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As filed with the Securities and Exchange Commission on April 14, 2000
Registration No. 333-___________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STATE COMMUNICATIONS, INC.
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(TO BE RENAMED TRIVERGENT CORPORATION)
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(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 4813 58-2354282
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(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
200 NORTH MAIN STREET
GREENVILLE, SOUTH CAROLINA 29601
(864) 370-4500
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(Address, including Zip code, and telephone number, including area code,
of Registrant's Principal Executive Offices)
RILEY M. MURPHY, ESQ.
GENERAL COUNSEL
TRIVERGENT CORPORATION
200 NORTH MAIN STREET
GREENVILLE, SOUTH CAROLINA 29601
(864) 370-4500
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
WILLIAM P. CRAWFORD, JR., ESQ. THOMAS R. BROME, ESQ. RICHARD D. TRUESDELL, JR., ESQ.
WYCHE, BURGESS, FREEMAN & PARHAM, P.A. CRAVATH, SWAINE & MOORE DAVIS POLK & WARDWELL
POST OFFICE BOX 728 WORLDWIDE PLAZA 450 LEXINGTON AVENUE
GREENVILLE, SOUTH CAROLINA 29602-0728 825 EIGHTH AVENUE NEW YORK, NEW YORK 10017
(864) 242-8200 (TELEPHONE) NEW YORK, NY 10019 (212) 450-4000 (TELEPHONE)
(864) 235-8900 (FACSIMILE) (212) 474-1000 (TELEPHONE) (212) 450-4800 (FACSIMILE)
(212) 474-3700 (FACSIMILE)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 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, check the following box and
list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
===================================================================================================
Title of Each Class of Securities Proposed Maximum Aggregate Amount of
to be Registered Offering Price (1) Registration Fee (2)
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Common Stock, par value $0.001....... $172,500,000 $45,540
===================================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933.
(2) Calculated pursuant to Rule 457(a) based on estimate of the proposed
maximum aggregate offering price.
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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EXPLANATORY NOTE
SUBJECT TO SHAREHOLDER APPROVAL, THE REGISTRANT PLANS TO CHANGE ITS
NAME TO TRIVERGENT CORPORATION AND REINCORPORATE AS A DELAWARE CORPORATION
BEFORE CIRCULATING THE PROSPECTUS INCLUDED IN THIS FILING. REFERENCES TO THE
REGISTRANT IN THE PROSPECTUS ARE TO THE PROPOSED NEW NAME, AND TO DELAWARE AS
THE STATE OF INCORPORATION.
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WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
SUBJECT TO COMPLETION -- APRIL 14, 2000
==============================================================================
PROSPECTUS
, 2000
[LOGO]
TRIVERGENT CORPORATION
SHARES OF COMMON STOCK
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TRIVERGENT CORPORATION:
- - We are a broadband telecommunications company offering web design and
web hosting, high-speed data and voice services.
- - TriVergent Corporation
200 North Main Street
Greenville, South Carolina 29601
PROPOSED SYMBOL AND MARKET:
- - We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "TRIV."
THE OFFERING:
- - We are offering shares of our common stock.
- - The underwriters have an option to purchase up to an additional
shares from us to cover over-allotments.
- - This is our initial public offering, and no public market currently
exists for our shares.
- - We anticipate that the initial public offering price for our shares
will be between $ and $ per share.
- - Closing: , 2000.
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Per Share Total
Public offering price: $ $
Underwriting fees:
Proceeds to TriVergent Corporation:
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THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
CREDIT SUISSE FIRST BOSTON
FIRST UNION SECURITIES, INC.
THOMAS WEISEL PARTNERS LLC
DLJDIRECT INC.
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(Graphical depiction of TriVergent's network, overlayed on a map of
the southeastern United States. The map identifies the locations of our DMS
sites, ATM sites and transmission facilities.)
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TABLE OF CONTENTS
PAGE
Prospectus Summary .................................... 3
Risk Factors .......................................... 9
Forward-Looking Statements ............................ 19
Use of Proceeds ....................................... 20
Dividend Policy ....................................... 20
Capitalization ........................................ 21
Dilution .............................................. 22
Selected Consolidated Financial Data .................. 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ....................................... 26
Business .............................................. 35
Description of Our Indebtedness ....................... 52
Government Regulation ................................. 56
Management ............................................ 63
Certain Relationships and Related
Transactions ..................................... 73
Principal Stockholders ................................ 76
Description of Capital Stock .......................... 79
Shares Eligible for Future Sale ....................... 83
Underwriting .......................................... 85
Legal Matters ......................................... 89
Experts ............................................... 89
Available Information ................................. 89
Index to Financial Statements ......................... F-1
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You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell shares of common
stock and seeking offers to buy shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or any sale of the common stock. In
this prospectus, "TriVergent," "we," "us" and "our" refer to TriVergent
Corporation.
We have applied to register the following trademarks which may appear
in this prospectus: Broadband Bundle(TM) and TrieWeb(TM). Our logo and certain
titles and logos of our services mentioned in this prospectus are our
trademarks.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us and our common stock being sold in this offering,
especially "Risk Factors" beginning on page 9 and our consolidated financial
statements and the notes thereto, before deciding to invest in our common
stock. Except as otherwise noted, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
We are a broadband telecommunications company offering automated web
design and web hosting, high-speed data and voice services. Our goal is to
become the leading single-source, web-based communications company serving
small and medium-sized businesses in the southeastern United States. Our
principal product is our Broadband Bundle, which provides automated web design
and web hosting, high-speed data and Internet access using digital subscriber
line, or DSL, technology 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. We believe we are the only
company providing this all-inclusive bundle in our markets. Our Broadband
Bundle has been designed to increase customer loyalty and provide a
cost-effective, web-based communications solution to our target customers. To
complement our Broadband Bundle we will offer carrier grade data centers for
dedicated web hosting and bandwidth connectivity in 33 of our 36 target markets
by the end of 2001. We also offer network and data integration services, such
as dedicated server colocation, 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 our Broadband Bundle, we offer our proprietary web
architecture service, TriEWeb, that enables our customers to design and
maintain their own websites using our template-driven web design Internet
application. Our 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 our customer care representatives. We also provide our customers
with high-speed Internet connectivity through our DSL services, unlimited local
service and 100 minutes of free long distance usage per line, as well as web
hosting. We believe this affordable, scalable solution enables our small and
medium-sized business customers to take advantage of web related and
connectivity services more typically utilized by larger companies. Since we
began offering the Broadband Bundle in January 2000, approximately 90% of our
new customers have entered into at least one-year contracts for service. At
March 31, 2000, approximately 50% of our Broadband Bundled customers had
three-year contracts. We also intend to release the second version of TriEWeb
in third quarter 2000, to allow our customers to develop e-commerce
applications and conduct transactions using their websites.
We currently offer our products and services in six markets across
South Carolina, North Carolina and Georgia. We intend to serve an additional 18
markets throughout nine southeastern states by the end of 2000, and a total of
36 markets by the end of 2001. We expect our total network footprint to cover
more than 70% of BellSouth's business access line market, encompassing 5.4
million business access lines. We believe our network will ultimately cover
over 90% of the business access lines in our target markets.
We believe the number and size of our colocations positions us with
the broadest colocation foot print in the BellSouth region. Our scale and
unified network design of converged voice and data services allow us to
accommodate future access line growth in our target markets both rapidly and
cost-effectively. At March 31, 2000, we had:
- secured 256 central office colocation facilities representing
approximately 50,000 square feet of caged-in space and passing over 10 million
access lines;
- installed voice and data equipment in 82 of these colocation
facilities, with 47 others under construction; and
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- deployed three asynchronous transfer mode, or ATM, switches,
2,400 route miles of lit fiber optic capacity, and three Nortel voice-switching
platforms.
Our network is designed to include six voice switches complemented by
33 ATM switches to provide our Broadband Bundle to our customers throughout the
southeastern region. We currently have three voice switches installed and
expect to install three more by the end of 2000 which will complete the voice
switch deployment necessary to cover all of our currently planned markets. We
intend to construct data centers in substantially all of our markets to house
our ATM switches and provide dedicated and shared web hosting services to our
customers. Because many of the traditional data service providers have targeted
only the largest cities in our target market, we believe the market for data
centers in small and medium sized cities in this region is currently
underserved. We expect to house our carrier-grade data centers connected
directly to our ATM switch. These data centers will have auxiliary battery and
diesel power restoration, fire suppression, security clearance and access to
customers' workstations and access to the Internet through our fiber network.
We will offer our customers a complete solution that includes web hosting and
high-speed Internet connections. We believe we will be first to market this
service in many of our target markets.
Since our inception, we have raised approximately $137 million in
equity from a number of experienced investors in the telecommunications
industry, including Moore Capital, Richland Ventures, Boston Millenia Partners,
First Union Capital Partners, Bank of America Securities, CIT Group, TD
Securities, CIBC, Southeastern Technology Fund, Wachovia Bank and Nortel
Networks. Our management team, board of directors and affiliates have invested
over $7 million in us. We also have a $120 million senior credit facility from
a syndicate of financial institutions and a $45 million credit facility from
Nortel Networks.
BUSINESS STRATEGY
We have been pursuing our current business strategy since February 1999.
Prior to that time, our business strategy was to resell to residential
customers local and long distance voice services. With the exception of our
prepaid business, we discontinued marketing resold residential service in April
1999 and expect this business to decline over the next two years. Our current
business strategy is to become the leading single-source, web-based
communications company serving small and medium-sized businesses in the
southeastern United States. To achieve this goal, we have developed the
following business strategy:
- Offer a Complete, Bundled Broadband Internet Communications
Solution
- Target Small and Medium-Sized Businesses in the Southeastern
United States
- Capitalize on First Mover Advantage in Bundled Services and Data
Centers
- Leverage Proven Distribution Channels
- Capitalize on our Colocation Footprint
- Implement Scalable and Integrated Back Office Systems
- Leverage Management Expertise
- Accelerate Growth and Expand Product Offering through Acquisitions
In most of our target markets, we expect to have a locally based sales
force led by a sales manager and a team of six to 40 account executives
responsible for customer acquisition and retention in their market. We also
intend to use third-party agents to enhance the reach of our direct sales
force. We currently have developed strong relationships with voice and data
equipment distributors located throughout the southeastern region of the United
States, including those affiliated with Teleco, Inc.
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Our management team is led by Charles S. Houser, our 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., or CTG, a switch-based long
distance carrier acquired by LCI International, Inc.;
- chief executive officer of Tel/Man, a switch-based long
distance carrier;
- chief operating officer of SouthernNet, a facilities-based
long distance carrier that was acquired by MCI in 1989; and
- chairman of Teleco, Inc.
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THE OFFERING
The calculation of the number of shares outstanding after this
offering includes the automatic conversion of all outstanding shares of
preferred stock into common stock but does not reflect shares that may be
issued upon the exercise of options and warrants. Unless otherwise specifically
stated, information in this prospectus assumes the underwriters do not exercise
their option to purchase additional shares in this offering.
Common stock offered by us.................... shares
Common stock outstanding after
this offering................................ shares
Use of proceeds............................... We plan to use the net proceeds from this offering:
- for capital expenditures relating to the planned
expansion of our network;
- to fund operating losses during the rollout of
services in new markets; and
- for working capital and other general corporate
purposes.
See "Use of Proceeds."
Dividend policy............................... We have never paid or declared any cash dividends on our common
stock and do not anticipate paying cash dividends in the
foreseeable future. We currently intend to retain all future
earnings, if any, for use in the operation of our business and
to fund future growth.
Proposed Nasdaq National Market symbol........ TRIV
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PRINCIPAL OFFICES
We are a Delaware corporation. Our predecessor was a South Carolina
corporation. Our principal executive offices are located at 200 North Main
Street, Greenville, South Carolina 29601. Our telephone number is (864)
370-4500.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data
for the periods indicated. The consolidated statement of operations data 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 the consolidated balance
sheet data as of December 31, 1999 have been derived from our consolidated
financial statements included elsewhere in this prospectus, which have been
audited by KPMG LLP, independent public accountants, as indicated in their
report included elsewhere in this prospectus. The results of our operations for
the periods indicated are not necessarily indicative of the results of
operations in the future.
The as adjusted balance sheet data gives effect to the following as if
each had taken place on December 31, 1999:
- the issuance of Series C preferred stock in February and
March 2000 for which we received total net proceeds of $67.1
million;
- the automatic conversion of Series A, B and C preferred stock
into shares of common stock and the issuance of
shares of common stock in payment of dividends
accrued on the Series A, B and C preferred stock through the
closing of this offering; and
- our receipt of net proceeds from the sale of shares
of common stock in this offering at an assumed initial public
offering price of $ per share, after deducting estimated
underwriting discounts and commissions and offering expenses.
EBITDA, shown below under "Other Financial Data," consists of net loss
before extraordinary item, excluding net interest, taxes, depreciation and
amortization and noncash compensation expense. We have provided EBITDA because
it is a measure of financial performance commonly used for comparing companies
in the telecommunications industry in terms of operating performance, leverage
and ability to incur and service debt. EBITDA provides an alternative measure
of cash flow from operations as determined under generally accepted accounting
principles. You should not consider it as a substitute for operating loss, as
an indicator of our operating performance nor as an alternative to cash flows
from operating activities as a measure of liquidity. We may calculate EBITDA
differently from other companies. For further information, see our consolidated
financial statements and related notes included elsewhere in this prospectus.
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You should read the summary consolidated financial data set forth
below in conjunction with our consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
PERIOD FROM
OCTOBER 29
(INCEPTION ) THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
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1997 1998 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues .............................................. $ -- $ 5,261 $ 25,037
Cost of services ...................................... -- 3,802 17,704
Selling, general and administrative ................... 40 12,166 23,523
Provision for uncollectible accounts .................. -- 1,976 7,285
Depreciation and amortization ......................... -- 150 1,318
Operating loss ........................................ (40) (12,833) (24,793)
Net loss .............................................. (40) (12,723) (25,664)
Net loss per common share ............................. (.01) (1.37) (2.60)
OTHER FINANCIAL DATA:
Net cash used in operating activities ................. $ (56) $(11,072) $(19,956)
Net cash used in investing activities ................. -- 1,465) (38,764)
Net cash provided by financing activities ............. 110 13,883 72,558
Capital expenditures .................................. -- 1,465 34,966
EBITDA ................................................ (40) (12,683) (23,475)
AS OF DECEMBER 31, 1999
--------------------------------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments ................ $ 17,928 $
Working capital ....................................... 5,485
Net property and equipment ............................ 44,057 44,057
Total assets .......................................... 67,277
Long-term debt ........................................ 18,200 18,200
Redeemable preferred stock ............................ 65,780
Stockholders' deficit ................................. (31,158)
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RISK FACTORS
An investment in our common stock involves a high degree of risk.
Before investing, you should consider carefully the risks described below,
together with all of the other information included in this prospectus.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY PROVIDING TELECOMMUNICATIONS SERVICES MAKES
EVALUATING OUR PERFORMANCE DIFFICULT.
We began operating as a telecommunications services provider in
October 1997 by reselling BellSouth's local telephone service. We changed our
business strategy from reselling local and long distance services to providing
a broadband bundle of services on our network in February 1999 and are
currently implementing this strategy in six markets. We are also beginning to
enter additional markets and plan to enter a total of 36 markets. As a result
of our limited operating history, you have limited historical financial
information upon which to evaluate how we will perform in the future. Many of
our services are new or have recently been introduced in new markets. We cannot
assure you that we will be able to compete successfully in the
telecommunications services provider business.
OUR FUTURE GROWTH WILL REQUIRE SIGNIFICANT AMOUNTS OF ADDITIONAL CAPITAL AND
OUR FAILURE TO OBTAIN ADDITIONAL CAPITAL COULD SIGNIFICANTLY IMPAIR OUR ABILITY
TO IMPLEMENT OUR BUSINESS STRATEGY.
The expansion and development of our business and the deployment of
our networks, services and systems will require significant amounts of
additional capital to fund debt service and cash flow deficits. Although we
anticipate that our existing funds and the net proceeds of this offering will
fund approximately 70% of our capital expenditures and operating losses to
finance our first 36 markets, we will need additional capital to complete these
markets. We may require additional financing or require financing sooner than
anticipated if our development plans change or prove to be inaccurate. If we
are not able to raise additional funds when needed (or obtain waivers of
provisions restricting future borrowings from our lenders under our credit
facilities) we would be required to significantly scale back our operations.
There can be no assurance that additional capital will be available on terms
acceptable to us, or available at all. Additional debt we may incur during the
next few years to finance our expansion could require us to dedicate a
substantial portion of our future cash flow from operations to the repayment of
that debt, thereby reducing the funds available for other business purposes,
limiting our ability to obtain additional financing and placing us at a
competitive disadvantage compared to competitors who have less debt than we do.
This could have an adverse effect on our business, operating results and
financial condition.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR FUTURE GROWTH, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
To implement our business plan, we intend to rapidly and significantly
expand our operations. Any future rapid expansion will challenge our
management, personnel, operational, financial and other resources. Failure to
manage our future growth effectively could adversely affect customer
satisfaction, service offerings and the continued implementation of our
business strategy. We cannot assure you that we can:
- improve existing and successfully implement new operations,
financial and management information controls, reporting
systems and procedures;
- hire, train and manage additional qualified personnel;
- expand and upgrade our core technologies;
- effectively allocate or obtain management resources; or
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- effectively manage relationships with our customers,
suppliers and other third parties.
Any failure to successfully manage and expand these areas and to implement and
improve these systems, procedures and controls in an efficient manner at a pace
consistent with the growth of our business could have a material adverse effect
on our business, financial condition and results of operations.
WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW AND WE MAY NOT BE
PROFITABLE IN THE FUTURE.
We have incurred significant losses and experienced negative operating
cash flow for each month since we began operations as a telecommunications
provider and expect to continue to incur losses in the future as we expand our
network. As of December 31, 1999, we had an accumulated deficit of
approximately $38.4 million. The development of our business and the deployment
of our networks, services and systems will require significant capital
expenditures. We expect our operating losses to increase significantly during
our network, services and systems deployment, which will continue for the
foreseeable future. The prolonged effects of generating losses without
additional funding would be a restriction on our ability to pursue our business
strategy.
If we cannot achieve profitability from operations or alternative
funding sources, we may not be able to meet:
- our capital expenditure needs;
- our debt service obligations; or
- our working capital needs.
PROVIDING SERVICES TO CUSTOMERS WITH CRITICAL WEB SITES AND WEB-BASED
APPLICATIONS COULD POTENTIALLY EXPOSE US TO LAWSUITS FOR CUSTOMERS' LOST PROFITS
OR OTHER DAMAGES.
Because our web hosting and applications services are critical to many
of our customers' businesses, any significant interruption in our services
could result in lost profits or other indirect or consequential damages to our
customers. Although the standard terms and conditions of our customer contracts
disclaim our liability for any such damages, a customer could still bring a
lawsuit against us claiming lost profits or other consequential damages as the
result of a service interruption or other web site or web application problems
that the customer may ascribe to us. There can be no assurance that a court
would enforce any limitation on our liability, and the outcome of any lawsuit
would depend on the specific facts of the case and legal and policy
considerations. In some cases we could be liable for substantial damage awards.
These damage awards might exceed our liability insurance by unknown but
significant amounts, which would have an adverse effect on our business.
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IF WE ARE UNABLE TO DEVELOP AND INTEGRATE OUR OPERATIONS SUPPORT SYSTEMS AND
INTERFACE WITH SYSTEMS OF THIRD PARTIES, WE WILL BE UNABLE TO MONITOR COSTS,
BILL CUSTOMERS, PROCESS CUSTOMER ORDERS AND PROVIDE GOOD CUSTOMER SERVICE.
We are developing and implementing our operational and support
systems, purchasing products and services offered by third party vendors and
integrating those products and services to produce efficient operational
solutions. If we are unable to identify our information and processing needs or
develop, integrate, maintain and upgrade our systems, these systems may not
perform as expected. In addition, our systems must interface with those of
third parties, such as BellSouth and other third parties, to exchange
information critical for ordering and provisioning our services to our
customers. We cannot assure you that these systems will be successfully
implemented on a timely basis, if at all, or that once implemented, they will
perform as expected. Risks to our business associated with our systems include:
- failure by these third party vendors to deliver their
products and services in a timely and effective manner and at
acceptable costs;
- our failure to identify all of our information and processing
needs;
- failure of our related processing or information systems to
function properly;
- failure to integrate new products or services effectively; or
- failure of the operations support systems of BellSouth and
other third parties to adequately exchange information with
our systems.
In addition, our right to use these systems is dependent upon license
agreements with third party vendors. Some of these agreements may be canceled
by the vendor and the cancelation or nonrenewal of these agreements may
interrupt our service until we find suitable alternative vendors.
OUR RELIANCE ON BELLSOUTH'S AND OTHER TRADITIONAL TELEPHONE COMPANIES'
FACILITIES AND INTERCONNECTIONS COULD ADVERSELY EFFECT OUR BUSINESS.
Our ability to deliver our services successfully requires
interconnection agreements with BellSouth and other traditional telephone
companies which are subject to federal and state regulation. These companies
are our competitors and currently dominate the provision of telecommunication
services in our markets. Federal legislation regulating the telecommunications
industry has enhanced competition in the local services market by requiring
traditional local telephone companies to provide access to their networks
through interconnection agreements and to offer unbundled elements of their
network and retail services at prescribed rates to other telecommunications
carriers, such as us. However, we still must negotiate required interconnection
agreements, including colocation provisions, or continue or renew existing
lease, interconnection and/or colocation arrangements provisions on terms
favorable to us. Otherwise, we could experience interruptions in service and,
in turn, customer dissatisfaction and the loss of existing and potential
customers. We cannot assure you that we will be able to negotiate such
arrangements on favorable terms or at all. If we are unable to renew our
interconnection agreements, or if the terms of these interconnection agreements
are not favorable to us, it could also have an adverse effect on our business.
We are and will continue to be dependent on traditional telephone
companies to assure uninterrupted service and competitive services. Blocked
calls, delays and problems in installing service result in customer
dissatisfaction and risk the loss of business. Many new carriers have
experienced difficulties in working with the traditional telephone companies
with respect to ordering, interconnecting, leasing premises and implementing
systems to order and receive unbundled network elements and wholesale services.
Furthermore, the rules governing which unbundled network elements the
traditional local telephone companies must provide and the cost methodology for
providing these elements are currently under Federal Communications Commission
and judicial review. If we are unable to obtain the cooperation of a
traditional telephone company, our ability to offer local services would be
adversely effected.
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We must use copper telephone lines controlled by BellSouth, or other
traditional telephone companies providing services in our target markets, to
provide connections to customers, including DSL. We also depend on the
traditional telephone company in each market for colocation, a substantial
portion of the transmission facilities used to connect our equipment in
traditional telephone companies' central offices to our network, and testing
and maintaining the quality of copper lines. Traditional telephone companies
may not provide timely cooperation because we are competitors. If this occurs,
we may not have alternate means of connecting our DSL and other equipment with
copper lines and/or connecting our equipment in central offices to our
switching centers, which could materially affect our business and operations.
Furthermore, we cannot assure you that we will be able to obtain copper
telephone lines and services we require from traditional telephone companies on
a timely basis or at quality levels, prices, terms and conditions satisfactory
to us. Delays in obtaining access to colocation space and telephone lines or
the rejection of our applications for colocation could result in delays in, and
increased expenses associated with, the implementation of our business
strategy.
Our ability to provide DSL-based and other services to potential
customers depends on the quality, physical condition, availability and
maintenance of telephone lines within the control of the traditional telephone
companies. DSL technology may not operate as expected on traditional telephone
companies' networks and may interfere with or be affected by other transport
technologies. All transport technologies using copper telephone lines have the
potential to interfere with, or to be interfered with by, other traffic on
adjacent copper telephone lines. This interference could degrade the
performance of our services or make us unable to provide service on selected
lines. We may be unable to negotiate successfully interference resolution
procedures with traditional telephone companies. Interference could adversely
affect the speed of deployment, our reputation and customer service, which
could cause us to lose our customers and have an adverse effect on our
business.
OUR DEPENDENCE ON THIRD PARTY VENDORS FOR EQUIPMENT, LEASED TRANSPORT
FACILITIES AND OTHER SERVICES MAY ADVERSELY AFFECT OUR BUSINESS.
Our network design strategy contemplates our owning and operating our
own switches but initially leasing a substantial portion of our transport
facilities, or network lines, from third parties. Currently, we use leased
facilities for a vast majority of our transport requirements. Although we have
begun to selectively acquire our own fiber transport capacity, we expect, for
the foreseeable future, to continue to lease a substantial portion of our
transport capacity from other carriers, many of which are competitors in our
service territories.
We currently purchase all of our equipment from a number of vendors
and outsource a significant portion of the installation and field service of
our networks to third parties, principally Nortel.
We currently lease a majority of our long haul transport facilities
from one carrier. Although we believe that adequate alternative sources of
transport facilities exist, if this carrier's facilities become unavailable,
our business could be disrupted. In addition, although we believe we have
protection against unexpected increases in the costs of our leased transport
facilities, an unexpected material increase in these costs could have an
adverse effect on our results. We also have minimum volume commitments, and our
failure to meet them may obligate us to pay underutilization changes.
We have entered into agreements with Nortel and other vendors to help
install our broadband network. We also have arrangements with Nortel to monitor
our network until we have installed our own network operations center. Any
failure or inability by these vendors to perform these functions in a timely
manner could cause significant delays and costs in providing services to our
existing and prospective customers and deploying our network in our target
markets. Any such failure could materially and adversely affect our business,
prospects, operating results and financial condition.
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We are also dependent on third-party supplies for substantial amounts
of fiber, conduit, computers, software, switches, routers and related
components that we use to expand and upgrade our network. If any of these
relationships is terminated or a supplier fails to provide reliable services or
equipment, and we are unable to reach suitable alternative arrangements quickly
or on favorable terms, we may experience significant delays and additional
costs. If that happens, it could have an adverse effect on us.
Our reliance on third party vendors involves a number of risks,
including the absence of guaranteed capacity and reduced control over delivery
schedules, quality assurance, production yields and costs. Any reduction or
interruption of supply or service could disrupt our business.
FAILURE TO MAINTAIN AND ADAPT OUR NETWORK COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS.
Our success will depend upon the capacity, reliability and security of
our network. Our failure to maintain and expand our network infrastructure on a
timely basis or adapt it to either changing customer requirements or evolving
industry standards could have a material adverse effect on our business,
prospects, operating results and financial condition. Because we expect that a
substantial portion of our future revenues will be derived from providing
tailored applications and services to our customers, we must continue to expand
and adapt our network infrastructure as the number of end users and the amount
of information they wish to transfer increase and as customer requirements
change. If end user demand evolves to favor higher downstream transmission
speeds than those we currently offer, we cannot be sure that we will be able to
expand or adapt our network infrastructure to meet this additional demand or
our customers' changing requirements on a timely basis, at a commercially
reasonable cost or at all.
OUR FAILURE TO EFFECTIVELY MANAGE THE RISKS RELATED TO THE PROVISION OF
INTERNET SERVICES COULD HARM OUR BUSINESS.
In addition to our telephone and data service product offerings, we
act as an Internet service provider to our customers. The Internet is comprised
of many Internet service providers that operate their own networks and
interconnect with each other at various peering points. We are in the process
of developing relationships to permit us to exchange traffic with these
providers. We cannot assure you that we will be able to expand or adapt our
network infrastructure to meet the current requirements for Internet service
providers or any new requirements on a timely basis, at a commercially
reasonable cost, or at all. In addition, we cannot guarantee that other
national Internet service providers will maintain these types of relationships
with us.
The law in the United States relating to the liability of Internet
service providers for information carried on, disseminated through or hosted on
their systems is currently unsettled. Exposure to such liability could require
us to expend substantial resources or discontinue certain product or service
offerings. In addition, increased attention to liability issues, as a result of
lawsuits, legislation and legislative proposals, could adversely affect the
growth of Internet use and, in turn, our business and results of operations.
CLAIMS AGAINST US ALLEGING OUR INFRINGEMENT OF A THIRD PARTY'S INTELLECTUAL
PROPERTY COULD ADVERSELY AFFECT OUR BUSINESS.
We rely on a combination of licenses, confidentiality agreements and
other contracts to establish and protect our intellectual property rights. The
steps we have taken may be inadequate to protect our technology or other
intellectual property. Third parties may assert infringement claims against us
and, in the event of an unfavorable ruling on any claim, we may be unable to
obtain a license or similar agreement to use intellectual property we rely upon
to conduct our business. In addition, these claims may divert management's
attention away from the business and be costly to defend.
We have applied for service marks on certain terms and symbols that we
believe are important for our business. We also rely on unpatented trade
secrets and know-how to maintain our competitive positions,
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which we seek to protect, in part, by confidentiality agreements with
employees, consultants and others. However, these agreements may be breached or
terminated, and we may not have adequate remedies for any breach. In addition,
our competitors may otherwise learn or discover our trade secrets. We currently
have no patents or patent applications pending.
Many of our management and other personnel were previously employees
of other telecommunications companies. In many cases these individuals conduct
activities for us similar to those they conducted prior to joining us. These
employees could be subject to allegations of violations of trade secrets,
non-compete or confidentiality agreements or other similar claims.
THE TELECOMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGES, AND
OUR FAILURE TO KEEP UP WITH THESE CHANGES COULD IMPEDE OUR ABILITY TO ATTRACT
NEW CUSTOMERS AND CAUSE US TO LOSE EXISTING CUSTOMERS.
The telecommunications industry is subject to rapid and significant
changes in technology, customer requirements and preferences. Our failure to
keep up with these changes could impede our ability to attract new customers
and cause us to lose existing customers. New technologies could reduce the
competitiveness of our network by reducing the cost or increasing the supply of
services that compete with those we plan to offer. One result may be that our
most significant future competitors may be new entrants into the communications
services industry.
The high-speed data communications industry is in the early stages of
development and is subject to rapid and significant technological change.
Because the industry is new and technologies available for high-speed data
communications services are rapidly evolving, the services we provide our
customers will need to change over time. Many providers of high-speed data
communication services are testing products from numerous suppliers for various
applications, and these suppliers have not broadly adopted an industry
standard. In addition, various industry groups are in the process of trying to
establish standards, which could limit the types of available technologies.
Certain critical issues concerning commercial use of DSL technology for
Internet access, including security, reliability, ease and cost of access and
quality of service, remain unresolved and may impact the growth of these
services.
IF WE ARE UNABLE TO RETAIN AND HIRE OUR KEY PERSONNEL, WE MAY NOT BE ABLE TO
SUCCESSFULLY ACHIEVE OUR OBJECTIVES.
Our future success depends on the performance of our key personnel and
of our senior management team in executing our business strategy, including the
continued services of our chief executive officer and chief operating officer.
Several members of our management have joined us very recently, and if they are
unable to integrate themselves into our business or work together as a
management team, our business will suffer. Our future success also depends in
large part on our ability to identify, attract, motivate and retain skilled and
qualified management personnel. Competition for qualified employees and
personnel in the telecommunications industry is intense, and there is a limited
number of persons with knowledge of and expertise in the industry. We cannot
assure you that we will be able to hire or retain necessary personnel in the
future. Loss of services of key personnel or our inability to attract
additional qualified personnel could adversely affect our business.
