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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ to ________
Commission file number 333-53953
CONVERGENT COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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Colorado 84-1337265
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
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400 Inverness Drive South, Suite 400
Englewood, Colorado 80112
(303) 749-3000
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
Common Stock Nasdaq National Market
Securities registered pursuant to section 12(g) of the Act:
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No ______
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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On March 20, 2000, 28,932,281 shares of the registrant's Common Stock were
outstanding. On March 20, 2000, the aggregate market value of our common stock
held by non-affiliates was approximately $314.6 million, based on a price per
share of common stock of 10.875.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to our
definitive Proxy Statement for the 2000 Annual Meeting of Stockholders which
will be filed with the Securities and Exchange Commission no later than 120 days
after December 31, 1999.
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TABLE OF CONTENTS
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PART I
Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 12
Item 3. Legal Proceedings............................................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 13
Item 6. Selected Financial Data....................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.......... 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 27
Item 8. Financial Statements and Supplementary Data................................................... 28
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.......... 50
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 50
Item 11. Executive Compensation....................................................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 50
Item 13. Certain Relationships and Related Transactions............................................... 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 51
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Note Concerning Forward-Looking Information
Some of the information in this report contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they: (1) discuss our
future expectations; (2) contain projections of our future results of operations
or of our financial condition; or (3) state other "forward-looking" information.
We believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we have not
accurately predicted or over which we have no control. These events may include
future operating results and potential competition, among other things.
Cautionary language in this report provides examples of risks, uncertainties and
events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. You should be aware
that the occurrence of the events described in this report could have a material
adverse effect on our business, operating results and financial condition.
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PART I
Item 1. Business
Introduction
We are a rapidly growing national provider of e-Sourcing solutions
primarily to businesses with 25 to 500 employees. "e-Sourcing" is the management
of communications solutions that allow businesses to leverage technology,
systems and networking resources -including broadband Internet Protocal based
applications- without having to "own" or internally build and manage those
resources. Inside our customers' premises we own communications networks and
provide professional services, such as the design, installation, management and
monitoring of those networks. Outside our customers' premises, we provide a full
range of data and voice transport services. By operating networks both inside
and outside our customers' premises, and by offering a broad range of Internet,
data and voice systems and services, we provide small and medium sized
businesses with state-of-the-art communications solutions, including data and
voice networks based on broadband Internet Protocol, electronic commerce,
connections to the Internet and sophisticated communications systems.
Internet Protocol
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Internet Protocol or IP is a standard industry method of identifying, tracking
and reassembling packets of information transferred over multiple communications
networks, including the Internet.
We offer each of our systems and services on a stand alone basis or as a
bundled communications solution under long-term service agreements in which we
may own all or a portion of the inside network, provide professional services
inside our customers' premises, supply data network services outside their
premises and provide equipment financing where the customer chooses to own their
inside network. The comprehensive solution, which we call Enterprise Managed
Services, reduces our customers' capital needs, technical staffing requirements
and risks associated with evolving communications technologies.
We are deploying Cisco Systems, Inc.'s multi-service data and voice switch
in each of the 35 metropolitan areas in which we currently operate and will also
deploy them in additional markets we expect to enter. These next-generation
switches will enable us to route our customers' external communications traffic
more efficiently and with lower capital outlay than with traditional switches.
Over the last three years, we have:
. rapidly established a nationwide presence in 35 metropolitan markets;
. grown our customer base and provided our systems and services to more
than 33,000 customers in the last two years either directly or through
businesses we have acquired;
. increased sales to $160.0 million in 1999 from $61.6 million in 1998
and $10.2 in 1997;
. raised $338.6 million in debt and equity offerings;
. completed 18 acquisitions, expanding our market presence, technicians
and capabilities to deliver our comprehensive service offerings;
. designed and implemented an IP/ATM network that will connect our
multi-service, data and voice switching platforms and carry our
customers' traffic using ATM technology;
ATM
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Asynchronous Transfer Mode (or ATM) is a high-speed technology used to transport
information in packets. ATM packets are fixed in size and allow the transport of
size-intensive and time-sensitive applications, such as video and voice, quickly
and efficiently.
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. our employee base to more than 1,500, including an experienced sales
team of 375, technical staff of 558 and customer care support staff of
180;
. devoted significant resources to the development, testing and
implementation of our operational support system; and
. developed, tested and implemented our national network operations
center.
Our Solutions
We offer comprehensive communications solutions--ones that have
traditionally been readily available only to large enterprises--to small and
medium sized businesses. The combination of our focus on this market and our
national scale enables us to design sophisticated data and voice systems and
solutions tailored to these small and medium sized businesses.
Our services utilize the data and voice networks, inside and outside of our
customers' enterprises.
. Inside our customers' enterprises we own networks and design, install,
manage, maintain and monitor these networks (local area networks, wide
area networks, computers, private branch exchanges, key systems,
handsets, etc.) under long-term service agreements for which the
customer pays a flat monthly fee. The IP-based integrated data and
voice network solutions that we provide (including eCommerce, web
application development and web hosting), and which we expect will
become a larger portion of our business, can significantly reduce
overall network administration and capital costs for our customers.
. Outside our customers' enterprises, we provide next generation data
centric networks that connect the internal network to the Internet
using broadband transport technology. As we continue to build our
IP/ATM network, we will migrate many of these services to our own
network.
[DIAGRAM APPEARS HERE]
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With our premiere offering, Enterprise Managed Services, our most
comprehensive eSourcing solution, we become an outsourcing partner to our
clients by taking ownership and full responsibility for planning, installing,
provisioning and maintaining their communications systems and networks,
including their critical eBusiness integration projects. We offer this service,
in addition to owning all or a portion of the data and voice communications
systems inside our customers' enterprises, for a flat, monthly, per user fee
under a long-term contract. Using these inside networks in conjunction with our
comprehensive next generation IP/ATM networks, we lower our customers' costs by
reducing network outages and providing faster Internet access which allows them
to use their applications more efficiently. This offering can also reduce their
capital expenditures, technical staffing requirements and risks associated with
quickly evolving communications technologies.
Our Business Strategy
Our business strategy is designed to generate a broad source of stable and
recurring revenue. In implementing this strategy, we will:
Target Small and Medium Sized Businesses. The small and medium sized
business market has historically been underserved by national systems
integrators, outsourcers, data technology companies and telecommunications
providers, even though many small and medium sized businesses demand
high-performance communications solutions. Because we are focused on this
market, we have developed systems, services and solutions that are well suited
for the financial resources, growth characteristics, technological
sophistication and other needs of small and medium sized businesses.
Provide Sophisticated, One-Stop, Integrated Communications Solutions.
Most small and medium sized businesses do not have the internal capability or
capital required to deploy, fully utilize and effectively manage evolving data
and voice systems. We are increasingly able to respond to substantially all of
our customers' communications needs and can offer equipment leasing and
maintenance contracts. This comprehensive approach is designed to reduce the
complexity and expense of owning and operating communications networks for our
customers. Our solutions are designed to facilitate the migration of traditional
communications systems to integrated IP-based data and voice networks.
Own the Communications Network Inside Our Customers' Enterprises.
