMOUNT DEFICIT STOCK EQUITY (DEFICIT)
------- ----------- ------------ --------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, October 29, 1997 (date of
inception)....................... $ -- $ -- $ -- $ -- $ --
Issuance of common stock, 6,600,000
shares in initial private
offering at average price of $.11
per share........................ 6,600 698,400 -- -- 705,000
Net loss........................... -- -- (39,851) -- (39,851)
------- ----------- ------------ --------- ------------
Balance, December 31, 1997......... 6,600 698,400 (39,851) -- 665,149
Issuance of common stock, 1,761,000
shares at $1.00 per share........ 1,761 1,759,239 -- -- 1,761,000
Issuance of common stock, 1,963,462
shares at $2.25 per share, net of
$4,243 issue costs............... 1,963 4,411,583 -- -- 4,413,546
Net loss........................... -- -- (12,723,047) -- (12,723,047)
Accretion of preferred stock....... -- (57,863) -- -- (57,863)
------- ----------- ------------ --------- ------------
Balance, December 31, 1998......... 10,324 6,811,359 (12,762,898) -- (5,941,215)
Issuance of common stock in
acquisitions, 808,792 shares at
$2.40 per share.................. 809 1,940,292 -- -- 1,941,101
Issuance of 14,666 shares of common
stock at $1.50 and $2.25 per
share pursuant to exercise of
stock options.................... 15 22,484 -- -- 22,499
Issuance of 884,649 common stock
detachable warrants, net of
$7,933 issue costs............... -- 1,295,328 -- -- 1,295,328
Acquisition of 69,540 shares of
common stock at $3.00 per
share............................ -- -- -- (208,620) (208,620)
Net loss........................... -- -- (25,663,845) -- (25,663,845)
Accretion of preferred stock....... -- (2,603,040) -- -- (2,603,040)
------- ----------- ------------ --------- ------------
Balance, December 31, 1999......... 11,148 7,466,423 (38,426,743) (208,620) (31,157,792)
Issuance of common stock in
acquisitions, 705,402 shares at
$4.25 per share (unaudited)...... 705 2,997,254 -- -- 2,997,959
Issuance of 200 shares of common
stock at $3.00 per share pursuant
to exercise of stock options
(unaudited)...................... 1 599 -- -- 600
Issuance of 81,178 shares of common
stock at $4.25 per share
(unaudited)...................... 81 344,926 -- -- 345,007
Issuance of common stock in
acquisitions, 196,000 shares at
$6.15 per share (unaudited)...... 196 1,205,204 -- -- 1,205,400
Compensation expense for stock
based awards (unaudited)......... -- 62,500 -- -- 62,500
Net loss (unaudited)............... -- -- (27,033,127) -- (27,033,127)
Accretion of preferred stock
(unaudited)...................... -- (9,737,189) -- -- (9,737,189)
------- ----------- ------------ --------- ------------
Balance at June 30, 2000
(unaudited)...................... $12,131 $ 2,339,717 $(65,459,870) $(208,620) $(63,316,642)
======= =========== ============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 178
STATE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 29, 1997 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1997 AND THE YEARS ENDED DECEMBER 31, 1998 AND 1999
AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION SIX MONTHS ENDED
THROUGH JUNE 30,
DECEMBER 31, ---------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(39,851) $(12,723,047) $(25,663,845) $(16,104,954) $(27,033,127)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for uncollectible accounts........... -- 1,976,000 7,285,528 5,815,916 382,095
Depreciation and amortization.................. -- 150,595 1,318,277 517,656 4,725,273
Other amortization............................. -- -- 145,833 -- 47,775
Amortization of debt discount.................. -- -- 339,727 -- --
Extraordinary item -- early extinguishment of
debt......................................... -- -- 217,637 -- 724,768
Compensation expense........................... -- -- -- -- 62,500
Changes in operating assets and liabilities:
Accounts receivable.......................... -- (4,579,643) (5,568,734) (6,230,747) 300,510
Other assets................................. -- (194,275) 194,275 -- (2,045,120)
Prepaid expenses and other current assets.... (16,607) (206,326) (229,100) (533,291) (597,402)
Accounts payable............................. -- 1,820,561 1,196,743 215,050 (8,400,434)
Accrued expenses............................. -- 2,684,205 807,198 563,219 1,860,366
-------- ------------ ------------ ------------ ------------
Net cash used in operating activities.... (56,458) (11,071,930) (19,956,461) (15,757,151) (29,972,796)
-------- ------------ ------------ ------------ ------------
Cash flows from investing activities:
Investments held to maturity..................... -- -- (2,691,377) -- 2,691,377
Purchases of property and equipment.............. -- (1,464,939) (34,965,980) (1,687,653) (35,484,021)
Purchase of indefeasible right to use fiber
lines.......................................... -- -- -- -- (14,002,592)
Cash paid for acquisitions, net of cash
acquired....................................... -- -- (1,106,630) (494,004) (3,026,791)
-------- ------------ ------------ ------------ ------------
Net cash used in investing activities.... -- (1,464,939) (38,763,987) (2,181,657) (49,822,027)
-------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of note payable to bank... -- 90,000 -- -- --
Principal payments on note payable to bank....... -- (6,618) (25,986) -- (57,396)
Proceeds from Series 1999 notes payable and
warrants....................................... -- -- 10,460,000 10,574,809 --
Payment of Series 1999 notes payable............. -- -- (4,210,000) -- --
Purchase of treasury stock....................... -- -- (208,620) -- --
Proceeds from exercise of stock options.......... -- -- 22,499 -- 600
Proceeds from issuance of preferred stock........ -- 7,029,603 49,839,121 4,208,002 65,942,964
Proceeds from issuance of common stock........... 109,500 6,770,046 -- -- 345,007
Deferred financing costs......................... -- -- (1,142,572) -- (4,385,463)
Proceeds from term loan and warrants............. -- -- 17,834,394 2,008,206 32,831,615
Payment on term loan............................. -- -- -- -- (17,824,657)
Other............................................ -- -- (10,886) -- --
-------- ------------ ------------ ------------ ------------
Net cash provided by financing
activities............................. 109,500 13,883,031 72,557,950 16,791,017 76,852,670
-------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... 53,042 1,346,162 13,837,502 (1,147,791) (2,942,153)
Cash and cash equivalents at beginning of period... -- 53,042 1,399,204 1,399,204 15,236,706
-------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period......... $ 53,042 $ 1,399,204 $ 15,236,706 $ 251,413 $ 12,294,553
======== ============ ============ ============ ============
Supplemental disclosures:
Interest paid.................................... $ -- $ 1,952 $ 939,381 $ 296,758 $ 1,334,271
======== ============ ============ ============ ============
Stock subscriptions receivable................... $595,500 $ 4,208,002 $ -- $ -- $ --
======== ============ ============ ============ ============
Notes payable exchanged for preferred stock...... $ -- $ -- $ 6,250,000 $ -- $ --
======== ============ ============ ============ ============
Accounts payable incurred for property and
equipment...................................... $ -- $ -- $ 7,380,319 $ -- $ --
======== ============ ============ ============ ============
Notes receivable from officers exchanged for
preferred stock................................ $ -- $ -- $ -- $ -- $ 898,750
======== ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 179
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
State Communications, Inc., (the "Company") a broadband telecommunications
provider, was organized in October 1997 as a South Carolina corporation. The
Company offers broadband data and voice telecommunications services primarily to
residential and small and medium-sized business markets in the southeastern
United States. The Company's services include high speed data and Internet
service, principally utilizing digital subscriber line technology, local
exchange service and long distance service.
The Company has limited operating history and is changing certain of its
business strategies. As a result, the Company is in the process of entering
additional markets. Since inception, the Company has recognized operating losses
and negative cash flows and expects to incur losses in the future as the Company
expands its network. The expansion and development of the Company's business and
deployment of its networks, services and systems will require significant
amounts of additional capital.
(B) INTERIM FINANCIAL STATEMENTS
The interim financial information as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 is unaudited and has been prepared on the
same basis as the audited consolidated financial statements. In the opinion of
management, such unaudited information includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
interim information. Operating results for the six months ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
(C) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its wholly owned subsidiaries, which include TriVergent
Communications, Inc., TriVergent Communications South, Inc., TriVergent Leasing
LLC and Carolina OnLine, Inc. All significant intercompany transactions are
eliminated in consolidation.