WE FACE RISKS INVOLVING ACQUIRED BUSINESSES, POTENTIAL ACQUISITIONS AND THE
DEVELOPMENT OF STRATEGIC ALLIANCES OR INVESTMENTS NEEDED TO COMPLEMENT OUR
EXISTING BUSINESS.
One of our business strategies contemplates growth through strategic
acquisitions. There can be no assurance that we will be able to successfully
compete with other bidders for targeted acquisitions. Our ability to finance
acquisitions may be constrained by our degree of leverage. In addition, our
credit facilities may significantly limit our ability to enter into strategic
alliances or acquisitions and to incur related indebtedness.
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Furthermore, the evaluation of potential acquisition targets may divert
management's time and resources away from current operations. The inability to
complete strategic acquisitions may have a negative impact on our planned
growth and expansion to additional markets. Integrating acquired businesses
into our operations can be difficult and require much of management's time and
attention. We cannot assure you that:
- we will be able to identify suitable targets in the future;
- we will be able to successfully integrate the network,
operations, personnel, products, technologies and financial
and other systems of the acquired businesses into our
operations;
- we will not encounter unexpected difficulties in entering
markets where we have little or no prior experience;
- we will be able to successfully enhance our customer support
resources to adequately service our existing customers and
the customers of the acquired businesses; or
- the integration of acquired businesses into our business will
not be more expensive or take longer than anticipated.
OUR FAILURE AND THE FAILURE OF OUR SUPPLIERS TO ADEQUATELY ADDRESS YEAR 2000
PROBLEMS COULD NEGATIVELY IMPACT OUR BUSINESS AND CAUSE US TO LOSE CUSTOMERS.
We have experienced no Year 2000 issues to date and we are not aware
of any material issues for our suppliers. However, we are continuing to
evaluate and determine whether our significant suppliers are in compliance or
have appropriate plans to remedy Year 2000 issues when their systems interact
with our systems. There can be no assurance that our systems or the systems of
other companies on which we rely are Year 2000 compliant, that another
company's failure to successfully convert, or that another company's conversion
to a system incompatible with our systems, would not have an adverse impact on
our operations.
OUR BUSINESS WILL SUFFER IF INTERNET USAGE DOES NOT CONTINUE TO INCREASE THE
DEMAND FOR OUR SERVICES OR IF THE INTERNET FAILS TO PERFORM RELIABLY CAUSING
OUR QUALITY OF SERVICE TO DECREASE.
Use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners has recently
begun to increase rapidly. The adoption of the Internet for information
retrieval and exchange, commerce and communications, particularly by those
enterprises that have historically relied upon alternative means of information
gathering, commerce and communications, generally requires the adoption of a
new medium of conducting business and exchanging information. If the Internet
as a commercial or business medium fails to develop further or develops more
slowly than expected, our business could be materially adversely affected.
Our success depends in large part on continued growth in the use of
the Internet which causes an increase in the demand for our services. We would
be adversely affected if Internet usage does not continue to grow. Internet
usage and growth may be inhibited for a number of reasons, such as:
- inadequate network infrastructure;
- security concerns;
- uncertainty of legal and regulatory issues concerning the use
of the Internet;
- inconsistent quality of service;
- lack of availability of cost-effective, reliable, high-speed
service; and
- failure of Internet usage to expand internationally.
If Internet usage grows, the Internet infrastructure may not be able
to support the demands placed on it by this growth, or its performance and
reliability may decline. For example, web sites have experienced interruptions
in service as a result of outages and other delays occurring throughout the
Internet network
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infrastructure. If these outages or delays occur frequently, use of the
Internet as a commercial or business medium could grow more slowly or decline
in the future, which would harm our business.
RISKS RELATED TO THIS OFFERING
INTENSE COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY MAY NEGATIVELY AFFECT
THE NUMBER OF OUR CUSTOMERS AND THE PRICING OF OUR SERVICES.
The telecommunications industry is highly competitive, and one of the
primary purposes of the Telecommunications Act is to foster further
competition. In each of our markets, we compete principally with BellSouth or
the traditional telephone company serving that market. It is likely that we
will also face competition from other communications providers, and competitive
local exchange carriers, cable companies, cellular carriers, interexchange
carriers, DSL providers and many other competitors. We currently do not have a
significant market share in any of our markets. BellSouth and other traditional
telephone companies have long-standing relationships with their customers,
financial, technical and marketing resources, including brand name recognition,
substantially greater than ours and the potential to fund competitive services
with cash flows from a variety of businesses. Additionally, they currently
benefit from existing regulations that favor the traditional telephone
companies over competitors. Furthermore, the regional Bell operating companies
recently have been granted, under particular conditions, pricing flexibility
from federal regulators with regard to some services with which we compete.
This may present BellSouth with an opportunity to subsidize services that
compete with our services and offer competitive services at lower prices.We
also expect to experience declining prices and increasing price competition. We
cannot assure you that we will be able to achieve or maintain adequate market
share or margins, or compete effectively, in any of our markets. Any of the
foregoing factors could have an adverse effect on us.
WE ARE SUBJECT TO SIGNIFICANT REGULATION THAT COULD CHANGE IN A MANNER ADVERSE
TO US.
Telecommunications services are subject to significant regulation at
the federal, state and local levels. The following factors may have an adverse
effect on us:
- delays in receiving required regulatory approvals or onerous
conditions imposed on these approvals;
- difficulties completing interconnection agreements with
traditional telephone companies; or
- the enactment of new and adverse federal and/or state
legislation or regulatory requirements or changes in the
interpretation of existing legislations and/or changes in
regulatory requirements.
Recent federal legislation governing the U.S. telecommunications
industry remains subject to judicial review and additional FCC rule-making. As
a result, we cannot predict the legislation's effect on our future operations
or results. Many regulatory actions regarding important items that impact us
are underway or are being contemplated by federal and state authorities.
Changes in current or future regulations adopted by federal, state or local
regulators, or other legislative or judicial initiatives relating to the
telecommunications industry, could have a material adverse effect on us.
Unlike some of our competitors, particularly the traditional telephone
companies, we are not currently subject to some of the burdensome regulations
imposed by federal legislation. Our ability to compete in the local exchange
market will depend upon a continued favorable, pro-competitive regulatory
environment, and could be adversely affected by new regulations or legislation
affording greater flexibility and regulatory relief to our competitors.
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In August 1998, the FCC requested comments on new rules that would
allow traditional telephone companies to provide their own DSL services through
a separate affiliate free from traditional regulation. The provision of DSL
services by a traditional telephone company affiliate not subject to
traditional regulation could have a material adverse effect on us.
We are currently required to publicly file with governmental
authorities our tariffs describing the prices we charge our customers and the
terms and conditions for some intrastate, interstate and international
services. Challenges to these tariffs by regulators or third parties could
cause us to incur substantial legal and administrative expenses.
Federal and state regulatory agencies also have the right to impose
sanctions and forfeitures, mandate refunds or impose other penalties for
regulatory non-compliance.
RISKS RELATED TO THIS OFFERING
THERE MAY BE A LACK OF A TRADING MARKET FOR OUR COMMON STOCK.
Our common stock has not been traded in the public market before this
offering. We cannot be sure that an active public market for our common stock
will develop or continue after this offering. Investors may not be able to sell
their common stock at or above our initial public offering price or at all.
Prices for our common stock will be determined in the marketplace and may be
influenced by many factors, including variations in our financial results,
changes in financial estimates or recommendations by industry research
analysts, investors' perceptions of us and our industry, announcements by us or
our competitors, future sales of our stock and general economic, industry and
market conditions. The trading price of our common stock is likely to be
volatile. The stock market has experienced extreme volatility and this
volatility has often been unrelated to the operating performance of particular
companies.
FUTURE SALES OF OUR COMMON STOCK MAY LOWER OUR STOCK PRICE.
If our existing stockholders and optionholders sell a large number of
shares of our common stock, the market price of our common stock could decline
significantly. The perception in the public market that these holders might
sell shares of common stock could alone depress our market price. Immediately
after this offering, approximately shares of our common stock will be
outstanding. The shares included in this offering will be available for
immediate resale in the public market. The remaining shares, or % of our total
outstanding shares, will become available for resale in the public market as
shown on the chart below, subject to performance by the stock. Although of
those shares are subject to lock-up agreements restricting their sale for 90,
135 or 180 days from the date of this prospectus, the underwriters may waive
this restriction at any time. For a more thorough discussion of shares that
will become available, see "Shares Eligible for Future Sale."
ADDITIONAL SHARES AVAILABLE FOR RESALE DATE OF FIRST AVAILABILITY
-------------------------------------- --------------------------
90 days after the date of this prospectus
subject, in some cases, to price and
volume limitations
135 days after the date of this prospectus
subject, in some cases, to price and
volume limitations
180 days after the date of this prospectus
subject, in some cases, to price and
volume limitations
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INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF $ PER SHARE
IN THE BOOK VALUE OF THEIR INVESTMENT.
If you purchase shares of our common stock at the public offering
price, you will experience immediate dilution of $ per share because the
price that you pay will be substantially greater than the net tangible book
value per share of the shares you acquire. This dilution is due in large part
to the fact that our earlier investors paid substantially less than the initial
public offering price when they purchased their shares and because we have
experienced significant operating losses. You will experience additional
dilution upon the exercise of outstanding stock options and warrants to
purchase common stock. For a more thorough discussion of dilution, see
"Dilution."
OUR CERTIFICATE OF INCORPORATION CONTAINS CERTAIN PROVISIONS THAT COULD DELAY
OR IMPEDE A CHANGE OF CONTROL AND THEREFORE COULD HAVE A NEGATIVE IMPACT ON OUR
STOCKHOLDERS.
Provisions of our certificate of incorporation and Delaware law could
make it more difficult for a third party to acquire us, even if doing so would
be a benefit to our stockholders. For a more thorough discussion of our
certificate of incorporation and Delaware law, see "Description of Capital
Stock."
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FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this prospectus. These
forward-looking statements include but are not limited to statements about our
plans, objectives, expectations, intentions, assumptions and other statements
that are not historical facts. Some of the forward-looking statements can be
identified by the use of words such as "believes," "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "estimates" or
"anticipates" or the negative of those words or other comparable terminology.
Forward-looking statements involve risks and uncertainties. These statements are
based on management's current views and assumptions and involve known and
unknown risks and uncertainties that could cause actual results, performance or
events to differ materially from those expressed or implied in those statements,
including:
- the rate of expansion of our network and our customer base;
- highly competitive market conditions;
- changes in or developments under laws, regulations, licensing
requirements or telecommunications standards;
- changes in the availability of colocation and transmission
facilities;
- changes in retail or wholesale communications rates;
- changes in technology;
- the loss of the services of key officers; and
- general economic conditions.
For a discussion of these, and of additional factors that could cause
actual results to differ, please see the preceding discussion under "Risk
Factors" contained in this prospectus. The forward-looking statements made in
this prospectus relate only to events as of the date on which the statements are
made.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $
million from the sale of our common stock in this offering, based upon the
midpoint of the filing range and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses of $ million
payable by us. If the underwriters' over-allotment option is exercised in full,
we estimate that such net proceeds would be approximately $ . See
"Underwriting."
We intend to use the net proceeds from this offering:
- for capital expenditures relating to the planned expansion of
our network;
- to fund operating losses during the rollout of services in new
markets; and
- for working capital and other general corporate purposes.
We may also use a portion of the net proceeds from this offering and
borrowings under our senior credit facility to acquire complementary businesses
or enter into strategic alliances, although we have no material specific
understandings, commitments or agreements to do so at this time.
Because of the number and variability of factors that may determine our
use of the net proceeds of this offering, our management will retain a
significant amount of discretion over the application of the net proceeds. The
actual net proceeds could also vary substantially from our current plans due to
market conditions.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock
and do not anticipate paying cash dividends in the foreseeable future. We
currently intend to retain all future earnings, if any, for use in the operation
of our business and to fund future growth.
Future dividends, if any, will be determined by our board of directors
and will depend upon our results of operations, financial condition and capital
expenditure plans, as well as other factors that our board of directors
considers relevant. Our senior credit facility and Nortel credit facility
currently limit the payment of dividends and future financing agreements are
likely to contain similar restrictions.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31,
1999 on an actual basis and as adjusted to give effect to:
- the issuance of Series C preferred stock in February and March
2000 for which we received total net proceeds of $67.1 million;
- the automatic conversion of Series A, B and C preferred stock into
shares of common stock and the issuance of shares of
common stock in payment of dividends accrued on the Series A, B
and C preferred stock through the closing of this offering; and
- our receipt of net proceeds from the sale of shares of common
stock in this offering at an assumed initial public offering price
of $ per share, after deducting estimated underwriting
discounts and commissions and offering expenses.
This table should be read in conjunction with our consolidated
financial statements, notes to those statements, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Use of Proceeds"
included elsewhere in this prospectus.
AS OF DECEMBER 31, 1999
-------------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
Cash, cash equivalents and investments .......................... $ 17,928 $
======== ========
Long-term debt (excluding current portion of capital
lease obligations):
Term loan ................................................... $ 17,100 $ 17,100
Other ....................................................... 1,100 1,100
-------- --------
Total long-term debt ........................................ 18,200 18,200
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; no shares
issued and outstanding (as adjusted).................... 12,685 --
Series B 5.5% cumulative convertible preferred stock,
$.01 par value; 14,133,329 shares authorized;
13,866,662 shares issued and outstanding (actual);
no shares issued and outstanding (as adjusted).......... 53,094 --
Stockholders' deficit:
Common stock, $0.001 par value, 100,000,000 shares
authorized; 11,147,920 shares issued and outstanding,
(actual)................................................ 11
Additional paid-in capital ............................. 7,466
Accumulated deficit .................................... (38,427) (38,427)
Treasury stock ......................................... (208) (208)
-------- --------
Total stockholders' deficit .............................. (31,158)
-------- --------
Total capitalization ........................... $ 52,821 $
======== ========
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DILUTION
Our net tangible book value as of December 31, 1999 was approximately
$31,341,991 million, or $0.69 per share of common stock after giving effect to
the issuance of Series C preferred stock in February and March 2000. Net
tangible book value per common share is equal to total tangible assets less
total liabilities, divided by the number of shares of common stock outstanding,
assuming the conversion of all shares of preferred stock into common stock.
After giving effect to this offering and after deducting estimated underwriting
discounts and commissions and estimated expenses payable by us, our net tangible
book value as of December 31, 1999 would have been approximately $ million, or $
per share of common stock. This represents an immediate increase in net tangible
book value of $ per share of common stock to existing stockholders and an
immediate dilution in net tangible book value of $ per share of common stock to
new stockholders purchasing our common stock in this offering. The following
table illustrates this per share dilution as of December 31, 1999:
Assumed initial public offering price per share........................ $
--------
Net tangible book value per share at December 31, 1999................. $0.69
Increase in net tangible book value per share attributable to new
stockholders...........................................................
-----
Pro forma net tangible book value per share after this offering........
--------
Dilution per share to new stockholders................................. $
========
The following table summarizes on a pro forma basis as of December 31,
1999 after giving effect to the conversion of all outstanding shares of our
preferred stock and accrued dividends thereunder into an aggregate of 34,354,806
shares of common stock at the closing of this offering:
- the number of shares of our common stock purchased by existing
stockholders, the total consideration and the average price
per share paid to us for these shares;
- the number of shares of our common stock purchased by new
stockholders, the total consideration and the price per share
paid for these shares, valuing them at the midpoint of the
filing range; and
- the percentage of shares of our common stock purchased by the
existing stockholders and new stockholders and the percentage
of consideration paid to us for these shares.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
--------------------------- --------------------------- PER SHARE
NUMBER PERCENT AMOUNT PERCENT -------------
Existing stockholders............... 45,502,726 $139,205,389.60 $3.06
% %
New stockholders....................
---------- --------------- -------
Total.......................... % %
========== ========== =============== =======
The table above assumes that none of the stock options or warrants
outstanding upon the closing of this offering will be exercised, which at
December 31, 1999 include:
- 5,276,707 shares of common stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of
$2.68 per share; and
- 1,084,649 shares of common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of
$2.05 per share.
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If any of these stock options or warrants are exercised, there will be
further dilution to new investors. If all of these stock options and warrants
are exercised, the number of shares held by new investors will be reduced to
% of the shares purchased, for which new investors will have paid %
of the total consideration for shares purchased. Based on our pro forma net
tangible book value as of December 31, 1999 described above and giving effect to
the exercise of all of these stock options and warrants, the dilution per share
to new investors would be $ .
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data
for the periods indicated. The consolidated statement of operations data 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 the consolidated balance
sheet data as of December 31, 1998 and 1999 have been derived from our
consolidated financial statements included elsewhere in this prospectus, which
have been audited by KPMG LLP, independent public accountants, as indicated in
their report included elsewhere in this prospectus.
You should read the selected consolidated financial data set forth
below in conjunction with our consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
The as adjusted balance sheet data gives effect to the following as if
each had taken place on December 31, 1999:
- the issuance of Series C preferred stock in February and March
2000 for which we received total net proceeds of $67.1 million;
- the automatic conversion of Series A, B and C preferred stock into
shares of common stock and the issuance of shares of
common stock in payment of dividends accrued on the Series A, B
and C preferred stock through the closing of this offering; and
- our receipt of net proceeds from the sale of shares of common
stock in this offering at an assumed initial public offering price
of $ per share, after deducting estimated underwriting
discounts and commissions and offering expenses.
EBITDA, shown above under "Other Financial Data," consists of net loss
before extraordinary item, excluding net interest, taxes, depreciation and
amortization and noncash compensation expense. We have provided EBITDA because
it is a measure of financial performance commonly used for comparing companies
in the telecommunications industry in terms of operating performance, leverage
and ability to incur and service debt. EBITDA provides an alternative measure of
cash flow from operations as determined under generally accepted accounting
principles. You should not consider it as a substitute for operating loss, as an
indicator of our operating performance nor as an alternative to cash flows from
operating activities as a measure of liquidity. We may calculate EBITDA
differently from other companies. For further information, see our consolidated
financial statements and related notes included elsewhere in this prospectus.
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PERIOD FROM
OCTOBER 29
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------- ---------------------------------
1997 1998 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues .............................................. $ -- $ 5,261 $ 25,037
Cost of services ...................................... -- 3,802 17,704
Operating expenses:
Selling, general and administrative ............... 40 12,166 23,523
Provision for uncollectible accounts .............. -- 1,976 7,285
Depreciation and amortization ..................... -- 151 1,318
---------- ---------- ----------
Total operating expenses ...................... 40 14,292 32,126
Operating loss ........................................ (40) (12,833) (24,793)
Interest income ....................................... -- 123 816
Interest expense ...................................... (13) (1,469)
---------- ---------- ----------
Loss before extraordinary item ........................ (40) (12,723) (25,446)
========== ========== ==========
Extraordinary item - early extinguishment of
debt .................................................. -- -- (218)
Net loss .............................................. (40) (12,723) (25,664)
Preferred stock accretion ............................. 0 (58) (2,603)
---------- ---------- ----------
Net loss to common stockholders ....................... $ (40) $ (12,781) $ (28,267)
========== ========== ==========
Net loss per common share (basic
and diluted) ...................................... $ (.01) $ (1.37) $ (2.60)
========== ========== ==========
Shares used in computing net loss per share
weighted average common shares outstanding
6,390,476 9,308,771 10,868,729
OTHER FINANCIAL DATA:
Net cash used in operating activities ................. $ (56) $ (11,072) $ (19,956)
Net cash used in investing activities ................. -- (1,465) (38,764)
Net cash provided by financing activities ............. 110 13,883 72,558
Capital expenditures .................................. -- 1,465 34,966
EBITDA ................................................ (40) (12,683) (23,475)
AS OF DECEMBER 31, 1999
---------------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments......................................... $17,928 $
Working capital................................................................ 5,485
Net property and equipment..................................................... 44,057 44,057
Total assets................................................................... 67,277
Long-term debt................................................................. 18,200 18,200
Redeemable preferred stock..................................................... 65,780 --
Stockholders' deficit.......................................................... (31,158)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the "Selected
Consolidated Financial and Operating Data" and our consolidated financial
statements and notes thereto contained elsewhere in this prospectus.
Overview
From our inception in October 1997, through April 1999, our 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 our resold
services. This check (when cashed) served as authorization for transferring the
service from their existing telecommunications service providers to us. In March
1999, we changed our 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
our prepaid business we discontinued marketing our resale voice services, and
began to implement our new business strategy. To implement our new strategy, we
began to acquire a significant number of BellSouth central office colocations,
deploy data switches, build data centers, develop electronic operational support
systems and acquire data management expertise through the acquisition of
Internet-related companies.
Our historical financial statements reflect our financial and operating
performance under our former business strategy and do not reflect our new
business strategy of deploying our own network and data centers and focusing our
marketing on small and medium-sized businesses located in the southeastern
United States.
We expect our revenues from our original resale services to decline to
immaterial amounts over the next two years. We anticipate that in the future,
the majority of our revenues will come from the sale of our Broadband Bundle.
The Broadband Bundle is sold for a single price based on the customer selected
bandwidth capacity and number of access lines. We will also continue to sell
prepaid local telephone services, primarily through local check cashing
businesses. We expect this business to continue, but not to grow.
To date, we have experienced significant operating losses and negative
cash flow, substantially from our resale business. Under our new business
strategy, we do not anticipate achieving positive cash flow in any of our target
markets during the initial development, construction and expansion of our
telecommunications services until we establish a sufficient revenue-generating
customer base. We estimate that it will take approximately 24 months before a
typical target market becomes cash flow positive. As a result, we expect to
experience significant operating losses and negative cash flow as we expand
operations into our initial 36 markets.
Our business plan provides for six DMS switch sites and 33 ATM switch
sites to cover our initial 36 markets. Fixed costs associated with the buildout
of a particular market include:
- securing collocation facilities. We anticipate fixed costs of a
collocation facility will be approximately $390,000. This includes
non-recurring initial set up fees payable to BellSouth and the
costs associated with the switching and ancillary equipment
located there, not including a small ATM switch, which would cost
approximately $50,000.
- purchasing necessary voice and data switching equipment. Switch
costs associated with DMS switch sites are approximately $4.5
million and include approximately $3.5 million for the cost of a
Nortel DMS 100/500 switch and the related equipment. An ATM switch
site costs approximately $1.5 million, which includes $750,000 for
the cost of the switch and related equipment.
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- leasehold improvements to switch sites. These costs are
approximately $1.0 million for Nortel DMS 100/500 switches and
$750,000 for ATM switches.
We acquire local telephone services on a wholesale basis from BellSouth
and other traditional telephone companies, both for our resale and prepaid
businesses. To provide our Broadband Bundle, we have interconnection agreements
with BellSouth for our network and our colocation facilities. Except for some
initial nonrecurring charges, we pay for these facilities on a monthly basis. We
also have agreements with a long haul telecommunications provider, to provide us
with long distance services both for our resale business and Broadband Bundle
service offering. We are charged for long distance services as used. We also
have the indefeasible right to use the lit fiber to connect our switches with
the same provider, for which we paid $14 million in March 2000. We will amortize
this cost over the 20-year life of the contract. We will also pay monthly
maintenance charges related to this indefeasible right of use.
To accelerate our new business strategy, we have acquired four data
communications and Internet companies in two of our target markets whose
customers we hope to migrate to our Broadband Bundle:
- 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);
- DCS, Inc., a Greenville, South Carolina data integrator and
equipment provider (acquired in July 1999 for a total purchase
price of $1.0 million, including assumption of debt);
- 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, including assumption of debt); and
- 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).
While there were no significant revenues from these Internet and
equipment services in 1999, we expect to have revenue in future periods from
these businesses.
FACTORS AFFECTING RESULTS OF OPERATIONS
REVENUES
Our revenues through the end of 1999 consisted primarily of revenues
from the resale of local and long distance voice services to residential
customers, and to a lesser extent from prepaid local telephone services. There
were no revenues in this period from the sale of our Broadband Bundle or our
data center services. Through the end of 1999, our 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
- small amounts of cabling equipment revenues from the local
area and wide area network equipment business of DCS.
In the future, we expect to continue to receive revenue from these sources,
although revenues associated with our residential resale business will decline
substantially.
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With the change in our business strategy, we expect to generate most of
our future revenues from sales of our Broadband Bundle to small and medium-sized
businesses. We expect the increasing portion of our revenues will come from:
- our Broadband Bundle product, which includes high-speed Internet
access using DSL connections, website 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;
- rental of space for customer servers at our data centers;
- compensation for termination of calls of other providers to our
customers over our network; and
- installation, equipment sale and cabling services.
COST OF SERVICES
The cost of services for our residential resale business consists
primarily of the purchase of wholesale local telephone services from BellSouth,
and the purchase of wholesale long distance services from a long haul
telecommunications provider.
As we deploy our network and begin selling our Broadband Bundle, we
will incur additional costs of services, primarily for:
- the lease of transport and customer connections;
- the costs of the indefeasible right to use;
- operating costs, such as rent and personnel costs, associated with
our colocation facilities, data centers and our own switching
sites; and
- payments to other carriers to terminate our customers' calls on
their networks.
We lease lines from the traditional telephone company in each market to
connect our customers with our colocation and switching facilities. We also
lease transmission lines from other communications companies, including
traditional telephone companies, to connect our switching and colocation
facilities.
We have an agreement with a long haul telecommunication provider for
the resale and transport of long distance services on a per minute basis which
contains minimum volume commitments. In the event we fail to meet our minimum
volume commitments, we may be obligated to pay under-utilization charges.
Similarly, in the event we underestimate our need for transmission capacity, we
may be required to obtain capacity through more expensive means. Transmission
capacity costs will increase as our customers' long distance calling volume
increases, and we expect these costs to be a significant portion of our cost of
long distance services.
We expect switch site lease costs and colocation costs to be a
significant part of our ongoing cost of services. Traditional telephone
companies typically charge both a start-up fee and a monthly recurring fee for
use of their central offices for colocation. Our primary expense associated with
providing Internet access to our customers is the cost of interconnecting our
network with a national Internet service provider.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative expenses include selling and
marketing costs, billing, corporate administration, human resources and network
maintenance.
For our residential resale business, we incurred costs associated with
our direct mailing and direct marketing agency commissions. We will no longer
incur these costs since we are no longer marketing these services. The incentive
checks used to solicit our residential customer resale business were recognized
as a
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marketing expense as service was initiated and will no longer be incurred
in the future. For our remaining resale customers and our new businesses, we
will continue to incur costs associated with provisioning, customer care,
information technology, regulatory and facilities rental costs.
For our Broadband Bundle services we will incur additional selling,
general and administrative costs related to:
- our direct sales force, as well as commissions for our
independent sales agents;
- increased provisioning, customer care, information technology
and other personnel costs;
- our new network engineering department;
- outsourcing reciprocal compensation and access billings;
- increased general administrative overhead; and
- advertising and public relations.
We expect our selling and marketing costs to increase significantly as
we expand our operations. We will employ a large direct sales force in most
markets we enter with our Broadband Bundle. To attract and retain a highly
qualified sales force, we are offering our sales personnel a compensation
package emphasizing base salaries, commissions and stock options. In addition to
our direct sales force, we expect to make significant use of independent sales
agents in each of our markets to sell our broadband products. Our sales agents
are compensated with monthly residual payments based upon the monthly billings
of customers they service.
We are 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. We
also expect billing costs to increase as the number of our customers and call
volume increase.
We expect that other costs and expenses, including the costs associated
with the maintenance of our network, administrative overhead and office leases,
will grow significantly as we expand our operations, and that administrative
overhead will be a large portion of these expenses during the development phase
of our business. However, we expect these expenses to decrease as a percentage
of our revenue as we build our customer base.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
Our provision for uncollectible accounts, particularly in 1999,
reflected the poor credit quality of our residential resale customers. Our
direct mail solicitation offered local and long distance services at a discount
from BellSouth's rates. Therefore, it attracted a number of consumers who were
poor credit risks and about whom we had no credit information. In addition, due
to the lag time between the transfer of billing information from BellSouth to
us, many of our 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. We believe that our 1999 provision
for uncollectible accounts has adequately reflected these problems, and that our
remaining residential resale business will not require unusual uncollectible
provisions in future periods.
DEPRECIATION AND AMORTIZATION
Our depreciation and amortization expense includes depreciation of
switch related equipment and equipment colocated in BellSouth's central offices,
network infrastructure equipment, information systems, furniture and fixtures
and amortization of initial non-recurring charges from BellSouth for our
colocation
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facilities. It also includes, for a portion of 1999, amortization of goodwill in
connection with our 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. We expect our depreciation and
amortization expense to increase as we continue to make capital expenditures and
consummate acquisitions which are accounted for using the purchase method of
accounting.
INCOME TAXES
We have not generated any taxable income to date and do not expect to
generate taxable income in the next few years. Our 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, we have not recorded a net deferred tax asset relating to these
net operating loss carryforwards.
RESULTS OF OPERATIONS
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 growth in sales to
existing residential customers and the addition of new 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 our 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 we were 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 our initial residential
customers and to billing delays described under the heading "Factors Affecting
Results of Operations--Provision for Uncollectible Accounts."
DEPRECIATION AND AMORTIZATION
Our 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
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amortization of goodwill related to two acquisitions during 1999 for a portion
that year, plus depreciation for a full 12 months for equipment acquired in
1998.
INTEREST INCOME
Interest income was earned from the temporary investment of proceeds
from the sale of our preferred stock in investment grade securities.
INTEREST EXPENSE
Interest expense was $1.5 million for 1999 compared to $13,000 in 1998,
and was primarily interest on debt issued to finance purchases of network
equipment and interest on the Series 1999 Subordinated Notes.
INCEPTION THROUGH DECEMBER 31, 1997
During the period from our inception at October 29, 1997 through the
end of 1997, we were in the development stage of operations and did not generate
any revenue. Our 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 of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The development of our Boadband 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.
Our principal capital expenditure requirements will include:
- the purchase and installation of switches; and
- the development and integration of operations support systems.
To fund our business strategy, we expect to use a combination of stock, debt and
funds from operations.
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EQUITY AND PREFERRED FINANCING
Our equity and preferred financing has consisted of approximately $137
million provided by our institutional investors and management. Of this amount,
approximately $130 million was for our preferred stock, including $67 million
received in February and March 2000. The remainder was for our common stock.
CREDIT FACILITIES
In January 2000, we entered into a senior credit facility with a group
of commercial banks which permits us to borrow up to $120 million, subject to
various conditions, through December 31, 2007. The senior credit facility is
comprised of an $80 million term loan facility and a $40 million revolving
credit facility. Any borrowings under the term loan facility must be completed
by December 31, 2000. Under the revolving credit facility, $20 million will not
be available unless specified financial results are achieved for the third
quarter of 2000. As of March 31, 2000, $25 million is outstanding under the term
loan facility and no amount is outstanding under the revolving credit facility.