Through our Enterprise Managed Services, we seek to own the data and voice
networks inside our customers' premises and provide these networks to our
customers along with management, maintenance and monitoring services under
long-term service agreements. This approach is designed to:
. allow our customers to focus on their core business and outsource
their communications needs;
. capture a large portion of our customers' communications spending;
. minimize customer turnover;
. generate high-margin revenue; and
. enhance our opportunities to sell additional systems and service
upgrades to existing customers.
Focus on Solutions-Based Selling. We market our systems and services,
such as Enterprise Managed Services, as solutions to business problems rather
than as stand-alone products. We do so by marketing to the senior management and
principals of our potential customers, providing them with an analysis of the
benefits of our comprehensive solutions. In the process we become the single
source provider (e-Sourcer) to these customers under long-term service
contracts.
Provide Preeminent, Local Customer Care. We strive to provide best-in-
care service by offering our customers immediate and around-the-clock access to
our customer care staff. Our 180 customer care specialists are trained in all
aspects of the systems, services and solutions offered in their market.
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Our Systems and Services
As a single-source provider of a wide array of communications systems,
services and solutions we have identified three core areas of expertise from
which these solutions are produced and supported. These areas, segmented by our
Strategic Management Units (SMUs), include eBusiness Solutions, Enterprise
Services and Enterprise Systems.
eBusiness Solutions
Our eBusiness capabilities allow growing enterprises to capitalize on the
power of the Internet to reach and support their customers. Managed through five
national eBusiness solution centers in Portland, Denver, Chicago, Atlanta and
San Francisco, services offered are as follows:
. Application Service Provider ("ASP") Services. We offer ASP Services,
which are custom-tailored service offerings for growing enterprises
seeking rapid delivery of cost-effective, high value-added,
comprehensive solutions for their eBusiness initiatives. ASP Services
consist of eCommerce applications, e-procurement, and other electronic
Customer Relationship Management (eCRM) applications. These services
transform the methods by which organizations connect buyers and
sellers and process transactions, as well as customize and sell their
systems and services.
. Strategic Web Development. We specialize in creating dynamic Web sites
that perform beyond that of a "static" home page, incorporating
features such as database integration, multimedia streaming and one-
to-one marketing capabilities. In cases in which a business has an
existing Web site, we provide enhancements that increase its
functionality and performance. In either case, we help make the
Internet presence an even more valuable part of their business.
. eCommerce. Our eBusiness Solutions Group uses creativity and digital
technology to transform the way organizations connect buyers and
sellers, process payments and customize and sell systems and services.
We develop and implement custom eCommerce solutions to help clients
generate new and additional sources of revenue, streamline business
processes, extend marketing efforts and maximize efficiency. We also
integrate those eCommerce solutions with our clients' existing
database and back-office systems.
. Intranet Development. Our custom intranet solutions turn simple Web
sites running on a corporate network into a strategy for information
distribution across our client's company and the world. We implement
dynamic and manageable intranets that streamline business processes,
and maximize efficiency.
. Extranet Development. We extend the use of our clients' intranet to
enable selected suppliers, distributors, and customers to communicate
through a business-to-business extranet. We build and implement
applications that allow selected users access to private data and
applications via the World Wide Web. By applying an extranet
application to business processes, we enhance marketing efforts and
maximize efficiency.
. Custom Web Hosting. We offer three types of hosting environments:
shared, dedicated and co-located. Our hosting solutions are customized
on multiple platforms to meet our clients' online requirements and to
ensure that the final online product is reliable. We have the
facilities and manpower to ensure the connectivity, redundancy and
security of our customers' online business objectives.
. e-WebBuilder. We offer e-WebBuilder, which allows businesses to
realize the promise of online technology today, without having to
divert funds from their operating budget to buy expensive equipment,
or hire and retain the networking staff needed to design and maintain
web-based programs. With e-WebBuilder Express, customers develop the
information about their company that they want to place online. Then,
choosing from more than 100 professionally designed templates, they
select a look for the
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site that best reflects the image of their company. Our Catalog option
adds the benefits of e-commerce by allowing customers to display
products and services in an online catalog.
Enterprise Services
Our Enterprise Services SMU is focused on the support of both inside and
outside premises services and solutions, including:
. Enterprise Managed Services (EMS). We provide Enterprise Managed Services
solutions under long-term service agreements for a flat, monthly, per user
fee. We believe the EMS offering to be particularly attractive to our small
and medium sized business customers because it:
. provides them with a broadband network platform with highspeed
connectivity to the Internet;
. reduces their costs of long-term ownership while increasing their
business effectiveness;
. reduces their risks and burdens associated with owning, operating and
maintaining data and voice networks;
. replaces costly and unpredictable capital outlays with stable and
predictible monthly expenses; and
. reduces their need to employ costly and difficult-to-recruit
information technology personnel.
Other services we offer in conjunction with EMS are as follows:
- EMS Connect. EMS Connect is a bundled solution delivering our most
popular network services in a pre-designed format including DSL,
dedicated long distance and frame relay service.
- EMS Telephony. EMS Telephony is a complete service offering of voice
communications systems tailored to meet the needs of small and medium
sized businesses.
- EMS Office. EMS Office is an offering that includes packaged voice and
data desktop configurations, internet access, LAN and telephony
servers offered at a flat rate based on the number of desktops.
In addition, for customers that choose to own their internal network, we
provide leasing options to facilitate the purchase of their data and voice
systems. We use our existing credit arrangements, or obtain new credit
facilities, to provide lease alternatives to our customers. We believe that
these services enhance our ability to attract customers and act as their
single-source provider. We also believe that these services allow us to maintain
contact with customers and provide us with the opportunity to sell additional
systems and services to them.
. Professional Services. We design, install, manage, maintain and monitor
networks and systems including local area networks, wide area networks and
integrated IP-based networks, and assist our customers with adding and
moving phone lines. The benefits to our customers include:
. A single point of contact for networking services;
. Improved reliability and quality of our customer's network through
proactive trending analysis;
. Real-time, Web-based network performance reporting available 24 hours
per day, 7 days a week; and
. Lower cost of network management through leveraging shared resources;
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. Broadband Services. Our Broadband Services include Internet access, frame
relay (ATM and IP switching), long distance service, local telephone
service and public phone service.
. Internet Access. We currently offer highspeed Internet access services
in all of our markets through our EMS Connect service using
interconnections with UUNet. Our network is connected to three primary
Internet gateways located at Hearndon, Virginia, Santa Clara,
California, and Chicago, Illinois.
Frame Relay
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Frame relay is a high-speed service which transports information in packets of
varying sizes. Frame relay is a highly reliable digital service, efficient at
handling high-speed, "bursty" data over wide area networks.
. Transport Services. We are developing an ATM service in conjunction
with our development and deployment of our national IP/ATM network. We
also provide managed frame relay services to our customers allowing
them to transmit data, voice and video traffic on a single digital
facility. We are currently testing various types of digital subscriber
line, or DSL, services with a leading provider. Once we select a
primary provider of digital subscriber line services, we will begin
providing those transport services to our customers.
DSL
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Digital Subscriber Line (or DSL) enables high-speed local data transport over
the existing copper wire insfrastructure.