(D) REVENUE RECOGNITION
The Company bills customers in advance for fixed monthly service fees and
in arrears for actual local and long-distance usage amounts. Revenues are
recognized ratably over the service period for fixed fees and on usage for local
and long distance services. Accounts receivable as of December 31, 1998 and 1999
include revenues of approximately $728,161 and $226,276, respectively, for which
services were provided in December and billed in the subsequent period.
(E) CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
trade accounts receivable and investments held to maturity. In determining the
nature of the Company's cash and cash equivalents and held to maturity
investments, the Company's policy is to invest in highly rated commercial paper
and corporate bonds. Although the Company's customer base is fairly centralized
geographically, there is no particular concentration of industry. As a result,
management believes no additional credit risk beyond amounts provided for
collection losses is inherent in accounts receivable.
F-21
<PAGE> 180
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
(F) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with maturities
from time of purchase of three months or less. The cost of the cash equivalents
approximates fair market value.
The Company had letters of credit totaling $313,000 for vendor guarantees
as of December 31, 1999. Letters of credit are primarily collateralized by cash.
(G) INVESTMENT SECURITIES
The Company does not have any trading securities or available-for-sale
securities at December 31, 1999 or December 31, 1998. The investments
held-to-maturity include highly rated corporate bonds with original maturities
of six months or less and are reported at amortized cost. The carrying value of
the corporate bonds approximates the fair value. The investments have been
classified as held-to-maturity because the Company has the intent and the
ability to hold all such securities until maturity.
(H) DEFERRED FINANCING COSTS
Deferred financing costs consist of legal fees and other fees related to
the Company's debt obligations. These costs are being amortized on a
straight-line basis over the term of the related debt. Amortization expense for
these costs is included as a component of interest expense in the consolidated
statements of operations.
(I) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation on property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets ranging from 3 to 7 years. Switch equipment will be
depreciated when placed in service during fiscal year 2000 using the
straight-line method over a useful life of 7 years.
(J) EQUIPMENT UNDER CAPITAL LEASE
The Company leases certain of its data communication equipment under a
lease agreement accounted for as a capital lease. The assets and liabilities
under capital leases are recorded at the lesser of the present value of
aggregate future minimum lease payments, including estimated bargain purchase
options, or the fair value of the assets under lease. Assets under the capital
lease are amortized over the term of the lease and such amortization is included
in depreciation expense.
(K) GOODWILL
Goodwill represents the excess of the purchase price and related costs over
the value assigned to the net tangible and identifiable intangible assets of
businesses acquired. Goodwill is amortized on a straight-line basis over 10
years.
(L) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets including goodwill in accordance
with the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison
F-22
<PAGE> 181
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
of the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. There have been no
impairments through December 31, 1999. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
(M) INCOME TAXES
The Company records income taxes under the asset and liability method. As
such, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(N) STOCK SPLIT
On May 1, 1998, the Company issued a two-for-one stock split of its common
stock in the form of a stock dividend. A total of 4,180,500 shares of common
stock were issued in connection with the two-for-one stock split. The stated par
value of each share was not changed from $.001. All common stock share data have
been retroactively adjusted to reflect this change.
(O) STOCK OPTION PLAN
SFAS No. 123 allows an entity to apply the provisions of APB Opinion No. 25
and provide pro forma net loss and, if loss per share is presented, pro forma
loss per share disclosures for employee stock option grants made as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the intrinsic-value-based method under the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123. Compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeds the exercise price.
(P) SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which requires a "management approach" to
segment information. The management approach designates the internal reporting
that is used by management for making operating decisions and assessing
performance as the source of reportable segments. The Company operates in a
single industry segment, "Communication Services." Operations are managed and
financial performance is evaluated based on the delivery of multiple
communications services to customers.
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires that every derivative be recorded as either an asset or liability
in the balance sheet and measured at its fair value. SFAS No. 133 also requires
that changes in the derivative's fair market value be recognized currently in
F-23
<PAGE> 182
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate and assess the effectiveness of transactions that
require hedge accounting. The Company is required to adopt SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities an Amendment of FASB
Statement No. 133," on a prospective basis for interim periods and fiscal years
beginning January 1, 2001. The Company does not anticipate that adoption of SFAS
No. 133 will have a material effect on its financial statements.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in financial statements. SAB 101 must be applied to financial statements no
later than the fourth fiscal quarter of 2000. The Company does not believe
adoption will have a material impact on its consolidated financial position or
results of operations.
(R) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company considers the recorded value of its current assets and
liabilities, consisting primarily of cash and cash equivalents, investments,
accounts receivable, other current assets, accounts payable, and accrued
expenses to approximate fair value because of the short term maturity of the
instruments. The fair value of long-term debt, including the current portion, is
estimated based on quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same maturities. Due to the
fact that the Company's long-term debt has a variable interest rate, the
carrying value approximates fair value.
(S) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, such as
the allowance for uncollectible accounts, and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(T) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 established reporting and
disclosure requirements for comprehensive income and its components within the
financial statements. Other than net loss, there were no comprehensive income
components for the three years ended December 31, 1999.
F-24
<PAGE> 183
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998 1999 2000
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Switch equipment....................................... $ -- $34,920,377 $65,152,576
Indefeasible right to use fiber lines.................. -- -- 14,002,592
Computer equipment and software........................ 1,338,688 9,090,448 12,344,225
Furniture, fixtures and other equipment................ 126,251 986,645 2,751,079
Leasehold improvements................................. -- 365,419 832,816
---------- ----------- -----------
1,464,939 45,362,889
Less accumulated depreciation.......................... (150,595) (1,305,658) (5,576,253)
---------- ----------- -----------
$1,314,344 $44,057,231 $89,507,035
========== =========== ===========
</TABLE>
No depreciation expense was recorded in 1999 on the switch equipment costs.
Depreciation of the switch equipment began once the switches were placed in
service in 2000. Depreciation expense amounted to $150,595, $1,155,063, and
$4,270,595 in 1998, 1999, and the six months ended June 30, 2000 respectively.
(3) ACQUISITIONS
In March 1999, the Company acquired the assets and liabilities of Carolina
Online, Inc., a South Carolina based internet service provider, for a total
purchase price of approximately $1.8 million which included cash and stock.
Common stock issued for the Carolina Online acquisition was 545,833 shares
valued at $2.40 per share. The Carolina Online acquisition has been accounted
for by the purchase method of accounting and, accordingly, the results of
operations of Carolina Online from the period after the acquisition are included
in the accompanying consolidated financial statements. The excess cost over the
estimated fair value of net assets acquired was allocated to goodwill. A total
of approximately $1.6 million was allocated to goodwill and is being amortized
on a straight-line basis over 10 years. The pro forma results for 1998 and 1999
as if Carolina Online were acquired at the beginning of each year would not be
significantly different than the actual results.
In July 1999, the Company acquired the assets and liabilities of DCS, Inc.
for a total purchase price of approximately $1.0 million in cash, stock and the
assumptions of debt. DCS is a telecommunications equipment dealer that provides
data integration products and services. The Company issued 262,959 shares of
common stock valued at $2.40 per share. The DCS acquisition has been accounted
for by the purchase method of accounting and, accordingly, the results of
operations of DCS from the period after the acquisition are included in the
accompanying consolidated financial statements. The excess of cost over the
estimated fair value of net assets acquired of approximately $812,000 was
allocated to goodwill and is being amortized on a straight-line basis over 10
years. The pro forma results for 1998 and 1999 as if DCS were acquired at the
beginning of each year would not be significantly different than the actual
results.
In addition, the Company acquired two companies in February 2000 and one
company in June 2000 as described in Note 15.
F-25
<PAGE> 184
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
(4) TERM LOAN
In May 1999, the Company entered into a term loan facility ("term loan")
with Nortel, a major equipment vendor. The term loan provides the Company with
maximum borrowings of $42.0 million at London interbank offered rate plus 4.75%
interest (10.75% at December 31, 1999). The term loan is due in May 2003. The
term loan is secured by all assets of the Company.