This senior credit facility is described in greater detail in "Description of
Our Indebtedness."
We also have a credit facility with Nortel under which we may borrow up
to $45 million by March 31, 2001, subject to various conditions. Repayments of
principal will begin after March 31, 2001. As of March 31, 2000, no amount is
outstanding under the Nortel credit facility. The Nortel credit facility is
described in greater detail in "Description of Our Indebtedness."
CASH FLOWS
We have incurred significant operating and net losses since our
inception. We expect to experience increasing operating losses and negative cash
flow as we expand our operations and build our customer base. As of December 31,
1999, we had an accumulated deficit of $38.4 million. Net cash used in operating
activities was $11.1 million for 1998 and $20.0 million 1999. The net cash used
for operating activities during 1999 was primarily due to net losses.
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 our preferred stock, $17.8 million from
a term loan and warrants and $10.5 million from private placements of notes and
warrants.
CAPITAL REQUIREMENTS
Net cash used in investing activities was $1.5 million for 1998 and
$38.8 million for 1999. Capital expenditures were $35.0 million, and cash paid
for acquisitions amounted to $1.1 million, for 1999. Capital expenditures were
$1.5 million for 1998. We expect that our capital expenditures will be
substantially higher in future periods in connection with the purchase of
equipment necessary for the development and expansion of our network, the
development of new markets and potential acquisitions and strategic alliances.
At December 31, 1999, we had purchased approximately $25 million of
Nortel switching equipment and services under a total current commitment of
approximately $100 million. In March 2000, we purchased an indefeasible right of
use from a long haul telecommunications provider for $14 million.
To expand and develop our business, we will need a significant amount
of cash. We estimate that our current business plan, including future capital
expenditures, operating losses associated with the roll out of our network in
our initial 36 target markets by December 31, 2001 and working capital needs,
will require
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approximately $436 million, to the point when we anticipate these markets will
become cash flow positive. Upon completion of this offering, we will have
pre-funded approximately 70% of these capital requirements with:
- cash on hand;
- borrowing capacity under our credit facilities; and
- anticipated cash provided by operations.
The actual amount and timing of our future capital requirements may
differ materially from our estimates as a result of the demand for our services
and regulatory, technological and competitive developments, including additional
market developments and new opportunities in the industry and other factors. We
may also require additional financing in order to take advantage of
unanticipated opportunities, to effect acquisitions of businesses, to develop
new services or to otherwise respond to changing business conditions or
unanticipated competitive pressures. Sources of additional financing may include
commercial bank borrowings, vendor financing and the private or public sale of
equity or debt securities. Our ability to obtain additional financing is
uncertain. We cannot assure you that we will be able to raise sufficient debt or
equity capital on terms that we consider acceptable, if at all. If we are unable
to obtain adequate funds on acceptable terms, our ability to deploy and operate
our network, fund our future expansion plans or respond to competitive pressures
would be significantly impaired.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999, the carrying value of our debt obligations was
$17.2 million and of our capital lease obligations was $1.4 million. The
weighted average interest rate on our debt obligations at December 31, 1999 was
10.95%. Because the interest rates on our senior credit facility are at floating
rates, we are exposed to interest rate risks. If market interest rates had been
1% higher in 1999 our interest expenses for that year would have been increased
by $ .
We have not, in the past, used financial instruments in any material
respect as hedges against financial and currency risks or for trading. However,
as we expand our operations, we 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. We do not intend
to use derivative financial instruments for speculative purposes. Interest rate
swap agreements would be used to reduce our exposure to risks associated with
interest rate fluctuations and are required by our credit facility. In March
2000 we entered into an interest rate swap agreement with a $60 million notional
amount related to our borrowings under our credit agreement. By their nature,
these instruments involve risk, including the risk of nonperformance by
counterparties, and our maximum potential loss may exceed the amount recognized
in our balance sheet. We would attempt to control our exposure to counterparty
credit risk through monitoring procedures and by entering into multiple
contracts.
YEAR 2000
While we have not experienced any Year 2000 problems to date and are
not aware of any material issues for our suppliers, we are continuing to
evaluate and determine whether our significant suppliers are in compliance or
have appropriate plans to remedy any Year 2000 issues that have not been
discovered. We cannot assure you that another company's failure to successfully
convert to a Year 2000 compliant system, or that another company's conversion to
a system incompatible with our systems, would not have a material adverse impact
on our operations.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement,
as subsequently amended, is effective on a prospective basis for interim periods
and fiscal years beginning January 1, 2001. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging securities.
To the extent we enter into any such transactions in the future, we will adopt
the statement's disclosure requirements in the financial statements for the year
ending December 31, 2001.
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. We do not
believe that our adoption of this bulletin will have a material impact on our
consolidated financial position or results of operations.
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BUSINESS
We are a broadband telecommunications company offering automated web
design and web hosting, high-speed data and voice services. Our goal is to
become the leading single-source, web-based communications company serving small
and medium-sized businesses in the southeastern United States. Our principal
product is our Broadband Bundle, which provides automated web design and web
hosting, high-speed data and Internet access using digital subscriber line, or
DSL, technology 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. We believe we are the only company providing this
all-inclusive bundle in our markets. Our Broadband Bundle has been designed to
increase customer loyalty and provide a cost-effective, web-based communications
solution to our target customers. To complement our Broadband Bundle, we will
offer carrier grade data centers for dedicated web hosting and bandwidth
connectivity in 33 of our 36 target markets by the end of 2001. We also offer
network and data integration services, such as dedicated server colocation, 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 our Broadband Bundle, we offer our proprietary web
architecture service, TrieWeb, that enables our customers to design and maintain
their own websites using our template-driven web design Internet application.
Our 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 our
customer care representatives. Our Broadband Bundle also includes high-speed
Internet connectivity through our DSL services, unlimited local service and 100
minutes of free long distance usage per line, as well as web hosting. We believe
this affordable, scalable solution enables our small and medium-sized business
customers to take advantage of web related and connectivity services more
typically utilized by larger companies. Since we began offering the Broadband
Bundle in January 2000, approximately 90% of our new customers have entered into
at least one-year contracts for service. At March 31, 2000, approximately 50% of
our Broadband Bundled customers had three-year contracts. We also intend to
release the second version of TrieWeb in third quarter 2000, which will allow
customers to develop e-commerce applications and conduct transactions using
their websites.
We currently offer our products and services in six markets across
South Carolina, North Carolina and Georgia. We intend to serve an additional 18
markets throughout nine southeastern states by the end of 2000, and a total of
36 markets by the end of 2001. We expect our total network footprint to cover
more than 70% of BellSouth's business access line market, encompassing 5.4
million business access lines. We believe our network will ultimately cover over
90% of the business access lines in our target markets.
We believe the number and size of our colocations positions us with the
broadest colocation footprint in the BellSouth region. Our scale and unified
network design of converged voice and data services allow us to accommodate
future access line growth in our target markets both rapidly and
cost-effectively. At March 31, 2000, we had:
- secured 256 central office colocation facilities representing
approximately 50,000 square feet of caged-in space and passing
over 10 million access lines;
- installed voice and data equipment in 82 of these colocation
facilities, with 47 others under construction; and
- deployed three asynchronous transfer mode, or ATM, switches,
2,400 route miles of lit fiber optic capacity, three Nortel
voice-switching platforms and unified colocation facilities.
Our network is designed to include six voice switches complemented by
33 ATM switches. Our network design supports our Broadband Bundle, combining
data and voice service to our customers. We currently have three voice switches
installed and expect to install three more by the end of 2000 which will
complete the voice switch deployment necessary to cover all of our currently
planned markets. We anticipate in the future migrating to the soft switch
platform by Nortel called Succession Network, which is designed to
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be compatible with our current network. Our colocation facilities are connected
using redundant routes to our ATM switches which then transmit the data to one
of our host switches. We believe this method of network deployment allows us to
build our target markets faster, use less capital and reduce ongoing circuit
costs.
We believe the Succession Network design, once implemented, will
enhance the functionality and efficiencies of our existing voice and data
switches by allowing us to:
- effectively switch voice and data traffic on our ATM network;
- extend our network to reach additional customers;
- lower our transmission costs; and
- reduce capital expenditures.
We intend to construct data centers in substantially all of our markets
to house our ATM switches and provide dedicated and shared web hosting services
to our customers. Because many of the traditional data service providers have
targeted only the largest cities in the Southeast, we believe the market for
data centers in small and medium-sized cities in this region is currently
underserved. We expect to house our data centers in 1,500 to 5,000 square foot
facilities connected directly to our ATM switch. These carrier-grade data
centers include auxiliary battery and diesel power restoration, fire
suppression, security clearance and access to customers' workstations. Our data
centers provide access to our Internet backbone, allowing us to provide a
complete solution that includes web hosting and high-speed Internet connections.
We believe we will be first to market this service in many of our target
markets.
In most of our target markets, we expect to have a locally based sales
force led by a sales manager and a team of six to 40 account executives
responsible for customer acquisition and retention in their markets. To support
our local sales force we employ:
- a centralized and local staff that include service order
coordinators, client development representatives and technical
consultants;
- a support staff that maintains competitive pricing
information, designs proposals and assists in post-sales
account management.
As of March 31, 2000, our sales and sales support staff consisted of 70
persons. We also intend to use third-party agents to enhance the reach of our
direct sales force. We currently have developed strong relationships with voice
and data equipment distributors located throughout the southeastern region of
the United States, including those affiliated with Teleco, Inc., a nationwide
distributor of telecommunications equipment.
Our management team is led by Charles S. Houser, our 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., or CTG, 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;
- chief operating officer of SouthernNet, Inc., a
facilities-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, CTG, Tel/Man, Teleco and was chairman of the
Telecommunications Resellers Association and presently serves on the board of
directors of Ibasis.
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BUSINESS STRATEGY
We have been pursuing our current business strategy since February
1999. Prior to that time, our business strategy was to resell to residential
customers local and long distance voice services. With the exception of our
prepaid business, we discontinued marketing resold residential service in April
1999 and expect this business to decline over the next two years.
Our current business strategy is to become the leading single-source,
web-based communications company serving small and medium-sized businesses in
the southeastern United States. To achieve this goal, we have developed the
following business strategy:
OFFER A COMPLETE, BUNDLED BROADBAND INTERNET COMMUNICATIONS SOLUTION
Our Broadband Bundle is a complete Internet and communications solution
utilizing DSL technology. Our services include automated web 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 our bundled package, we become, in effect,
their Internet and telecommunications manager. We believe that bundling services
in this manner allows our customers to receive a high level of service and
enables us to leverage our sales force to generate higher revenues per account
executive. We believe we are the only company in our region that provides a
single bundle of DSL, automated web design and web hosting, and telephone
services to its customers.
An important component of our Broadband Bundle is our proprietary web
design software, TrieWeb, which allows a customer to design and maintain a fully
functional website integrated with our DSL and telephone services. Our service
allows small businesses that have not had the expertise or financial resources
to develop websites to take advantage of growing Internet and e-commerce
opportunities. We believe that no other telephone or DSL company in our target
markets offers services comparable to TrieWeb, which we believe will allow us to
differentiate ourselves from our competitors.
TARGET SMALL AND MEDIUM-SIZED BUSINESSES IN THE SOUTHEASTERN UNITED
STATES
We target small and medium-sized businesses in the southeastern United
States that we believe have been underserved by the traditional telephone
companies. In particular, we attempt to sell our services to businesses that
cannot afford to maintain a communications staff, but that have increasingly
complex telecommunications and Internet needs. When targeting these businesses,
we offer our customers a high bandwidth, a fixed price and a flexible
communications solution. With our Broadband Bundle, we believe we are able to
provide all of the services a typical small and medium-sized business needs to
have a presence on the worldwide web.
CAPITALIZE ON FIRST MOVER ADVANTAGE IN BUNDLED SERVICES AND DATA
CENTERS
We have typically been the first communications service provider in our
target markets to offer a full suite of data and telecommunications services as
a single bundle. This bundle includes automated web design and web hosting,
high-speed data and Internet access using digital subscriber line, or DSL,
technology and local and long distance voice services. We believe we will
maintain our first mover advantage by continuing to offer product innovations.
For example, we intend to release the second version of our TrieWeb in third
quarter 2000, which will allow customers to develop e-commerce applications and
conduct transactions using their websites. As a result of our first mover
advantage, we believe we will be able to capture larger portions of our target
markets before our competitors can provide comparable services.
We also believe we have a first-mover advantage by providing
carrier-grade data center space in many of the markets we serve. These
carrier-grade data centers include auxiliary battery and diesel power
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restoration, fire suppression, security clearance and access to customers'
workstations. We will provide our customers with either dedicated or shared data
service and broadband connections. Our data centers provide access to our
Internet backbone allowing us to provide a complete solution that includes web
hosting and high-speed Internet connectivity.
LEVERAGE PROVEN DISTRIBUTION CHANNELS
We use both a direct sales force and authorized agents to distribute
our products and services. We believe that the key to our success will be
finding direct sales people and authorized agents with strong community
relationships and technical backgrounds.
In most markets, we 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. Our consultative approach
allows our sales force to work with new and existing customers to analyze their
needs and optimally configure the services each customer receives to ensure we
deliver superior customer care. Our sales staff is assisted by a support staff
that maintains competitive pricing information, develops proposals and assists
in post sales account management.
We believe authorized agents serve as an exceptional distribution
channel and will complement our direct sales force marketing efforts due to
their expertise in telephone and data-related products and their existing
customer bases. A number of our executives were former members of the senior
management team of CTG, a company that we believe successfully utilized
authorized agents such as equipment vendors, consultants and systems integrators
to sell its telecommunications services. We expect to target these agents
formerly associated with CTG to sell our Broadband Bundle.
CAPITALIZE ON OUR COLOCATION FOOTPRINT
We believe the number and size of our colocations will allow us to
accommodate future access line growth in our target markets both rapidly and
cost-effectively. With 256 central office colocation facilities representing
approximately 50,000 square feet of caged-in space and passing over 10 million
access lines, we believe we have the broadest colocation footprint for converged
voice and data services in the BellSouth region.
Within each colocation facility we have deployed, or are deploying
integrated voice and data switches to provide simultaneous voice and DSL
service. We believe this provides us significant competitive advantages over
competitors that deploy only voice or data. By designing our colocations in this
manner, we are able to allocate the overhead costs associated with deploying
colocations across multiple products and revenue streams. This unified
colocation architecture can be extended to support emerging applications as
customer requirements dictate.
IMPLEMENT SCALABLE AND INTEGRATED BACK OFFICE SYSTEMS
We are committed to having an efficient and scalable back office
system. We are developing an integrated strategy for our operations support
systems and other back-office systems that we believe will implement
state-of-the-art technologies and will provide superior customer service and
significant competitive advantages in terms of accuracy, efficiency, and
capacity to process large order volumes. In December 1999, we initiated our back
office system by installing the Metasolv operational support system and the
Daleen billing system. These systems, which are integrated and readily
expandable, will enable us to reduce our operating costs and shorten our
provisioning times by minimizing data entries and the potential for errors. We
are also attempting to achieve electronic bonding with BellSouth's and other
carriers' customer support and local service request systems.
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LEVERAGE MANAGEMENT EXPERIENCE
We have assembled a strong management team with communications, network
design, web hosting and applications, operations and sales expertise. In
addition, we intend to strengthen our competitive position in the southeastern
region by hiring management with strong operating experience and local ties to
the communities we serve. Our board and its advisors also includes industry
veterans with significant telecommunications expertise who will continue to help
us in the development of products and services necessary to meet the
telecommunications requirements of our customers. Our 14 top executives and
board members have an average of 18 years of telecommunications experience.
ACCELERATE GROWTH AND EXPAND PRODUCT OFFERINGS THROUGH ACQUISITIONS
We intend to seek acquisitions of Internet and related
telecommunications companies to accelerate our market penetration and growth. We
also seek to acquire companies that offer products and services that complement
our current offerings and can be integrated into our existing operations and
networks, as well as those that will provide us with additional skilled
management and sales personnel.
RECENT ACQUISITIONS
To accelerate our business strategy, we have acquired several companies
with a customer base to which we believe we can successfully market our
Broadband Bundle including:
- In March 1999, we 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, we acquired DCS, Inc., a data integrator and
equipment provider headquartered in Greenville, South
Carolina.
- In February 2000, we 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, we 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 March 2000, we entered into a letter of intent to acquire NetMCR,
Inc., a Greensboro, North Carolina based Internet service provider. NetMCR
serves approximately 2,800 businesses and consumers in the greater Greensboro,
North Carolina market. Although we cannot assure you that we will close this
acquisition, we expect to do so in the near future. We currently have no
definitive understandings relating to any other acquisitions.
MARKET OPPORTUNITY
We provide a broad range of services that include automated web design
and web hosting, high-speed data and voice services. We believe markets for
these services are growing rapidly, which will allow us to grow our business
quickly and expand the number of products and services that we offer our
customers.
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OVERALL MARKET SIZE AND GROWTH
According to IDC, the overall market of unswitched data and voice
traffic is estimated to have generated a total of $212.8 billion in revenues in
1998 and is expected to grow to $252.2 billion by 2002. IDC estimates the number
of switched network access lines is expected to grow from 187.5 million lines in
1998 to 232.6 million lines by 2002. IDC also estimates competitive local
exchange carrier market share by revenue will grow from 2.6% in 1998 to 5.6% by
2002. Due to this rapid growth, estimates of data and Internet services revenue
are not as well established as those relating to traditional voice traffic
communications. However, we believe that a significant market opportunity exists
for providers of data and Internet services.
We believe that the rapid opening of the local market to competition,
accelerated growth rates in local traffic related to increases in Internet
access, and the desire for "one-stop shopping" by small and medium-sized
businesses and consumers, present an opportunity for new entrants to achieve
product differentiation and significant penetration into this growing market.
Success in this environment will depend primarily on speed-to-market, marketing
creativity and a new entrant's ability to provide competitively priced services
rapidly, and to issue concise, accurate integrated billing statements.
GROWTH AND EMERGENCE OF OUTSOURCED DATA SYSTEMS
We believe many small and medium-sized businesses lack the resources to
administer increasingly complex data networking systems. Outsourced solutions,
such as those we offer, allow these businesses to reduce costs and to focus
resources on their core business activities. We estimate, based on industry
sources, that spending in the United States on distributed networking, network
services and applications will grow from $54.2 billion in 1998 to $173.0 billion
in 2002.
GROWING MARKET DEMAND FOR HIGH-SPEED DIGITAL COMMUNICATIONS BANDWIDTH
According to public documents filed by BellSouth, the fastest growing
area in its underlying network is data and data-related access lines and
services. BellSouth's growth rates for the following services provide evidence
of the market opportunity:
1998 PERCENT GROWTH
ACCESS LINE ---------------------------------------
SERVICE EQUIVALENTS 1997 VS. 1998 1996 VS. 1997
Basic Rate ISDN........................... 175,000 34.3% 53.4%
Primary Rate ISDN......................... 458,000 103.9 49.0
DS-1...................................... 4,090,000 27.6 168.6
DS-3...................................... 6,646,000 48.1 59.5
We believe these growth rates are attributable to the growth in data
traffic being transmitted over the BellSouth network. We believe this data is
consistent with growth rates for data services on a national basis.
High-speed data and Internet connectivity has become increasingly
important to small and medium-sized businesses due to the growth in Internet
usage and e-commerce. According to IDC, the number of Internet users worldwide
is estimated to have reached approximately 86.6 million in 1997 and is
forecasted to grow at a 36% compounded annual growth rate to approximately 398.6
million by 2002. IDC also estimates that the value of goods and services sold
worldwide through the Internet will increase from $15.4 billion in 1997 to over
$733.6 billion in 2002. The popularity of the Internet with consumers and
e-commerce applications has stimulated businesses to establish web sites and
corporate intranets and extranets to expand their client reach and improve their
communications efficiency. High-speed digital connections are also
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becoming increasingly important to businesses and consumers as higher bandwidth
information and applications become available on the Internet. Growing use of
the Internet is also creating an increased demand for web design, web hosting
and data centers. Due to the increasingly complex nature of these services, our
customers have increasingly looked to outsource their service requirements to
emerging communications service providers like us.
DSL MARKET DEMAND
According to IDC, total DSL revenue is expected to increase in the U.S.
from $14.5 million in 1998 to $5.7 billion in 2003, for a 229% compounded annual
growth rate. By 2003, IDC estimates there will be 12.6 million DSL connections,
up from approximately 100,000 DSL connections in 1998.
FAVORABLE REGULATORY ENVIRONMENT
Until February 1996, the competitive local telecommunications industry
generally has been limited to providing interstate dedicated access, interstate
switched access and private line services, accounting for only approximately
one-fourth of the total local services market. The Telecommunications Act of
1996 established a legal framework that encourages the utilization of
traditional telephone company infrastructure to compete with those carriers. The
Telecommunications Act mandates that traditional telephone companies allow
competitors to lease telephone lines on a line-by-line basis, provide space in
their central offices for competitors' equipment to connect to the leased lines,
provide access to backbone fiber networks and provide access to operations
support systems to permit competitors to access customer databases. Under the
Telecommunications Act, in order to be able to offer long distance services in
their local service area, traditional telephone companies must demonstrate to
the satisfaction of state public utilities commissions that they have permitted
competitive access to their local telephone networks. Although DSL technology
predated the Telecommunications Act, by opening the local telephone loop to
competition, the Telecommunications Act made it possible for competitive
carriers focused on high-speed data communications to integrate their equipment
and service offerings with the public switched telephone network. However,
regulatory changes may also increase the competition with our services.
PRODUCTS AND SERVICES
Through our Broadband Bundle, we offer a complete package of
communications services, including automated web design and web hosting,
high-speed data and Internet access using digital subscriber line, or DSL,
technology 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 free long distance usage per telephone line.
BUNDLED SERVICES
Our current bundled package of broadband Internet communications
services includes the following:
Digital Subscriber Line - Through our unified colocation facilities we
provide DSL services at speeds up to one megabyte per second primarily through
Nortel's 1-Meg Modem. We provide simultaneous voice and DSL service over a
single unbundled network element. We also intend to offer voice-over-DSL
services through our relationship with Nortel and Jetstream Communications, Inc.
Web Page Design - Our proprietary web architecture software system,
TrieWeb, allows our customers to produce template-driven web pages. Our
customers have unlimited use of TrieWeb through our control panel function that
enables them to access their web site 24 hours a day to maintain and update
information, such as adding e-mail accounts or inserting new product offerings.
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Web Hosting - We provide web hosting services for all customers that
sign up for the Broadband Bundle. We provide each customer with up to 24
megabytes of storage for their website. Customers have the ability to utilize
more storage capacity for an additional fee through our control panel in
TrieWeb.
Local Exchange Telephone Services - We provide local exchange telephone
service and the ancillary services typically provided by traditional telephone
companies, such as call waiting, caller ID and hunting.
Long Distance Telephone Service - We provide 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, we provide each customer with 100 minutes of long distance service
per month. Customers who exceed the basic bundle are billed for overage on a
per-minute basis.
We offer our services on a bundled basis where our customers pay a
fixed price, based on the number of access lines and desired access speed, for
all of our services whether the customer takes one or all of the services
offered. The following is a sample monthly pricing matrix currently in effect
for our Greenville, South Carolina, market:
NUMBER OF ACCESS LINES
--------------------------------------------------------------------
ACCESS SPEED 1 6 12 18 24
160 kilobytes $ 195 $ 420 $ 690 $ 960 $1,230
320 kilobytes 285 510 780 1,050 1,320
640 kilobytes 375 600 870 1,140 1,410
1 megabyte 465 690 960 1,230 1,500
OTHER SERVICES
Web Hosting Services - We offer a full range of web and managed server
web hosting services in geographically dispersed and environmentally and
technologically controlled carrier grade data facilities with both redundant
power and Internet access. Our web hosting includes vertical rack space, cabinet
units, security cage on NT and UNIX platforms with guaranteed bandwidth.
Network Equipment - We also provide 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 their
DSL service with current or new local area networks.
Cabling Services - We also provide inside wiring services to customers
on a custom basis, including cable drops, telephone drops and other wire-based
installation services.
PLANNED SERVICES
We intend to maintain a leading position in developing Internet and web
based services for our customers. We plan to release new versions of our
software that will permit greater utilization of the Internet. These services
will revolve around customer content, delivered over our high-speed platforms,
as well as scalable e-commerce initiatives for product transactions through
TrieWeb.
Web Page e-commerce - We plan to release the second version of TriEWeb
in the second quarter of 2000. This version will have a catalogue feature
allowing our customers to develop a catalogue of their products and services. We
also expect to release version 3.0 of TriEWeb in the third quarter of 2000 that
will incorporate with our catalogue feature a new e-commerce initiative that
includes credit card processing and shopping cart functions.
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Broadband Internet Portal - We plan to release a custom Internet portal
application with broadband capabilities, including video streaming. This
application will include local news, sports and weather, along with access to
online pay-per-view events.
Remote Local Area Network Access Services - We believe 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. We
intend to pursue opportunities to provide DSL services to equip employees of
targeted businesses with the ability to work at home and in other remote
locations through remote local area network access.
Virtual Private Network Services - We intend to combine our DSL and
dedicated T-1 access services with our virtual private network equipment to
provide clients with high-speed and secure connections to their corporate local
area network and the Internet. We believe this product will enable our customers
to have a flexible, cost-effective solution that supports both telecommuters and
site-to-site connections. Our virtual private network services will provide our
clients with the convenience of an always-on connection and the high-speed and
performance of DSL technology.
SALES AND MARKETING
We use both a direct sales force and authorized agents to distribute
our products and services. We believe that the key to our success will be our
ability to hire a direct sales force and authorized agents with strong community
relationships and technical backgrounds. We also believe that our chief
executive officer brings valuable relationships and contacts in our southeastern
region, and within the telecommunications and systems integration industries,
which will allow us more easily to gain access to customers in these markets.
In most markets we 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 our 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 all customers in
those markets. To support our sales force we have a central staff that includes
service order coordinators, client development representatives and technical
consultants. Our 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 our internal sales staff at March 31, 2000,
our agent sales force consisted of 29 authorized agents.
Our authorized agents include interconnect dealers and data
integrators. We provide our agents with a training program and marketing
literature to help our agents become familiar with our bundles offering. Agents
typically sell our services into their existing customer bases using our brand
name. We provide the sales support, proposals, customer care, billing and
collections functions. Agents are compensated with monthly residual commissions,
based entirely on production. We intend to capitalize on prior relationships,
and utilize many of the agents formerly associated with CTG to sell our
services. CTG (where a number of our executives were previously employed)
achieved $100 million in revenues in approximately five years largely through
utilizing authorized agents, such as telecommunications equipment vendors,
consultants and systems integrators, to sell its services.
We believe that our bundle of services allows us to leverage our sales
force to produce higher revenue production because a single individual is able
to sell the multiple services. As we increase the number and square footage of
our colocation facilities, we intend to increase our sales and support staff
accordingly.
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PROJECTED AT
AT DECEMBER 31, AT MARCH 31, DECEMBER 31,
SALES STAFF 1999 2000 2000
--------------- --------------- ---------------
Account executives 15 38 230
Sales managers 2 8 30
Regional managers 0 4 10
Agent account managers 1 4 20
Sales support 6 13 70
Vice President of Sales 1 3 3
--------------- --------------- ---------------
Total 25 70 363
=============== =============== ===============
Our Target Markets
We are targeting our sales and marketing efforts to cover 36 of the
largest markets in the southeastern United States. We presently serve six
markets with the Broadband Bundle and are scheduled to serve an additional 18
markets by the end of 2000. We expect to develop all additional 12 markets by
the end of 2001.
The following tables show our current operational and planned markets,
the number of colocation facilities we are planning to secure and build, and the
approximate number of addressable access lines:
OPERATIONAL MARKETS --Markets in which we currently offer the Broadband
Bundle:
ESTIMATED DATA CENTERS
ESTIMATED TOTAL INSTALLED PLANNED ---------------------
ADDRESSABLE ADDRESSABLE COLOCATION COLOCATION INITIAL ESTIMATED OPENING
MARKET BUSINESS LINES ACCESS LINES FACILITIES FACILITIES SERVICE DATE SQ. FEET DATE
- ------ -------------- ------------ ---------- ---------- ------------
Greenville, SC 79,489 201,255 7 7 1st Qtr. 00 1,500 2nd Qtr. 00
Spartanburg, SC 52,993 134,170 2 3 1st Qtr. 00 -- --
Atlanta, GA 824,586 1,656,506 10 29 1st Qtr. 00 1,000 2nd Qtr. 00
Greensboro, NC 90,630 204,116 6 6 1st Qtr. 00 1,500 2nd Qtr. 00
Burlington, NC 40,280 90,718 2 2 1st Qtr. 00 -- --
Winston-Salem, NC 70,490 158,757 3 3 1st Qtr. 00 -- --
MARKETS UNDER CONSTRUCTION - Markets where we are currently installing
equipment to offer the Broadband Bundle:
ESTIMATED DATA CENTERS
ESTIMATED TOTAL INSTALLED PLANNED -----------------------
ADDRESSABLE ADDRESSABLE COLOCATION COLOCATION INITIAL ESTIMATED OPENING
MARKET BUSINESS LINES ACCESS LINES FACILITIES FACILITIES SERVICE DATE SQ. FEET DATE
- ------ -------------- ------------ ---------- ---------- ------------
- -
Wilmington, NC 40,709 97,920 2 3 2nd Qtr. 00 1,500 2nd Qtr. 00
Miami/Ft.
Lauderdale, FL 907,891 2,365,430 15 29 2nd Qtr. 00 1,500 2nd Qtr. 00
Charlotte, NC 221,469 504,291 11 11 3rd Qtr. 00 1,500 3rd Qtr. 00
Raleigh, NC 163,889 379,134 -- 12 3rd Qtr. 00 2,500 3rd Qtr. 00
Nashville, TN 210,500 499,833 8 13 3rd Qtr. 00 2,500 3rd Qtr. 00
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MARKETS IN DEVELOPMENT -- Markets where we have secured colocation
space and are currently constructing or planning construction of switching
facilities to offer the Broadband Bundle:
ESTIMATED DATA CENTERS
ESTIMATED TOTAL PLANNED ----------------------
ADDRESSABLE ADDRESSABLE COLOCATION PLANNED ESTIMATED OPENING
MARKET BUSINESS LINES ACCESS LINES FACILITIES SERVICE DATE SQ. FEET DATE
------ -------------- ------------ ---------- ------------
Columbia, SC 93,471 203,624 5 3rd Qtr. 00 2,500 3rd Qtr. 00
Knoxville, TN 95,831 281,136 5 3rd Qtr. 00 2,500 3rd Qtr. 00
Charleston, SC 94,352 262,735 7 3rd Qtr. 00 2,500 3rd Qtr. 00
Asheville, NC 39,766 98,300 2 3rd Qtr. 00 2,500 3rd Qtr. 00
Jackson, MS 137,630 322,088 10 4th Qtr. 00 2,500 4th Qtr. 00
Augusta, GA 61,513 171,453 4 4th Qtr. 00 2,500 4th Qtr. 00
Jacksonville, FL(1) 213,917 590,926 16 4th Qtr. 00 2,500 4th Qtr. 00
Chattanooga, TN 92,992 237,482 5 4th Qtr. 00 2,500 4th Qtr. 00
Memphis, TN 222,231 603,909 11 4th Qtr. 00 2,500 4th Qtr. 00
Louisville, KY 182,620 474,245 12 4th Qtr. 00 2,500 4th Qtr. 00
Columbus, GA 41,252 140,637 3 4th Qtr. 00 2,000 4th Qtr. 00
Macon, GA 45,850 122,389 3 4th Qtr. 00 2,000 4th Qtr. 00
New Orleans, LA 228,924 575,701 13 4th Qtr. 00 2,500 4th Qtr. 00
(1) In Jacksonville, FL, we have installed sixteen colocation facilities.