. Long Distance Services. We provide resold inter-state and intra-state
long distance services. We also provide enhanced services such as
toll-free calling services and travel card services.
. Local Phone Services. We provide resold local phone services.
Enterprise Systems
. Data Systems. We are a provider of systems from a large variety of
suppliers needed to create data networks including routers, hubs, bridges,
multiplexers, switches, servers, personal computers, and other equipment.
We also market integrated IP-based private branch exchanges, or PBXs, and a
broad range of other IP-based devices.
. Voice Systems. We are a provider of voice network systems such as private
branch exchanges, key systems (smaller versions of PBXs), handsets, voice
processing and messaging systems and call management software.
Sales and Marketing
Since January 1, 1998, we have provided our systems or services to more
than 35,000 businesses, either directly or through businesses we have acquired.
As of December 31, 1999, we are selling all our data systems and services in 17
of our markets, voice systems and services in all of our markets and a full
suite of offerings, including EMS, in seven markets. We are developing
additional data, Internet and EMS expertise in the markets in which we do not
currently offer those systems and services. We anticipate being able to provide
all of our systems and services in an additional four of our markets by the end
of 2000, and in all of our existing markets by the second half of 2002.
Our Sales Team. We sell our systems, services and solutions through
our staff of approximately 375 sales representatives and support and
approximately 558 technicians in 49 offices in our 35 markets. Our sales force
is supervised by area and regional general managers, each of whom has
responsibility for all sales functions in one of our geographic regions. A
significant portion of the compensation of the sales force is tied to annual
goal and quota programs with incentive bonuses paid based on gross margin
(rather than revenue) targets set by us.
Selling Our Enterprise Managed Services. We market our Enterprise
Managed Services to the upper level management of our current and potential
customers as a business solution rather than a technology solution. Our
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sales teams seek to demonstrate to the business decision makers the quantifiable
benefits of not owning their inside communications systems and networks and
allowing us to own and manage the communications systems and networks inside
their premises. The analyses we use to accomplish this task include:
. Vendor Cost-Efficiency Analysis. A field audit of a customer's past
communications bills for a variety of services from outside vendors
identifies the total cost for these services, vendor billing errors,
services billed but not provided, or services paid for but not
utilized.
. Network Analysis. A physical audit of a customer's communications
network assets quantifies the capital a customer has invested in their
communications network and the costs associated with future upgrades
to the customers network to meet their growing needs, and identifies
design flaws in the customer's network.
. Resource and Skill Set Analysis. An audit of internal resources
required to maintain the customer's communications system and network
quantifies the labor costs and identifies the skill sets required to
achieve the customer's stated business goals.
. Security Analysis. An audit of a customer's system and network
determines the vulnerability of a customer's proprietary information
to hackers and competitors.
. The Convergent Communications Solution. A custom-tailored proposal
that presents our advanced communications solution to the customer's
Internet, data and voice requirements.
As part of our solution, we conclude by providing a comparative "total cost of
ownership analysis." This analysis is an economic comparison of our solution to
the customer's current communications system and network and management
approach. The comparison includes the potential cash infusion the customer will
receive from the sale of its network assets to us and the potential reduction in
expenses associated with reducing personnel and outside vendor costs.
Marketing. We use a variety of marketing programs and media to raise
awareness of our systems, services and solutions and to generate sales leads and
opportunities. In addition, sales leads often come from our existing satisfied
customers. Our programs include:
. advertising in newspapers, magazines and trade journals;
. advertising on radio;
. sending direct mail solicitations;
. conducting business seminars;
. participating in trade shows;
. cross selling systems and services to the more than 81,000 customers
who have previously purchased voice systems or services from us or
companies we have acquired; and
. creating alliances and lead referral agreements with key vendors and
suppliers.
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Customers and Markets
Our Customers. We have provided our systems and services to more than
35,000 customers since January 1, 1998, either directly or through businesses we
have acquired.
Our Markets. We currently provide our systems and services in 35
metropolitan areas and we intend to expand into an additional 15 markets over
the next two years. Our existing markets are:
[MAP APPEARS HERE]
* - Data and Voice Markets
[_] - Data Markets
. - Voice Markets
Customer Care and Operations Support
Our Customer Care Staff. Our sales and customer support functions are
highly integrated. Our 180 customer care specialists are trained in all aspects
of the systems, services and solutions offered in their markets. Our integrated
approach allows us to pursue our goal of providing best-in-care service starting
with the initial customer contact and continuing throughout the life of the
account.
Commitment to Superior Service. In order to provide superior service we:
. Act Immediately. Our employees are specialists who will begin
troubleshooting immediately to resolve any problem and reach a
conclusion during the initial contact. Our national customer care
center provides additional around-the-clock support, 365 days a year
and the seven regional customer care centers are staffed nine hours a
day, five days a week to handle the anticipated workload.
. Provide a Single Point of Contact. Our customers can call a single
toll-free number for assistance in solving most problems. Because our
customer care teams are trained in the entire suite of communication
systems and services we offer, they are able to assist customers in
solving problems that may involve more than one system or service
issue.
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Our Operational Support System. Our operational support system is designed
to integrate all of our internal support services. This integration will permit
customer care, sales engineering, service management, service delivery,
accounting and inventory sales management personnel to access a single customer
record. Accordingly, a customer can get support for any of our systems and
services with one phone call. By providing comprehensive, real-time customer
information, this system is designed to enable our customer support
representatives to respond faster to inquiries, provide greater quality customer
care, and identify more opportunities to sell additional systems and services.
We are in the process of adding additional functionality to our operational
support system, including improved order entry systems, dispatch and other
logistics functions, improved trouble ticket systems and contract management
features. These enhancements are designed to increase our efficiency in
supporting our existing voice product and service customers and to increase our
sales of data systems and services to them.
National Network Operations Center. Our national network operations center
provides customer support and proactive and fully redundant network monitoring
systems. These systems provide us the ability to monitor all types of network
and customer devices installed in the field including routers, hubs, servers,
switches, desktop computers, printers and other peripheral devices. For these
devices, our system provides:
. logical depictions of our customers' networks for quick isolation of
trouble;
. graphical presentations of equipment locations by bay, shelf and card
for quick identification;
. remote connection and testing capability; and
. network administration to manage bandwidth and configure and manage
equipment.
Network Architecture
Our DS3 nationwide network connects our Cisco powered next generation
multi-services switching platforms (NG-MSSP) which we call our Enterprise Points
of Presence, or ePOPs. This nationwide network carries our customers' voice,
video, data and Internet traffic using Internet Protocol (IP) and ATM
technology, unlike traditional switches, which are designed to transport only
specific types of data or voice services. Our NG-MSSP allows for customers to
connect to the network via multiple technologies including XDSL, Frame Relay,
ATM, IP, Private Line, and wireless at speeds ranging from 64k (DS0) up to DS3.
We lease fiber capacity from Level 3 Communications, MCI Worldcom and Williams
Communications and install our equipment at the connection points. Our NG-MSSP
network is connected to three regional Internet aggregation private peering
gateways located in Hearndon, VA, Chicago, IL, and Santa Clara, CA. These
gateways provide redundant connectivity to the Internet, improve throughput
speed, allow private and public connections over the same customer connection,
and provide connectivity to hosting facilities. We have 16 nationwide
operational ePOPs. We expect to have 32 operational ePOPs by the end of 2000.