In conjunction with the term loan, the Company issued Nortel warrants to
purchase 508,089 shares of common stock at $2.00 per share, expiring on May 27,
2006. The fair value of the warrants was determined to be $1.67 per share. The
fair value of the warrants has been recorded as additional paid-in capital and
as debt discount. The total debt discount of $848,509 is being amortized over
the term of the loan as interest expense. As of December 31, 1999, the
unamortized discount amounted to $724,768.
In February 2000, the Company paid in full the balance of the term loan
resulting in an extraordinary loss of $724,768 from early extinguishment of debt
(unaudited). (See note 15).
(5) NOTES PAYABLE
The Company borrowed $90,000 on September 29, 1998 from a bank. The loan
had an outstanding balance of $83,382 and $57,396 as of December 31, 1998 and
1999, respectively. The loan bears interest at 8.75%, matures September 29,
2001, and is collateralized by furniture and fixtures. This loan was paid in
full in January 2000.
In March 1999, the Company issued $6,460,000 of Series 1999 notes with a
stated interest rate of 13% due January 3, 2000. As part of the agreement, the
Company issued warrants to purchase 232,560 shares of common stock at $2.00 per
share expiring three years from issuance. The fair value of the warrants was
determined to be $1.20 per share. The fair value of the warrants was recorded as
additional paid-in capital and as debt discount. The debt discount was being
amortized over the term of the loan as interest expense. Notes payable of
$6,250,000 were converted to Series B preferred stock in July 1999, resulting in
an extraordinary loss of $167,443 from early extinguishment of debt. The
remaining $210,000 was paid in full in October 1999.
In May 1999, the Company issued $4.0 million of Series 1999A notes to the
lender with detachable warrants. The notes had an original maturity of January
2000 and an interest rate of 13%. The warrants were issued to purchase 144,000
shares of common stock at $2.00 per share expiring on May 27, 2006. The fair
value of the warrants was determined to be $1.67 per share. The fair value of
the warrants was recorded as additional paid-in capital and as debt discount.
The debt discount was being amortized over the term of the loan as interest
expense. This loan was paid in full in October 1999, resulting in an
extraordinary loss of $50,194 from early extinguishment of debt.
(6) REDEEMABLE PREFERRED STOCK
SERIES A PREFERRED STOCK
During October 1998, the Company privately sold 4,711,672 shares of its
Series A 5.5% cumulative convertible preferred stock for $2.40 per share. Net
proceeds from the subscriptions from this stock of $7,029,603 were received in
1998. The balance of $4,208,002 was received by the Company in January 1999.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series A preferred stock would be entitled to receive, prior
and in preference to the holders of common stock, (i) an amount for each share
of Series A preferred stock held by them equal to the Series A original
F-26
<PAGE> 185
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
purchase price (as adjusted for stock dividends, splits, combinations, etc.)
plus (ii) any accrued and unpaid dividends.
Each holder of Series A preferred stock has the right to convert each share
into shares of common stock on a one-for-one basis subject to certain conversion
price adjustments. All shares of Series A preferred stock shall automatically be
converted into shares of common stock, (i) at the election of 75% of the holders
or (ii) in the event of a qualified public offering of the Company's common
stock as defined.
Each holder of Series A preferred stock may cause the Company to redeem up
to one-third of the preferred stock originally issued to such holder on the
following dates: (i) February 1, 2005, (ii) February 1, 2006 and (iii) February
1, 2007. In the event that there is a change in control or reorganization or
liquidation or insolvency of the Company, the holders of the Series A preferred
would have the right to request that their shares be redeemed. Such redemptions
would be at a price equal to the greater of fair market value of the Series A
preferred stock on the day of redemption or the original Series A preferred
price (as adjusted for stock dividends, splits, combinations, etc.) plus accrued
and unpaid dividends.
Each share of Series A preferred stock is entitled to a single vote for
every share of common stock then issuable upon conversion. The holders of the
Series A preferred stock would vote with common stock on all matters except as
specifically provided herein or as otherwise required by law.
The holders of the Series A preferred stock would be entitled to receive
cumulative dividends in preference to any dividend on the common stock at the
rate of 5.5% of the original Series A purchase price when and as declared by the
Board of Directors. Any accrued unpaid dividends will be payable upon an initial
public offering, an acquisition or liquidation of the Company. Accrued unpaid
dividends at December 31, 1999 and June 30, 2000 amounted to $671,267 and
$1,594,789, respectively.
SERIES B PREFERRED STOCK
During July 1999, the Company privately sold 12,200,000 shares of its
Series B 5.5% cumulative convertible preferred stock for $3.75 per share. Gross
proceeds before expenses from the subscriptions for this stock of $45,750,000
were received during 1999. In addition, $6,250,000 notes payable, discussed in
note 5, were converted into 1,666,662 shares of Series B preferred stock. Total
consideration for the Series B issuance was $52.0 million.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series B preferred will be entitled to receive, prior and in
preference to the holders of Common Stock, (i) an amount for each share of
Series B preferred stock held by them equal to the Series B original purchase
price (as adjusted for stock dividends, splits, combinations, etc.) plus (ii)
any accrued and unpaid dividends.
Each holder of Series B preferred stock has the right to convert each share
into shares of common stock on a one-for-one basis subject to certain conversion
price adjustments. All shares of Series B preferred stock shall automatically be
converted into shares of common stock, (i) at the election of 50% of the holders
or (ii) in the event of a qualified public offering of the Company's common
stock as defined.
Each holder of Series B preferred stock may cause the Company to redeem up
to one-third of the preferred stock originally issued to such holder on the
following dates: (i) February 1, 2005, (ii) February 1, 2006 and (iii) February
1, 2007. In the event that there is a change in control or reorganization or
liquidation or insolvency of the Company, the holders of the Series B preferred
would have the right to request that their shares be redeemed. Such redemptions
would be at a price equal to the
F-27
<PAGE> 186
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
greater of fair market value of the Series B preferred stock on the day of
redemption or the original Series B preferred price (as adjusted for stock
dividends, splits, combinations, etc.) plus accrued and unpaid dividends.
Each share of Series B preferred stock is entitled to a single vote for
every share of common stock then issuable upon its conversion. The holders would
vote with common stock on all matters except as specifically provided or as
otherwise required by law.
The holders would be entitled to receive cumulative dividends in preference
to any dividend on the common stock at the rate of 5.5% of the original Series B
purchase price when and as declared by the Board of Directors. Any accrued but
unpaid dividends will be payable upon an initial public offering, an acquisition
or liquidation of the Company. Accrued unpaid dividends at December 31, 1999 and
June 30, 2000 amounted to $1,213,345 and $3,852,772, respectively.
PREFERRED STOCK ACCRETION
The Company periodically increases the carrying amount of its redeemable
preferred stock through accretion using the interest method so that the carrying
amount will equal the expected redemption amount at the expected redemption
dates. In addition, the Company increases the carrying amount of its preferred
stock by amounts representing cumulative dividends not currently declared or
paid, but will be due and payable upon redemption. The Company recorded no
accretion for 1997 and accretion of $57,863, $2,603,040, $299,877, and
$9,737,189 for the years ended December 31, 1998 and 1999, and for the six month
periods ended June 30, 1999 and June 30, 2000, respectively.