PLANNED MARKETS -- Markets in which we have either secured or applied
for colocation space and plan to offer the Broadband Bundle:
ESTIMATED DATA CENTERS
ESTIMATED TOTAL PLANNED -------------------------
ADDRESSABLE ADDRESSABLE COLOCATION PLANNED ESTIMATED
MARKET BUSINESS LINES ACCESS LINES FACILITIES SERVICE DATE SQ. FEET OPENING DATE
- ------ -------------- ------------ ---------- ------------
Birmingham, AL 20,248 484,580 15 1st Qtr. 00 2,500 1st Qtr. 01
Savannah, GA 64,910 139,750 3 1st Qtr. 00 2,500 1st Qtr. 01
Mobile, AL 62,767 174,048 5 1st Qtr. 01 2,500 1st Qtr. 01
Huntsville, AL 45,914 138,073 4 1st Qtr. 01 2,500 1st Qtr. 01
Baton Rouge, LA 93,579 233,025 6 1st Qtr. 01 2,500 1st Qtr. 01
Montgomery, AL 57,546 154,704 3 1st Qtr. 01 2,500 1st Qtr. 01
Daytona, Fl 45,306 157,841 4 1st Qtr. 01 2,500 1st Qtr. 01
Lafayette, LA 66,241 172,639 4 1st Qtr. 01 2,500 1st Qtr. 01
Shreveport, LA 101,868 285,339 7 1st Qtr. 01 2,500 1st Qtr. 01
Biloxi-Gulfport, MS 32,613 80,462 4 2nd Qtr. 01 2,500 2nd Qtr. 01
Gainesville, FL 29,685 87,957 1 2nd Qtr. 01 2,500 2nd Qtr. 01
Pensacola, FL 53,357 160,096 5 2nd Qtr. 01 2,500 2nd Qtr. 01
The estimated addressable lines in the above tables are based on
reports filed by BellSouth with the FCC in 1998, increased based on our
assumptions of a 2.5% growth rate per year for residential lines and 10% a year
for business lines.
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NETWORK INFRASTRUCTURE
We anticipate in the future migrating to the soft switch platform by
Nortel called Succession Network, which we expect to be compatible with our
current network.
We are deploying a unified voice and data network that allows us to
provide all services included in the Broadband Bundle. The planned network will
consist of six Nortel DMS 100/500 digital switches that are connected together
through our 2,400 mile fiber optic network that we purchased through a 20-year
indefeasible right of use from a long haul telecommunications service provider
in March 2000. We currently have three of these switches installed and expect to
install the other three by the end of 2000. The six Nortel switches will provide
the primary voice switching functions for all our planned markets throughout the
southeastern United States. We are also deploying asynchronous transfer mode, or
ATM, switches in all our planned primary and secondary markets. We plan to
connect our ATM switches with multiple redundant routes from various long haul
providers such as Global Crossing. The final step in our unified network is to
connect our unified colocation facilities with the ATM switches. This will be
accomplished through the lease of DS-1, DS-3 or OC-3 routes from BellSouth or
alternative fiber optic network providers. These are typically utilized through
a long-term lease arrangement.
Our fiber backbone will be connected to our switching platforms, which
will be connected to our colocation facilities, typically through multiple,
redundant DS-1, DS-3 or OC-3 circuits. Our colocation facilities are typically
secured in caged-in areas which contain primarily voice and data equipment. We
have deployed a unique method in building and designing our colocation
facilities. Our colocation facilities contain both voice and data equipment
instead of either voice or data equipment, independently. We believe these
unified colocation facilities will allow us to drive greater revenue over a
standard copper pair or leased unbundled network element. Currently, we are able
to provide simultaneous voice and data services over a single UNE, thus
significantly increasing the revenue per line in relation to voice only or data
only equipped colocations.
INFORMATION SYSTEMS
We are developing an integrated strategy for our operations support
systems and other back-office systems that we believe will implement
state-of-the-art technologies and will provide superior customer service and
significant competitive advantages in terms of accuracy, efficiency, and
capacity to process large order volumes. If our development is successful, we
expect that our seamless end-to-end back office system will enable us to
synchronize multiple activities such as circuit ordering and updating of
national databases. Upon completion of installation, we expect this system to
allow customer orders to be entered a single time, with the information then
shared between the various components of our systems.
We believe that our 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. Our 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 our
information systems. We utilize the Metasolv operations systems software for
this purpose. Our sales executives will be able to take orders and upload them
via the web to our provisioning representatives who enter the initial customer
information into our Metasolv system. When Metasolv is fully coupled with the
capabilities of our DSET gateways, orders can be submitted to business partners
electronically, thereby minimizing implementation time, coordination
complexities and installation costs.
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In addition to cost benefits associated with electronic installation of
access lines and inventory management system, the Metasolv system should improve
our internal processes in various other ways through its "workflow" management
capabilities. The system routes tasks to the appropriate employee groups, tracks
order progress and is capable of alerting operations personnel of any "jeopardy"
situations. The system is designed to allow sales executives or customer care
coordinators to maintain installation schedules and notify customers of any
potential delays. Once an order has been completed, the Metasolv system
electronically updates our billing system to initiate billing of installed
services.
ELECTRONIC BONDING
Through our DSET and Metasolv software, we are implementing interfaces
with some BellSouth systems for the electronic exchange of order information. We
believe that we are one of the first competitive providers to do so with
BellSouth. While many of our competitors initiate service for a customer by
sending the traditional telephone company a fax or e-mail or by remote data
entry, the electronic interfaces, which we are in the process of implementing,
link our operations support systems directly to BellSouth's system, so that we
can process some types of orders on an automated basis. Additionally, once fully
installed and implemented, we will be able to confirm receipt and installation
of service on-line and in real-time. Due to issues relating to BellSouth's
internal operations support systems, we expect to experience some difficulties
with the electronic interfaces which may require some manual intervention. Other
traditional telephone companies in our region are just beginning to develop
automated interfaces on a limited basis. We anticipate establishing similar
connections with other traditional telephone companies.
We expect to have our operations support system and other back office
systems fully integrated by the third quarter of 2000. The following table lists
the status of each independent portion of our operations support systems:
SYSTEM PURPOSE INSTALLATION DATE INTEGRATION DATE
------ ------- ----------------- ----------------
Metasolv OSS 4th Qtr. 99 1st Qtr. 00
Daleen Billing 4th Qtr. 99 1st Qtr. 00
DSET Gateways 4th Qtr. 99 2nd Qtr. 00
BellSouth CSR Address Validation 1st Qtr. 00 2nd Qtr. 00
BellSouth LSR Local Service Request 1st Qtr. 00 1st Qtr. 00
SCC 911 Data 4th Qtr. 99 2nd Qtr. 00
Global Crossing Long Distance 1st Qtr. 00 2nd Qtr. 00
NPAC Local Number Portability 2nd Qtr. 00 2nd Qtr. 00
Illuminet LIDB/CNAM 1st Qtr. 00 2nd Qtr. 00
Vertex Tax Database 4th Qtr. 99 1st Qtr. 00
BILLING SYSTEM
For billing, we utilize the Daleen BillPlex system, which provides our
customers with a consolidated invoice for all of our 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, we will be adding the capability to provide the invoice and call detail
records in electronic form over the web. The Daleen system will allow us to add
advanced features such as special discounts based on "bundles" of service, call
volume, or number of services used. It will also allow us to calculate complex
local, state and federal taxation and discrete billing options by type of
service ordered.
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CUSTOMER CARE AND TROUBLE MANAGEMENT
Our 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 our 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. We have entered into a service
agreement with Nortel to assist us in the continuous monitoring and operating of
our switch network. The network management system is also designed to anticipate
failures and intervene before many service interruptions or service degradations
occur.
COMPETITION
OVERVIEW
We operate in a highly competitive environment and currently do not
have a significant market share in any of our markets. Most of our actual and
potential competitors have substantially greater financial, technical, marketing
and other resources, including brand name recognition. Further, the continuing
trend toward business alliances in the telecommunications industry, and the
increasingly reduced regulatory and technological barriers to entry in the data
and Internet services markets, could give rise to significant new competition.
We believe that the principal competitive factors affecting our business will be
pricing levels and clear pricing policies, customer service, accurate billing
and a variety of services. Our ability to compete effectively will depend upon
our ability to provide high quality services at prices generally equal to or
below those charged by our competitors. To maintain our competitive posture, we
believe that we must be able to reduce our prices in response to reductions in
rates, if any, by others.
Implementation of the Telecommunications Act and the related trend
towards business combinations and alliances in the telecommunications industry
may create significant new competitors for us. The Telecommunications Act was
designed to eliminate most barriers to local competition and to permit the
traditional local telephone companies, if they demonstrate compliance with
certain pro-competitive conditions, to provide in-region traditional long
distance services.
Our primary competitors in local service markets are the traditional
telephone companies that have long-standing relationships with customers and
regulatory authorities at the federal and state levels. In addition, traditional
telephone companies have existing fiber optic networks and switches. If future
regulatory or court decisions afford traditional telephone companies increased
rates for access or interconnection services, greater pricing flexibility, the
ability to refuse to offer particular services or network elements on an
unbundled basis or other regulatory relief, those decisions could have a
material adverse effect on us. Further, new competitive telecommunication
providers, cable television companies, electric utilities, microwave providers,
wireless telephone system operators and large customers who build private
networks also seek to compete in the local services market.
BELLSOUTH CORPORATION INC.
BellSouth has dominant market share of the local exchange business in
the most of markets where we plan to compete. We believe BellSouth maintains
control over 93% of the business access lines in the central offices where we
colocate our equipment. Because of its dominant presence, we must buy a
significant portion of our underlying network from BellSouth. Some of the
network pieces we purchase or lease from BellSouth include the unbundled network
element, inside wiring and SmartRing services. This significant reliance on our
primary competitor is burdensome and typically time consuming. Although federal
and state laws require BellSouth to provide us equal services, there is no way
to guarantee this will occur.
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BellSouth currently offers digital subscriber line services as well as
Internet services. It is one of the larger competitors in these data oriented
markets as well. We expect BellSouth to compete aggressively to attempt to keep
as much business as possible. BellSouth has significantly more capital,
technological and management resources and poses a competitive threat to our
success.
DATA/INTERNET SERVICES PROVIDERS AND FIXED WIRELESS COMPANIES
Our competitors in our target markets also include Internet service
providers, other telecommunications companies, online services providers and
Internet software providers. In addition, we may face competition from companies
providing DSL services such as Bluestar Communications, and DSL.Net, Inc. The
FCC has authorized cellular, personal communications services and other
providers to offer wireless services to both fixed and mobile locations. These
providers can offer wireless and other services to fixed locations, such as
office and apartment buildings, in direct competition with us. Some of these
competitors such as WinStar Communications, Inc., Teligent, Inc. and Advanced
Radio Telecom, Inc., have already begun connecting high-rise buildings in some
of the largest cities in the United States. Many of these competitors have
greater financial technological and marketing resources than those available to
us.
COMPETITIVE TELECOMMUNICATIONS PROVIDERS
We face competition as well from long distance carriers seeking to
enter the local exchange market such as AT&T and WorldCom, and from resellers of
local exchange services and competitive access providers. We also face
competition from other competitive local exchange carriers with overlap in our
target markets, such as US LEC, Inc., Business Telecom, Inc. and ITC Deltacom,
Inc. Established telephone companies, particularly the regional Bell operating
companies, have established independent competitive local exchange carrier
subsidiaries to compete with their former Bell System cousins in local
competition. AT&T, WorldCom and Sprint have each begun to offer local
telecommunications services in major U.S. markets using their own facilities or
reselling the other providers' services. In addition, the continuing trend
toward consolidation of telecommunications companies, and the formation of
strategic alliances within the telecommunications industry and the development
of new technologies could give rise to significant new competitors. Such
combined entities may provide a bundled package of telecommunications products,
such as local, long distance and Internet telephone, that directly compete with
the products we offer.
OTHER COMPETITORS
Other companies that currently offer, or are capable of offering, local
switched services include: cable television companies, electric utilities,
microwave carriers and large business clients who build private networks. These
entities, upon entering into appropriate interconnection agreements or resale
agreements with traditional telephone companies, could offer single source local
and long distance services like those that we offer. We also expect to
increasingly face competition from companies offering long distance data and
voice services over the Internet. Such companies could enjoy a significant cost
advantage because they do not currently pay carrier access charges or universal
service fees.
SERVICES WHICH COMPETE WITH OUR DSL SERVICES
The traditional telephone companies represent significant competition
as they possess sufficient capital to deploy DSL equipment rapidly, have their
own telephone wires and can bundle digital data services with their existing
analog voice services to achieve economics of scale in serving customers.
Cable modem service providers such as Excite@Home and Road Runner are
deploying high-speed Internet services over cable networks. Where deployed,
these networks provide similar and in some cases higher-speed Internet access
than we provide. However, we believe that cable modem service providers are
faced with slower deployment and greater costs.
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Many competitive telecommunications companies such as NorthPoint
Communications Group, Inc., Rhythms NetConnections Inc. and Bluestar
Communications, Inc. offer high-speed digital services. In addition, long
distance carriers, such as AT&T Corp., Sprint Corporation, WorldCom, Inc. and
Qwest Communications International Inc., have deployed large-scale Internet
access networks, and have high brand recognition. Internet services providers,
such as BellSouth.Net, Inc. and EarthLink Inc. also provide Internet access to
residential and business customers.
On-line service providers, such as AOL, and MSN, a subsidiary of
Microsoft, provide content and applications ranging from news and sports to
consumer video conferencing. Many of these on-line service providers have
developed their own access networks for modem connections. If these on-line
service providers were to extend their access networks to DSL or other
high-speed service technologies, they would become our competitors.
Wireless and satellite data service providers are developing wireless
and satellite-based Internet connectivity. We may face competition to provide
voice, data and videoconferencing services from terrestrial wireless service
providers such as Teligent, Inc., Advanced Radio Telecom Corp. and WinStar
Communications Inc.
Additionally, we also may face competition from satellite-based
systems. Motorola, Inc., Hughes Communications Satellite Services, Inc., a
subsidiary of General Motors Corporation, Teledesic LLC and others have planned
global satellite networks that can be used to provide broadband voice and data
services, and the FCC has authorized several of these applicants to operate
their proposed networks.
INTELLECTUAL PROPERTY
We regard our products, services and technology as proprietary and
attempt to protect them with copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. We also generally enter into
confidentiality or license agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information. Currently we have seven servicemark applications
pending. Despite our precautions, we may not be able to prevent misappropriation
or infringement of our products, services and technology.
Our logo and some titles and logos of our services mentioned in this
prospectus are either our service marks or service marks that have been licensed
to us. Each trademark, trade name or service mark of any other company appearing
in this prospectus belongs to its holder.
EMPLOYEES
At March 31, 2000, we had 369 full-time employees. We also hire
temporary employees and independent contractors as needed. In connection with
our growth strategy, we anticipate hiring a significant number of additional
personnel in sales and other areas of our operations by the end of 2000. Our
employees are not unionized, and we believe our relations with our employees are
good. Our success will continue to depend in part on our ability to attract and
retain highly qualified employees.
LEGAL PROCEEDINGS
From time to time the company becomes engaged in legal proceedings that
occur under the normal course of business. There are no pending legal
proceedings that we believe would individually or in the aggregate, have a
material adverse effect on our business or financial condition.
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FACILITIES
We are headquartered in Greenville, South Carolina and lease offices
and space in a number of locations, primarily for sales offices and network
equipment installations. The table below lists our leased facilities, other than
colocation facilities, as of March 31, 2000:
APPROXIMATE
LOCATION PURPOSE LEASE EXPIRATION SQUARE FOOTAGE
-------- ------- ---------------- --------------
Greenville, SC Headquarters January 2004 9,600
Switch site July 2009 6,100
Atlanta, GA Sales office December 2004 4,500
Switch site July 2009 4,400
Greensboro, NC Sales office January 2005 3,500
Switch site October 2009 4,500
Jacksonville, FL Sales office January 2005 4,500
Switch site May 2010 5,000
Miami, FL Switch site July 2009 13,500
Charleston, SC Sales office June 2005 3,700
We believe that our leased facilities are adequate to meet our current
needs and that additional facilities are available to meet our development and
expansion needs in existing and projected target markets.
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DESCRIPTION OF OUR INDEBTEDNESS
THE SENIOR CREDIT FACILITY
TriVergent Communications, Inc., our wholly owned subsidiary, entered
into a loan agreement with Toronto Dominion (Texas), Inc., as administrative
agent, Newcourt Commercial Finance Corporation, as documentation agent, TD
Securities (USA), Inc. and Capital Syndication Corporation, as co-lead arrangers
and co-book runners, First Union National Bank, as syndication agent, and other
lenders.
Through this subsidiary, we conduct our original residential resale
business and will conduct our facilities-based business in our first five
markets, Greenville, Atlanta, Greensboro, Miami and Jacksonville. This
subsidiary owns the related assets.
The senior credit facility consists of two tranches:
- a term loan facility in the amount of $80 million which is
available to us through December 31, 2000; and
- a revolving facility in the amount of $40 million which has a
termination date of December 31, 2007.
As of March 31, 2000, approximately $25 million was outstanding under
the term loan facility and no amount was outstanding under the revolving
facility. The senior credit facility:
- bears interest at rates per annum equal to, at our option:
- LIBOR plus 4.50%; or
- 3.50% plus the greater of Toronto Dominion's prime rate and the
federal funds effective rate plus 0.50%, in each case subject
to reduction based on TriVergent Communications' financial
performance;
- is guaranteed by us and each of TriVergent Communications'
subsidiaries; and
- contains covenants that, among other things, require TriVergent
Communications to meet ongoing financial tests and restrict its
ability to incur additional indebtedness, incur liens, pay
dividends or repurchase capital stock.
The credit agreement requires TriVergent Communications to enter into
interest rate hedging agreements satisfactory to the lenders that will fix the
interest rate obligations of TriVergent Communications for at least the
following three years, on at least 50% of the outstanding loans.
We have guaranteed the obligations of TriVergent Communications under
the credit agreement and have pledged the stock of TriVergent Communications to
secure our guaranty. Under the guaranty agreement, we may not invest more than
$100 million in our other subsidiaries, and no more than two-thirds of those
investments may be financed by indebtedness.
These guarantees are secured by:
- a pledge by us of the capital stock of TriVergent Communications to
secure our guaranty;
- a pledge by TriVergent Communications of the capital stock of its
subsidiaries; and
- a lien on substantially all the assets of TriVergent Communications
and its subsidiaries.
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MATURITY, AVAILABILITY AND REPAYMENT
The amount available under the term loan facility will be reduced if a
total of $50 million has not been borrowed by July 1, 2000, and no further
amounts may be borrowed after December 31, 2000. Unless TriVergent
Communications achieves specified financial results for the three months ending
September 30, 2000, $20 million of the revolving facility will not be available.
The amount available under the revolving facility reduces, at the end of each
quarter, starting on March 31, 2003, by amounts increasing from 3.125% in 2003
to 6.25% in 2007, and any excess outstanding amount must be repaid.
The outstanding amounts under the term loan facility must be repaid
quarterly, beginning on March 31, 2003, in amounts increasing from 3.125%
($2,500,000) per quarter in 2003 to 6.25% ($5,000,000) per quarter in 2007.
Amounts outstanding under the senior credit facility may be prepaid and
revolving credit commitments may be permanently reduced, in whole or in part, at
any time, subject to customary breakage charges.
TriVergent Communications is required to prepay amounts outstanding and
reduce revolving credit commitments in pro rata amounts equal to:
- 75% of excess cash flow of TriVergent Communications and its
subsidiaries for 2001 and 50% of their excess cash flow for each
subsequent year;
- 100% of the net cash proceeds in excess of $500,000 received by
TriVergent Communications and its subsidiaries from the sale of
assets; and
- 50% of the net proceeds of the issuance of equity securities, and
100% of the net proceeds from borrowed money, received by
TriVergent or any of its subsidiaries or by TriVergent (other than
up to $100 million raised by TriVergent for its other
subsidiaries).
COVENANTS
The senior credit facility also restricts the ability of TriVergent
Communications and its subsidiaries, among other things, to:
- make capital expenditures, investments, loans or advances or
acquisitions in excess of certain limits;
- dispose of assets in excess of $3,000,000 in aggregate value;
- guarantee obligations or pay dividends;
- create liens, other than certain permitted encumbrances, or incur
additional indebtedness, other than certain permitted indebtedness;
or
- engage in mergers or consolidations, transactions with affiliates
or materially change their lines of business.
The credit agreement also requires TriVergent Communications to satisfy
certain operating and financial tests. For this year and the next these are:
- minimum installed access lines (increasing from 21,900 at March 31,
2000, to 91,200 at December 31, 2001);
- minimum annualized revenues (increasing from $14.6 million at March
31, 2000, to $90.8 million at December 31, 2001);
- minimum annualized cash flows (increasing from negative $30.8
million at March 31, 2000, to $11.9 million at December 31, 2001);
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- maximum capital expenditures ($56.2 million for 2000, and $9.0
million for 2001); and
- maximum debt to capitalization ratio (55% through December 31,
2001).
There are also requirements starting in 2002 for the ratio of operating
cash flow to cash interest expense, the fixed charge ratio, the leverage ratio
(maximum limits start on December 31, 2001) and the ratio of cash flow to debt
service.
THESE COVENANTS RELATE ONLY TO TRIVERGENT COMMUNICATIONS AND ITS
SUBSIDIARIES, AND NOT TO TRIVERGENT AND ITS OTHER SUBSIDIARIES.
The senior credit facility also contains customary events of default,
including failure to pay interest or principal, breach of covenants,
cross-default to other debt, material judgments, a change of control of
TriVergent or TriVergent Communications and bankruptcy or insolvency.
USE OF PROCEEDS
TriVergent Communications can use the senior credit facility to fund
capital expenditures for telecommunications equipment purchases, interest on the
loans and other general corporate purposes.
THE NORTEL FACILITY
In March 2000, TriVergent Communications South, Inc., our subsidiary
that conducts our business in the markets not part of the business of TriVergent
Communications, entered into a credit agreement with Nortel Networks Inc.
providing for up to $45 million in term loans to finance the acquisition of
network equipment and related software and services from Nortel. No amount is
currently outstanding under this facility and no amount may be borrowed without
the consent of the lenders under the senior credit facility, which we expect to
be able to obtain.
The Nortel facility:
- bears interest at rates equal to, at our option,
- the prime rate of Citibank, N.A. (New York), plus 3.75% or
- LIBOR plus 4.75%;
- is guaranteed by all current and future subsidiaries of TriVergent
Communications South; and
- contains covenants that, among other things, require TriVergent
Communications South and its subsidiaries to meet ongoing financial
covenants and restrict their ability to incur additional
indebtedness, incur liens and pay dividends.
The Nortel facility is secured by:
- a lien on substantially all the assets of TriVergent Communications
South and its subsidiaries; and
- a pledge by us of all the capital stock of TriVergent
Communications South
MATURITY, AVAILABILITY AND REPAYMENT
The amount outstanding under the Nortel facility is repayable in
quarterly principal payments of 8 1/3% beginning on June 30, 2001, with the
balance payable at maturity on June 30, 2004.
Amounts outstanding under the Nortel facility may be prepaid and
unutilized commitments may be reduced, in whole or in part, at any time. Amounts
prepaid may not be reborrowed.
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TriVergent Communications South would be required to prepay amounts
outstanding equal to:
- 75% of excess cash flow for the preceding year on March 31 of each
year, commencing in 2002;
- 100% of net cash proceeds in excess of $100,000 from dispositions
of property by TriVergent Communications South or any of its
subsidiaries that are not reinvested in the business; and
- 100% of net cash proceeds received by TriVergent Communications
South from issuances of debt or equity securities.
COVENANTS
The Nortel facility also restricts the ability of TriVergent
Communications South and its subsidiaries, among other things, to:
- declare or pay dividends to the extent they are not payable in
capital stock or restrict any subsidiaries ability to pay
dividends;
- prepay debt, subject to certain exceptions;
- make payments to redeem, repurchase or retire capital stock,
subordinated debt, warrants or options;
- enter into sale/leaseback transactions;
- incur liens other than certain permitted encumbrances or materially
change their line of business; and
- engage in mergers or consolidations.
The Nortel facility also requires TriVergent Communications South to
maintain:
- maximum ratios, tested on a quarterly basis, of total debt to total
capitalization (not in excess of 67%) and total debt to annualized
EBITDA (starting in 2002);
- a maximum amount of cumulative capital expenditures (increasing
from $16.2 million at March 31, 2000, to $214 million at December
31, 2001);
- a quarterly fixed charge coverage ratio (1.1 for all periods) and a
minimum quarterly interest coverage ratio (starting in 2002);
- minimum annualized EBITDA, on a quarterly basis (decreasing to
negative $41.3 million for the first quarter of 2001 to negative
$3.5 million of the fourth quarter of 2001);
- a minimum number of access lines in service (increasing from none
at March 31, 2000 to 80,683 at December 31, 2001); and
- minimum quarterly revenue (increasing from none for the first
quarter of 2000 to $22 million for the fourth quarter of 2001).
The Nortel agreement requires TriVergent Communications South to enter
into interest rate hedging agreements satisfactory to Nortel to fix the interest
rate on at least 50% of its debt and that of its subsidiaries that has a
floating rate of interest.
THESE COVENANTS RELATE ONLY TO TRIVERGENT COMMUNICATIONS SOUTH AND ITS
SUBSIDIARIES, AND NOT TO TRIVERGENT AND ITS OTHER SUBSIDIARIES.
The Nortel facility contains customary events of default, including but
not limited to, cross default to the purchase agreement with Nortel, a change of
control event and cross default to other debt.
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GOVERNMENT REGULATION
The following summary of regulatory developments and legislation
describes the primary present and proposed federal, state, and local regulation
and legislation that is related to the Internet service and telecommunications
industries and would have a material effect on our business. Existing federal
and state regulations are currently subject to judicial proceedings, legislative
hearings and administrative proposals that could change, in varying degrees, the
manner in which our industries operate. We cannot predict the outcome of these
proceedings or their impact upon the Internet service and telecommunications
industries or upon us.
OVERVIEW
Our telecommunications services are subject to regulation by federal,
state and local government agencies. Generally, Internet and certain data
services are not directly regulated, although the underlying telecommunications
services may be regulated in certain instances. We hold various federal and
state regulatory authorizations for our regulated service offerings. The FCC has
jurisdiction over our facilities and services to the extent those facilities are
used in the provision of interstate or international telecommunications. State
regulatory commissions also have jurisdiction over our facilities and services
to the extent they are used in intrastate telecommunications. Municipalities and
other local government agencies may require telecommunications services
providers to obtain licenses or franchises regulating use of public
rights-of-way necessary to install and operate their networks, although no such
local franchise authorizations are required for our current operations. The
networks also are subject to certain other local regulations such as building
codes and generally applicable public safety and welfare requirements. Many of
the regulations issued by these regulatory bodies may change and are the subject
of various judicial proceedings, legislative hearings and administrative
proposals. We cannot predict what impact, if any, these proceedings or changes
will have on our business or results of operations.
FEDERAL REGULATION
The FCC regulates us as a non-dominant common carrier, or one that is
not considered to be dominant over other service providers in the relevant
product or geographic markets in which it operates. Non-dominant carriers are
subject to lesser regulation than dominant carriers but remain subject to the
general requirements that they offer just and reasonable rates and terms of
service and do not unreasonably discriminate in the provision of services. We
have obtained authority from the FCC to provide domestic interstate long
distance services and international services between the United States and
foreign countries and have filed the required tariffs. While we believe we are
in compliance with applicable laws and regulations we cannot assure you that the
FCC or third parties will not raise issues with regard to our compliance.
THE TELECOMMUNICATIONS ACT
In February 1996, the Telecommunications Act was passed by the United
States Congress and signed into law by President Clinton. This comprehensive
telecommunications legislation was designed to increase competition in the long
distance and local telecommunications industries. The Telecommunications Act
imposes a variety of duties on competitive telecommunications providers to
facilitate competition in the provision of local telecommunications and access
services. Like all local telecommunications carriers, where we provide local
telephone services, we are required to:
- interconnect our networks with those of other telecommunications
carriers;
- originate calls to and terminate calls from competing providers on
a reciprocal basis;
- permit resale of our services;
- permit users to retain their telephone numbers when changing
providers; and
- provide competing providers with access to poles, ducts, conduits
and rights-of-way, if any.
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Traditional telephone companies, such as the regional Bell operating
companies, are subject to requirements in addition to these, including the duty
to:
- undertake additional obligations applicable to the interconnection
of their networks with those of competitors;
- permit colocation of competitors' equipment at their central
offices;
- provide access to individual network elements and "unbundled
elements," including network facilities, features and capabilities,
on non-discriminatory and cost-based terms; and
- offer their retail services for resale at wholesale rates.
The Telecommunications Act also eliminates certain pre-existing
prohibitions on the provision of traditional long distance services by the
regional Bell operating companies and GTE on a phased-in basis. Regional Bell
operating companies currently are permitted to provide long distance service
outside those states in which they provide local telecommunications service. In
order to provide this category of long distance services, the regional Bell
operating companies must receive all requisite state or federal regulatory
approvals customary to the provision of long distance services. Regional Bell
operating companies will be permitted to provide traditional long distance
service within the regions in which they also provide local telecommunications
service only upon demonstrating to the FCC, with input from state regulatory
agencies and the Department of Justice, that they have complied with a statutory
checklist of requirements intended to open local telephone markets to
competition. GTE and other non-Bell traditional telephone companies are not
limited by this regional restriction. To date only Bell Atlantic has been
granted approval to provide in-region long distance services and that is
restricted to long distance calls originating in New York. However, Bell
Atlantic has begun the process to obtain permission to provide long distance
services in other states and other Bell operating companies, including
BellSouth, either already have started or are expected to soon begin the process
of seeking long distance authority within their local operating territories.
Southwestern Bell filed an application with the FCC on January 12, 2000, seeking
permission to provide long distance services to customers in Texas. Entry of
BellSouth into the long distance business could result in substantial
competition to our services and may have a material adverse effect on us and our
customers. When the FCC permits BellSouth to provide traditional long distance
service in its local telephone service region, which is the same region we
serve, they will be able to offer integrated local and long distance services
and may enjoy a significant competitive advantage.