As of December 31, 1999, we had deployed 16 ePOPs with 8 additional ePOPs
under construction with estimated completion by July 2000. During the next 30
months, we intend to deploy 34 additional ePOPs, including the 8 currently under
construction. This switching architecture allows us to offer more functionality
at a substantially lower capital and operating cost than the combination of
traditional switches necessary to carry the same types of traffic. Our agreement
with Cisco also makes us a Cisco Powered Network Partner, which is a designation
that recognizes a select group of service providers who are committed to
providing high-performance reliable networking services. In addition, we have a
$103.5 million financing facility with Cisco Systems Capital Corporation to
finance the purchase and installation of ePOPs.
Acquisitions
Since our inception, we have completed 18 acquisitions that have aided in
establishing our operations in 28 of our 35 markets and have added to our skills
and areas of expertise. We are expanding the product and service
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offerings available to the acquired sales and field personnel, thereby creating
new sales opportunities. We expect to continue to make selective acquisitions to
expand our expertise and broaden our geographic coverage.
The key factors we have and will continue to use in evaluating potential
acquisitions are:
. cross-selling and up-selling opportunities;
. size and quality of the acquired customer base;
. acceleration of our new market entry or expansion of existing markets;
. additions to our sales force and technical personnel;
. costs of acquisition; and
. historical and projected financial performance.
Market Environment
Although several larger data and voice companies have entered or will enter
our market, we believe that we will be successful because:
. we have expertise in providing integrated data and voice systems,
services and solutions specifically tailored to the needs of small and
medium sized business;
. we provide broad product and service offerings with a suitable
solution and price point for nearly every business in our target
market;
. we have already established a sizeable customer base and a well
trained technical staff;
. we are focused on providing extremely high quality customer service
and technical support;
. we are willing to lease our network solutions to our customers; and
. we intend to continue to offer new systems, services and solutions to
enable small and medium sized businesses to take advantage of leading
technology.
We expect that we will face growing competition from a number of systems
integrators, outsourcers, data technology companies and telecommunications
providers, among others. Although we do not believe that a significant number of
other companies are providing Enterprise Managed Services solutions or a
comparable range of data and telephony systems, services and solutions to small
and medium sized businesses, we do face intense competition in each of our
individual product and service offerings.
Regulatory Environment
Overview. Some of our offerings are subject to federal and state
regulation. At the federal level, we are subject to the Communications Act of
1934 and the regulations of the Federal Communications Commission (FCC) to the
extent that we provide interstate and international telecommunications services.
At the state level, we are subject to state laws and the jurisdiction of the
state public utility commissions. The degree of regulation varies from state to
state.
The regulation of telecommunications services at all levels is in flux in
the aftermath of the Telecommunications Act of 1996, which comprehensively
amended the Communications Act of 1934 to promote competition in all areas of
telecommunications. The Telecommunications Act of 1996 amendments eliminated
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many legal barriers to competition in various telecommunications marketplaces
and set many of the basic terms governing the relationships between competing
telecommunications carriers, particularly in the provision of local telephone
service. The implementation of the Telecommunications Act of 1996 is ongoing. It
is the subject of numerous administrative proceedings both before the FCC and
the various state public utility commissions, and litigation in both the federal
and state courts. These proceedings could, to varying degrees, significantly
alter the regulatory landscape. We cannot predict the outcome of any of these
proceedings or whether they will adversely affect our business.
Federal Regulation. Our interstate and international "telecommunications
services", like those of all carriers, are subject to the regulations of the
FCC. By contrast, our "information services" offerings, network design and
maintenance services, network management services, and web page development and
hosting services are not regulated. Also unregulated is the equipment that we
provide to our customers to use with our telecommunications services, although,
as discussed below, the FCC does require that equipment connected to the public
network meet certain technical standards.
There is some ambiguity regarding the regulatory status of certain of our
services. While we regard those services as unregulated, to date there has been
no ruling on their status by the FCC. It is possible that the FCC will
ultimately rule that they are telecommunications services and therefore are
subject to regulation. For example, under the current regulatory structure, we
believe our national IP/ATM network is an information service, and therefore
exempt from regulation. However, the regulatory classification of voice
communications using IP or ATM technology is in a state of flux, and there is a
possibility that voice communications using IP or ATM technology will be subject
to regulation in the near future. A determination that these products are not
information services could make them significantly less competitive.
The FCC has established different levels of regulation for dominant and
nondominant carriers. The regional Bell operating companies, GTE, and other
incumbent local exchange telephone companies are classified as dominant. All
other carriers, including us, are classified as nondominant. As a nondominant
carrier, we are subject to much less regulation than are the dominant carriers.
Among other things, the FCC does not regulate the rates that we charge for our
interstate and international services or require us to obtain authorization in
advance for the installation, acquisition or operation of our domestic network
facilities.
The FCC has also decided that nondominant carriers should not file tariffs
setting forth their rates for interstate services. That ruling, however, has
been stayed pending the resolution of a court challenge. Until the stay is
lifted, we are required to file tariffs for our interstate services, including
resold long-distance, frame relay, and operator services. If and when the
decision not to require the filing of tariffs becomes effective, we could
benefit from the decrease in compliance costs and the elimination of delays in
getting new products to market.
Regardless of our nondominant status, we must comply with the provisions of
the Communications Act of 1934 pertaining to common carriers. We are subject to
the general requirement that the rates, terms, and conditions of our services be
"just and reasonable" and we may not make any "unjust or unreasonable"
discrimination in our rates, terms, and conditions. The FCC has the authority to
enforce our compliance with these requirements.
We offer some services that are subject to specific regulatory
requirements, including operator services and public phone service. With respect
to our operator services, we are required to disclose to callers that they may
obtain a rate quote before placing a call and must file informational tariffs
with the FCC containing detailed information about our rates. With respect to
our public phone services, the FCC requires us to post certain consumer
information at each public phone location.
The FCC also requires that equipment that is connected to the public
switched telephone network will not harm the network. The systems we install
must meet the FCC's technical standards. While we are ultimately responsible for
ensuring that our equipment complies with federal network standards, as a
practical matter, the burden of compliance lies with our suppliers.
11
<PAGE>
While the FCC recently ruled that calls to the Internet are interstate
calls and thus subject to the FCC's jurisdiction, the FCC currently does not
regulate the Internet and has said that it will refrain from doing so in the
future. No assurances can be given, however, as to the degree of the FCC's
regulation of the Internet in the future, or its effect on our website hosting
and other Internet-related systems or services. Potential negative effects could
include the increased costs to comply with any regulations which are imposed and
delays in getting new products and services to market.
In addition to regulating interstate and international telecommunications
services, the FCC also has a significant new role under the Telecommunications
Act of 1996 in overseeing the opening of the intrastate telecommunications
marketplace to competition. The FCC has issued an extensive framework of rules
governing the terms under which incumbent local exchange companies are required
to open their networks to competing providers. Among other things, the incumbent
local exchange companies must allow competitors to interconnect with their
networks and must make their retail services available to competitors at
wholesale rates for resale. We have taken advantage of these rules to enter the
local telecommunications marketplace by reselling incumbent local exchange
companies' services. Numerous parties have challenged various portions of the
resale regulations both before the FCC and in the courts, including the
discounts at which the local exchange companies must make their services
available to us for resale. If the discounts available to us are decreased as a
result of those challenges, it would affect our costs of providing local
telephone service.