(7) LEASES
The Company leases office space and other equipment. Rent expense for the
years ended December 31, 1998 and 1999 totaled $106,717 and $807,011,
respectively. Future minimum lease payments under capital and noncancelable
operating leases for the years subsequent to December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
---------- -----------
<S> <C> <C>
2000........................................................ $ 392,086 $ 2,169,464
2001........................................................ 481,745 2,295,039
2002........................................................ 481,745 2,162,030
2003........................................................ 459,946 1,994,011
2004........................................................ -- 1,851,443
Thereafter.................................................. -- 8,818,908
---------- -----------
Total minimum lease payments......................... 1,815,522 $19,290,895
===========
Less amount representing interest (12.5%)................... 380,804
----------
Present value of minimum lease payments..................... 1,434,718
Less current portion of capital lease obligation............ 392,086
----------
Long-term portion of capital lease obligation............... $1,042,632
==========
</TABLE>
F-28
<PAGE> 187
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
(8) INCOME TAXES
The income tax benefit for 1997, 1998 and 1999 and the six months ended
June 30, 2000 differed from the amounts computed by applying the Federal income
tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999 2000
-------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computed "expected" tax benefit.............. $(14,000) $(4,326,000) $(8,726,000) $(9,191,000)
Increase (decrease) in income taxes resulting
from:
State and local income taxes, net of Federal
income tax effect.......................... (1,000) (420,000) (841,000) (892,000)
Change in the valuation allowance for
deferred tax assets allocated to income tax
expense.................................... 15,000 4,742,000 9,506,000 9,981,000
Other, net................................... -- 4,000 61,000 102,000
-------- ----------- ----------- -----------
Actual tax benefit........................... $ -- $ -- $ -- $ --
======== =========== =========== ===========
</TABLE>
The tax effect of temporary differences and carryforwards which give rise
to deferred tax assets and liabilities as of December 31, 1998 and 1999 and June
30, 2000 are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1998 1999 2000
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Accrued liabilities and allowances................ $ 740,000 $ 72,000 $ 158,000
Capitalized start-up costs........................ 436,000 337,000 287,000
Net operating loss carryforwards.................. 3,669,000 13,986,000 24,304,000
----------- ------------ ------------
Total gross deferred tax assets................ 4,845,000 14,395,000 24,749,000
Less valuation allowance............................ (4,757,000) (14,263,000) (24,244,000)
----------- ------------ ------------
Net deferred tax assets............................. 88,000 132,000 505,000
----------- ------------ ------------
Deferred tax liabilities:
Prepaid expenses.................................. -- (18,000) (18,000)
Property and equipment, principally due to
differences in depreciation.................... (88,000) (114,000) (487,000)
----------- ------------ ------------
Total gross deferred tax liabilities........... (88,000) (132,000) (505,000)
----------- ------------ ------------
Net deferred tax asset (liability).................. $ -- $ -- $ --
=========== ============ ============
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998,
1999 and June 30, 2000 was $4,757,000, $14,263,000 and $24,244,000,
respectively. The net change in the total valuation allowance for the periods
ended December 31, 1998, 1999 and June 30, 2000 was an increase of $4,742,000,
$9,506,000 and $9,981,000, respectively.
At December 31, 1999, the Company has a net operating loss carryforward for
Federal and state income tax purposes of approximately $37,495,000 which is
available to offset future taxable income, if any, through the year 2019.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of
F-29
<PAGE> 188
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. In
order to fully realize the deferred tax asset, the Company will need to generate
future taxable income prior to the expiration of the net operating loss
carryforward. Management considered the scheduled reversal of deferred tax
liabilities in making this assessment. Based upon the level of taxable losses
incurred during the start-up phase and projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it has established an appropriate valuation allowance at December 31,
1998 and 1999 and June 30, 2000.
(9) RELATED PARTY TRANSACTIONS
The Company purchased investing advice and other services from Seruus
Ventures, Inc., an entity in which two executive officers of the Company have an
ownership interest. Payments to Seruus totaled $13,788 and $61,448 for the years
ended December 31, 1998 and 1999, respectively.
As discussed in note 5, of the $6,460,000 Series 1999 notes payable,
$250,000 were issued to an executive officer of the Company. In July of 1999,
these notes were converted to preferred stock. During 1999, the Company
recognized interest expense of $12,187 related to these notes.
During 1999, the Company acquired 69,540 shares of its own stock for
$208,620 in satisfaction of a note receivable from an employee. The Company
recognized interest income of $14,346.
(10) COMMITMENTS
The Company has a long-distance capacity agreement with a long haul
telecommunications provider. Under the agreement, the Company is liable for a
yearly minimum usage charge according to the schedule below:
<TABLE>
<S> <C>
2000........................................................ $30,000,000
2001........................................................ 7,000,000
2002........................................................ 5,000,000
2003........................................................ 4,000,000
2004........................................................ 4,000,000
</TABLE>
In the event such yearly commitments are not met, the Company is required
to remit 100% of the difference between the yearly commitment and actual usage.
Such amount, if necessary, would be recorded as cost of services in the period
incurred. The agreement extends through October 2004.
(11) NET LOSS PER COMMON SHARE
Basic and diluted loss per share amounts are presented below in accordance
with the requirements of SFAS No. 128, "Earnings Per Share." Basic net loss per
share is computed by dividing net loss applicable to common stockholders by the
weighted average number of shares of the Company's common stock outstanding
during the period. Diluted net loss per share is determined in the same manner
as basic net loss per share except that the number of shares is increased
assuming exercise of dilutive stock options and warrants using the treasury
stock method and conversion of the Company's convertible preferred stock.
Potential common stock (stock options and warrants) have been excluded from the
calculation of diluted loss per share, as they are antidilutive. The Series A,
Series B and Series C convertible preferred stock that are convertible into
shares of common stock also are excluded from the calculation of diluted loss
per
F-30
<PAGE> 189
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
share as they are antidilutive. The following table presents the calculation of
basic and diluted loss per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1998 1999 1999 2000
--------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Loss before extraordinary
item...................... $ (39,851) $(12,723,047) $(25,446,208) $(16,104,954) $(26,308,359)
Preferred stock accretion... -- (57,863) (2,603,040) (299,877) (9,737,189)
--------- ------------ ------------ ------------ ------------
Loss to common stockholders
before extraordinary
item...................... (39,851) (12,780,910) (28,049,248) (16,404,831) (36,045,548)
Extraordinary item.......... -- -- (217,637) -- (724,768)
--------- ------------ ------------ ------------ ------------
Net loss to common
stockholders.............. $ (39,851) $(12,780,910) $(28,266,885) $(16,404,831) $(36,770,316)
========= ============ ============ ============ ============
Weighted average common
shares outstanding, basic
and diluted............... 6,390,476 9,308,771 10,868,729 10,645,897 11,773,102
Basic and dilutive loss per
share:
Before extraordinary
item................... $ (.01) $ (1.37) $ (2.58) $ (1.54) $ (3.06)
Extraordinary item........ -- -- (.02) -- (.06)
--------- ------------ ------------ ------------ ------------
Net loss.................... $ (.01) $ (1.37) $ (2.60) $ (1.54) $ (3.12)
========= ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1999 2000
---------- -----------
(UNAUDITED)
<S> <C> <C>
Shares of common stock issuable upon conversion of:
Series A convertible preferred stock...................... 4,711,672 4,711,672
Series B convertible preferred stock...................... 13,866,662 13,866,662
Series C convertible preferred stock...................... -- 15,776,471
Options for common stock issued to employees.............. 5,276,707 9,411,403
Warrants for common stock issued to non-employees......... 1,084,649 1,084,649
</TABLE>
(12) EMPLOYEE INCENTIVE PLAN
On January 12, 1998, the Company established an employee incentive plan
under which options, bonus stock awards and restricted stock awards may be
issued at the discretion of the Board of Directors of the Company. Options and
awards for no more than 10,000,000 shares of the Company's common stock may be
granted pursuant to this plan. The options vest at the rate of 20% per year for
five years and are exercisable for 10 years from date of grant.
The Company applies APB Opinion No. 25 in accounting for options granted
under its employee incentive plan. No compensation cost has been recognized for
option grants in the financial statements. Had the Company accounted for
compensation cost based on the fair value at the grant date for stock
F-31
<PAGE> 190
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
options in the plan under SFAS No. 123, net loss and net loss per common share
would have been reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1998 1999 1999 2000
-------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss:
As reported............... $(39,851) $(12,723,047) $(25,663,845) $(16,104,954) $(27,033,127)
Pro forma................. (39,851) (13,093,427) (26,598,856) (16,526,945) (28,981,135)
Net loss per common share,
basic and diluted:
As reported............... $ (.01) $ (1.37) $ (2.60) $ (1.54) $ (3.12)
Pro forma................. (.01) (1.41) (2.69) (1.58) (3.29)
</TABLE>
For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model and the minimum value method permitted by SFAS No. 123 for
entities not publicly traded with the following weighted-average assumptions
used for grants in 1998, 1999 and 2000:
<TABLE>
<S> <C>
Dividend yield.............................................. 0 percent
Risk-free interest rate..................................... 5.00 percent
Expected life............................................... 7 years
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1998 and 1999 was $.62 and $.96 respectively.