The FCC is charged with establishing national rules implementing
certain portions of the Telecommunications Act. In August 1996, the FCC released
an order adopting an extensive set of regulations governing network
interconnection, network unbundling and resale of traditional telephone company
services, under the Telecommunications Act. In July 1997, the United States
Court of Appeals for the Eighth Circuit issued a decision vacating substantial
portions of these rules, principally on the ground that the FCC had improperly
intruded into matters reserved for state jurisdiction. In January 1999, the
United States Supreme Court reversed many aspects of the Eighth Circuit's
decision, concluding that the FCC has jurisdiction to implement the local
competition provisions of the Telecommunications Act. In so doing, the Supreme
Court found that the FCC has authority to establish pricing guidelines
applicable to the provision of unbundled network elements and the resale of
traditional telephone company services, to prevent traditional telephone
companies from desegregating existing combinations of network elements, and to
establish rules enabling competitors to select all or portions of any existing
traditional telephone company interconnection agreements for use in their own
interconnection agreements with traditional telephone companies. The Supreme
Court, however, did not evaluate the specific pricing methodology adopted by the
FCC and has remanded the case to the Eighth Circuit for further consideration.
While the Supreme Court resolved many issues, including the FCC's jurisdictional
authority, other issues remain subject to further consideration by the courts
and the FCC. Although most of these FCC rules were upheld by the Supreme Court,
the Court found that the FCC had not adequately considered certain statutory
criteria for requiring traditional telephone companies to make unbundled network
elements available to competitive telecommunications providers. The FCC then
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conducted new proceedings to reexamine which unbundled network elements
traditional telephone companies must provide. On November 5, 1999, the FCC
released an order in which it required that traditional telephone companies make
available most, but not all, of the network elements specified in its initial
order, as well as certain new network elements not included on the original
list. The FCC also clarified the obligation of traditional telephone companies
to provide certain combinations of network elements. Various interested parties
have sought reconsideration and filed appeals of the FCC's order.
In the first half of 1998, four regional Bell operating companies,
including BellSouth, petitioned the FCC to be relieved of certain regulatory
requirements in connection with their provision of advanced telecommunications
services. Advanced telecommunications services are wireline, broadband
telecommunications services, as opposed to traditional voice services, and are
widely used for Internet access, often relying on DSL technology and
data-switched technology. In response, in August 1998, the FCC issued an order
and notice which clarified its views on the applicability to advanced services
of existing statutory requirements in the Telecommunications Act relating to
network interconnection and unbundling. The FCC also solicited public comments
on a wide variety of issues associated with the provision of advanced services
by wireline carriers. The FCC generally determined that advanced
telecommunications services are subject to its interconnection and unbundling
rules. The FCC has not yet ruled on a preliminary FCC proposal that would permit
traditional telephone companies to deploy advanced telecommunications services
through a separate affiliate, which would not be regulated as a traditional
telephone company and therefore would not be subject to the Telecommunications
Act's unbundling and resale provisions. These orders have been appealed and are
the subject of further FCC proceedings as well. Notably, in an order approving
the merger of SBC with Ameritech, the FCC authorized SBC to transfer some
advanced services, equipment and capabilities to a separate affiliate. If
BellSouth were authorized to do the same, we could encounter additional
difficulty obtaining access to network elements useful in providing DSL and
other advanced services.
In March 1999, the FCC adopted a further order strengthening the rights
of competitive telecommunications providers to obtain physical colocation for
purposes of interconnecting with traditional telephone company networks, as well
as requiring that traditional telephone companies permit competitive
telecommunications providers to collocate equipment used for interconnection
and/or access to unbundled network elements. The FCC also adopted rules designed
to limit traditional telephone companies' ability to deny competitive
telecommunications providers the ability to deploy transmission hardware in
colocation space by purporting that the equipment will cause electrical
interference with other wires, requiring the construction of caged enclosures,
and imposing large minimum space requirements and space preparation fees, among
other things, and it proposed rules making these requirements more specific. On
March 17, 2000 the U.S. Court of Appeals for the District of Columbia vacated
significant portions of these FCC colocation rules, and remanded the matter to
the FCC for further consideration. Among other things, the appeals court vacated
new FCC rules that would have required traditional telephone companies to permit
colocation of equipment usable to provide enhanced services, use colocation
space to cross connect to third party carriers, and collocate their equipment in
any unused space in their central offices. Further FCC and appellate proceedings
are expected.
Notably, rates charged for unbundled network elements are established
through negotiation or by state regulatory commissions, subject to general FCC
rules governing pricing methodology. FCC rules require traditional telephone
companies to establish geographically deaveraged pricing for network elements
soon, and such deaveraging could result in a substantial price increase for
network elements in certain non-urban markets served by the Company.
ACCESS REGULATION
The FCC regulates the interstate access rates charged by traditional
telephone companies for the origination and termination of interstate long
distance traffic. Those access rates make up a significant portion
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of the cost of providing these long distance services. Over the past few years,
the FCC has implemented changes in interstate access rules that result in the
restructuring of the access charge system and changes in access charge rate
levels. On remand from an appeals court, the FCC is conducting further
proceedings to explain and refine its recent reforms affecting access charge
rate levels. In addition, the FCC is considering several proposals to further
reform access charge rate structures, including a proposal submitted by a
coalition of long distance companies and regional Bell companies referred to as
"CALLS". These and related actions may change access rate structures and rate
levels. If access rates are reduced, access revenues of all local
telecommunications carriers, including us, could be reduced, and the costs to
traditional telephone companies and long distance carriers to provide long
distance services also could be reduced significantly. The impact of these new
changes will not be known until they are fully implemented.
The FCC has also raised the issue of whether it should begin to
regulate the access charges imposed by competitive telecommunications providers.
Currently, competitive telecommunications providers are free to charge access
rates at any levels they deem appropriate so long as they are "just and
reasonable" and nondiscriminatory. The current proceeding seeks comment from the
industry on whether competitive telecommunications providers should be required
to cost-justify the access charges they impose on long distance carriers or
whether such rates should be limited to a prescribed range of "reasonable"
charges. A decision by the FCC to regulate competitive telecommunications
providers' access charges could result in the reduction of those charges for all
competitive telecommunications providers, including ours. Over the past few
years, the FCC has granted traditional telephone companies significant
flexibility in pricing their interstate special and switched access services. We
anticipate that this pricing flexibility will result in traditional telephone
companies lowering their prices in high traffic density areas, the probable
areas of competition with us. We also anticipate that the FCC will grant
traditional telephone companies increasing pricing flexibility as the number of
potential competitors increases in each of these markets.
In August 1999, the FCC released an order that granted substantial
additional pricing flexibility to traditional telephone companies for certain
interstate services. Among other things, the FCC granted immediate pricing
flexibility to many traditional telephone companies in the form of streamlined
introduction of new services, the ability to change rates for certain interstate
services based on geographic location, and removal, after certain local toll
dialing restrictions are lifted, of certain interstate long distance services
from restrictive pricing regulation. The FCC also established a framework for
granting many traditional telephone companies greater flexibility in the pricing
of all interstate access services once they satisfy certain prescribed
competitive criteria. The FCC also invited public comment on proposals for yet
further traditional telephone company pricing flexibility.
In addition, in various contexts, certain traditional telephone
companies have asked the FCC to rule that certain calls made over the Internet
are subject to regulation as telecommunications services including the
assessment of interstate switched access charges and universal service fund
assessments. Although the FCC has suggested that Internet-based
telephone-to-telephone calls may be considered telecommunications services, it
has not reached a final decision on that issue.
UNIVERSAL SERVICE
In 1997, the FCC established a significantly expanded universal service
regime to subsidize the cost of telecommunications services to high-cost areas,
and to low-income customers and qualifying schools, libraries and rural health
care providers. Providers of telecommunications services, like us, as well as
certain other entities, must pay for these programs. Our share of the payments
into these subsidy funds will be based on our share of certain defined
telecommunications end-user revenues. Currently, the FCC is assessing these
payments on the basis of a telecommunications services provider's interstate and
international revenue for the previous year. Various states are also in the
process of implementing their own universal service programs. We are currently
unable to quantify the amount of subsidy payments we will be required to make in
the future
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or the effect that these requirement payments will have on our financial
condition. Moreover, the FCC's universal service rules remain subject to change,
which could increase our costs.
DETARIFFING
In November 1996, the FCC issued an order that required non-dominant,
long distance carriers, like us, to cease filing tariffs for our domestic long
distance services. Tariffing is a traditional requirement of telephone companies
whereby such companies publish for public inspection at state and federal
regulatory agencies all terms, conditions, pricing, and available services
governing the sale of all such services to the public. Traditional long distance
service tariffs are filed with the FCC and tariffs for local telephone services
are filed with state regulatory commissions. 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, and it is unclear at this time whether or when the
detariffing order will be implemented.
In June 1997, the FCC issued another order stating that non-dominant
local services providers may withdraw their tariffs for interstate access
services provided to long distance carriers. The FCC continues to require that
services providers obtain authority to provide service between the United States
and foreign points and file tariffs for international service.
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 websites of
their rates, terms and conditions for domestic interstate services. The
effective date of these rules also is delayed until a court decision is rendered
on the appeal of the FCC's detariffing order. If the FCC's orders become
effective, non-dominant interstate services providers will no longer be able to
rely on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms and conditions under which they offer their domestic
interstate services, and will have to rely more heavily on individually
negotiated agreements with end-users.
RECIPROCAL COMPENSATION
In decisions rendered in late 1998 and early 1999, the FCC determined
that both dedicated access and dial-up calls from a customer to an Internet
service provider are primarily interstate in nature and therefore are to be
considered interstate calls, subject to the FCC's jurisdiction. The FCC's orders
were appealed to the U.S. Court of Appeals for the District of Columbia. On
March 17, 1999, the Court of Appeals vacated the FCC's order determining that
dial-up calls placed to Internet service providers are jurisdictionally
interstate, and remanded the matter to the FCC for further consideration. The
FCC has initiated a proceeding to determine the effect that this regulatory
classification will have on the obligation of a service provider to pay
reciprocal compensation for dial-up calls to Internet service providers that
originate on one service provider's network and terminate on another service
provider's network. Currently, the FCC has permitted existing reciprocal
compensation arrangements between service providers, as set forth in
interconnection agreements and approved by state regulatory commissions, to
remain intact.
The FCC is currently determining whether a new compensation mechanism
should be implemented. A decision which invalidates current reciprocal
compensation arrangements could result in the reduction, or elimination, of
potential revenues we may receive from reciprocal compensation payments for
traffic terminated over our network to Internet service providers.
CUSTOMER PRIVACY
The Communications Act of 1934 and FCC rules protect the privacy of
certain information that a telecommunications carrier such as us acquires by
providing telecommunications services to such customers.
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Such protected information known as Customer Proprietary Network Information,
includes information related to the quantity technological configuration, type,
destination and amount of use of a customer. Under the FCC's rules, a carrier
may not use this information acquired through one of its offerings of
telecommunications services to market certain other services without the
approval of the affected customers. The United States Court of Appeals for the
Tenth Circuit, however, recently overturned the FCC's rules regarding the use
and protection of this information. The FCC relaxed these rules recently, but
may seek review of the Tenth Circuit's decision by the U.S. Supreme Court.
STATE REGULATION
The Telecommunications Act preempts state and local statutes and
regulations that would tend to prohibit the provision of competitive
telecommunications services. As a result, we will be free to provide the full
range of local, long distance and data services in all states in which we
currently operate, and in any states into which we may wish to expand. While
this action greatly increases our potential for growth, it also increases the
amount of competition to which we may be subject. Because we provide intrastate
common carrier services, we are subject to various state laws and regulations.
Most state public utility and public service commissions require some form of
certification or registration. We must acquire this authority before commencing
service. In most states, we are also required to file tariffs or price lists
setting forth the terms, conditions and prices for services that are classified
as intrastate.
We are required to update or amend these tariffs when we adjust our
rates or add new products and are subject to various reporting and
record-keeping requirements in these states. Many states also require prior
approval for transfers of control of certified providers, corporate
reorganizations, acquisitions of telecommunications operations, assignment of
carrier assets, carrier stock offerings and incurrence of significant debt
obligations. States generally retain the right to sanction a service provider or
to revoke certification if a service provider violates applicable laws or
regulations. If any regulatory agency were to conclude that we are or were
providing intrastate services without the appropriate authority or in violation
of any regulation, the agency could initiate enforcement actions, which could
include the imposition of fines, a requirement to disgorge revenues or the
refusal to grant the regulatory authority necessary for the future provision of
intrastate telecommunications services.
We are authorized to provide competitive local telecommunications
services in South Carolina, North Carolina, Georgia, Kentucky, Tennessee,
Alabama, Louisiana, Florida and Mississippi. We have authority to provide
intrastate long distance services in all states where we hold local services
authority, and in several other states as well. We expect to apply for
additional state authority in the future. However, there can be no assurance
that we will receive such authorizations.
LOCAL INTERCONNECTION
The Telecommunications Act imposes a duty upon all traditional
telephone companies to negotiate in good faith with potential competitive
telecommunications providers to provide interconnection to their networks,
exchange local traffic, make unbundled network elements available and permit
resale of most local telephone services. In the event that negotiations do not
succeed, we have a right to seek arbitration with the state regulatory authority
of any unresolved issues. Arbitration decisions involving interconnection
arrangements in several states have been challenged and appealed to federal
courts. We may experience difficulty in obtaining timely traditional telephone
company implementation of local interconnection agreements, and we can provide
no assurance we will offer local services in these areas in accordance with our
projected schedule, if at all.
We have entered into interconnection agreements with BellSouth in all
of its territories. We have begun to negotiate similar agreements with other
traditional telephone companies where we have obtained status as a competitive
telecommunications provider. Moreover, a number of our interconnection
agreements
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will expire at various times over the next six months, after which
time, we will be required to renegotiate each such agreement. The initial term
of our interconnection agreement with BellSouth already has lapsed, but its
terms continue to apply until a successor agreement is established through
negotiation or state regulatory commission arbitration proceedings. It is
uncertain how successful we will be in negotiating the terms critical to our
provision of local data and voice services and we may be forced to arbitrate
certain provisions of such agreements.
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MANAGEMENT
The following sets forth information concerning our directors,
executive officers and selected key employees, including their ages, as of
March 31, 2000.
NAME AGE POSITION
- ---- --- --------
Charles S. Houser 56 Chairman of the Board of Directors and Chief Executive Officer
G. Michael Cassity 50 President and Chief Operating Officer, Director
Shaler P. Houser 30 Senior Vice President of Corporate Development and Strategy,
Director
Clark H. Mizell 44 Senior Vice President and Chief Financial Officer
Russell W. Powell 32 Senior Vice President of Sales
Riley M. Murphy 44 Senior Vice President of Law, General Counsel and Secretary
Judith C. Slaughter 54 Senior Vice President of Customer Operations
G. Randolph McDougald 40 Senior Vice President of Marketing
Vincent M. Oddo 42 Senior Vice President and Chief Information Officer
Ronald Kirby 48 Senior Vice President of Network Customer Operations
J. W. Adams 64 Senior Vice President of Network Engineering
Daniel E.H. Sterling 32 Vice President of Dealer Sales
William H. Oberlin 55 Director
Joseph A. Lawrence 51 Director
Jack Tyrrell 53 Director
Robert S. Sherman 54 Director
Alan N. Colner 45 Director
Watts Hamrick 40 Director
Lawrence J. Bouman 53 Senior Technology Advisor
BIOGRAPHICAL SKETCHES
Charles S. Houser, a co-founder of TriVergent and our Chairman of the
board of directors and Chief Executive Officer, has more than fifteen 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 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
telecommunications equipment distributor; iBasis, Inc., an Internet-based
communications carrier; and Summit Financial Corporation, a Greenville, South
Carolina-based bank holding company.
G. Michael Cassity became our President and Chief Operating Officer
and a Director in March 2000. From 1999 until joining TriVergent, Mr. Cassity
served as vice president and chief procurement officer for BellSouth
Telecommunications in Atlanta. From 1998 to 1999, Mr. Cassity was vice
president of network operations for BellSouth's northern states. Since 1971,
Mr. Cassity has also held other positions at BellSouth in Atlanta, including
vice president of the strategic management unit and vice president of
organization planning and development.
Shaler P. Houser, a co-founder of TriVergent, Senior Vice President of
Corporate Development and Strategy and a Director, has nine years of experience
in the telecommunications industry. Prior to co-founding our company in 1997,
Mr. Houser was senior vice president and co-founder of Seruus Ventures, LLC.
From 1991 to 1996, Mr. Houser served in various capacities, including product
development, business development, international development and carrier sales,
at Corporate Telemanagement Group and its
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successor parent company, LCI International, both long distance companies.
Shaler P. Houser is Charles S. Houser's son.
Clark H. Mizell has served as our Senior Vice President and Chief
Financial Officer since August 1998. From 1979 to 1984, Mr. Mizell was an
accountant with PriceWaterhouse in its Dallas, Texas office, covering both tax
and audit areas. In 1984, Mr. Mizell joined KPMG Peat Marwick, where he became
a partner in 1990 and served in that capacity until joining TriVergent.
Russell W. Powell serves as our Senior Vice President of Sales. From
December 1997 until March 2000, Mr. Powell served as our President. From August
until November 1997, Mr. Powell was vice president of sales for BTI Telecom
Corp., a facilities-based long distance and competitive local exchange services
provider. From 1991 to August 1997, Mr. Powell was employed by Corporate
Telemanagement Group and, following their merger by LCI International, in
various positions, including sales manager for its dealer sales division.
Riley M. Murphy became our Senior Vice President of Law, General
Counsel and Secretary in March 2000. Prior to joining TriVergent, she was
executive vice president of legal and regulatory affairs, general counsel and
secretary of e.spire Communications, Inc., an integrated services provider.
Prior to joining e.spire in 1994, Ms. Murphy was in private practice of
telecommunications regulatory law for 12 years.
Judith C. Slaughter has been our Senior Vice President of Customer
Operations since December 1997. From 1991 to 1997, Ms. Slaughter was employed
by Corporate Telemanagement Group and, following their merger, by LCI
International, in various management positions, including manager of sales
support, marketing and operations, director of customer service and
provisioning and director of operations for its dealer sales division. Prior to
1991, she served in various sales and operations positions with
telecommunications companies including Tel/Man, Inc., SouthernNet and Teleco,
Inc.
G. Randolph McDougald has been our Senior Vice President of Marketing
since April 1999. From October 1997 until March 1999, Mr. McDougald served as
president of Catalyst Telecom, the telecommunications and computer telephone
division of ScanSource, Inc., a point-of-sale equipment distributor. During the
years 1996 to 1997 and 1995 to 1996 Mr. McDougald served as regional vice
president of sales, southern division, and director of marketing, respectively,
for LCI International. Prior to LCI International's purchase of Corporate
Telemanagement Group in 1995, Mr. McDougald served as national director of
sales for Corporate Telemanagement Group.
Vincent M. Oddo has been our Senior Vice President and Chief
Information Officer since June 1999. From 1995 to May 1999, Mr. Oddo served as
senior vice president of operations for Conxus Communications, Inc., a wireless
communications firm. Prior to 1995, Mr. Oddo also served as vice president at
Geotek Communications.
Ronald Kirby has been our Senior Vice President of Network Operations
since July 1999. From 1990 to 1999, Mr. Kirby was president of Data and
Communications Solutions Inc., a South Carolina-based provider of data
integration products and services. Additionally, Mr. Kirby was a director of
network operations and support from 1987 to 1989 and director of carrier
support from 1989 to 1990 for Telecom USA. From 1982 to 1987, Mr. Kirby was
director of North Carolina and South Carolina network operations for
SouthernNet.
J. W. Adams has been our Senior Vice President of Network Engineering
since November 1999. From March 1996 to November 1999, he was president of
Diamond Consulting, LLC of Charlotte, North Carolina, a telecommunications
consulting firm. Mr. Adams has also held positions as vice president in the
areas of engineering and operations with various telecommunications companies
including Access/On
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Multimedia, Inc. in North Carolina, Intermedia Communications of Florida,
Norlight in Wisconsin and SouthernNet/Telecom USA in Atlanta, as well as
president of BellSouth Systems Technology.
Daniel E.H. Sterling serves as our Vice President of Dealer Sales.
Mr. Sterling joined TriVergent in December 1997, and has held such positions as
Vice President of Sales and Marketing and Vice President of Sales. From
September 1997 until December 1997, Mr. Sterling served as senior manager for
dealer sales with BTI Telecom Corp. From 1993 to 1997, Mr. Sterling was employed
by Corporate Telemanagement Group, and following their merger with LCI
International in various positions including sales support representative, sales
manager for the Mid-Atlantic regional dealer sales division and manager of
dealer sales for LCI's northeast region.
William H. Oberlin has been a Director on our board since September
1988. Mr. Oberlin is founder, chairman and chief executive officer of Bullseye
Telecom. From 1996 to 1998, Mr. Oberlin was president and chief executive
officer of Midcom Communications. Mr. Oberlin served as president and chief
operating officer of Frontier Communications, during 1995 after its acquisition
of Allnet where Mr. Oberlin had served as chief operating officer from 1988 to
1995. Mr. Oberlin has also worked at Bell System, Sprint, DHL Business Systems
and Cable and Wireless. Mr. Oberlin is a joint owner of Telecom Locator of Des
Moines, Iowa, and has served on the boards of directors of Savvis, LDMI, Allnet
and Frontier. Presently, Mr. Oberlin serves on the board of directors of
Bullseye, and is on the board of advisors of Western Integrated Networks, LLC.
Joseph A. Lawrence has been a Director on our board since July 1999.
Mr. Lawrence is currently retired. Mr. Lawrence became senior vice president of
finance and corporate development of LCI International in 1997 and served in
that capacity until LCI was acquired by Qwest Communications Corporation in
March 1998. Mr. Lawrence served as LCI's chief financial officer from 1993 to
1997. From 1983 to 1993, Mr. Lawrence was employed in numerous positions with
MCI Telecommunications Corporation including senior vice president of finance,
vice president of finance and administration for the Consumer Division and vice
president of finance for the Mid-Atlantic Division.
Jack Tyrrell has been a Director on our board since October 1998.
Currently a managing partner at Richland Ventures, Mr. Tyrrell has been a
founding partner of five venture capital funds since 1985. Mr. Tyrrell serves
on the boards of Genus.net, PRIMIS, Aperture Credentialing, Media1st.com,
TriVergent Communications, First Insight, Darwin Networks and National Health
Investors. Mr. Tyrrell has served on the boards of Regal Cinemas, Premier
Parks, Oxford Health Plans, Medaphis and Regent Communications. Mr. Tyrrell was
nominated to serve on our board by Richland Ventures II, L.P., which is
entitled to nominate one member of our board under our stockholders' agreement.
Robert S. Sherman has been a Director on our board since July 1999.
Mr. Sherman is a founding general partner of Boston Millennia Partners. Mr.
Sherman's previous experience includes five years at Boston Capital Ventures
and eight years as a general partner at Hambro International Venture Fund. Mr.
Sherman serves on the boards of several private companies. Mr. Sherman was
nominated to serve on our board by Boston Millennia Partners Limited
Partnership and Boston Millennia Associates I Partnership, which entities are
entitled to nominate one member of our board under our stockholders' agreement.
Alan N. Colner has been a Director on our board since July 1999. Since
August 1996, he has served as managing director, Private Equity Investments at
Moore Capital Management, Inc. Before joining Moore, he was a managing director
of Corporate Advisors, L.P., the general partner of Corporate Partners, a
private equity fund affiliated with Lazard Freres & Co. LLC. Mr. Colner also
serves as a director of GoTo.com, Inc., iVillage Inc. and Nextcard Inc. Mr.
Colner was nominated to serve on our board by Moore Global Investments, Ltd.
and Remington Investment Strategies, L.P., which entities are entitled to
nominate one member of our board under our stockholders' agreement.
Watts Hamrick has been a Director of our board 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 our board by
First Union Capital Partners, which is entitled to nominate one member of our
board under our stockholders' agreement.
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Lawrence J. Bouman has been our Senior Technology Advisor since
October 1999. In that capacity, Mr. Bouman advises the board of directors on
new technology to aid us in our development as a facilities-based service
provider. Mr. Bouman also works on a regular basis with our management and
employees in the analysis of technology. He was senior vice president and chief
technology officer of LCI International from October 1995 to January 1999.
Prior to that, Mr. Bouman spent twenty years at MCI, most recently holding
positions such as vice president for network operations in Richardson, Texas
and senior vice president for network engineering in Washington, DC.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors currently has three standing committees: an
executive committee, a compensation committee and an audit committee.
The executive committee has the authority to act as a liaison between
the board and executive management and exercise such powers as shall be
delegated to it from time to time by the board. Pursuant to our articles of
incorporation and the transaction agreement, the executive committee will be
comprised of our chief executive officer and may be comprised of four other
representatives. One member may be designated by each of Richland Ventures,
First Union Capital Partners, Boston Millenia Partners and Moore Capital
Management for as long as that investor is entitled to designate a director to
the board. The current members of the executive committee are Messrs. Hamrick,
Tyrrell, Colner and Sherman.
The compensation committee administers the 1998 Employee Incentive
Plan, or Plan, and reviews and recommends the compensation arrangements for
management, including salaries, bonus plans and options granted outside of the
Plan, if any. The current members of the compensation committee are Messrs.
Tyrrell, Hamrick and Colner.
The audit committee, among other things, recommends the firm to be
appointed as independent accountants to audit our financial statements,
discusses the scope and results of the audit with the independent accountants,
reviews with management and the independent accountants our interim and
year-end operating results, assesses the adequacy of our internal accounting
controls and audit procedures and reviews the non-audit services to be
performed by the independent accountants. The audit committee is currently
comprised of Messrs. Lawrence, Oberlin and Sherman.
COMPENSATION OF DIRECTORS
Joseph A. Lawrence and William H. Oberlin each receive $2,000 per
month for services provided as a director. Other members of our board of
directors currently receive no compensation for services provided as a director
or as a member of any board committee. We will reimburse the members of our
board of directors for their reasonable out-of-pocket expenses incurred in
connection with attending board or committee meetings and related activities.
Additionally, we are obligated to maintain our present level of directors' and
officers' liability insurance.
EXECUTIVE COMPENSATION
The following table sets forth compensation earned, awarded or paid
for services rendered to us in all capacities for the year ended December 31,
1999 by our Chief Executive Officer and our other executive officers whose
annual salary and bonus, on a prorated basis, exceeded $100,000 for all
services rendered to us during such period.
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SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
------------------- OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SARS (#) COMPENSATION(1)
- --------------------------- ---- ---------------
Charles S. Houser........ 1999(2) $ 62,188 $ 7,500 -- $ --
Chief Executive Officer and
Chairman of the Board
Shaler P. Houser......... 1999 156,380 18,000 -- 4,752
Sr. Vice President of
Corporate Development
Clark H. Mizell.......... 1999 131,050 13,200 -- 4,365
Sr. Vice President and Chief
Financial Officer
Russell W. Powell........ 1999 144,000 33,800 -- 4,320
Sr. Vice President of
Sales (3)
Daniel E.H. Sterling..... 1999 102,000 7,650 -- 3,289
Vice President of
Dealer Sales (4)
- --------------------
(1) Reflects our matching contributions made under our 401(k) plan on
behalf of such executive officer.
(2) Mr. C. Houser joined us on May 13, 1999 and the compensation disclosed
is for the period from that date through December 31, 1999.
(3) During 1999, Mr. Powell served as President.
(4) During 1999, Mr. Sterling was Vice President of Sales.
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The following table sets forth information regarding option grants
with respect to common stock made by us to certain executive officers during
the fiscal year ended December 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES PERCENT OF ANNUAL RATES OF STOCK
UNDERLYING TOTAL OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM
GRANTED EMPLOYEES BASE PRICE EXPIRATION ------------------------
NAME (#) IN 1999 ($/SH)(1) DATE(2) 5% 10%
- ----------------------- ----------- ------------- ---------- ----------
Charles S. Houser 400,000 15.0% $3.75 8/13/09 $75,000 $150,000
40,000 1.5% 3.75 11/13/09 7,500 15,000
40,000 1.5% 3.75 12/15/09 7,500 15,000
Shaler P. Houser 50,000 1.9% 3.75 12/15/09 9,375 18,750
Clark H. Mizell 40,000 1.5% 2.40 1/1/09 4,800 9,600
1,041 0.1% 2.40 2/5/09 125 250
20,000 0.8% 3.75 12/15/09 3,750 7,500
Russell W. Powell 50,000 1.9% 3.75 12/15/09 9,375 18,750
Daniel E.H. Sterling 18,000 0.7% 2.40 1/1/09 2,160 4,320
- ------------------------
(1) The exercise base price was set at our determination of the fair
market value of our common stock on the date of grant. All options set
forth in the table above 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 grant date.
(2) The plan pursuant to which the options were granted sets forth certain
earlier expiration dates upon the option holder's termination of
employment.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED ON OPTIONS AT OPTIONS AT
NAME EXERCISE (#) DECEMBER 31, 1999 DECEMBER 31, 1999(1)
- ---- ------------ ----------------- --------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Charles S. Houser -- 0 480,000 $ -- $ --
Shaler P. Houser -- 160,000 690,000 216,000 864,000
Clark H. Mizell -- 38,000 213,041 57,000 283,405
Russell W. Powell -- 120,000 530,000 162,000 648,000
Daniel E.H. Sterling -- 60,222 258,888 135,333 565,632
- --------------------
(1) Calculated based on a price of $3.75 per share, the fair market value
of our capital stock on December 31, 1999 as determined by our board
of directors, minus the per share exercise price, multiplied by the
number of shares underlying the option.
STOCK PLANS
EMPLOYEE INCENTIVE PLAN
In January 1998, we established our Employee Incentive Plan, under
which we may issue stock options, bonus stock awards and restricted stock
awards to our employees and certain other associated persons. The plan is
administered by our board of directors and terminates on January 12, 2008,
subject to our board's right to terminate it at an earlier date. Our board, in
its sole discretion, has the authority to determine the terms and provisions of
all options and stock awards, subject to specific limitations set forth in the
plan and applicable law. The plan provides for a maximum of ten million shares
of Company common stock to be issued thereunder. At March 31, 2000, we have
granted options to purchase 8,784,458 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 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.
Incentive stock options, bonus stock awards and restricted stock
awards may be granted only to our employees. Non-incentive stock options may be
granted to employees and other persons selected by our board of directors.
Options granted under the employee option plan may be either incentive stock
options or non-incentive stock options, as determined by the board. Of the
total options granted through March 31, 2000, 4,903,125 were incentive stock
options and 3,881,333 were non-incentive stock options.
Incentive stock options granted under the plan are intended to qualify
as "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code, and are subject to the provisions of the Internal Revenue Code
that applicable to such options. The exercise price of an incentive stock
option granted to an individual who owns shares possessing more than 10% of the
total combined voting power of all classes of our 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 an incentive stock option granted to an individual other than
a 10% owner and of a non-qualified stock options will be at least 100% of the
fair market value of a share of common stock on the date of grant (as
determined by the board of directors).