State Regulation. Some of our resold local and long-distance services are
classified as intrastate and therefore are subject to state regulation. In most
states in which we do business, we are required to obtain a certificate of
public convenience and necessity and operating authority for the sale of long
distance and local phone services. In addition, we are often required to file
tariffs setting forth the terms, conditions, and prices for services which are
classified as intrastate, particularly local exchange services.
The state public utility commissions also must approve the agreements that
we enter into allowing us to purchase the retail services of the incumbent local
exchange carriers at a discount for resale.
Our Regulatory Status. We are authorized by the FCC to provide resold
international services. We also have tariffs on file with the FCC for interstate
long distance services, frame relay services and operator services. At the state
level, we are authorized to provide intrastate long distance services in 47
states and are certified to provide local telephone services in 17 states.
Employees
As of December 31, 1999, we had 1,559 full-time employees, none of whom are
represented by unions.
<TABLE>
<CAPTION>
Number of
Job Description Employees
- ------------------------------------------------------------------------------------------ -------------
<S> <C>
Sales Representatives and Sales Management....................................... 375
Technical Staff.................................................................. 558
Customer Care.................................................................... 180
Information Technology........................................................... 49
Support Services................................................................. 397
--------
1,559
========
</TABLE>
Employee Retention. We believe that our ability to implement our business
plan and continue to grow will depend in large part on our ability to continue
to attract and retain qualified employees. In addition to fixed base
compensation, employees at all levels participate in our incentive compensation
plan. All employees are eligible to receive cash bonuses, while management may
receive bonuses including both cash and shares of our common stock. In addition,
we offer a comprehensive benefits package including a 401(k) plan with a
discretionary company match
12
<PAGE>
of shares of our common stock, insurance, cafeteria plan, tuition reimbursement,
and, for upper management, a deferred compensation plan.
13
<PAGE>
Item 2. Properties
We lease sales and support facilities in each of our markets. Our principal
corporate and support facilities are also leased, and are as follows:
<TABLE>
<CAPTION>
Location Size (sq. ft) Lease Expiration Use of Facility
-------- ------------- ---------------- ---------------
<S> <C> <C> <C>
Englewood, Colorado 28,488 April 30, 2003 Headquarters and support services
Englewood, Colorado 68,566 February 28, 2002 Information systems, information technology
Englewood, Colorado 16,700 November 30, 2000 National Operations Center and Denver
Operations
</TABLE>
Item 3. Legal Proceedings
We are involved in legal proceedings from time to time, none of which we
believe, if decided adversely to us, would have a material adverse effect on our
business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
This item is inapplicable.
14
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is quoted on The Nasdaq National Market under the symbol
"CONV." Trading in our common stock began on July 19, 1999. The following table
sets forth the high and low intra-day sales prices per share of our common stock
as reported on The Nasdaq National Market based on published financial sources,
for the periods indicated:
<TABLE>
<CAPTION>
Period High Low
- ---------------------------- --------------------------- ---------------------------
<S> <C> <C>
1998
First Quarter n/a n/a
Second Quarter n/a n/a
Third Quarter n/a n/a
Fourth Quarter n/a n/a
1999
First Quarter n/a n/a
Second Quarter n/a n/a
Third Quarter $ 28.000 $ 8.500
Fourth Quarter $ 18.750 $ 8.563
</TABLE>
As of March 20, 2000, there were 28,932,281 shares of our common stock
issued and outstanding held by approximately 6,000 shareholders of record.
We have never paid cash dividends on our common stock. We currently intend
to retain future earnings, if any, to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends in
the foreseeable future. In addition, the terms of the indenture governing our
13% Series B Senior Notes due 2008 contain restrictions on our ability to pay
dividends or other distributions.
15
<PAGE>
The following tables summarize all equity securities issued or sold by us
during the fiscal year ended December 31, 1999 that were not sold pursuant to
registered offerings:
<TABLE>
<CAPTION>
Underwriters or
Class of Number of Exemption
Date Purchasers Shares Consideration ($) Claimed
- -------------- ----------------- ----------------- --------------------------- -------------------
<S> <C> <C> <C> <C>
Feb. 12, 1999 and Sellers in an acquisition 24,925 Substantially all of the Section 4(2)
May 26, 1999...... assets of the target company
Mar. 31, 1999 Employee options 48,250 $193,500 Rule 701
through Aug. 2,
1999..............
Apr. 19, 1999..... Sellers in an acquisition 37,000 100% equity interest in the Section 4(2)
target company
Apr. 23, 1999 and Employees 93,547 Deferred compensation plan Section 4(2)
May 7, 1999....... payment
Apr 23, 1999 1996 and 1997 Private 2,285,040 $13,130,195 Section 4(2)
through Dec. 21, Placement Warrant
1999.............. Exercises
Jul. 19, 1999..... Series A Preferred Stock 2,666,677 Conversion of previously Section 4(2)
Conversion issued securities. No
additional consideration
received.
Aug. 3, 1999...... Employee options 30,552 $54,800 Section 4(2)
Aug. 4, 1999...... Employees 27,500 Services performed Section 4(2)
Sep. 10, 1999..... Sellers in an acquisition 2,500 Additional consideration for Section 4(2)
purchase pursuant to earn-out
provisions
Sep. 23, 1999..... Sellers in an acquisition 40,771 100% equity interest in the Section 4(2)
target company
Oct. 19, 1999..... Employees 5,498 Incentive compensation plan Section 4(2)
payment
Oct. 29, 1999..... Sellers in an acquisition 217,671 100% equity interest in the Section 4(2)
target company
Nov. 30, 1999..... Sellers in an acquisition 84,165 Substantially all of the Section 4(2)
assets of the target company
Warrants
Mar. 17, 1999 and Series A Preferred Stock 958,334 Additional consideration for Series A Section 4(2)
Mar, 31, 1999..... holders Preferred Stock purchase
Mar. 21, 1999..... Credit facility provider 200,000 Increase in credit facility Section 4(2)
Jun. 3, 1999...... Credit facility provider 375,000 $20 million credit facility Section 4(2)
Jul. 16, 1999..... Credit facility provider 575,000 $105 million credit facility Section 4(2)
Series A
Preferred Stock
Mar. 17, 1999 and Accredited investors 800,000 $20,000,000 Section 4(2)
Mar. 31, 1999
</TABLE>
16
<PAGE>
Item 6. Selected Financial Data
The following selected financial data should be read along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and accompanying notes all
of which appear later in this Form 10-K. The selected financial data have been
derived from our consolidated financial statements and the financial statements
of our predecessor, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. On December 17, 1996, we acquired Integrated
Communication Networks, L.C., which is referred to as the "predecessor" for the
period prior to the acquisition. Convergent Communications, since March 1, 1996,
together with Integrated Communication Networks, L.C., since December 17, 1996,
is referred to as the "successor." Share and per share information is not
presented for the predecessor as they are not relevant due to the predecessor's
different capital structure.