The following is a summary of the activity in the Company's Plan during the
years ended December 31, 1998 and 1999 and the period ended June 30, 2000:
<TABLE>
<CAPTION>
1998 1999 2000
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
period.......................... -- $ -- 2,997,104 $2.11 5,276,707 $2.68
Options granted................... 2,997,104 2.11 2,655,371 3.25 4,211,647 6.46
Options exercised................. -- -- (14,666) 1.53 (200) 3.00
Options canceled.................. -- -- (361,102) 2.21 (76,751) 3.48
--------- ----- --------- ----- --------- -----
Options outstanding, end of
period.......................... 2,997,104 $2.11 5,276,707 $2.68 9,411,403 $4.36
========= ===== ========= ===== ========= =====
</TABLE>
The weighted-average remaining contractual life of options outstanding was
8.9 years, with exercise prices ranging from $1.50 to $3.75, as of December 31,
1999. Options exercisable at December 31, 1999 were 548,530 shares at a weighted
average exercise price of $2.12. The weighted average remaining contractual life
of options outstanding was 9.1 years, with exercise prices ranging from $1.50 to
$2.40, as of December 31, 1998. None of the options granted were exercisable at
December 31, 1998.
F-32
<PAGE> 191
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
Options outstanding as of December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
WEIGHTED
RANGE WEIGHTED AVERAGE
OF AVERAGE REMAINING
EXERCISE EXERCISE CONTRACTUAL
PRICE SHARES PRICE LIFE
-------- --------- -------- -----------
<C> <S> <C> <C> <C>
$1.50 ......................................................... 818,000 $1.50 8.1
2.25 ......................................................... 236,200 2.25 8.5
2.40 ......................................................... 2,494,129 2.40 8.5
3.00 ......................................................... 134,311 3.00 9.3
3.75 ......................................................... 1,594,067 3.75 9.9
---------
5,276,707
=========
</TABLE>
(13) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan for all eligible employees
of the Company under the provisions of the Internal Revenue Code Section 401(k).
The TriVergent Communications, Inc. 401(k) Plan allows employees to contribute
up to 15% of compensation and, upon annual approval of the Board of Directors,
the Company matches 50% of employee contributions up to 6% of total compensation
subject to certain adjustments and limitations. No contribution was made in
1997. A total of $24,332 and $100,086 was charged to operations for the
Company's matching contributions in 1998 and 1999, respectively.
(14) ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Changes in the allowance for uncollectible accounts for the years and
period ended December 31 and June 30 were as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999 2000
---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of year or period........... $ -- $ -- $1,976,000 $186,000
Provision for uncollectible accounts......... -- 1,976,000 7,285,528 382,095
Allowance of acquired company................ -- -- -- 11,381
Charge-offs.................................. -- -- 9,075,528 156,044
---------- ---------- ---------- --------
Balance, end of year or period................. $ -- $1,976,000 $ 186,000 $423,432
========== ========== ========== ========
</TABLE>
(15) SUBSEQUENT EVENTS (UNAUDITED)
In January 2000, the Company entered into a $40,000,000 senior secured
eight-year revolving credit facility and an $80,000,000 senior secured
eight-year delayed drawdown term loan facility ("credit facility"). The interest
rate is a sliding scale based on financial performance and covenants. The
interest rate starts at LIBOR plus 4.50% or Prime plus 3.50%. The agreement
establishes milestones where the Company must borrow set dollar amounts during
the year. The proceeds will be used to fund capital expenditures for the
Company's communications facilities and the associated interest expense. The
facility provides for certain restrictive financial and operating covenants. The
senior secured credit facility is guaranteed by the Company and is secured by
all of the assets of TriVergent Communications, Inc. and its subsidiaries.
F-33
<PAGE> 192
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
Commencing March 31, 2003 and at the end of each calendar quarter
thereafter, the principal amount of the credit facility shall be reduced by an
amount equal to the following annual percentages: March 31, 2003 through and
including December 31, 2003 -- 12.5%, March 31, 2004 through and including
December 31, 2004 -- 17.5%, March 31, 2005 through and including December 31,
2005 -- 20%, March 31, 2006 through and including December 31, 2006 -- 25%,
March 31, 2007 through and including December 31, 2007 -- 25%. As of June 30,
2000 the Company has drawn $25,000,000 on the revolving credit facility.
During February 2000, the Company privately sold 11,561,768 shares of
Series C 5.5% redeemable cumulative convertible preferred stock for $4.25 per
share for total proceeds of approximately $49,138,000. Each share of Series C
preferred is convertible into one share of common stock. A portion of the
proceeds were used to repay the Nortel term loan as discussed in note 4.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series C preferred would be entitled to receive, prior and in
preference to the holders of Common Stock, (i) an amount for each share of
Series C preferred stock held by them equal to the Series C original purchase
price (as adjusted for stock dividends, splits, combinations, etc.) plus (ii)
any accrued and unpaid dividends.
Each holder of Series C preferred stock has the right to convert each share
into shares of common stock on a one-for-one basis subject to certain conversion
price adjustments. All shares of Series C preferred stock shall automatically be
converted into shares of common stock, (i) at the election of 67% of the holders
or (ii) in the event of a qualified public offering of the Company's common
stock as defined.
Each holder of Series C preferred stock may cause the Company to redeem up
to one-third of the preferred stock originally issued to such holder on the
following dates: (i) February 1, 2005, (ii) February 1, 2006 and (iii) February
1, 2007. In the event that there is a change in control or reorganization or
liquidation or insolvency of the Company or the Company breaches a term of the
related financing documents, the holders of the Series C preferred would have
the right to request that their shares be redeemed. Such redemptions would be at
a price equal to the greater of fair market value of the Series C preferred
stock on the day of redemption or the original Series C preferred price (as
adjusted for stock dividends, splits, combinations, etc.) plus accrued and
unpaid dividends.
Each share of Series C preferred stock shall be entitled to a single vote
for every share of common stock then issuable upon its conversion. The holders
shall vote with common stock on all matters except as specifically provided or
as otherwise required by law.
The holders of the Series C preferred stock would be entitled to receive
cumulative dividends in preference to any dividend on the common stock at the
rate of 5.5% of the original Series C purchase price when and as declared by the
Board of Directors. Any accrued but unpaid dividends will be payable upon an
initial public offering, an acquisition or liquidation of the Company. Accrued
unpaid dividends at June 30, 2000 amounted to $1,437,239.
In February 2000, the Company purchased the assets and liabilities of two
companies. The Company purchased Ester Communications for a total purchase price
of $4.5 million. Ester Communications, provides local exchange, long distance
and integrated voice and data products. Cash of approximately $2.0 million and
587,755 shares of common stock valued at $4.25 per share were exchanged for the
company. The Company also purchased Information Services and Advertising
Corporation, an internet service provider, for a total purchase price of
$800,000. Cash of $300,000 and 117,647 shares valued at $4.25 per share of
common stock were exchanged for the company. The acquisitions were accounted for
using the purchase method of accounting.
F-34
<PAGE> 193
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
In March 2000, the Company granted 750,000 common stock options to an
executive of the Company. The options vest over five years and have an exercise
price of $3.00, however the fair market value of the options at date of grant
was $4.25. As a result, the Company will record compensation expense over the
vesting period and has recorded $62,500 of compensation expense for the six
months ended June 30, 2000.
In March 2000, the Company entered into a multiple-advance term loan
facility with Nortel. The term loan provides the Company with maximum borrowings
of $45.0 million at LIBOR plus 4.75% or Prime plus 3.75% interest. The term loan
has a due date of March 2004. The term loan is secured by all assets of
TriVergent Communications South, Inc., and provides for certain restrictive
financial and operating covenants. This subsidiary will own the assets acquired
with the proceeds of the loan. In March 2000, the Company also entered into an
agreement to purchase $100 million of Nortel switching equipment and services.
At June 30, 2000 the Company had drawn down $7,831,615 of the term loan to
purchase equipment from Nortel.
In March 2000, the Company privately sold 4,214,703 shares of Series C 5.5%
redeemable cumulative convertible preferred stock for $4.25 per share for gross
proceeds before expenses of $17,912,487.
In March 2000, the Company paid $14.0 million to a long haul
telecommunications provider for an indefeasible right to use fiber lines for
twenty years to connect switching equipment.