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Stock Options. Both incentive and non-incentive stock options are
evidenced by written stock option agreements in such form as may be determined
by the board of directors. The term, vesting schedule and exercise price of
stock options are determined by the board (subject to the exercise price
limitations discussed above with respect to incentive stock options); however,
substantially all options to date have 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 merger of us and another company where we are not the
surviving corporation, the sale of substantially all of our assets, or a change
in our ownership by more than 50%, all outstanding options become immediately
exercisable.
All shares issued pursuant to the exercise of stock options are
subject to our right to buy back such shares within six months after the
optionee's employment with us is terminated for any reason. The purchase price
for such repurchased shares is generally the most recent evaluation of our
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 our
right of first refusal and may not be sold, assigned or otherwise transferred
unless first offered to us on the same terms and conditions.
The board may impose such conditions and restrictions upon the
exercise of options as it may deem advisable. However, special rules apply to
incentive stock options. The plan provides that if an employee dies while still
our employee, incentive stock options granted under the plan may be exercised
after his death only to the extent that they were exercisable at death and then
for a period not to exceed the lesser of (1) the remaining term of such option,
or (2) nine months after the employee's death. Except where employment is
terminated as a result of the death of the employee, incentive stock options
are not exercisable after the employee ceases to be our employee, unless the
board, in its sole discretion, extends the exercise date of such incentive
stock options for a period of 90 days following the date of such termination of
the employee's employment.
Options and awards are exercisable only by the employee to whom it is
granted and are not assignable other than by will or by the laws of descent and
distribution. Grants of tandem stock options are prohibited. Also, incentive
and non-incentive stock options may not be granted under any sort of
arrangement where the exercise of one affects the right to exercise the other.
Restricted Stock Awards. Restricted stock awards are evidenced by
written agreements in such form as may be determined by the board of directors.
The term, forfeiture schedule and purchase price of the restricted stock are
determined by the board. In the event of a merger of us and another company
where we are not the surviving corporation, the sale of substantially all of
our assets, or a change in our ownership by more than 50%, the risks of
forfeiture with respect to restricted stock lapses.
Shares of restricted stock are subject to the same assignability,
buyback and right of first refusal limitations are as applicable to the stock
options (described above). A grantee of restricted stock shall have the right
to vote such shares and to receive all dividends, cash or stock, paid or
delivered thereon. However, such shares may not be sold, assigned, pledged,
hypothecated or otherwise transferred prior to the vesting of such shares.
Bonus Stock Awards. Bonus stock awards are evidenced by written
agreements in such form as may be determined by the board of directors. Bonus
shares are awarded at the fair market value of such shares at date of award.
The bonus shares are issued without the payment of any cash consideration by
the grantee (subject to our right to require the grantee to pay to us certain
amounts to satisfy our withholding obligations with respect to federal and
state income taxes. The value of the bonus shares at the time of award is
reported on the grantee's W-2 for the year in which the award is made.
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All shares of bonus stock are subject to our right to repurchase these
shares upon the termination of the grantee's employment for any reason, as
follows: (1) If termination of employment occurs within three years from date
of the award, the purchase price is the value of such bonus shares on the
initial award date, plus interest at the annual prime rate less 1% during the
period from the initial award date through the date of repurchase, or (2) if
termination of employment occurs after three years from date of award, the
price to be paid upon repurchase is the "fair market value" as described in the
repurchase right applicable to the stock options (described above). All shares
of bonus stock are also subject to the same right of first refusal applicable
to stock options.
401(k) PLAN
We have adopted a tax-qualified employee savings and retirement plan,
or 401(k) plan, covering all of our full-time employees. Pursuant to the 401(k)
Plan, employees may elect to reduce their current compensation up to the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) plan. The 401(k) plan is intended to qualify under
Section 401 of the Code so that contributions by employees to the 401(k) plan
and income earned on plan contributions are not taxable to employees until
withdrawn from the 401(k) plan. The trustees under the 401(k) plan, at the
direction of each participant, invest such participant's assets in the 401(k)
plan in selected investment options. The employees' contributions are fully
vested and nonforfeitable at all times.
EMPLOYMENT AGREEMENTS
On September 17, 1999, we entered into an employment agreement with
Clark H. Mizell as Senior Vice President and Chief Financial Officer, on July
21, 1999 with Charles S. Houser as Chief Executive Officer, on September 9, 1999
with Daniel E.H. Sterling as Vice President of Dealer Sales, on July 20, 1999
with Russell W. Powell as President and on July 20, 1999 with Shaler P. Houser
as Senior Vice President of Corporate Development.
Pursuant to these agreements, each employee is paid an initial annual
base salary (which may be increased but not decreased), a bonus at the board's
discretion and certain benefits. These agreements contain standard
confidentiality and non-disclosure provisions, and standard provisions
providing for assignment of any intellectual property created by each employee
in his or her capacity as an officer of TriVergent.
The employment agreements have rolling terms of two years. We 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." 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 we terminate 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 we materially breach the agreement or there is an
"involuntary termination," as defined in the agreement, he or she is entitled
to severance payments of 24 months, immediate vesting of his or her options,
and other benefits. The employee is entitled to have his or her severance
payments grossed up for tax purposes if his or her termination occurs after a
"change in control."
A "involuntary termination" is generally defined to mean the
termination of the employee's employment by the employee following a "change in
control" which, in the sole judgment of the employee, is due to (i) a change of
the employee's responsibilities, position, authority or duties (including
changes resulting from the assignment to the employee of any duties
inconsistent with his or her positions, duties or responsibilities as in effect
immediately prior to the "change in control"); or (ii) a change in the terms or
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status (including the rolling term status) of the agreement; or (iii) a
reduction in the employee's compensation or benefits; or (iv) a forced
relocation of the employee outside the Greenville metropolitan area; or (v) a
significant increase in the employee's travel requirements.
NONCOMPETITION AGREEMENTS
We have entered into substantially identical, standard noncompetition
agreements with each of our executive officers that preclude such officer from
participating in, or in any respect being associated with, any
telecommunications business that competes with us within any metropolitan
statistical service area in which we provide services on the date of the
termination of the officer's employment. This period of noncompetition is
applicable during such officer's employment with us 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 our employees or customers under
certain circumstances, and contains standard confidentiality provisions with
respect to proprietary and confidential information. The agreement also
contains certain provisions that treat as our property all property, including
intellectual property, created by the officer during his or her employment that
relates to our business.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK PURCHASES
Since our inception, certain executive officers, directors and
shareholders beneficially owning 5% or more of a class or series of our stock
have purchased our 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, we and the purchasers entered into registration rights agreements
and a stockholders' agreement. The stockholders' agreement will terminate
automatically on the closing of this offering. The registration rights
agreements are described below, under the heading "-Registration Rights
Agreements."
In October 1997, Shaler P. Houser, Charles S. Houser and Charles L.
Houser purchased 1,900,000, 1,200,000 and 1,800,000 shares of our 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 common stock, respectively, for $0.098 per share. Russell Powell
purchased 800,000 shares of TriVergent common stock for $0.005 per share. Janie
P. Houser is the wife of Charles S. Houser and the mother of Shaler P. and
Charles L. Houser. Jennifer L. Houser is the daughter of Charles S. Houser and
the sister of Shaler P. and Charles L. 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., Russell W. Powell and Judith
C. Slaughter purchased 750,000, 100,000 and 100,000 shares of our common stock,
respectively, 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), Jennifer L. Houser and Russell Powell purchased
4,000, 55,114, 111,110, 44,444, 44,446 and 4,000 shares of our common stock,
respectively, for $2.25 per share.
In October 1998, we sold 2,083,334 shares of our Series A Convertible
Preferred Stock to each of Richland Ventures II, L.P. and First Union Capital
Partners for $2.40 per share. In December 1998, we sold Charles S. Houser, the
Houser Charitable Remainder Unitrust and Willou & Co. 41,667, 41,667 and
416,670 shares of its Series A Convertible Preferred Stock, respectively, for
$2.40 per share.
In July 1999, Ronald Kirby and his wife Victoria Kirby received
126,219 and 136,739 shares of TriVergent common stock, respectively, in
connection with our acquisition of DCS, Inc. These shares were valued at $2.40
per share by the parties to the merger.
In July 1999, we sold Richland Ventures II, L.P., Richland Ventures
III, L.P. (an affiliate of Richland Ventures II, L.P.), First Union Capital
Partners, Inc., Moore Global Investments, Ltd., Remington Investment
Strategies, L.P. (an affiliate of Moore Global Investments, Ltd.), Boston
Millennia Partners Limited Partnership, Boston Millennia Associates I
Partnership (an affiliate of Boston Millennia Partners Limited Partnership),
John R. Tyrrell (an affiliate of Richland Ventures II, L.P. and Richland
Ventures III, L.P.), Charles S. Houser, the Houser Charitable Remainder
Unitrust, Joseph A. Lawrence and William H. Oberlin 666,666, 2,666,667,
1,466,667, 2,666,667, 2,666,667, 1,844,257, 22,410, 20,000, 166,666, 66,666,
53,333 and 26,667 shares of our Series B Convertible Preferred Stock,
respectively, at $3.75 per share.
In February 2000, we sold Richland Ventures II, L.P., Richland
Ventures III, L.P., First Union Capital Partners, Inc., Moore Global
Investments, Ltd., Remington Investment Strategies, L.P., Boston Millennia
Partners Limited Partnership, Boston Millennia Associates I Partnership,
Toronto Dominion Capital, Inc.,
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Newcourt Commercial Finance, BancAmerica Capital Investors, William H. Oberlin
and Joseph A. Lawrence 588,235, 1,035,295, 1,176,471, 1,035,295, 1,035,295,
1,279,080, 15,038, 2,352,941, 1,176,471, 1,176,471, 70,588 and 50,000 shares of
our Series C Convertible Preferred Stock, respectively, for $4.25 per share.
In March 2000, we sold Moore Technology Venture Fund II L.P. (an
affiliate of Moore Global Investments, Ltd. and Remington Investment
Strategies, L.P.), CIBC WMC Inc., Nortel Networks Inc., John R. Tyrrell, Portia
B. Ortale, Laura Farish Chadwick Management Trust, The Chadwick 1998 Children's
Trust, Patrick S. Hale, Mark Eric Isaacs, Linda F. Swafford, Beverly Ann
Schrichte, G. Michael Cassity, Riley M. Murphy, Ronald Kirby, G. Randolph
McDougald and J.W. Adams 282,352, 1,764,706, 1,176,471, 51,765, 28,236, 11,765,
11,765, 5,882, 5,882, 1,176, 1,176, 212,940, 35,000, 52,941, 23,529 and 20,000
shares of our Series C Convertible Preferred Stock, respectively, for $4.25 per
share. Portia B. Ortale, Laura Farish Chadwick Management Trust, The Chadwick
1998 Children's Trust, Patrick S. Hale, Mark Eric Isaacs, Linda F. Swafford and
Beverly Ann Schrichte are all affiliates of Richland Ventures II, L.P. and
Richland Ventures III, L.P.
In April 1998, we issued Charles S. Houser a warrant for 100,000
shares of our common stock with an exercise price of $2.25 per share as
consideration for a personal guaranty of a $1,000,000 line of credit from a
commercial bank. In March 1999, we issued each of Charles S. Houser and the
Houser Charitable Remainder Unitrust warrants for 9,000 shares of our common
stock with an exercise price of $2.00 per share. In April 1999, we issued each
of Richland Ventures II, L.P. and First Union National Bank warrants for 18,000
shares of our common stock with an exercise price of $2.00 per share. In May
1999, TriVergent issued Nortel Networks Inc. a warrant for 652,089 shares of
our common stock with an exercise price of $2.00 per share. 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 our Series
1999 Notes equal to $250,000, $250,000, $500,000 and $500,000 respectively.
Nortel Networks Inc. purchased our Series 1999A Note in the principal amount of
$4,000,000 and entered into a credit facility as TriVergent Communications,
Inc.'s creditor providing for a line of credit of up to $42,000,000.
REGISTRATION RIGHTS AGREEMENTS
We have entered into substantially similar registration rights
agreements with a number of the purchasers of our capital stock, including all
purchasers of our preferred stock. These agreements require us to register our
securities held by these shareholders, subject to specified conditions and
limitations. After completion of this offering, all our preferred stock will be
converted to common stock, and these registration rights will relate to the
sale of shares of our common stock. These agreements will continue in effect
after this offering. These agreements generally provide for three "types" of
registration rights: (1) "demand rights," where a specified percentage of the
shareholders party to an agreement can require us to register their shares, (2)
"S-3 rights," which is a short-form registration statement available under
certain circumstances and (3) "piggy-back rights," which entitle the holders to
include their shares in a primary or secondary registered public offering of
our stock. Subject to certain limitations, we are required to bear all
registration expenses, including the cost of independent legal counsel for the
selling holders of registrable shares, and other expenses in connection with
these registrations (but excluding underwriting discounts and commissions). We
must also provide appropriate indemnification to our selling shareholders under
these agreements. These registration rights also contain other provisions
typical of such agreements. The table below sets forth information with respect
to these registration rights agreements.
The registration rights under these agreements have been waived, and
the shareholders have agreed not to sell their shares for certain periods as
described under the heading "Shares Eligible for Future Sale--Lock-Up
Agreements."
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AMOUNT SHARES OF COMMON
NUMBER OF SHELF (S-3) PIGGY-BACK REQUIRED TO STOCK SUBJECT TO THE
HOLDERS DEMAND RIGHTS RIGHTS RIGHTS DEMAND AGREEMENT
------- ------------- ----------- ----------- ----------- --------------------
Seruus Telecom Fund, L.P. 1 None Yes Majority 880,500
50% of Series A
Holders of Series A registrable
Preferred Stock 3 Unlimited Yes shares 4,711,872
30% of Series B
Holders of Series B registrable
Preferred Stock 3 Unlimited Yes shares 13,866,663
30% of Series C
Holders of Series C registrable
Preferred Stock 3 Unlimited Yes shares 15,776,471
TRANSACTIONS WITH AFFILIATES
On November 13, 1998, we entered into an arrangement with Seruus
Ventures, LLC, an investment services firm, to provide investment-related
services to us. During 1998 and 1999, we paid $13,788 and $61,448,
respectively, to Seruus Ventures under this arrangement. Charles S. Houser and
Shaler P. Houser are principals of Seruus Ventures, LLC.
In connection with Riley M. Murphy's employment, we loaned Ms. Murphy
$148,750 at an interest rate of 10% per year, with the principal on such loan
being due and payable on March 15, 2003. Interest payments are payable on each
anniversary of the note until maturity. The proceeds of this loan were used to
purchase our preferred stock.
In connection with Michael Cassity's employment, we 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 us. We, in our 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 our preferred stock.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock, including preferred stock on an as converted
basis, as of March 31, 2000, and the percentages of such stock held at that
date as adjusted to reflect the sale of the shares offered by us in this
offering for:
- each person who is known by us to own beneficially more than
5% of any class of our capital stock, including preferred
stock;
- each of our directors;
- each executive officer named in the compensation table; and
- all directors and executive officers as a group.
Unless otherwise indicated below, each entity or person listed below
maintains a mailing address of c/o TriVergent Corporation, 200 North Main
Street, Greenville, SC 29601. Unless otherwise indicated below, to our
knowledge each person or group identified possesses sole voting and investment
power with respect to the shares beneficially owned by such stockholder,
subject to community property laws where applicable.
The numbers of shares and percentages are determined on the basis of
(a) 11,864,960 shares of common stock outstanding on March 31, 2000, (b)
34,354,806 shares of common stock issuable on the automatic conversion, on the
issuance of the shares offered by this prospectus, of all outstanding shares of
preferred stock and accrued dividends thereunder (calculated on the basis of an
assumed public offering price of $ per share), (c) shares offered by this
prospectus, assuming no exercise of the underwriters' over-allotment option,
and (d) treating shares issuable pursuant to options or warrants that are
exercisable currently or within 60 days of March 31, 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.
PERCENT OF COMMON STOCK
NUMBER OF OUTSTANDING
SHARES -----------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------ ------------
DIRECTORS AND EXECUTIVE OFFICERS
Charles S. Houser 1,173,349 (1) 2.53% %
G. Michael Cassity 294,118 *
Shaler P. Houser 2,219,834 (2) 4.77%
Clark H. Mizell 56,208 (3) *
Russell W. Powell 1,144,000 (4) 2.46%
Riley M. Murphy 35,000 *
Judith C. Slaughter 224,044 (5) *
Randy McDougald 73,529 (6) *
Vincent M. Oddo 39,000 (7) *
Ronald Kirby 335,900 (8) *
J.W. Adams 20,000 *
William Oberlin 103,255 (9) *
Joseph Lawrence 103,333 *
Jack Tyrrell 7,044,510 (10) 15.24%
Robert S. Sherman 2,734,118 (11) 5.97%
Alan N. Colner 7,686,276 (12) 16.61%
Watts Hamrick 4,726,472 (13) 10.23%
ALL DIRECTORS & EXECUTIVE OFFICERS AS A GROUP 28,792,554 61.00%
(17 PEOPLE)
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PERCENT OF COMMON STOCK
NUMBER OF OUTSTANDING
SHARES -----------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------ ------------
5% OWNERS (NOT INCLUDED ABOVE)
Houser Group 7,598,670 (14) 16.26%
Moore Group 7,686,276 (15) 16.61%
Richland Group 7,044,510 (16) 15.24%
First Union Capital Partners, Inc. 4,726,472 (17) 10.23%
Boston Millennia Group 2,760,785 (18) 5.97%
Toronto Dominion Capital (USA), Inc. 2,352,941 5.09%
- ---------
* Denotes less than one percent.
(1) Includes only shares directly owned by Charles S. Houser and 109,000
shares issuable upon the exercise of options and warrants exercisable
within 60 days of March 31, 2000. See note 14 for a description of
other shares that might be construed as beneficially owned by Mr.
Houser.
(2) Includes only shares directly owned by Shaler P. Houser and 320,000
shares issuable upon the exercise of options and warrants exercisable
within 60 days of March 31, 2000. See note 14 for a description of
other shares that might be construed as beneficially owned by Mr.
Houser.
(3) Includes 10,000 shares in Mr. Mizell's SSB IRA Rollover and 46,208
shares issuable upon the exercise of options exercisable within 60
days of March 31, 2000.
(4) Includes 240,000 shares issuable upon the exercise of options
exercisable within 60 days of March 31, 2000.
(5) Includes 124,444 shares issuable upon the exercise of options
exercisable within 60 days of March 31, 2000.
(6) Includes 50,000 shares issuable upon the exercise of options
exercisable within 60 days of March 31, 2000.
(7) Includes 29,000 shares issuable upon the exercise of options
exercisable within 60 days of March 31, 2000.
(8) Includes 136,739 shares owned by Mr. Kirby's wife Victoria Kirby,
20,000 shares issuable upon the exercise of options held by Mr. Kirby
and exercisable within 60 days of March 31, 2000. Mr. Kirby disclaims
beneficial ownership of all shares beneficially owned by Ms. Kirby.
(9) Includes 6,000 shares issuable upon the exercise of options
exercisable within 60 days of March 31, 2000.
(10) Includes 7,044,510 shares beneficially owned by the Richland Group
(see note 16 below). Mr. Tyrrell disclaims beneficial ownership of all
of these shares.
(11) Represents shares beneficially owned by the Boston Millennia Group
(see note 18 below). Mr. Sherman disclaims beneficial ownership of all
of these shares.
(12) Includes 7,686,276 shares beneficially owned by the Moore Group (see
note 15 below). Mr. Colner disclaims beneficial ownership of all of
these shares.
(13) Includes 4,726,472 shares beneficially owned by First Union Capital
Partners, Inc. (see note 17 below). Mr. Hamrick disclaims beneficial
ownership of all of these shares.
(14) 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. Each person
listed below disclaims beneficial ownership of all shares not shown on
the table below as being directly owned by that person.
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PERCENT OF COMMON STOCK
NUMBER OF OUTSTANDING
SHARES -----------------------
BENEFICIALLY PRIOR TO AFTER
NAME RELATIONSHIP OWNED OFFERING OFFERING
- ---- ------------ ------------ -------- --------
Charles S. Houser 1,173,349 2.53%
Shaler P. Houser Charles S. Houser's son 2,219,834 4.77%
Charles L. Houser Charles S. Houser's son 1,605,000 3.47%
Seruus Telecom Fund, L.P. Charles. S and Shaler P. Houser are 861,110 1.86%
principals
Janie P. Houser Charles S. Houser's wife 549,098 1.19%
Houser Enterprises, L.P. Family Limited Partnership 360,000 * *
Shaler P. Houser, general partner
Melissa Houser Charles L. Houser's wife 240,000 * *
Seruus Ventures, LLC Charles S. and Shaler P. Houser are 150,000 * *
principals
Jennifer L. Houser Charles S. Houser's daughter 100,000 * *
Houser Charitable Remainder Charles S. and Janie P. Houser are 152,777 * *
Unitrust trustees
Irrevocable Trust FBO Jennifer L. Trust for Charles S. Houser's 50,000 * *
Houser daughter
Charles Schwab & Co., Inc. FBO Trust for Charles S. Houser 44,446 * *
Charles S. Houser
Mr. & Mrs. Robert L. Sims Charles L. Houser's parents-in-law 35,000 * *
Charles S. Houser Family Trust Estate Planning Trust 13,333.33 * *
Agreement I
Charles S. Houser Family Trust Estate Planning Trust 13,333.33 * *
Agreement II
Charles S. Houser Family Trust Estate Planning Trust 13,333.33 * *
Agreement III
Nicole Houser Shaler P. Houser's wife 6,000 * *
Charles Davis Houser Shaler P. Houser's minor son 4,166 * *
Charles Davis Houser Trust Trust for Shaler P. Houser's son 4,000 * *
David R. Houser Charles S. Houser's brother 1,000 * *
John R. Houser Charles S. Houser's brother 1,000 * *
Morton Houser Charles S. Houser's brother 1,000 * *
Sue M. Houser Charles S. Houser's mother 1,000 * *
Total 7,598,670 16.26%
- ----------------------
* Denotes less than one percent.
The number of shares shown as beneficially owned by the Houser
Charitable Remainder Unitrust includes 9,000 shares issuable upon
exercise or warrants. The numbers of shares shown as beneficially
owned by Charles S. Houser, Shaler P. Houser and Charles L. Houser
include 109,000, 320,000, and 80,000 shares, respectively, issuable
upon exercise of options which are exercisable within 60 days of March
31, 2000.
(15) Includes 1,850,981 shares owned by Moore Overseas Technology Venture
Fund, LDC, 1,850,981 owned by Moore Technology Venture Fund, LLC,
1,850,981 shares owned by Moore Global Investments, Ltd., 1,850,981
shares owned by Remington Investment Strategies, L.P. and 282,352
shares owned by Moore Technology Venture Fund II, L.P. All of the
foregoing entities are affiliates.
(16) 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.
(17) Includes 18,000 shares issuable upon exercise of warrants held by
First Union Capital Partners, Inc.
(18) Includes 2,696,670 shares owned by Boston Millennia Partners Limited
Partnership and 37,448 shares owned by Boston Millennia Associates I
Partnership.
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DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
Our total authorized capital stock consists of 100,000,000 shares of
common stock, par value $0.001 per share, and 50,000,000 shares of "blank
check" preferred stock. As of March 31, 2000, there were 11,864,960 shares of
our common stock outstanding, held of record by 68 stockholders. As of March
31, 2000, there were an aggregate of 34,354,806 shares of convertible preferred
stock outstanding consisting of 4,711,672 shares of Series A preferred stock,
13,866,663 shares of Series B preferred stock and 15,776,471 shares of Series C
preferred stock. All outstanding shares of preferred stock will be
automatically converted into an aggregate of 34,354,806 shares of common stock
upon the closing of this offering and will no longer be issued and outstanding.
After this conversion, we will have 50,000,000 shares of "blank check"
preferred stock authorized and unissued. After this offering, we will have
outstanding shares of common stock if the underwriters do not
exercise their over-allotment option, or shares of common stock if the
underwriters exercise their over-allotment option in full.
COMMON STOCK
The holders of outstanding shares of our common stock are entitled to
receive dividends out of assets legally available therefor at such time and in
such amounts as the board of directors may from time to time determine subject
to the prior rights of the holders of any preferred stock. The shares of common
stock are not convertible and the holders have no preemptive or subscription
rights to purchase any of our securities. However, our board of directors may,
without further action by our stockholders, grant such convertible preemptive
or subscription rights from time to time. Upon our liquidation, dissolution or
winding up, the holders of common stock are entitled to receive, pro rata, our
assets which are legally available for distribution, after payment of all debts
and other liabilities and subject to the rights of any holders of preferred
stock. Each outstanding share of common stock is entitled to one vote on all
matters submitted to a vote of stockholders. There is no cumulative voting.
We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol "TRIV."
PREFERRED STOCK
At the closing of this offering, our outstanding shares of preferred
stock will be automatically converted into common stock. For a description of
the preferred stock please see note 7 to the notes to the financial statements
included elsewhere in the prospectus. Because there will be no shares of
preferred stock outstanding when we complete this offering, the following
information pertains to preferred stock we may issue in the future under our
certificate of incorporation.
Our board of directors has the sole authority, without shareholder
vote, to issue shares of authorized but unissued preferred stock to whomever
and for whatever purposes it, in its sole discretion, deems appropriate. The
relative rights, preferences and limitations of the preferred stock are
determined by our board of directors in its sole discretion. Among other
things, the Board may designate with respect to the preferred stock, without
further action of our shareholders, the dividend rate and whether dividends
shall be cumulative or participating or possess other special rights, the
voting rights, the rights and terms of redemption, the liquidation preferences,
any rights of conversion and any terms related thereto, and the price or other
consideration for which the preferred stock shall be issued. The preferred
stock could be utilized to impede the ability of third parties who attempt to
acquire control of us without the cooperation of our board of directors. Upon
completion of this offering, there will be no shares of preferred stock
outstanding, and we have no present intention to issue any shares of preferred
stock.
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WARRANTS
The table below lists all of the outstanding warrants to purchase our
common stock and the exercise prices and expiration dates of the warrants. All
of these warrants are currently exercisable.
AGGREGATE
NUMBER OF
UNDERLYING
NUMBER OF WARRANTS COMMON SHARES(#) EXERCISE PRICE EXPIRATION DATE
------------------ ------------- -------------- ---------------
15 232,560 $ 2.00 from 3/16/02 to 5/3/02
2 652,089 2.00 5/27/06
2 200,000 2.25 none
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND DELAWARE GENERAL
CORPORATION LAW
OUR CERTIFICATE OF INCORPORATION AND DELAWARE GENERAL CORPORATION LAW
Certain provisions of Delaware law and our certificate of
incorporation could make the following more difficult:
- the acquisition of us by means of a tender offer;
- acquisition of us by means of a proxy contest or otherwise;
or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to acquire control of
us to first negotiate with our board. We believe that the benefits of increased
protection of the potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging such proposals because negotiation of such
proposals could result in an improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS
Our 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 by:
- a majority of the directors then in office, though less than
a quorum is then in office; or
- by the sole remaining director.
In addition, our certificate of incorporation states that directors
may only be removed for cause by at least two-thirds of the outstanding stock
entitled to vote.
STOCKHOLDER MEETINGS
Under our certificate of incorporation, only a majority of the board
of directors, which the corporation would have if there were no vacancies, may
call special meetings of stockholders.
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REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS
Our by-laws will establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law,
an anti-takeover law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless the "business combination" or
the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder"
is a person who, together with affiliates and associates, owns or within three
years prior to the determination of interested stockholder status, did own 15%
or more of a corporation's voting stock. The existence of this provision may
have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held
by stockholders.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT
Upon the completion of the offering, our certificate of incorporation
will eliminate the right of stockholders to act by written consent without a
meeting. This provision may have the effect of discouraging, delaying or making
more difficult a change in control of our company or preventing the removal of
incumbent directors even if a majority of our stockholders were to deem such an
action to be in our best interests.
UNDESIGNATED CAPITAL STOCK
The authorization of undesignated capital stock will make it possible
for our board of directors to issue stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
TriVergent. These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control of our company or management.
LIMITATION OF LIABILITY
As permitted by the Delaware general corporation law, our certificate
of incorporation provides that our directors shall not be personally liable to
us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
- under Section 174 of the Delaware general corporation law,
relating to unlawful payment of dividends or unlawful stock
purchase or redemption of stock; or
- for any transaction from which the director derives an
improper personal benefit.
As a result of this provision, we and our stockholders may be unable
to obtain monetary damages from a director for breach of his or her duty of
care.
Our certificate of incorporation provides that we will indemnify of
our directors and officers to the fullest extent authorized by the Delaware
General Corporation Law, and we have purchased such insurance
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on behalf of our directors and officers. The indemnification provided under our
certificate of incorporation and bylaws includes the right to be paid expenses
in advance of any proceeding for which indemnification may be had, provided
that the payment of these expenses incurred by a director or officer in advance
of the final disposition of a proceeding may be made only upon delivery to us
of an undertaking by or on behalf of the director or officer to repay all
amounts so paid in advance if it is ultimately determined that the director or
officer is not entitled to be indemnified. If we do not pay a claim for
indemnification within 60 days after we have received a written claim, the
claimant may at any time thereafter bring an action to recover the unpaid
amount of the claim and, if successful, the director or officer will be
entitled to be paid the expense of prosecuting the action to recover these
unpaid amounts. In any such action, we shall have the burden of proving that
the claimant was not entitled to the requested indemnification or payment of
expenses under applicable law.
REGISTRATION RIGHTS
We are a party to certain registration rights agreements with certain
of our shareholders. See "Certain Relationships and Related
Transactions--Registration Rights Agreement."
STOCK TRANSFER AGENT
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C. New York, New York.
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SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options, in the public
market following this offering, the market price of our common stock could
decline. These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.
Upon completion of this offering, we will have outstanding an
aggregate of shares of our common stock, assuming the issuance of
shares of common stock offered by us, no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, all of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act; provided
however, that any shares purchased by our "affiliates" as that term is defined
in Rule 144 under the Securities Act, may be sold only in compliance with Rule
144 summarized below.
The additional shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act and are restricted shares.
Restricted shares can be resold pursuant to a registered transaction, or Rule
144 or 701. All these shares will be subject to lock-up agreements described
below, on the effective date of this offering. Giving effect to the lock-up
agreements, the restricted shares set forth in the table below will become
eligible for sale on the dates set forth below. In addition, holders of stock
options could exercise such options and sell certain of the restricted shares
issued for exercise as described below.
ELIGIBILITY OF RESTRICTED SHARES
NUMBER OF DAYS AFTER THE DATE OF THIS PROSPECTUS FOR SALE IN PUBLIC MARKET
------------------------------------------------ -------------------------
Immediately after the date of this prospectus(1)
90 days, in some cases, to price and volume limitations
135 days, in some cases, to price and volume limitations
180 days, in some cases, to price and volume limitations
- ---------------------
(1) Assumes no exercise of underwriters' option to purchase additional
shares in the offering or the sale of shares of underlying stock.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person who has beneficially owned shares
of our common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then
outstanding, which will equal approximately ___ shares
immediately after this offering; or
- the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to
that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
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RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
REGISTRATION RIGHTS
Upon completion of this offering, holders of shares of our common
stock will have the right to demand registration under the Securities Act of
1933 at our expense of all or a portion of the shares of common stock they own.