in thousands, except per share amounts
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------------------------------------------------------------------
For the Year January 1, March 1, For the Year For the Year For the Year
Ended 1996 through 1996 through Ended Ended Ended
December 31, December 16, December 31, December 31, December 31, December 31,
1995 1996 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Operating Statement Data:
Revenue........................ $ 1,434 $ 1,496 $ 98 $ 10,210 $ 61,600 $ 159,922
Cost of sales excluding
depreciation................. 964 1,018 79 7,368 43,703 104,045
Selling , general and
administrative................ 405 554 552 10,983 47,862 125,350
Depreciation and
amortization.................. 127 124 41 1,453 7,493 17,295
Impairment of long-lived
assets........................ -- -- -- -- -- 650
Total operating expenses..... 1,496 1,696 672 19,804 99,058 247,340
------------ ------------ ------------ ------------ ------------ ------------
Operating loss............... (62) (200) (574) (9,594) (37,458) (87,418)
Interest expense............... (17) (21) (1) (156) (17,502) (25,491)
Interest income................ -- -- -- 251 4,632 4,880
Other expense, net............. -- -- -- (156) (248) (231)
------------ ------------ ------------ ------------ ------------ ------------
Net loss....................... $ (79) $ (221) $ (575) $ (9,655) $ (50,576) $ (108,260)
============ ============ ============ ============ ============ ============
Net loss per share (basic and
diluted)...................... $ (0.15) $ (0.92) $ (3.68) $ (5.32)
Weighted average shares
outstanding (basic and
diluted)...................... 3,887 10,461 13,732 20,356
Other Operating Data:
Net cash provided by (used
in) operating activities...... 60 $ (31) $ (242) $ (6,698) $ (28,698) $ (97,355)
Net cash used in investing
activities.................... (8) (36) (1,446) (11,648) (94,647) (61,143)
Net cash provided by (used
in) financing activities...... (61) 91 4,849 15,852 148,274 (158,116)
EBITDA(1)...................... 65 (76) (534) (8,141) (29,965) (69,473)
</TABLE>
__________________
(1) As used in this report, EBITDA consists of earnings before interest (net),
income taxes, depreciation and amortization, impairment of long-lived
assets and other income (expense). EBITDA is a measure commonly used to
analyze companies on the basis of operating performance. It is not a
measure of financial performance under GAAP and should not be considered as
an alternative to net income (loss) as a measure of performance or as an
alternative to cash flow as a measure of liquidity. Our measure of EBITDA
may not be comparable to similarly titled measures used by other companies.
17
<PAGE>
Item 6. Selected Financial Data-(Continued)
in thousands
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------ --------------------------------------------------------------
As of As of As of As of As of
December 31, December 31, December 31, December 31, December 31,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet:
Cash, cash equivalents and short-term
investments................................... $ 13 $ 3,161 $ 8,039 $ 25,597 $ 59,957
Restricted cash................................ -- -- 406 51,350 38,469
Working capital................................ (10) 1,890 5,334 28,500 76,975
Goodwill, net.................................. 228 3,201 6,393 46,526 56,037
Total assets................................... 797 9,887 24,922 185,656 295,213
Total debt..................................... 440 1,456 1,933 168,268 205,474
Total liabilities.............................. 580 1,902 6,194 207,005 258,593
Shareholders' equity (deficit)................. 217 7,985 18,728 (21,349) 36,620
</TABLE>
______________
18
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read along with the consolidated
financial statements and the accompanying notes included later in this Form 10-
K. This discussion includes forward-looking statements and is based on current
expectations which involve risks and uncertainties. Because of the uncertainty
of many factors, what actually occurs in the future may be very different from
what we project in our forward-looking statements.
Overview
We are a rapidly growing national provider of e-Sourcing solutions
primarily to businesses with 25 to 500 employees. "e-Sourcing" is the management
of communications solutions that allow businesses to leverage technology,
systems and networking resources such as broadband Internet Protocol based
applications. Inside our customers' premises we own communications networks and
provide professional services, such as the design, installation, management and
monitoring of those networks. Outside our customers' premises, we provide a full
range of data and voice transport services. By operating networks both inside
and outside our customers' premises, and by offering a broad range of Internet,
data and voice systems and services, we enable small and medium sized businesses
to use state-of-the-art communications solutions, including data and voice
networks based on broadband Internet Protocol, electronic commerce, the Internet
and sophisticated communications systems. We intend to become the leading
provider of IP-based Internet, data and voice systems and services to small and
medium sized businesses.
We were first capitalized in March 1996. Since that time, we have
successfully raised $338.9 million in capital, including $450,000 in founders'
capital, $24.0 million in two private placements of common stock in 1996 and
1997 (including an additional $450,000 from the founders), $160.0 million
through the 1998 sale of our 13% Senior Notes and related warrants, $20.0
million in a 1999 sale of our convertible preferred stock and warrants to
affiliates of Sandler Capital Group and $134.1 million in our Initial Public
Offering in July 1999. We also have borrowing capacity under our existing
Comdisco equipment lease facility of $30.0 million.
In the last three years, we completed 18 strategic acquisitions, the most
significant of which was the 1998 acquisition of substantially all of the assets
of Tie Communications at a cost of approximately $51.4 million. With the
acquisition of these assets, we accelerated our growth by adding 24 new markets
and 452 employees with experience in voice systems and services. This
acquisition also gave us the opportunity to cross-market our data systems and
services, including Enterprise Managed Services, to customers that purchased
systems or services from Tie in the past.
We began offering Enterprise Managed Services in December 1997 and, as of
December 1999, had entered into long-term Enterprise Managed Services contracts
with 64 customers with an aggregate of approximately 3,246 computers and
telephones. We expect these contracts to provide us with approximately $9.1
million in annual contract revenue, and over their terms we expect them to
produce total revenue of approximately $46.4 million.
19
<PAGE>
Description of Financial Components
We classify our business into three segments: eBusiness, Enterprise
Services and Enterprise Systems.
Revenue and cost of sales. The following chart outlines the components of
revenue and the related cost of sales excluding depreciation, by segment:
<TABLE>
<CAPTION>
Revenue: Cost of Sales (excluding depreciation):
<S> <C>
e Business
. web design and hosting . engineer and technician compensation and benefits
. eCommerce
. intranet and extranet development
________________________________________________
Enterprise Services
Professional Services . engineer and technician compensation and benefits
. network planning, design, maintenance, and monitoring
Broadband Services . leased line facilities' costs of connecting a
. frame relay (ATM and IP switching), Internet access, customer's to long distance or local network
long distance service, local telephone service and capacity charges that long distance and local
public phone service carriers, Internet service providers and others
impose to use their equipment and network
Managed Services . all the costs associated with all the data and
. long-term contracts (typically three to five years) voice systems and services described in this
under which we own, manage and are responsible for all table
or a portion of the network inside our customers'
premises
________________________________________________
Enterprise Systems
. sale and installation of data, voice and video network . cost of data, voice and video network systems
systems
. costs of installation, including technician
compensation and benefits
</TABLE>
20
<PAGE>
Selling, general and administrative expenses have increased significantly
and will continue to increase as we recruit additional management and support
personnel necessary for continued growth. However, we expect these expenses to
decline as a percentage of our revenue as we expand our customer base and begin
selling additional systems and services in each of our markets.