On March 6, 2000, the Company entered into a $750,000 note receivable
("note") agreement with an executive officer of the Company. This note arose
whereby the Company loaned the executive officer money to purchase shares of the
Company's Series C preferred stock at the then fair market value. The note bears
interest at 8.12%, matures on the third anniversary of the note or sixty days
after the effective date of the termination of the executive officer's
employment with the Company, and is collateralized by shares of the Company's
Series C preferred stock. The receivable is shown on the balance sheet as a
reduction of total redeemable preferred stock.
On March 14, 2000, the Company entered into a $148,750 note receivable
("note") agreement with an executive officer of the Company. This note arose
whereby the Company loaned the executive officer money to purchase shares of the
Company's Series C preferred stock at the then fair market value. The note bears
interest at 10%, matures on the third anniversary of the note or sixty days
after the effective date of the termination of the executive officer's
employment with the Company, and is collateralized by shares of the Company's
Series C preferred stock. The receivable is shown on the balance sheet as a
reduction of total redeemable preferred stock.
On March 15, 2000, the Company entered into an interest rate hedge
agreement ("agreement") with a $60 million notional amount related to its
borrowings under the credit facility. The purpose of the agreement is to reduce
its exposure to risks associated with interest rate fluctuations and are
required by the credit facility.
On April 14, 2000, the Company filed a registration statement with the
Securities and Exchange Commission in anticipation of a possible public offering
of equity securities. On June 9, 2000, the Company and Gabriel Communications,
Inc. entered into an Agreement and Plan of Merger to combine the two companies
to form a regional, facilities-based integrated communications provider. The
merger has been unanimously approved by the Boards of Directors of both
companies and stockholders holding more than two-thirds of the voting stock of
both companies have agreed to vote their shares to approve the merger. Further
action regarding the registration statement is pending the contemplated merger
with Gabriel Communications, Inc.
F-35
<PAGE> 194
STATE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
On June 30, 2000, the Company acquired the assets and liabilities of
Internet/MCR Corporation, Inc. for a total purchase price of approximately
$1,665,400 in cash and stock. Internet/MCR is an internet and network
integration company headquartered in Greensboro, NC. The Company issued 196,000
shares of common stock valued at $6.15 per share. The Internet/MCR acquisition
has been accounted for by the purchase method of accounting and, accordingly,
the results of operations of Internet/MCR from the period after the acquisition
are included in the accompanying consolidated financial statements. The excess
of cost over the estimated fair value of net assets acquired of approximately
$1,665,400 was allocated to goodwill and is being amortized on a straight-line
basis over 10 years. The pro forma results for 1998 and 1999 as if Internet/MCR
were acquired at the beginning of each year would not be significantly different
than the actual results.
On August 31, 2000, the Company reincorporated in the State of Delaware. As
a result, the authorized common stock is now 100,000,000 shares at a par value
of $.0001 per share. Likewise, the authorized preferred stock is now 50,000,000
shares at a par value of $.0001, of which 5,500,000 shares have been designated
as Series A cumulative convertible preferred stock, 15,000,000 shares have been
designated as Series B cumulative convertible preferred stock and 16,500,000
shares have been designated as Series C cumulative convertible preferred stock.
F-36
<PAGE> 195
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> 196
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............................. 1
1.3. Merger Consideration................................ 2
1.4. Stockholders' Rights upon Merger.................... 4
1.5. Surrender and Exchange of Shares.................... 4
1.6. Options and Warrants................................ 5
1.7. Certificate of Incorporation and Bylaws of Surviving
Corporation............................................ 6
1.8. Certificate of Incorporation and Bylaws of
Gabriel................................................ 6
1.9. Other Effects of Merger............................. 6
1.10. Directors and Officers of Gabriel and the Surviving
Corporation............................................ 6
1.11. Registration Statement.............................. 6
1.12. Reorganization...................................... 8
1.13. Additional Actions.................................. 8
1.14. Reincorporation of TriVergent in Delaware........... 8
ARTICLE II. REPRESENTATIONS, WARRANTIES AND CERTAIN
COVENANTS OF TRIVERGENT................................... 9
2.1. Organization and Good Standing...................... 9
2.2. Capitalization...................................... 9
2.3. Subsidiaries........................................ 10
2.4. Authorization; Binding Agreement.................... 10
2.5. Governmental Approvals.............................. 11
2.6. No Violations....................................... 11
2.7. Securities Filings; Litigation...................... 12
2.8. TriVergent Financial Statements..................... 12
2.9. Absence of Certain Changes or Events................ 12
2.10. Compliance with Laws................................ 13
2.11. Permits............................................. 13
2.12. Finders and Investment Bankers...................... 13
2.13. Material Contracts.................................. 13
2.14. TriVergent Employee Benefit Plans................... 14
2.15. Taxes and Returns................................... 16
2.16. No Undisclosed Liabilities.......................... 17
2.17. Environmental Matters............................... 17
2.18. Intellectual Property............................... 18
2.19. Real Estate......................................... 18
2.20. Corporate Records................................... 19
2.21. Title to and Condition of Personal Property......... 19
2.22. No Adverse Actions.................................. 19
2.23. Labor Matters....................................... 19
2.24. Indebtedness to and from Officers, Directors and
Others................................................. 20
2.25. Insurance........................................... 20
2.26. Takeover Statutes................................... 20
2.27. Investment Company.................................. 20
2.28. Fairness Opinion.................................... 20
</TABLE>
i
<PAGE> 197
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
ARTICLE III. REPRESENTATIONS, WARRANTIES AND CERTAIN
COVENANTS OF GABRIEL...................................... 21
3.1. Organization and Good Standing...................... 21
3.2. Capitalization...................................... 21
3.3. Subsidiaries........................................ 22
3.4. Authorization; Binding Agreement.................... 22
3.5. Governmental Approvals.............................. 22
3.6. No Violations....................................... 23
3.7. Litigation.......................................... 23
3.8. Gabriel Financial Statements........................ 23
3.9. Absence of Certain Changes or Events................ 23
3.10. Compliance with Laws................................ 24
3.11. Permits............................................. 24
3.12. Finders and Investment Bankers...................... 24
3.13. Material Contracts.................................. 24
3.14. Gabriel Employee Benefit Plans...................... 25
3.15. Taxes and Returns................................... 26
3.16. No Undisclosed Liabilities.......................... 28
3.17. Environmental Matters............................... 28
3.18. Intellectual Property............................... 28
3.19. Real Estate......................................... 28
3.20. Corporate Records................................... 29
3.21. Title to and Condition of Personal Property......... 29
3.22. No Adverse Actions.................................. 29
3.23. Labor Matters....................................... 29
3.24. Indebtedness to and from Officers, Directors and
Others................................................. 30
3.25. Insurance........................................... 30
3.26. Investment Company.................................. 30
3.27. Fairness Opinion.................................... 30
ARTICLE IV. ADDITIONAL COVENANTS OF TRIVERGENT............. 31
4.1. Conduct of Business of TriVergent and the TriVergent
Subsidiaries........................................... 31
4.2. Notification of Certain Matters..................... 33
4.3. Access and Information.............................. 33
4.4. Stockholder Approval................................ 34
4.5. Reasonable Best Efforts............................. 34
4.6. Public Announcements................................ 34
4.7. Intentionally Omitted............................... 34
4.8. Tax Treatment....................................... 34
4.9. TriVergent Benefit Plans............................ 34
4.10. No Solicitation of Acquisition Proposal............. 35
4.11. Securities and Stockholder Materials; Withdrawal of
Form S 1............................................... 35
4.12. Takeover Statutes................................... 35
4.13. Comfort Letters..................................... 36
ARTICLE V. ADDITIONAL COVENANTS OF GABRIEL................. 37
5.1. Conduct of Business of Gabriel and the Gabriel
Subsidiaries........................................... 37
5.2. Notification of Certain Matters..................... 39
5.3. Access and Information.............................. 39
5.4. Stockholder Approval................................ 40
</TABLE>
ii
<PAGE> 198
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
5.5. Reasonable Best Efforts............................. 40
5.6. Public Announcements................................ 40
5.7. Intentionally Omitted............................... 40
5.8. Tax Treatment....................................... 40
5.9. Indemnification..................................... 40
5.10. Employee Benefit Plans.............................. 40
5.11. Offers of Employment................................ 41
5.12. No Solicitation of Acquisition Proposal............. 41
5.13. Gabriel Charter Amendment........................... 42
5.14. Comfort Letters..................................... 42
5.15. Gabriel Series B Preferred Capital Calls............ 42
ARTICLE VI. CONDITIONS..................................... 43
6.1. Conditions to Each Party's Obligations.............. 43
6.1.1. Stockholder Approvals........................... 43
6.1.2. No Injunction or Action......................... 43
6.1.3. Governmental Approvals.......................... 43
6.1.4. HSR Act......................................... 43
6.1.5. Registration Statement.......................... 43
6.1.6. Blue Sky........................................ 43
6.1.7. Consents of Certain Third Parties............... 43
6.2. Conditions to Obligations of TriVergent............. 43
6.2.1. Gabriel Representations and Warranties.......... 43
6.2.2. Performance by Gabriel.......................... 44
6.2.3. Certificates and Other Deliveries............... 44
6.2.4. Opinions of Gabriel Counsel..................... 44
6.2.5. Tax Opinion..................................... 44
6.2.6. Required Third Party Consents................... 44
6.3. Conditions to Obligations of Gabriel and Acquisition
Subsidiary............................................. 44
6.3.1. TriVergent Representations and Warranties....... 44
6.3.2. Performance by TriVergent....................... 44
6.3.3. Certificates and Other Deliveries............... 44
6.3.4. Opinions of TriVergent Counsel.................. 45
6.3.5. Tax Opinion..................................... 45
6.3.6. Required Third Party Consents................... 45
6.3.7. Gabriel Option Agreements....................... 45
ARTICLE VII. TERMINATION AND ABANDONMENT................... 46
7.1. Termination......................................... 46
7.2. Procedure Upon Termination.......................... 46
ARTICLE VIII. MISCELLANEOUS................................ 47
8.1. Confidentiality..................................... 47
8.2. Amendment and Modification.......................... 47
8.3. Waiver of Compliance; Consents...................... 47
8.4. Survival of Representations and Warranties.......... 47
8.5. Notices............................................. 47
8.6. Binding Effect; Assignment.......................... 48
8.7. Expenses............................................ 48
8.8. Governing Law....................................... 48
</TABLE>
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<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
8.9. Counterparts........................................ 49
8.10. Interpretation...................................... 49
8.11. Entire Agreement.................................... 49
8.12. Severability........................................ 49
8.13. Specific Performance................................ 49
8.14. Third Parties....................................... 49
8.15. Schedules........................................... 49
</TABLE>
List of Exhibits:
A. Form of TriVergent Voting Agreement
B. Form of Gabriel Voting Agreement
iv
<PAGE> 200
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
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
</TABLE>
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<PAGE> 201
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
-------- -----------
<S> <C>
3.19(b) Gabriel Leased Real Property
3.20 Gabriel Records Off Premises
3.22 Gabriel Adverse Actions
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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<PAGE> 202
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)
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)
</TABLE>
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<TABLE>
<CAPTION>
SECTION WHERE
TERM DEFINED
---- -------------
<S> <C>
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)
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)
</TABLE>
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<TABLE>