See "Certain Relationships and Related Transactions--Registration Rights
Agreements."
LOCK-UP AGREEMENTS
All of our officers, directors and stockholders have entered into
lock-up agreements under which they agreed not to offer, pledge, sell, contract
to sell, sell any contract or option to purchase, purchase any contract or
option to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of our common stock
or any securities convertible into or exercisable or exchangeable for shares of
our common stock, for a 180 day period after the date of this prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation Incorporated on behalf of the underwriters, subject to limited
exceptions. However, holders of such shares who have not been employees of ours
on or since the date of this prospectus may offer, sell or otherwise dispose of
25% of their shares on the later of the end of the 90-day period after the date
of this prospectus or on the second trading day after the first public release
of our quarterly results if the last reported sale price on the Nasdaq National
Market for 20 of the 30 trading days ending on the last trading day of this
90-day period is at least twice the price per share in the initial public
offering. These stockholders may also offer, sell or otherwise dispose of an
additional 25% of their shares after the end of the 135-day period after the
date of this prospectus if the price per share of common stock has achieved the
same target level. However, Donaldson, Lufkin & Jenrette Securities
Corporation, may in its sole discretion, at any time without notice, release
all or any portion of the shares subject to lock-up agreements. Furthermore,
any shares released under these conditions must be sold through Donaldson,
Lufkin & Jenrette Securities Corporation or any of its affiliates acting as
broker. For more information, please see "Underwriting."
RULE 701
In general, under Rule 701 of the Securities Act, any of our
employees, directors, consultants or advisors who purchases shares of our
common stock from us in connection with a compensatory stock or option plan or
other written agreement is eligible to resell those shares 90 days after the
effective date of this offering in reliance on Rule 144, without compliance
with some of the restrictions, including the holding period, contained in Rule
144.
Following this offering, we intend to file a registration statement on
Form S-8 under the Securities Act covering approximately shares of common
stock issued or issuable upon the exercise of stock options, subject to
outstanding options or reserved for issuance under the 1998 Employee Incentive
Plan. Accordingly, shares registered under such registration statement will,
subject to Rule 144 provisions applicable to affiliates, be available for sale
in the open market, except to the extent that such shares are subject to vesting
restrictions or the contractual restrictions described above. See
"Management--Stock Plans."
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UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement dated , 2000, the underwriters named below, who are represented
by Donaldson, Lufkin & Jenrette Securities Corporation, Credit Suisse First
Boston Corporation, First Union Securities, Inc., Thomas Weisel Partners LLC and
DLJdirect Inc., have severally agreed to purchase from us the respective number
of shares of common stock set forth opposite their names below.
UNDERWRITERS NUMBER OF SHARES
Donaldson, Lufkin & Jenrette Securities
Corporation........................................
Credit Suisse First Boston Corporation..................
First Union Securities, Inc.............................
Thomas Weisel Partners LLC..............................
DLJdirect Inc...........................................
----------------
Total..............................................
================
The underwriting agreement provides that the obligations of the
several underwriters to purchase and accept delivery of the shares of our
common stock included in this offering are subject to approval of legal matters
by their counsel and to customary conditions. The underwriters are obligated to
purchase and accept delivery of all the shares of our common stock offered in
this prospectus, other than those covered by the over-allotment option
described below, if they purchase any of the shares of our common stock.
The underwriters propose to initially offer some of the shares of our
common stock directly to the public at the initial public offering price set
forth on the cover page of this prospectus and some of the shares of our common
stock to dealers (including the underwriters) at the initial public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and those dealers may reallow, a concession not in excess of $ per
share on sales to other dealers. After the initial public offering of our shares
to the public, the representatives of the underwriters may change the public
offering price and such concessions at any time without notice. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December 1998.
Since December 1998, Thomas Weisel Partners has been named as a lead or
co-managing underwriter in 159 filed public offerings of equity securities, of
which 110 have been completed, and has acted as a syndicate member in an
additional 88 public offerings of equity securities. Thomas Weisel Partners
does not have any material relationship with us or any of our officers,
directors or other controlling persons, except with respect to its contractual
relationship with us pursuant to the underwriting agreement entered into in
connection with this offering.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation and a member of the selling group, is facilitating the
distribution of the shares sold in this offering over the Internet. The
underwriters have agreed to allocate a limited number of shares to DLJdirect
for sale to its brokerage account holders. An electronic prospectus is
available on the Internet site maintained by DLJdirect Inc. Other than the
prospectus in electronic format, the information on the Internet site relating
to our offering is not part of this prospectus, has not been approved or
endorsed by us or any underwriter and should not be relied on by prospective
purchasers.
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The following table shows the underwriting discount we will pay to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares of our common stock:
FEES PAID BY TRIVERGENT
-----------------------------------------------
NO FULL
EXERCISE EXERCISE
Per share............................ $ $
Total................................ $ $
We have granted to the underwriters an option, exercisable for 30 days
after the date of the underwriting agreement, to purchase up to additional
shares of our common stock at the initial public offering price less the
underwriting fees. The underwriters may exercise their option solely to cover
over-allotments, if any, made in connection with this offering. To the extent
that the underwriters exercise their option, each underwriter will become
obligated, subject to conditions, to purchase a number of additional shares
approximately proportionate to their initial purchase commitment. We will pay
all of the offering expenses, estimated to be $ .
We have agreed to indemnify the underwriters against specified civil
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect of any of
those liabilities.
We, our executive officers and directors and substantially all of our
stockholders have agreed, for a period of 180 days after the date of this
prospectus, not to, without prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation:
- offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any
shares of our common stock or any securities convertible into
or exercisable or exchangeable for our common stock; or
- enter into any swap or other arrangement that transfers all
or a portion of the economic consequences associated with the
ownership of any common stock, regardless of whether any of
the transactions described in these clauses are to be settled
by the delivery of common stock, or such other securities, in
cash or otherwise.
However, 25% of the shares of common stock subject to the restrictions
described above (other than shares owned by our employees) will be released
from these restrictions if the reported last sale price of the common stock on
the Nasdaq National Market is at least twice the initial public offering price
for 20 of the 30 consecutive trading days ending on the last trading day of the
90-day period after the date of this prospectus. These shares will be released
on the later to occur of the end of the 90-day period after the date of this
prospectus or the second trading day after the first public release of our
quarterly results. An additional 25% of the shares subject to the restrictions
described above will be released from these restrictions if the reported last
sale price of the common stock on the Nasdaq National Market is at least twice
the initial public offering price for 20 of the 30 consecutive trading days
ending on the last trading day of the 135-day period after the date of this
prospectus. These shares will be released on the end of the 135-day period
after the date of this prospectus. Furthermore, any shares released under these
conditions must be sold through Donaldson, Lufkin & Jenrette Securities
Corporation or any of its affiliates acting as broker.
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However, we may:
- grant stock options or stock awards under our existing
benefit or compensation plans;
- issue shares of our common stock upon the exercise of
options, warrants or rights or the conversion of currently
outstanding securities; and
- issue, offer and sell shares of our common stock or
securities convertible into, or exercisable or exchangeable
for, our common stock in transactions not involving a public
offering, or in connection with future acquisitions, as long
as each recipient of the securities agrees in writing to be
bound by the restrictions in this paragraph.
In addition, during this period, we have agreed not to file any
registration statement with respect to, and each of our executive officers and
directors and a significant majority of our stockholders have agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock (other than a registration statement registering
options or shares granted under a stock option plan) without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Prior to this offering, there was no established trading market for
our common stock. The initial public offering price for our common stock will
be determined by negotiation among us and the representatives of the
underwriters.
The factors to be considered in determining the initial public
offering price include:
- the history of and the prospects for the industry in which we
compete;
- the ability of our management;
- our past and present operations;
- our prospects for future earnings;
- the general condition of the securities markets at the time
of this offering; and
- the recent market prices of securities of generally comparable
companies.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of our common
stock offered in this prospectus in any jurisdiction where action for that
purpose is required. The shares of our common stock offered in this prospectus
may not be offered or sold, directly or indirectly, nor may this prospectus or
any other offering material or advertisements in connection with the offer and
sale of any shares of our common stock to be distributed or published in any
jurisdiction, except under circumstances that will result in compliance with
the applicable rules and regulations of the jurisdiction. Persons who receive
this prospectus are advised to inform themselves about and to observe any
restrictions relating to the offering of our common stock and the distribution
of this prospectus. This prospectus is not an offer to sell or a solicitation
of an offer to buy any shares of our common stock included in this offering in
any jurisdiction where that would not be permitted or legal.
In connection with this offering, some underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may over-allot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of our common stock in the open market to cover syndicate
short positions or to stabilize the price of our common stock. In addition, the
underwriting syndicate may reclaim selling concessions from syndicate members
and selected dealers if they repurchase previously distributed shares of our
common stock in syndicate covering transactions, stabilizing transactions or
otherwise. These activities may stabilize
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or maintain the market price of our common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
At our request, the underwriters have reserved up to eight percent of
the shares offered by this prospectus for sale at the initial public offering
price to our employees, officers, directors and other individuals associated
with us and members of their families. The number of shares of common stock
available for sale to the general public will be reduced to the extent any
reserved shares are purchased. Any reserved shares not so purchased will be
offered by the underwriters on the same basis as the other shares of our common
stock. Any employees, directors or other persons purchasing such reserved
shares will be prohibited from selling, transferring, assigning, pledging or
hypothecating such shares for a period of three months following the effective
date of this offering.
We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol "TRIV."
88
92
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for us by our counsel, Wyche, Burgess, Freeman & Parham, P.A.,
Greenville, South Carolina. At the time of completion of this offering,
attorneys of Wyche, Burgess, Freeman & Parham, P.A. are expected to own
approximately 33,333 shares of our common stock and warrants to purchase 4,500
shares at $2.00 per share. Certain legal matters will be passed on for us by
Cravath, Swaine & Moore, New York, New York. Various regulatory matters in
connection with this offering are being passed upon for us by Kelley Drye &
Warren LLP, Washington, D.C. Various legal matters in connection with this
offering will be passed upon for the underwriters by Davis Polk & Wardwell, New
York, New York.
EXPERTS
The consolidated financial statements and schedule of TriVergent
Corporation and subsidiaries as of December 31, 1998 and 1999, and for the
period from October 29, 1997 (date of inception) through December 31, 1997 and
for the years ended December 31, 1998 and 1999, have been included herein and in
the registration statement 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.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1, including exhibits and schedules, under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules which are part of the registration statement. For
further information about us and our common stock, you should refer to the
registration statement. Any statements made in this prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the registration statement you should refer to the exhibit for
a more complete description of the matter involved, and each statement in this
prospectus shall be deemed qualified in its entirety by this reference.
You may read and copy all or any portion of the registration statement
or any reports, statements or other information in the files at the public
reference facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
request copies of these documents upon payment of a duplicating fee by writing
to the Commission. You may call the Commission at 1-800-SEC-0330 for further
information on the operation of its public reference rooms. Our filings,
including the registration statement, will also be available to you on the
Internet site maintained by the Commission at http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy
statements and other information with the SEC. You can request copies of these
documents, for a copying fee, by writing to the SEC. We intend to furnish our
stockholders with annual reports containing financial statements audited by our
independent auditors.
89
93
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants....................................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999............................................ F-3
Consolidated Statements of Operations for the period from October 29, 1997 (date of inception)
through December 31, 1997 and for the years ended December 31, 1998 and 1999......................... F-4
Consolidated Statements of Stockholders' Equity for the period from October 29, 1997
(date of inception) through December 31, 1997 and for the years ended December 31, 1998 and 1999...... F-5
Consolidated Statements of 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......................... F-6
Notes to Consolidated Financial Statements.............................................................. F-7
Schedule I - Condensed Financial Information of Registrant............................................. F-23
F-1
94
Once the name of State Communications, Inc., has been changed to TriVergent
Corporation, we will be in a position to render the following report.
KPMG LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
TriVergent Corporation:
We have audited the accompanying consolidated balance sheets of TriVergent
Corporation and subsidiaries 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
TriVergent Corporation and subsidiaries 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.
Greenville, South Carolina
February 25, 2000
F-2
95
TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
1998 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 1,399,204 $ 15,236,706
Investments held to maturity........................... -- 2,691,377
Accounts receivable, net of allowance for uncollectible
accounts of $1,976,000 in 1998 and $186,000 in 1999... 2,603,643 1,316,695
Stock subscriptions receivable......................... 4,208,002 --
Prepaid expenses and other current assets.............. 222,933 694,829
------------ ------------
Total current assets.............................. 8,433,782 19,939,607
Property and equipment...................................... 1,464,939 45,362,889
Less accumulated depreciation.......................... (150,595) (1,305,658)
------------ ------------
Net property and equipment........................ 1,314,344 44,057,231
Goodwill, net of accumulated amortization of $163,214....... -- 2,283,087
Deferred financing costs and other assets................... 194,275 996,739
------------ ------------
Total assets...................................... $ 9,942,401 $ 67,276,664
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable....................................... $ 1,820,561 $ 10,564,550
Accrued expenses....................................... 2,684,205 3,498,294
Current portion of capital lease obligation............ -- 392,086
------------ ------------
Total current liabilities......................... 4,504,766 14,454,930
Term loan................................................... -- 17,099,889
Long-term portion of capital lease obligation............... -- 1,042,632
Note payable to bank........................................ 83,382 57,396
------------ ------------
Total liabilities................................. 4,588,148 32,654,847
------------ ------------
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 and $18,282,174
in 1998 and 1999)..................................... 11,295,468 12,685,163
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 in 1999)............. -- 53,094,446
------------ ------------
Total redeemable preferred stock.................. 11,295,468 65,779,609
------------ ------------
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value, 50,000,000 shares
authorized in 1998 and 100,000,000 in 1999; 10,324,462
and 11,147,920 shares issued in 1998 and 1999,
respectively.......................................... 10,324 11,148
Additional paid-in-capital............................. 6,811,359 7,466,423
Accumulated deficit.................................... (12,762,898) (38,426,743)
Treasury stock, 69,540 common shares in 1999, at
cost.................................................. -- (208,620)
------------ ------------
Total stockholders' deficit....................... (5,941,215) (31,157,792)
------------ ------------
Total liabilities, redeemable preferred stock, and
stockholders' deficit........................... $ 9,942,401 $ 67,276,664
============ ============
See accompanying notes to consolidated financial statements.
F-3
96
TRIVERGENT CORPORATION AND SUBSIDIARIES
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
INCEPTION
THROUGH
DECEMBER 31,
1997 1998 1999
REVENUES: .................................... $ -- $ 5,261,146 $ 25,037,450
Cost of services......................... -- 3,802,036 17,703,754
---------- ------------ ------------
Gross profit....................... -- 1,459,110 7,333,696
---------- ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative
expenses.............................. (39,851) (12,165,893) (23,523,165)
Provision for uncollectible accounts..... -- (1,976,000) (7,285,528)
Depreciation and amortization............ -- (150,595) (1,318,277)
---------- ------------ ------------
Total operating expenses........... (39,851) (14,292,488) (32,126,970)
---------- ------------ ------------
Operating loss..................... (39,851) (12,833,378) (24,793,274)
---------- ------------ ------------
INTEREST INCOME (EXPENSE):
Interest income.......................... -- 123,233 816,057
Interest expense......................... -- (12,902) (1,468,991)
---------- ------------ ------------
Interest income (expense), net..... -- 110,331 (652,934)
---------- ------------ ------------
Loss before extraordinary item..... (39,851) (12,723,047) (25,446,208)
Extraordinary item -- early extinguishment of
debt........................................ -- -- (217,637)
Net loss........................... (39,851) (12,723,047) (25,663,845)
Preferred stock accretion.......... -- (57,863) (2,603,040)
---------- ------------ ------------
Net loss to common stockholders.... $ (39,851) $(12,780,910) $(28,266,885)
========== ============ ============
Net loss per common share, basic
and dilutive..................... $ (.01) $ (1.37) $ (2.60)
========== ============ ============
Weighted average common shares
outstanding, basic and
dilutive......................... 6,390,476 9,308,771 10,868,729
========== ============ ============
See accompanying notes to consolidated financial statements.
F-4
97
TRIVERGENT CORPORATION AND SUBSIDIARIES
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
ADDITIONAL
PAID-IN- TOTAL
COMMON CAPITAL ACCUMULATED TREASURY STOCKHOLDERS'
STOCK AMOUNT DEFICIT STOCK EQUITY (DEFICIT)
Balance, October 29, 1997 (date of
inception)........................... $ -- -- -- -- --
Issuance of common stock, 6,600,000
shares in initial private offering at
average.............................. 6,600 698,400 -- -- 705,000
price of $.11 per share
Net loss............................... -- -- (39,851) -- (39,851)
------- ---------- ----------- -------- -----------
Balance, December 31, 1997............. 6,600 698,400 (39,851) -- 665,149
Issuance of common stock, 1,761,000
shares at $1.00 per share............ 1,761 1,759,239 -- -- 1,761,000
Issuance of common stock, 1,963,462
shares at $2.25 per share, net of
$4,243 issue costs................... 1,963 4,411,583 -- -- 4,413,546
Net loss............................... -- -- (12,723,047) -- (12,723,047)
Accretion of preferred stock........... -- (57,863) -- -- (57,863)
------- ---------- ----------- -------- -----------
Balance, December 31, 1998............. 10,324 6,811,359 (12,762,898) -- (5,941,215)
Issuance of common stock in
acquisitions, 808,792 shares at $2.40
per share............................ 809 1,940,292 -- -- 1,941,101
Issuance of 14,666 shares of common
stock at $1.50 and $2.25 per share
pursuant to exercise of stock
options.............................. 15 22,484 -- -- 22,499
Issuance of 884,649 common stock
detachable warrants, net of $7,933
issue costs.......................... -- 1,295,328 -- -- 1,295,328
Acquisition of 69,540 shares of common
stock at $3.00 per share............. -- -- -- (208,620) (208,620)
Net loss............................... -- -- (25,663,845) -- (25,663,845)
Accretion of preferred stock........... -- (2,603,040) -- -- (2,603,040)
------- ---------- ----------- -------- -----------
Balance, December 31, 1999............. $11,148 7,466,423 (38,426,743) (208,620) (31,157,792)
======= ========== =========== ======== ===========
See accompanying notes to consolidated financial statements.
F-5
98
TRIVERGENT CORPORATION AND SUBSIDIARIES
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
INCEPTION
THROUGH
DECEMBER 31,
1997 1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(39,851) $(12,723,047) $(25,663,845)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for uncollectible accounts.............. -- 1,976,000 7,285,528
Depreciation and amortization..................... -- 150,595 1,318,277
Other amortization................................ -- -- 145,833
Amortization of debt discount..................... -- -- 339,727
Extraordinary item -- early extinguishment of
debt............................................ -- -- 217,637
Changes in operating assets and liabilities:
Accounts receivable............................. -- (4,579,643) (5,568,734)
Other assets.................................... -- (194,275) 194,275
Prepaid expenses and other current assets....... (16,607) (206,326) (229,100)
Accounts payable................................ -- 1,820,561 1,196,743
Accrued expenses................................ -- 2,684,205 807,198
-------- ------------ ------------
Net cash used in operating activities........ (56,458) (11,071,930) (19,956,461)
-------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments held to maturity......................... -- -- (2,691,377)
Purchases of property and equipment.................. -- (1,464,939) (34,965,980)
Cash paid for acquisition, net of cash acquired...... -- -- (1,106,630)
-------- ------------ ------------
Net cash used in investing activities........ -- (1,464,939) (38,763,987)
-------- ------------ ------------
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)
Proceeds from Series 1999 notes payable and
warrants.......................................... -- -- 10,460,000
Payment of Series 1999 notes payable................. -- -- (4,210,000)
Purchase of treasury stock........................... -- -- (208,620)
Proceeds from exercise of stock options.............. -- -- 22,499
Proceeds from issuance of preferred stock............ -- 7,029,603 49,839,121
Proceeds from issuance of common stock............... 109,500 6,770,046 --
Deferred financing costs............................. -- -- (1,142,572)
Proceeds from term loan and warrants................. -- -- 17,834,394
Other................................................ -- -- (10,886)
-------- ------------ ------------
Net cash provided by financing activity...... 109,500 13,883,031 72,557,950
-------- ------------ ------------
Net increase in cash and cash equivalents............ 53,042 1,346,162 13,837,502
Cash and cash equivalents at beginning of year....... -- 53,042 1,399,204
-------- ------------ ------------
Cash and cash equivalents at end of year............. $ 53,042 $ 1,399,204 $ 15,236,706
======== ============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid........................................ $ -- $ 1,952 $ 939,381
======== ============ ============
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
======== ============ ============
See accompanying notes to consolidated financial statements
F-6
99
TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
TriVergent Corporation, formerly 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) 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.
(C) 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.
(D) 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-7
100
TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(E) 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.
(F) 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.
(G) DEFERRED FINANCING COSTS
Deferred financing costs consist of legal fees and other fees
related to the Company's line of credit. These costs are being
amortized on a straight-line basis over the term of the related debt
(four years). Amortization expense for these costs is included as a
component of interest expense in the consolidated statements of
operations.
(H) 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.
(I) 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.
(J) 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.
F-8
101
TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(K) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets including goodwill in
accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair
value of the assets. There have been no impairments through December 31,
1999. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(L) 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.
(M) 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.
(N) STOCK OPTION PLAN
SFAS No. 123 allows an entity to apply the provisions of APB Opinion
No. 25 and provide pro forma net loss and, if loss per share is presented,
pro forma loss per share disclosures for employee stock option grants made
as if the fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the intrinsic-value-based
method under the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
F-9
102
TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(O) 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.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 requires that every derivative be recorded as
either an asset or liability in the balance sheet and measured at its fair
value. SFAS No. 133 also requires that changes in the derivative's fair
market value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company formally
document, designate and assess the effectiveness of transactions that
require hedge accounting. The Company is required to adopt SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," on a prospective basis for interim
periods and fiscal years beginning January 1, 2001. The Company does not
anticipate that adoption SFAS No. 133 will have a material effect on its
financial statements.
In December 1999, the Securities and Exchange Commission staff
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition."
SAB 101 provides interpretive guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB 101 must be applied to
financial statements no later than the second fiscal quarter of 2000. The
Company does not believe adoption will have a material impact on its
consolidated financial position or results of operations.
(Q) 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
F-10
103
TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
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.
(R) 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.
(S) 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
applicable to common stockholders, there were no comprehensive
income components for the three years ended December 31, 1999.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1998 1999
Switch equipment.................................... $ -- $34,920,377
Computer equipment and software..................... 1,338,688 9,090,448
Furniture, fixtures and other equipment............. 126,251 986,645
Leasehold improvements.............................. -- 365,419
---------- -----------
1,464,939 45,362,889
Less accumulated depreciation....................... (150,595) (1,305,658)
---------- -----------
$1,314,344 $44,057,231
========== ===========
No depreciation expense was recorded in 1999 on the switch equipment costs.
Depreciation of the switch equipment will begin once the switches are placed in
service in 2000. Depreciation expense amounted to $150,595 and $1,155,063 in
1998 and 1999, 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
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TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
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 as
described in Note 15.
4. TERM LOAN
In May 1999, the Company entered into a term loan facility ("term loan")
with Nortel, a major equipment vendor. The term loan provides the Company with
maximum borrowings of $42.0 million at London interbank offered rate plus 4.75%
interest (10.75% at December 31, 1999). The term loan is due in May 2003. The
term loan is secured by all assets of the Company.
In conjunction with the term loan, the Company issued Nortel warrants to
purchase 508,089 shares of common stock at $2.00 per share, expiring on May 27,
2006. The fair value of the warrants was determined to be $1.67 per share. The
fair value of the warrants has been recorded as additional paid-in capital and
as debt discount. The total debt discount of $848,509 is being amortized over
the term of the loan as interest expense. As of December 31, 1999, the
unamortized discount amounted to $724,768.
In February 2000, the Company paid in full the balance of the term loan.
(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
F-12
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TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
value of the warrants was determined to be $1.20 per share. The fair value of
the warrants was recorded as additional paid-in capital and as debt discount.
The debt discount was being amortized over the term of the loan as interest
expense. Notes payable of $6,250,000 were converted to Series B preferred stock
in July 1999, resulting in an extraordinary loss of $167,443 from early
extinguishment of debt. The remaining $210,000 was paid in full in October 1999.
In May 1999, the Company issued $4.0 million of Series 1999A notes to the
lender with detachable warrants. The notes had an original maturity of January
2000 and an interest rate of 13%. The warrants were issued to purchase 144,000
shares of common stock at $2.00 per share expiring on May 27, 2006. The fair
value of the warrants was determined to be $1.67 per share. The fair value of
the warrants was recorded as additional paid-in capital and as debt discount.
The debt discount was being amortized over the term of the loan as interest
expense. This loan was paid in full in October 1999, resulting in an
extraordinary loss of $50,194 from early extinguishment of debt.
6. REDEEMABLE PREFERRED STOCK
SERIES A PREFERRED STOCK
During October 1998, the Company privately sold 4,711,672 shares of its
Series A 5.5% cumulative convertible preferred stock for $2.40 per share. Net
proceeds from the subscriptions from this stock of $7,029,603 were received in
1998. The balance of $4,208,002 was received by the Company in January 1999.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series A preferred stock would be entitled to receive, prior
and in preference to the holders of common stock, (i) an amount for each share
of Series A preferred stock held by them equal to the Series A original purchase
price (as adjusted for stock dividends, splits, combinations, etc.) plus (ii)
any accrued and unpaid dividends.
Each holder of Series A preferred stock has the right to convert each share
into shares of common stock on a one-for-one basis subject to certain conversion
price adjustments. All shares of Series A preferred stock shall automatically be
converted into shares of common stock, (i) at the election of 75% of the holders
or (ii) in the event of a qualified public offering of the Company's common
stock as defined.
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.
F-13
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TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
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 amounted to $671,267.
SERIES B PREFERRED STOCK
During July 1999, the Company privately sold 12,200,000 shares of its
Series B 5.5% cumulative convertible preferred stock for $3.75 per share. Gross
proceeds before expenses from the subscriptions for this stock of $45,750,000
were received during 1999. In addition, $6,250,000 notes payable, discussed in
note 5, were converted into 1,666,662 shares of Series B preferred stock. Total
consideration for the Series B issuance was $52.0 million.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series B preferred will be entitled to receive, prior and in
preference to the holders of Common Stock, (i) an amount for each share of
Series B preferred stock held by them equal to the Series B original purchase
price (as adjusted for stock dividends, splits, combinations, etc.) plus (ii)
any accrued and unpaid dividends.
Each holder of Series B preferred stock has the right to convert each share
into shares of common stock on a one-for-one basis subject to certain conversion
price adjustments. All shares of Series B preferred stock shall automatically be
converted into shares of common stock, (i) at the election of 50% of the holders
or (ii) in the event of a qualified public offering of the Company's common
stock as defined.
Each holder of Series B preferred stock may cause the Company to redeem up
to one-third of the preferred stock originally issued to such holder on the
following dates: (i) February 1, 2005, (ii) February 1, 2006 and (iii) February
1, 2007. In the event that there is a change in control or reorganization or
liquidation or insolvency of the Company, the holders of the Series B preferred
would have the right to request that their shares be redeemed. Such redemptions
would be at a price equal to the greater of fair market value of the Series B
preferred stock on the day of redemption or the original Series B preferred
price (as adjusted for stock dividends, splits, combinations, etc.) plus accrued
and unpaid dividends.
Each share of Series B preferred stock is entitled to a single vote for
every share of common stock then issuable upon its conversion. The holders would
vote with common stock on all matters except as specifically provided or as
otherwise required by law.
The holders would be entitled to receive cumulative dividends in preference
to any dividend on the common stock at the rate of 5.5% of the original Series B
purchase price when and as declared
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107
TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
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 amounted to $1,213,345.
As of December 31, 1999 all preferred stock shareholders have deferred
their redemption rights until the repayment of the term loan described in note
4.
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 and $2,603,040 for the years ended
December 31, 1998 and 1999.
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:
CAPITAL OPERATING
LEASE LEASES
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
==========
F-15
108
TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
8. INCOME TAXES
The income tax benefit for 1997, 1998 and 1999 differed from the amounts
computed by applying the Federal income tax rate of 34% as a result of the
following:
1997 1998 1999
Computed "expected" tax benefit............ $(14,000) $(4,326,000) $(8,726,000)
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net of
Federal income tax effect.......... (1,000) (420,000) (841,000)
Change in the valuation allowance for
deferred tax assets allocated to
income tax expense................. 15,000 4,742,000 9,506,000
Other, net............................ -- 4,000 61,000
-------- ----------- -----------
Actual tax benefit......................... $ -- $ -- $ --
======== =========== ===========
The tax effect of temporary differences and carryforwards which give rise
to deferred tax assets and liabilities as of December 31, 1998 and 1999 are as
follows:
1998 1999
DEFERRED TAX ASSETS:
Accrued liabilities and allowances............ $ 740,000 $ 72,000
Capitalized start-up costs.................... 436,000 337,000
Net operating loss carryforwards.............. 3,669,000 13,986,000
----------- ------------
Total gross deferred tax assets......... 4,845,000 14,395,000
Less valuation allowance................ (4,757,000) (14,263,000)
----------- ------------
Net deferred tax assets................. 88,000 132,000
----------- ------------
DEFERRED TAX LIABILITIES:
Prepaid expenses.............................. -- (18,000)
Property and equipment, principally due to
differences in depreciation................ (88,000) (114,000)
----------- ------------
Total gross deferred tax liabilities.... (88,000) (132,000)
----------- ------------
Net deferred tax asset (liability)...... $ -- $ --
=========== ============
The valuation allowance for deferred tax assets as of December 31, 1998 and
1999 was $4,757,000 and $14,263,000, respectively. The net change in the total
valuation allowance for the years ended December 31, 1998 and 1999 was an
increase of $4,742,000 and $9,506,000, 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.
F-16
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TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. In order to fully realize
the deferred tax asset, the Company will need to generate future taxable income
prior to the expiration of the net operating loss carryforward. Management
considered the scheduled reversal of deferred tax liabilities in making this
assessment. Based upon the level of taxable losses incurred during the start-up
phase and projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it has established an
appropriate valuation allowance at December 31, 1998 and 1999.
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:
2000........................................................ $30,000,000
2001........................................................ 7,000,000
2002........................................................ 5,000,000
2003........................................................ 4,000,000
2004........................................................ 4,000,000
In the event such yearly commitments are not met, the Company is required
to remit 100% of the difference between the yearly commitment and actual usage.
Such amount, if necessary, would be recorded as cost of services in the period
incurred. The agreement extends through October 2004.