. Sales and marketing expenses include commissions paid in connection
with our sales programs, marketing salaries and benefits, travel
expenses, trade show expenses, consulting fees and promotional costs.
Also included are the costs of soliciting potential customers such as
telemarketing, brochures, targeted advertising and promotional
campaigns. We expect these expenses to increase as we add additional
sales and marketing personnel and further implement our business plan.
. General and administrative expenses primarily consist of salaries and
related expenses of management and support services personnel,
occupancy fees, professional fees and general corporate and
administrative expenses. We also include costs associated with the
development, support and expected enhancements of our operational
support software platform, to the extent these costs are not
capitalized.
Depreciation and amortization expense includes depreciation of property,
network and equipment (over two to five years), including our assets located
inside our customers' premises provided under Enterprise Managed Services
contracts. Amortization expense includes the amortization of intangible assets
(over three to ten years), primarily goodwill (over ten years), that resulted
from business acquisitions. We had 56.0 million of goodwill, net of
amortization, on December 31, 1999. Depreciation and amortization will increase
as we install additional ePOP switching platforms and expand our Enterprise
Managed Services business and as a result of increased amortization of
intangibles expected to result from future acquisitions.
Interest expense includes interest expense on our short-term and long-term
debt, including capital leases. The majority of the interest expense is related
to our 13% Senior Notes which mature in 2008. Interest expense will increase as
we continue to finance a significant portion of our capital expenditures,
including our purchase of Cisco Systems Inc.'s multi-service, data and voice
switches and additional Cisco Systems, Inc. equipment under our $103.5 million
equipment facility with Cisco Systems Capital Corporation.
21
<PAGE>
Results of Operations
Management evaluates and makes operating decisions about each of our
operating segments based on a number of factors. Two of the more significant
factors we use in evaluating operating performance are: revenue and gross margin
before depreciation. We do not account for assets by business segment. As a
result, depreciation and amortization are not factors used by management in
evaluating the operating performance of our segments.
The percentages shown in the following table with respect to revenue
represent revenue for each business segment as a percentage of total revenue.
Percentages with respect to cost of sales excluding depreciation and gross
margin before depreciation are a percentage of revenue for the related segment.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1998 1999
--------------- --------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
eBusiness.............................................. $ - -% $ - -% $ 1,742 1%
Enterprise Services.................................... 2,795 27 27,922 45 64,806 41
Enterprise Systems..................................... 7,415 73 33,678 55 93,374 58
-------- ----- -------- ----- --------- -----
Total revenue...................................... 10,210 100 61,600 100 159,922 100
-------- ----- -------- ----- --------- -----
Cost of sales excluding depreciation:
eBusiness.............................................. - - - - 720 41
Enterprise Services.................................... 1,278 46 15,587 56 32,827 51
Enterprise Systems..................................... 6,090 82 28,116 84 70,498 76
-------- -------- ---------
Total cost of sales excluding depreciation 7,368 72 43,703 71 104,045 65
-------- -------- ---------
Gross margin before depreciation:
eBusiness.............................................. - - - - 1,022 59
Enterprise Services.................................... 1,517 54 12,335 44 31,979 49
Enterprise Systems..................................... 1,325 18 5,562 17 22,876 25
-------- -------- ---------
Total gross margin before depreciation............. $ 2,842 28% $ 17,897 29% $ 55,877 35%
======== ======== =========
</TABLE>
Summary Quarterly Financial Data
The table below presents unaudited quarterly statement of operations data
for each of the last eight quarters through December 31, 1999. This information
has been derived from unaudited financial statements that have been prepared on
the same basis as the audited financial statements contained elsewhere in this
Form 10-K and, in our opinion, includes all adjustments, consisting only of
normal recurring adjustments, that are necessary for a fair presentation of the
information. You should read these unaudited quarterly results along with our
consolidated financial statements and the accompanying notes appearing later in
this Form 10-K. The operating results for any quarter are not necessarily
indicative of results for any future periods.
<TABLE>
<CAPTION>
1998 1999
---------------------------------------- -----------------------------------------
1st 2nd 3rd(1) 4th 1st 2nd 3rd 4th
------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarterly Operating Data:
Revenue................................ $ 6,523 $ 7,982 $ 22,316 $ 24,779 $ 31,709 $ 38,053 $ 42,422 $ 47,738
Cost of sales excluding depreciation... 4,798 5,772 14,717 18,416 20,743 23,714 26,977 32,610
Selling, general and administrative.... 6,062 7,710 15,507 18,583 23,337 27,411 31,927 42,675
Depreciation and amortization.......... 762 1,191 2,646 2,894 2,863 4,107 4,872 5,453
Impairment of long-lived assets........ - - - - - - - 650
------------------------------------------------------------------------------------
Operating loss........................ (5,099) (6,691) (10,554) (15,114) (15,234) (17,179) (21,355) (33,650)
Net loss............................... $(5,111) $(11,169) $(15,355) $(18,941) $(20,129) $(22,960) $(26,358) $(38,813)
------------------------------------------------------------------------------------
EBITDA(2).............................. $(4,337) $ (5,500) $ (7,908) $(12,220) $(12,372) $(13,071) $(16,483) $(27,547)
====================================================================================
</TABLE>
(1) On August 1, 1998, we completed our largest acquisition to date when we
acquired substantially all of the assets of Tie Communications, Inc. for
$51.4 million, including $40.0 million in cash plus other costs and assumed
liabilities.
22
<PAGE>
(2) As used in this report, EBITDA consists of earnings before interest
(net), income taxes, depreciation and amortization, impairment of long-
lived assets and other income (expense). EBITDA is a measure commonly
used to analyze companies on the basis of operating performance. It is
not a measure of financial performance under GAAP and should not be
considered as an alternative to net income (loss) as a measure of
performance or as an alternative to cash flow as a measure of liquidity.
Our measure of EBITDA may not be comparable to similarly titled measures
used by other companies.
We have generated greater revenue in each successive quarter since our
inception, reflecting increases in the number of customers, mainly due to
acquisitions, and in sales to existing customers. Cost of sales excluding
depreciation has increased in every quarter, reflecting product and service
costs directly associated with revenue. Our selling, general and
administrative expenses have increased in every quarter and reflect sales and
marketing costs such as sales commissions, and the development and growth of
regional and corporate support staff. Depreciation and amortization has
increased in each quarter through December 31, 1999. The increases in
depreciation are due to the purchase of property, network and equipment inside
and outside our customers' premises associated with our expansion to 35
markets as of December 31, 1999, and due to the deployment of our multi-
service data and voice switching platform in 16 markets. The increases in
amortization are due to the increase in goodwill and other intangible assets
resulting from the completion of 18 acquisitions through December 31, 1999. We
have also experienced increasing operating, EBITDA and net losses every
quarter.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1999
Revenue for 1999 was approximately $159.9 million, $98.3 million greater than
revenue for 1998. The increase in revenue was a result of both acquisitions
and internal growth. We completed six acquisitions during 1999, one
telecommunications equipment provider and integrator and five data network
integration services providers. The increase in revenue was also largely due
to our growing operations and sales staff having pursued the cross selling
opportunities presented in new markets. The majority of the increase in
revenue was attributable to the enterprise systems segment of our business,
which increased $59.7 million while enterprise services increased $36.9
million. The majority of the increase in enterprise systems revenue was from
sales of voice communications systems which is attributable to the influence
of the sales force obtained through the Tie acquisition which was a voice
equipment provider and long-distance reseller acquired in the third quarter
of 1998. The increase in enterprise services revenue consisted of increases of
$29.8 million in professional services, $4.1 million in broadband services and
$3.0 million in Enterprise Managed Services. Also, during 1999 we implemented
a new segment, eBusiness Solutions, which accounted for the remaining $1.7
million of the increase in revenue for 1999.