<CAPTION>
SECTION WHERE
TERM DEFINED
---- -------------
<S> <C>
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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<PAGE> 205
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 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
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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 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."
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(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 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
3
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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 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 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
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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 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,
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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.
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")
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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 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
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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.
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.
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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 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 outstanding. All issued and outstanding shares of capital stock
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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 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.
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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 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,
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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.
(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;
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(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 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, 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
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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
(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
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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; (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.
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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,
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.
(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
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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
losses, 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
such TriVergent 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 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
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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 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
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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 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, 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
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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 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
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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, 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
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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 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:
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(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
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"):
(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
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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 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.
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(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 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
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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.
(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 under
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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 (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,
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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.
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.
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
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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 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
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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, 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;
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(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.
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 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
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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 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
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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.
(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.
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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 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,
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(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, 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;
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(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
(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 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.
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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
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
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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 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
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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.
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.
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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.
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
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be expected to have a Gabriel Material Adverse Effect or a Surviving
Corporation Material Adverse Effect.
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 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
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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 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).
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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.
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.
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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.
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
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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
(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.
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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 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 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 /s/ DAVID L. SOLOMON
--------------------------------------
Name: David L. Solomon
Title: Vice Chairman and Chief
Executive Officer
TRIANGLE ACQUISITION, INC.
By /s/ DAVID L. SOLOMON
--------------------------------------
Name: David L. Solomon
Title: Chairman and Chief Executive
Officer
STATE COMMUNICATIONS, INC.
By /s/ CHARLES S. HOUSER
--------------------------------------
Name: Charles S. Houser
Title: Chairman and Chief Executive
Officer
50
<PAGE> 255
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
51
<PAGE> 256
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
52
<PAGE> 257
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 June 8, 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 Exhibit 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> 258
EXHIBIT A
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.
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,
<PAGE> 259
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 each share of Series B Preferred Stock, $2.17
per share for each share of Series C-1 Preferred Stock, $3.39 per share
for each share of Series C-2 Preferred Stock and $3.84 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.
<PAGE> 260
(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:
(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, $2.17, with respect to Series C-1 Preferred
Stock, $3.39, with respect to Series C-2 Preferred Stock and $3.84, 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, $2.17, $3.39 and $3.84, 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
<PAGE> 261
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 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, September 1, 2000.
<PAGE> 262
(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 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:
<PAGE> 263
(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 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
<PAGE> 264
(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 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
<PAGE> 265
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 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
<PAGE> 266
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.
(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> 267
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 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
<PAGE> 268
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.
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
<PAGE> 269
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.
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> 270
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, 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,
<PAGE> 271
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> 272
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").
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
<PAGE> 273
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 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
/s/ JAMES BRONER
By:
--------------------------------------
Name: James Broner
Title: Senior Vice President
<PAGE> 274
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 "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
<PAGE> 275
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.
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.
<PAGE> 276
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/ Salomon Smith Barney Inc.
SALOMON SMITH BARNEY INC.
<PAGE> 277
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 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.
<PAGE> 278
(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
(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
<PAGE> 279
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 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 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.
<PAGE> 280
(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.
<PAGE> 281
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware provides for, among
other things:
a. permissive indemnification for expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by designated
persons, including directors and officers of a corporation, in the event
such persons are parties to litigation other than stockholder derivative
actions if certain conditions are met;
b. permissive indemnification for expenses actually and reasonably
incurred by designated persons, including directors and officers of a
corporation, in the event such persons are parties to stockholder
derivative actions if certain conditions are met;
c. mandatory indemnification for expenses actually and reasonably
incurred by designated persons, including directors and officers of a
corporation, in the event such persons are successful on the merits or
otherwise in litigation covered by a. and b. above; and
d. that the indemnification provided for by Section 145 shall not be
deemed exclusive of any other rights which may be provided under any
by-law, agreement, stockholder or disinterested director vote, or
otherwise.
Gabriel's amended and restated certificate of incorporation provides that a
director shall not be personally liable to Gabriel or its stockholders for
monetary damages for breach of fiduciary duty as a director except for liability
(i) for any breach of the director's duty of loyalty to Gabriel or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for paying a
dividend or approving a stock repurchase in violation of Section 174 of the
General Corporation Law of Delaware or (iv) for any transaction from which the
director derived an improper personal benefit.
The by-laws also provide that each person who was or is made a party to, or
is involved in, any action, suit or proceeding by reason of the fact that he or
she is or was a director, officer of Gabriel shall be, and employees and agents
may be, indemnified and held harmless by Gabriel, to the fullest extent
authorized by the General Corporation Law of Delaware, as in effect (or, to the
extent indemnification is broadened, as it may be amended) against all expense,
liability or loss reasonably incurred by such person in connection therewith.