F-17
110
TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
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
and Series B convertible preferred stock that are convertible into shares of
common stock also are excluded from the calculation of diluted loss per share as
they are antidilutive. The following table presents the calculation of basic and
diluted loss per share:
1997 1998 1999
Loss before extraordinary item......... $ (39,851) $(12,723,047) $(25,446,208)
Preferred stock accretion.............. -- (57,863) (2,603,040)
---------- ------------ ------------
Loss to common stockholders before
extraordinary item................... (39,851) (12,780,910) (28,049,248)
Extraordinary item..................... -- -- (217,637)
---------- ------------ ------------
Net loss to common stockholders........ $ (39,851) (12,780,910) $(28,266,885)
========== ============ ============
Weighted average common shares
outstanding, basic and diluted....... 6,390,476 9,308,771 10,868,729
BASIC AND DILUTIVE LOSS PER SHARE:
Before extraordinary item......... $ (.01) $ (1.37) $ (2.58)
Extraordinary item................ -- -- (.02)
---------- ------------ ------------
Net loss.................... $ (.01) $ (1.37) $ (2.60)
========== ============ ============
1999
SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION OF:
Series A convertible preferred
stock.......................... 4,711,672
Series B convertible preferred
stock.......................... 13,866,662
Options for common stock issued to
employees...................... 5,276,707
Warrants for common stock issued
to non-employees............... 1,084,649
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
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TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
Board of Directors of the Company. Options and awards for no more than
10,000,000 shares of the Company's common stock may be granted pursuant to this
plan. The options vest at the rate of 20% per year for five years and are
exercisable for 10 years from date of grant.
The Company applies APB Opinion No. 25 in accounting for options granted
under its employee incentive plan. No compensation cost has been recognized for
option grants in the financial statements. Had the Company accounted for
compensation cost based on the fair value at the grant date for stock options in
the plan under SFAS No. 123, net loss and net loss per common share would have
been reported as the pro forma amounts indicated below:
1997 1998 1999
NET LOSS:
As reported......................... $(39,851) $(12,723,047) $(25,663,845)
Pro forma........................... (39,851) (13,093,427) (26,598,856)
NET LOSS PER COMMON SHARE, BASIC AND
DILUTED:
As reported......................... $ (.01) $ (1.37) $ (2.60)
Pro forma........................... (.01) (1.41) (2.69)
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 and 1999:
Dividend yield.............................................. 0 percent
Risk-free interest rate..................................... 5.00 percent
Expected life............................................... 7 years
The weighted average fair value of options granted during the years ended
December 31, 1998 and 1999 was $.62 and $.96 respectively.
The following is a summary of the activity in the Company's Plan during the
years ended December 31, 1998 and 1999:
1998 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
Options outstanding, beginning of
period.............................. -- $ -- 2,997,104 $2.11
Options granted....................... 2,997,104 2.11 2,655,371 3.25
Options exercised..................... -- -- (14,666) 1.53
Options canceled...................... -- -- (361,102) 2.21
--------- ----- --------- -----
Options outstanding, end of period.... 2,997,104 $2.11 5,276,707 $2.68
========= ===== ========= =====
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112
TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
The weighted-average remaining contractual life of options outstanding was
8.9 years, with exercise prices ranging from $1.50 to $3.75, as of December 31,
1999. Options exercisable at December 31, 1999 were 548,530 shares at a weighted
average exercise price of $2.12. The weighted average remaining contractual life
of options outstanding was 9.1 years, with exercise prices ranging from $1.50 to
$2.40, as of December 31, 1998. None of the options granted were exercisable at
December 31, 1998.
Options outstanding as of December 31, 1999 consisted of the following:
WEIGHTED
RANGE WEIGHTED AVERAGE
OF AVERAGE REMAINING
EXERCISE EXERCISE CONTRACTUAL
PRICE SHARES PRICE LIFE
$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
=========
13. EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan for all eligible employees
of the Company under the provisions of the Internal Revenue Code Section 401(k).
The TriVergent Communications, Inc. 401(k) Plan allows employee's to contribute
up to 15% of compensation and, upon annual approval of the Board of Directors,
the Company matches 50% of employee contributions up to 6% of total compensation
subject to certain adjustments and limitations. No contribution was made in
1997. A total of $24,332 and $100,086 was charged to operations for the
Company's matching contributions in 1998 and 1999, respectively.
14. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Changes in the allowance for uncollectible accounts for the years ended
December 31 were as follows:
1997 1998 1999
Balance, beginning of year.......................... $ -- $ -- $1,976,000
Provision for uncollectible accounts........... -- 1,976,000 7,285,528
Charge-offs.................................... -- -- 9,075,528
-------- ---------- ----------
Balance, end of year................................ $ -- $1,976,000 $ 186,000
======== ========== ==========
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TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
15. SUBSEQUENT EVENTS
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. 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.
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.
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TRIVERGENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
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.
In February 2000, the Company purchased the assets and liabilities of two
companies. The Company purchased Ester Communications for a total purchase price
of $4.5 million. Ester Communications, provides local exchange, long distance
and integrated voice and data products. Cash of approximately $2.0 million and
587,755 shares of common stock valued at $4.25 per share were exchanged for the
company. The Company also purchased Information Services and Advertising
Corporation, an internet service provider, for a total purchase price of
$800,000. Cash of $300,000 and 117,647 shares valued at $4.25 per share of
common stock were exchanged for the company. The acquisitions were accounted for
using the purchase method of accounting. In March 2000, the Company also entered
into an agreement to purchase $100 million of Nortel switching equipment and
services.
16. EVENTS SUBSEQUENT TO AUDITORS' REPORT (UNAUDITED)
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% interest or Prime plus 3.75%. 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.
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. See Note 15 for a description of the
Series C preferred stock.
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.
F-22
115
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TRIVERGENT CORPORATION
PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999
CONDENSED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
Cash and cash equivalents................................... $ 10,584,386
Investment in subsidiaries.................................. 24,616,713
------------
TOTAL ASSETS..................................... $ 35,201,099
============
Liabilities, Redeemable Preferred Stock and Stockholders'
Deficit
Payable to subsidiaries..................................... 579,282
Redeemable preferred stock.................................. 65,779,609
Stockholders' deficit....................................... (31,157,792)
------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT........................... $ 35,201,099
============
CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 27, 1999 THROUGH DECEMBER 31, 1999
PERIOD ENDED
DECEMBER 31, 1999
Income
Equity in undistributed net loss of subsidiaries............ $(11,287,652)
Interest income from investments............................ 321,477
Interest income, other...................................... 5,845
------------
Total Income (Loss).............................. (10,960,330)
Interest expense............................................ (489,225)
------------
Loss before extraordinary item......................... (11,449,555)
Extraordinary item -- early extinguishment of debt.......... (217,637)
------------
Net loss............................................... $(11,667,192)
============
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116
SCHEDULE I (CONTINUED)
TRIVERGENT CORPORATION
PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 27, 1999 THROUGH DECEMBER 31, 1999
PERIOD ENDED
DECEMBER 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(11,667,192)
Adjustments to reconcile net loss to net cash provided by
operations
Equity in undistributed net loss of subsidiaries....... 11,287,652
Amortization of debt discount.......................... 181,301
Extraordinary item -- early extinguishment of debt..... 217,637
Change in other operating assets....................... 202,775
------------
Net cash provided by operating activities................... 222,173
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in cash realized from:
Investment in subsidiaries............................. (30,000,000)
Cash paid for acquisition, net of cash acquired........ (368,898)
------------
Net cash used for investing activities...................... (30,368,898)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in cash realized from:
Borrowings from subsidiaries, net...................... 579,282
Payment of Series 1999 note payable.................... (4,210,000)
Payment of accrued interest on notes payable........... (114,859)
Payment of line of credit.............................. (779,557)
Proceeds of issuance of preferred stock................ 45,631,119
Purchase of treasury stock............................. (208,620)
Proceeds from exercise of stock options................ 22,499
Other.................................................. (188,753)
------------
Net cash provided by financing activities................... 40,731,111
------------
Net increase in cash and cash equivalents................... 10,584,386
Cash and cash equivalents at beginning of period............ --
------------
Cash and cash equivalents at end of year.................... $ 10,584,386
============
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
Effective May 27, 1999, the Company transferred substantially all of its
assets and liabilities to a subsidiary except for the following: note receivable
($202,775), Series 1999 notes payable ($10,574,859) and a balance due under a
line of credit ($779,557).
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SCHEDULE I (CONTINUED)
Once the name of State Communications, Inc. has been changed to TriVergent
Corporation, we will be in a position to render the following report.
KPMG LLP
The Board of Directors
TriVergent Corporation:
Under date of February 25, 2000, we reported on the consolidated balance
sheets of TriVergent Corporation and subsidiaries 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, which are included in the prospectus. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule in the registration statement.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
Greenville, South Carolina
February 25, 2000
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118
================================================================================
, 2000
TRIVERGENT CORPORATION
SHARES OF COMMON STOCK
-----------------
P R O S P E C T U S
-----------------
DONALDSON, LUFKIN & JENRETTE
CREDIT SUISSE FIRST BOSTON
FIRST UNION SECURITIES, INC.
THOMAS WEISEL PARTNERS LLC
DLJDIRECT INC.
----------------------------------------
We have not authorized any dealer, salesperson or other person to give
you written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of TriVergent
Corporation have not changed since the date hereof.
Until , 2000 (25 days after the date of this prospectus),
all dealers that effect transactions in these shares of common stock may be
required to deliver a prospectus. This is in addition to the dealer's obligation
to deliver a prospectus when acting as an underwriter in this offering and when
selling previously unsold allotments or subscriptions.
----------------------------------------
119
PART-II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses, other than the
underwriting discounts and commissions, paid or payable by the Registrant in
connection with the distribution of the securities being registered. All
expenses of the offering will be paid by the Registrant. All amounts are
estimates except the SEC registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
Securities and Exchange Commission registration fee .............. $45,540
National Association of Securities Dealers, Inc. filing fee ...... 17,750
Nasdaq National Market listing fee ............................... *
Printing ......................................................... *
Legal fees and expenses .......................................... *
Accounting fees and expenses ..................................... *
Blue Sky qualifications, related legal fees and expenses ......... *
Transfer Agent and Registrar's fees .............................. *
Miscellaneous expenses ........................................... *
=======
Total ............................................................ $ *
=======
- ---------------
* To be provided by amendment
ITEM 14: INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL") empowers a Delaware corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of such corporation or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. Such indemnification may
include expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, provided that such person acted in good faith
and in a manner such person reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. A Delaware corporation is permitted to indemnify directors, officers,
employees and other agents of such corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the person to
be indemnified has been adjudged to be liable to the corporation. Where a
director, officer, employee or agent of the corporation is successful on the
merits or otherwise in the defense of any action, suit or proceeding referred to
above or in defense of any claim, issue or matter therein, the corporation must
indemnify such person against the expenses (including attorneys' fees) which he
or she actually and reasonably incurred in connection therewith.
Trivergent's certificate of incorporation provides that TriVergent
shall indemnify, to the full extent and under the circumstances permitted by the
DGCL in effect from time to time, any past, present or future director or
officer, made or threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, by reason of the fact that such person is
or was a director, officer, employee or agent, or was serving in such capacities
at another entity at the specific request of TriVergent, on the same conditions
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120
provided by the DGCL. Trivergent's certificate of incorporation further provides
that TriVergent shall indemnify any such person in any threatened, pending or
completed action or suit by or on behalf of TriVergent under similar conditions,
except that no indemnification is permitted without judicial approval if the
person to be indemnified has be adjudged to be liable to TriVergent. In
addition, Trivergent's certificate of incorporation provides that the board of
directors may also grant indemnification to any individual other than an officer
or director, as it may determine in its sole discretion. Pursuant to these
provisions, TriVergent has entered into an indemnity agreement with each of its
directors and executive officers.
As permitted by Section 102(b)(7) of the DGCL, TriVergent's certificate
of incorporation contains a provision eliminating the personal liability of a
director to TriVergent or its stockholders for monetary damages for breach of
fiduciary duty as a director, subject to certain exceptions.
TriVergent maintains policies insuring its officers and directors
against certain civil liabilities, including liabilities under the Securities
Act.
ITEM 15: RECENT SALES OF UNREGISTERED SECURITIES
Since its inception, the Registrant has issued the following securities
without registration under the Securities Act (the number of shares set forth
below does not give effect to the proposed stock split of the Registrant's
common stock referred to in the prospectus).
On October 31, 1997, in connection with the Registrant's
formation, the Registrant issued 6,600,000 shares of common stock to a
total of eight individuals and entities (all of whom were "accredited
investors") for aggregate consideration of $705,000. This transaction
is exempt from registration under the Securities Act pursuant to
Section 4(2) of the Securities Act, along with Rule 506 of the
accompanying regulations of the Securities Act, as transactions not
involving any public offering.
On March 1, 1998, the Registrant issued 1,761,000 shares of
common stock for $1.00 per share to a total of twelve individuals and
entities (all of whom were "accredited investors") for aggregate
consideration of $1,761,000. This transaction is exempt from
registration under the Securities Act pursuant to Section 4(2) of the
Securities Act, along with Rule 506 of the accompanying regulations of
the Securities Act, as transactions not involving any public offering.
On April 1, 1998, the Registrant issued 200,000 warrants to
purchase shares of the Company's common stock at $2.25 per share to two
individuals who were "accredited investors" in exchange for each of
these investors giving a personal guarantee of the Company's
obligations under a $1,000,000 line of credit with a commercial bank.
This transaction is exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act, along with Rule 506 of
the accompanying regulations of the Securities Act, as transactions not
involving any public offering.
On May 15, 1998, the Registrant issued 1,963,462 shares of
common stock for $2.25 per share to a total of 42 individuals and
entities (all of whom were "accredited investors") for aggregate
consideration of $4,417,789.50. This transaction is exempt from
registration under the Securities Act pursuant to Section 4(2) of the
Securities Act, along with Rule 506 of the accompanying regulations of
the Securities Act, as transactions not involving any public offering.
In October 1998, the Registrant sold an aggregate of 4,166,668
shares of Series A Convertible Preferred Stock at $2.40 per share.
These securities were sold to two entities which were "accredited
investors" for aggregate consideration of $10,000,003.20. This
transaction is exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act, along with Rule
II-2
121
506 of the accompanying regulations of the Securities Act, as a
transaction not involving any public offering.
In December 1998, the Registrant sold an aggregate of 545,004
shares of Series A Convertible Preferred Stock at $2.40 per share.
These securities were sold to a total of four individuals and entities
(all of whom were "accredited investors") for aggregate consideration
of $1,308,009.60. This transaction is exempt from registration under
the Securities Act pursuant to Section 4(2) of the Securities Act,
along with Rule 506 of the accompanying regulations of the Securities
Act, as a transaction not involving any public offering.
In March 1999, the Registrant issued 545,833 shares of its
common stock to the five shareholders of Carolina Online, Inc., a South
Carolina corporation, in connection with the acquisition of Carolina
Online, Inc. by the Company. The parties to the merger ascribed a value
of $2.40 per share to the common stock. This transaction is exempt from
registration under the Securities Act pursuant to Section 4(2) of the
Securities Act as a transaction not involving a public offering.
In March and April 1999, the Registrant sold an aggregate of
$6,460,000 Series 1999 Notes (convertible into common stock at $2.40
per share subject to adjustment) with accompanying Warrants to purchase
232,560 shares of common stock at an exercise price of $2.00 per share.
These securities were sold to a total of 15 individuals and entities
(all of whom were "accredited investors") for aggregate consideration
of $6,460,000. This transaction is exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act, along
with Rule 506 of the accompanying regulations of the Securities Act, as
transactions not involving any public offering.
On May 27, 1999, the Registrant sold a $4,000,000 Series 1999A
Note (convertible into common stock at $2.40 per share subject to
adjustment) and Warrants to purchase 652,089 shares of common stock at
an exercise price of $2.00 per share to Nortel Networks Inc., the
creditor under the Company's then existing credit facility. The
consideration provided by Nortel Networks Inc. included $4,000,000 in
cash and the entry of Nortel into the transactions contemplated in the
credit facility, including without limitation the commitment to extend
up to $42 million of credit to the Company pursuant to the terms of the
credit facility. This transaction is exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act as a
transaction not involving a public offering.
On July 20, 1999, the Registrant issued 262,958 shares of its
common stock to the two shareholders of DCS, Inc., a South Carolina
corporation, in connection with the acquisition of DCS, Inc. by the
Company. The parties to the merger ascribed a value of $2.40 per share
to the common stock. This transaction is exempt from registration under
the Securities Act pursuant to Section 4(2) of the Securities Act as a
transaction not involving a public offering.
On July 29 and August 4, 1999, the Registrant sold an
aggregate of 13,186,665 shares of Series B Convertible Preferred Stock
at $3.75 per share. These securities were sold to a total of nineteen
individuals and entities (all of whom were "accredited investors") for
aggregate consideration of $49,449,993.75. This amount included
cancellation of an aggregate principal amount of $6,249,978.75 of
Series 1999 Notes. This transaction is exempt from registration under
the Securities Act pursuant to Section 4(2) of the Securities Act,
along with Rule 506 of the accompanying regulations of the Securities
Act, as transactions not involving any public offering.
On February 1, 2000, the Registrant sold an aggregate of
11,561,768 shares of Series C Convertible Preferred Stock at $4.25 per
share. These securities were sold to a total of fifteen individuals and
entities (all of whom were "accredited investors") for aggregate
consideration of
II-3
122
$49,137,514.00. This transaction is exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act, along
with Rule 506 of the accompanying regulations of the Securities Act, as
transactions not involving any public offering.
On February 8, 2000, the Registrant issued 117,647 shares of
its common stock to the sole shareholder of Information Services and
Advertising Corporation, a North Carolina corporation, in connection
with the acquisition of DCS, Inc. by the Company. The parties to the
merger ascribed a value of $4.25 per share to the common stock. This
transaction is exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act as a transaction not
involving a public offering.
On February 9, 2000, the Registrant issued 587,755 shares of
its common stock to the two shareholders of Ester Communications, Inc.,
a North Carolina corporation, in connection with the acquisition of
Ester Communications, Inc. by the Company. The parties to the merger
ascribed a value of $4.25 per share to the common stock. This
transaction is exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act as a transaction not
involving a public offering.
On March 20, 2000, the Registrant sold an aggregate of
4,214,703 shares of Series C Convertible Preferred Stock at $4.25 per
share. These securities were sold to a total of 23 individuals and
entities (all of whom were "accredited investors") for aggregate
consideration of $17,912,487.75. This transaction is exempt from
registration under the Securities Act pursuant to Section 4(2) of the
Securities Act, along with Rule 506 of the accompanying regulations of
the Securities Act, as transactions not involving any public offering.
On January 12, 1998, the Registrant established its Employee
Incentive Plan. A total of 10,000,000 shares of common stock have been
reserved for issuance thereunder. Since January 14, 1998, the following
options have been issued (all of which were issued to employees of the
Company):
NUMBER OF EXERCISE
SHARES PRICE PER SHARE DATES ISSUED
--------- --------------- -----------------
888,000 $1.50 1/14/98 - 4/01/98
420,620 2.25 5/01/98 - 3/08/99
2,592,124 2.40 1/14/98 - 9/12/99
904,976 3.00 2/01/99 - 3/06/00
1,902,133 3.75 1/03/99 - 1/25/00
876,585 4.25 2/01/00 - 3/15/00
600,000 10.00 2/23/00
600,000 15.00 2/23/00
Through the date hereof, a total of 8,878,458 options have
been granted, a total of 14,666 options have been exercised, and a
total of 388,843 options have been forfeited and returned to the plan.
These transactions were exempt from registration under the Securities
Act pursuant to Section 4(2) of the Securities Act, along with Rule 701
of the accompanying regulations of the Securities Act, as transactions
not involving any public offering.
II-4
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ITEM 16: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
Generally, schedules, exhibits, appendices and attachments to
documents included as exhibits which TriVergent believes are not material have
been omitted from the exhibits. TriVergent will provide the Commission with
such omitted schedules, exhibits, appendices and/or attachments upon request.
Exhibit No.
1.1 Form of Underwriting Agreement. *
3.1 Articles of Incorporation. *
3.2 By-Laws *
4.1.1 Form of Certificate for the Registrant's Common Stock. *
4.1.2 Form of Warrant.
4.2.1 State Communications, Inc. Second Amended and Restated Stockholders'
Agreement dated February 1, 2000.
4.2.2 Master Amendment Agreement (amending the agreements included as
Exhibits 4.2.1 & 4.3.5 hereto) dated March 20, 2000.
4.3.1 Amended and Restated Registration Rights Agreement dated February 19,
1998 between the Company and Seruus Telecom Fund, L.P.
4.3.2 Registration Rights Agreement dated May 27, 1999 between Registrant and
Nortel Networks Inc.
4.3.3 Registration Rights Agreement dated October 28, 1998, by and among
Registrant and each of the other parties listed on Schedule I thereto
(certain holders of Series A Convertible Preferred Stock).
4.3.4 Registration Rights Agreement dated July 29, 1999, by and among
Registrant and each of the other parties listed on Schedule I thereto
(certain holders of Series B Convertible Preferred Stock).
4.3.5 Registration Rights Agreement dated February 1, 2000, by and among
Registrant and each of the other parties listed on Schedule I thereto
(certain holders of Series C Convertible Preferred Stock).
4.4 Warrant Agreement dated as of May 27, 1999 by and between Registrant
and Nortel Networks Inc.
5.1 Opinion of Wyche, Burgess, Freeman & Parham, P.A. regarding legality of
shares of the Registrant.*
10.1 Amended and Restated State Communications Employee Incentive Plan
10.2.1 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.
10.2.2 Parent Guaranty of Registrant of the TD Facility dated February 1,
2000.
10.2.3 Parent Pledge Agreement dated February 1, 2000, by and among Registrant
and Toronto Dominion (Texas), Inc., as administrative agent for the
lenders.
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124
10.3.1 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.
10.3.2 Parent Pledge Agreement dated March 7, 2000, by and between Registrant
and Nortel Networks Inc.
10.4.1 Master Purchase Agreement dated May 26, 1999, by and between
State Communications, Inc. and Nortel Networks Inc. *
10.4.2 Amendment No. 1 to Master Purchase Agreement dated September 1, 1999,
by and between State Communications, Inc., Nortel Networks Inc. and
TriVergent Communications, Inc. *
10.4.3 Amendment No. 2 to Master Purchase Agreement dated March 7, 2000, by
and between TriVergent Communications, Inc. and Nortel Networks Inc. *
10.4.4 Master Asset Lease Agreement dated March 7, 2000 between TriVergent
Leasing South, LLC and TriVergent Communications South, Inc.
10.5.1 Preferred Stock Purchase Agreement for 4,166,668 Shares of Series A
Convertible Preferred Stock dated October 28, 1998.
10.5.2 Preferred Stock Purchase Agreement for 13,186,665 Shares of Series B
Convertible Preferred Stock dated July 29, 1999. Form of Joinder
Agreements of Joseph Lawrence, William Oberlin, David C. Poole, Terry
E. Richardson and Capital Insights Growth Investors, L.P.
10.5.3 Preferred Stock Purchase Agreement for 11,561,768 Shares of Series C
Convertible Preferred Stock dated February 1, 2000.
10.5.4 Preferred Stock Purchase Agreement for 4,214,703 Shares of Series C
Convertible Preferred Stock dated March 20, 2000.
10.9.1 Form of Employment Agreement dated October 28, 1998 of Charles S.
Houser, Shaler P. Houser, Russell W. Powell, and Clark H. Mizell and
schedule of material details for each such person.
10.9.2 Employment Agreement between G. Michael Cassity and State
Communications, Inc. dated March 10, 2000.
10.9.3 Employment Agreement between Riley Murphy and State Communications,
Inc. dated March 15, 2000.
10.10 Form of Non-Disclosure and Non-Competition Agreement between State
Communications, Inc., Richland Ventures II, L.P., First Union Capital
Partners, Inc. and each of Charles S. Houser, Shaler P. Houser, Russell
W. Powell and Clark H. Mizell and schedule of material details for each
such person.
10.11 Form of Indemnity Agreement by and between Registrant and each of its
directors and executive officers. *
10.12 Lease by and between TriVergent Communications, Inc., Alan B. Kahn and
Windsor City Partnership.
21.1 Listing of subsidiaries.
23.1 Consent of Wyche, Burgess, Freeman & Parham, P.A.: Contained in Exhibit
5.1.
23.2 Consent of KPMG LLP, independent auditors.
24.1 The Power of Attorney: Contained on the signature page of the initial
filing of this Registration Statement.
27.1 Financial Data Schedule for the year ended December 31, 1999.
- ----------------
* To be filed by amendment.
II-6
125
(B) FINANCIAL STATEMENT SCHEDULES.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
No other financial statement schedules are included. The information is
either included in the financial statements and notes thereto or is not
required.
ITEM 17: UNDERTAKINGS
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.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2)for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Greenville, State of
South Carolina, on April 12, 2000.
TRIVERGENT CORPORATION
By: /s/ Charles S. Houser
-----------------------------
Charles S. Houser
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles S. Houser and Clark H. Mizell,
and each of them, as true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement and any
additional registration statement filed pursuant to Rule 462(b), and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the SEC, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all which said attorneys-in-fact and agents or any of them, or
their or his or her substitute or substitutes, may lawfully do, or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated:
Signature Title Date
-------------------------------------- --------------
Chairman of the Board of Directors;
Chief Executive Officer (principal
/s/ Charles S. Houser executive officer) April 12, 2000
- -------------------------------
Charles S. Houser
Senior Vice President, Chief Financial
Officer (principal financial and
/s/ Clark H. Mizell accounting officer) April 12, 2000
- -------------------------------
Clark H. Mizell
/s/ William H. Oberlin Director April 12, 2000
- -------------------------------
William H. Oberlin
/s/ Joseph A. Lawrence Director April 12, 2000
- -------------------------------
Joseph A. Lawrence
/s/ Jack Tyrrell Director April 12, 2000
- -------------------------------
Jack Tyrrell
127
/s/ Robert S. Sherman Director April 12, 2000
- -------------------------------
Robert S. Sherman
/s/ Alan N. Colner Director April 12, 2000
- -------------------------------
Alan N. Colner
/s/ Watts Hamrick Director April 12, 2000
- -------------------------------
Watts Hamrick
/s/ Shaler P. Houser Director April 12, 2000
- -------------------------------
Shaler P. Houser
/s/ G. Michael Cassity Director April 12, 2000
- -------------------------------
G. Michael Cassity
128
EXHIBIT INDEX
Exhibit Description
-----------
1.1 Form of Underwriting Agreement. *
3.1 Articles of Incorporation. *
3.2 By-Laws *
4.1.1 Form of Certificate for the Registrant's Common Stock. *
4.1.2 Form of Warrant.
4.2.1 State Communications, Inc. Second Amended and Restated Stockholders'
Agreement dated February 1, 2000.
4.2.2 Master Amendment Agreement (amending the agreements included as
Exhibits 4.2.1 & 4.3.5 hereto) dated March 20, 2000.
4.3.1 Amended and Restated Registration Rights Agreement dated February 19,
1998 between the Company and Seruus Telecom Fund, L.P.
4.3.2 Registration Rights Agreement dated May 27, 1999 between Registrant and
Nortel Networks Inc.
4.3.3 Registration Rights Agreement dated October 28, 1998, by and among
Registrant and each of the other parties listed on Schedule I thereto
(certain holders of Series A Convertible Preferred Stock).
4.3.4 Registration Rights Agreement dated July 29, 1999, by and among
Registrant and each of the other parties listed on Schedule I thereto
(certain holders of Series B Convertible Preferred Stock).
4.3.5 Registration Rights Agreement dated February 1, 2000, by and among
Registrant and each of the other parties listed on Schedule I thereto
(certain holders of Series C Convertible Preferred Stock).
4.4 Warrant Agreement dated as of May 27, 1999 by and between Registrant
and Nortel Networks Inc.
5.1 Opinion of Wyche, Burgess, Freeman & Parham, P.A. regarding legality of
shares of the Registrant.*
10.1 Amended and Restated State Communications Employee Incentive Plan
10.2.1 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.
10.2.2 Parent Guaranty of Registrant of the TD Facility dated February 1,
2000.
10.2.3 Parent Pledge Agreement dated February 1, 2000, by and among Registrant
and Toronto Dominion (Texas), Inc., as administrative agent for the
lenders.
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10.3.1 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.
10.3.2 Parent Pledge Agreement dated March 7, 2000, by and between Registrant
and Nortel Networks Inc.
10.4.1 Master Purchase Agreement dated May 26, 1999, by and between
State Communications, Inc. and Nortel Networks Inc. *
10.4.2 Amendment No. 1 to Master Purchase Agreement dated September 1, 1999,
by and between State Communications, Inc., Nortel Networks Inc. and
TriVergent Communications, Inc. *
10.4.3 Amendment No. 2 to Master Purchase Agreement dated March 7, 2000, by
and between TriVergent Communications, Inc. and Nortel Networks Inc. *
10.4.4 Master Asset Lease Agreement dated March 7, 2000 between TriVergent
Leasing South, LLC and TriVergent Communications South, Inc.
10.5.1 Preferred Stock Purchase Agreement for 4,166,668 Shares of Series A
Convertible Preferred Stock dated October 28, 1998.
10.5.2 Preferred Stock Purchase Agreement for 13,186,665 Shares of Series B
Convertible Preferred Stock dated July 29, 1999. Form of Joinder
Agreements of Joseph Lawrence, William Oberlin, David C. Poole, Terry
E. Richardson and Capital Insights Growth Investors, L.P.
10.5.3 Preferred Stock Purchase Agreement for 11,561,768 Shares of Series C
Convertible Preferred Stock dated February 1, 2000.
10.5.4 Preferred Stock Purchase Agreement for 4,214,703 Shares of Series C
Convertible Preferred Stock dated March 20, 2000.
10.9.1 Form of Employment Agreement dated October 28, 1998 of Charles S.
Houser, Shaler P. Houser, Russell W. Powell, and Clark H. Mizell and
schedule of material details for each such person.
10.9.2 Employment Agreement between G. Michael Cassity and State
Communications, Inc. dated March 10, 2000.
10.9.3 Employment Agreement between Riley Murphy and State Communications,
Inc. dated March 15, 2000.
10.10 Form of Non-Disclosure and Non-Competition Agreement between State
Communications, Inc., Richland Ventures II, L.P., First Union Capital
Partners, Inc. and each of Charles S. Houser, Shaler P. Houser, Russell
W. Powell and Clark H. Mizell and schedule of material details for each
such person.
10.11 Form of Indemnity Agreement by and between Registrant and each of its
directors and executive officers. *
10.12 Lease by and between TriVergent Communications, Inc., Alan B. Kahn and
Windsor City Partnership.
21.1 Listing of subsidiaries.
23.1 Consent of Wyche, Burgess, Freeman & Parham, P.A.: Contained in Exhibit
5.1.
23.2 Consent of KPMG LLP, independent auditors.
24.1 The Power of Attorney: Contained on the signature page of the initial
filing of this Registration Statement.
27.1 Financial Data Schedule for the year ended December 31, 1999.
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* To be filed by amendment.