The by-laws further provide that such rights to indemnification are contract
rights and shall include the right to be paid by Gabriel the expenses incurred
in defending the proceedings specified above, in advance of their final
disposition, provided that, if the General Corporation Law so requires, such
payment shall only be made upon delivery to Gabriel by the indemnified party of
an undertaking to repay all amounts so advanced if it shall ultimately be
determined that the person receiving such payment is not entitled to be
indemnified. Gabriel must advance the expenses incurred by the director or
officer in defending any proceeding, within 60 days of receipt of the request
for indemnification. These expenses, including attorneys' fees, may be paid with
respect to indemnified employees and agents, as the board of directors deems
appropriate. The by-laws provide that the right to indemnification and to the
advance payment of expenses shall not be exclusive of any other right which any
person may have or acquire under any statute, provision of Gabriel's by-laws,
amended restated certificate of incorporation, or otherwise. The by-laws also
provide that, subject to the approval of a majority of the board of directors
regarding the terms of availability of the insurance, Gabriel must maintain
insurance, at its expense, to protect any of its directors and officers against
any liability arising out of his or her status as a director or officer, whether
or not Gabriel would have the power to indemnify the director or officer against
such liability under the restated by-law's indemnification provision.
II-1
<PAGE> 282
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
See exhibit index.
(B) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO ADDITIONS
BEGINNING OF COSTS AND CHARGED TO OTHER BALANCE AT END
YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
------------ ---------- ---------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
For the period from June 15, 1998
(inception) to December 31, 1998
Allowance for doubtful accounts.... $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------ -------
Total valuation and qualifying
accounts......................... $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------ -------
For the year ended December 31,
1999
Allowance for doubtful accounts.... $ -- $15,602 $ -- $ -- $15,602
------- ------- ------- ------ -------
Total valuation and qualifying
accounts......................... $ -- $15,602 $ -- $ -- $15,602
------- ------- ------- ------ -------
For the six months ended June 30,
2000 (unaudited)
Allowance for doubtful accounts.... $15,602 $64,617 $ -- $5,961 $74,258
------- ------- ------- ------ -------
Total valuation and qualifying
accounts......................... $15,602 $64,617 $ -- $5,961 $74,258
------- ------- ------- ------ -------
</TABLE>
ITEM 22. UNDERTAKINGS.
(A) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(B) The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, 13 of this
Form S-4, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the Registration Statement through the date of
responding to the request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
II-2
<PAGE> 283
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Chesterfield, State of Missouri, on the 23rd day of October 2000.
Gabriel Communications, Inc.
By: /s/ JOHN P. DENNEEN
------------------------------------
John P. Denneen
Executive Vice
President -- Corporate
Development and Legal Affairs
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ------------------------------------ ----------------
<C> <S> <C>
/s/ DAVID L. SOLOMON* Director, Chief Executive Officer October 23, 2000
--------------------------------------------- and Chairman of the Board
David L. Solomon
/s/ GERARD J. HOWE* President and Chief Operating October 23, 2000
--------------------------------------------- Officer and Director
Gerard J. Howe
/s/ THOMAS P. ERICKSON* Senior Vice President and October 23, 2000
--------------------------------------------- Chief Financial Officer
Thomas P. Erickson (Chief Accounting Officer)
/s/ JOHN P. DENNEEN Executive Vice October 23, 2000
--------------------------------------------- President -- Corporate Development
John P. Denneen and Legal Affairs, Secretary and
Director
/s/ MICHAEL R. HANNON* Director October 23, 2000
---------------------------------------------
Michael R. Hannon
/s/ WILLIAM LAVERACK, JR.* Director October 23, 2000
---------------------------------------------
William Laverack, Jr.
/s/ BYRON D. TROTT* Director October 23, 2000
---------------------------------------------
Byron D. Trott
*By /s/ JOHN P. DENNEEN
----------------------------------------
Attorney-in-Fact
</TABLE>
II-3
<PAGE> 284
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1* Agreement and Plan of Merger, dated as of June 9, 2000, by
and among Gabriel Communications, Inc., Triangle
Acquisition, Inc. and State Communications, Inc. (included
an Annex A to the information statement/prospectus included
in this Registration Statement.)(+)
3.1* Amended and Restated Certificate of Incorporation of Gabriel
as of April 14, 2000.
3.2* By-laws of Gabriel as amended as of March 21, 2000.
4.1* Form of $6.00 Warrant Agreement between Gabriel and the
holders of Gabriel Preferred Stock.
4.2* Form of $10.25 Warrant Agreement between Gabriel and the
holders of Gabriel Preferred Stock.
4.3* Shareholders Agreement dated August 14, 1998, as amended as
of November 18, 1998 and December 13, 1999 by and among
Gabriel and its employee stockholders.
4.4* Stockholders' Agreement dated as of March 31, 2000 among
Gabriel and the stockholders of Gabriel.
4.5* Registration Rights Agreement dated as of March 31, 2000
among Gabriel and the stockholders of Gabriel.
5.1* Legal opinion of Bryan Cave LLP.
8.1 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.
10.5* Amended and Restated State Communications Employee Incentive
Plan dated as of June 21, 2000.
10.6* Employment Agreement dated as of December 13, 1999 between
Gabriel and David L. Solomon.
10.7* Form of Employment Agreement of Charles S. Houser and Shaler
P. Houser dated October 28, 1998, and schedule of material
details for each such person, incorporated herein by
reference to Exhibit 10.9.1 to State Communications, Inc.'s
Registration Statement on Form S-1 (File No. 333-34834) (the
"Form S-1").
10.8* Employment Agreement between G. Michael Cassity and State
Communications, Inc. dated March 10, 2000, incorporated
herein by reference to Exhibit 10.9.2 to the Form S-1.
10.9* Employment Agreement between Riley Murphy and State
Communications, Inc. dated March 15, 2000, incorporated
herein by reference to Exhibit 10.9.3 to the Form S-1.
10.10* Employment Agreement between Gabriel and Gerard J. Howe
dated August 15, 2000.
10.11* Employment Agreement between Gabriel and John P. Denneen
dated August 15, 2000.
10.12* Employment Agreement between Gabriel and Marguerite A.
Forrest dated August 15, 2000.
10.13* Employment Agreement between Gabriel and Michael E. Gibson
dated August 15, 2000.
</TABLE>
<PAGE> 285
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.14* Credit Agreement dated as of October 28, 1999 relating to
the $90 million secured debt facility among Gabriel, Gabriel
Communications Finance Company, Canadian Imperial Bank of
Commerce, as administrative agent, and the several lenders
parties thereto.
10.15* Loan Agreement dated February 1, 2000 (the "TD Facility"),
by and among TriVergent Communications, Inc., the financial
institutions whose names appear as lenders on the signature
pages thereof, TD Securities (USA), Inc. and Capital
Syndication Corporation, as affiliate of The CIT Group,
Inc., as co-lead arrangers and co-book runners, Newcourt
Commercial Finance Corporation, as affiliate of The CIT
Group, Inc., as documentation agent, First Union National
Bank, as syndication agent, and Toronto Dominion (Texas),
Inc., as administrative agent for the lenders and Assignment
and Assumption Agreements dated March 9 and March 30, 2000
adding additional lenders, incorporated herein by reference
to Exhibit 10.2.1 to the Form S-1.
10.16* Parent Guaranty of TriVergent of the TD Facility dated
February 1, 2000, incorporated by reference to Exhibit
10.2.2 to the Form S-1.
10.17* Parent Pledge Agreement dated February 1, 2000, by and among
TriVergent and Toronto Dominion (Texas), Inc., as
administrative agent for the lenders incorporated by
reference to Exhibit 10.2.3 to the Form S-1.
10.18* Credit Agreement dated as of March 7, 2000, by and among
TriVergent Communications South, Inc., as Borrower, and
Nortel Networks Inc., as administrative agent, and the
lenders named therein incorporated by reference to Exhibit
10.3.1 to the Form S-1.
10.19* Parent Pledge Agreement dated March 7, 2000, by and between
TriVergent and Nortel Networks Inc. incorporated by
reference to Exhibit 10.3.2 to the Form S-1.
11.1* Statement regarding computation of per share earnings.
21.1 Subsidiaries of Registrant.
23.1 Consent of KPMG LLP.
23.2 Consent of KPMG LLP.
23.3* Consent of Charles S. Houser to being named as a director in
the information statement/prospectus.
23.4* Consent of Watts Hamrick to being named as a director in the
information statement/prospectus.
23.5* Consent of Jack Tyrrell to being named as a director in the
information statement/prospectus.
24.1* Power of attorney (included on signature page).
27.1* Financial data schedule.
</TABLE>
-------------------------
+ Schedules omitted pursuant to Regulation S-K, Item 601(b)(2). The registrant
hereby undertakes to furnish such schedules to the Commission supplementally
upon request.
* Filed previously.