A significant factor in our strategy to increase recurring enterprise services
revenue is through our Enterprise Managed Services offering. While revenue
from Enterprise Managed Services contributed $2.9 million to the increase in
revenue for 1999, contract value increased from $14.6 million as of December
31, 1998 to $46.4 million as of December 31, 1999. This represents an increase
in customers from 18 at the end of 1998 to 64 at the end of 1999.
Cost of sales excluding depreciation increased $60.3 million from 1998 to
1999, while declining as a percentage of total revenue from 71% for the year
ended December 31, 1998 to 65% for the year ended December 31, 1999. This
decline as a percentage of total revenue is a reflection of the decline in
cost of sales excluding depreciation for both systems and services. Cost of
enterprises systems sales excluding depreciation declined 8.0% as a percentage
of enterprise systems revenue, from 84% for 1998 to 76% for 1999. This
decrease as a percentage of product revenue is due to an increase in sales of
voice systems, which have a lower related cost of sales excluding depreciation
than data systems. Cost of enterprise services sales, as a percentage of
enterprises services revenue, decreased from 56% for 1998 to 51% for 1999. The
decrease in cost of service sales as a percentage of service revenue was
primarily due to an increase in our offering of professional services such as
network and Web design, maintenance and monitoring and Enterprise Managed
Services, which have a lower related cost.
Selling, general and administrative expenses increased $77.5 million from 1998
to 1999. This increase in selling, general and administrative expenses is
largely due to continued growth of the support services organization required
to support expanding field operations, which accounted for approximately $59.9
million or 48% of total selling, general and administrative expenses for the
year ended December 31, 1999. Salary and benefit related expenses increased
$53.5 million, as a result of adding 682 employees between December 31, 1998
and December 31, 1999,
23
<PAGE>
and as a result of having a full year of expenses related to the 452 employees
obtained through the Tie acquisition compared to five months of Tie related
expenses in 1998. The increase in expense is also a result of the six business
combinations completed during 1999. Selling, general and administrative expenses
remained constant as a percentage of revenue at 78% for both 1998 and 1999. We
expect selling, general and administrative expenses to decrease as a percentage
of revenue as we limit the growth of our corporate support services organization
and continue to expand our customer base and sell additional systems and
services in all of our markets.
Depreciation and amortization expense increased approximately $9.8 million
from 1998 to 1999. The increase is a direct result of an increase of $49.3
million in property, network and equipment and $15.1 million in goodwill. Other
intangible assets increased $2.8 million. As of December 31, 1999 we had $56.0
million in goodwill, net of amortization, which is being amortized over ten
years. The increase in property, network and equipment is largely due to:
. the addition and expansion of new and existing markets;
. the completion of six acquisitions;
. the development and deployment of 16 of our multi-functional, integrated
data and voice switching platforms;
. continued development of our operational support system;
. the increase in assets managed under Enterprise Managed Services contracts;
and
. office equipment and furniture related to the growth of our support
services organization.
Impairment of long-lived assets resulted from the writeoff of certain of our
operating systems which are no longer being utilized.
Interest expense increased by approximately $8.0 million from 1998 to 1999.
The increase is primarily a result of a full year of interest expense in 1999
compared to nine months of interest in 1998 on $160.0 million in principal
amount of our 13% Senior Notes issued in April 1998. The increase is also a
result of:
. assumed indebtedness from acquisitions;
. increased indebtedness under our equipment financing facilities with
Comdisco and GATX Capital;
. indebtedness under the Goldman Sachs Credit Partners L.P. senior secured
credit facility;
. indebtedness incurred under the financing facility with Cisco Systems
Capital Corporation; and
. indebtedess for proceeds received in discounted long-term receivables
transactions.
We expect that interest expense will increase as we continue to finance a
significant portion of our capital expenditures, including equipment purchased
for installation at our customers' offices in connection with the provision of
Enterprise Managed Services and equipment purchased under our $103.5 million
equipment facility with Cisco Systems Capital Corporation.
Interest income increased approximately $248,000 from 1998 to 1999. The
increase in interest income is due to earnings on the remaining proceeds from
the $160.0 million in principal amount of our 13% Senior Notes issued in April
1998, proceeds from the sale of convertible preferred stock in March 1999, a
$10.0 million credit facility entered into in June 1999 and net proceeds of
approximately $122.3 million from our initial public offering in July 1999
compared to interest income on the proceeds of the $160.0 million in principal
amount of our 13% Senior Notes in 1998.
24
<PAGE>
Other income (expense), net which consists of miscellaneous other non-
operating types of income and expenses, changed slightly from net other expense
of approximately $248,000 in 1998 to net other expense of approximately $231,000
in 1999. Net other expense for 1999 is primarily due to a loss recognized on the
termination of a stock purchase agreement and sale of an investment.
25
<PAGE>
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1998
Revenue increased by $51.4 million in 1998, to approximately six times 1997
revenue. The increase in revenue was primarily due to our expansion from
eight markets at December 31, 1997 to 32 markets at December 31, 1998, as a
result of the six acquisitions we completed during the year. The increase in
revenue was also due to internal growth of our operations and sales staff.
The most significant acquisition was the acquisition of the assets of Tie,
which occurred in the third quarter of 1998. The Tie acquisition contributed
most of the sizable increase in enterprise systems revenue and an even
greater increase in enterprise services revenue. The balance of the growth
in enterprise systems revenue was primarily a result of the development and
growth of existing markets and a full year of operations in 1998 compared to
a partial year of operations in 1997 for those markets we entered in late
1997. As a result of the Tie acquisition and our strategy to increase our
service offerings, our overall revenue mix shifted from approximately 27% in
services in 1997, to 45% in services in 1998.
Cost of sales excluding depreciation increased $36.3 million from 1997 to
1998. While it declined slightly as a percentage of total revenue from 72%
in 1997 to 71% in 1998, cost of enterprise services sales as a percentage of
enterprise services revenue increased from 46% in 1997 to 56% in 1998. The
increase as a percentage of enterprise services revenue was primarily due to
a shift in service mix to services such as long-distance which have a higher
related cost of sales. Cost of enterprise systems sales excluding
depreciation, as a percentage of enterprise systems revenue, remained
relatively constant, increasing from 82% in 1997 to 84% in 1998.
Selling, general and administrative expenses increased $36.9 million from
1997 to 1998, but decreased as a percentage of revenue from 108% in 1997 to
78% in 1998. However, we expect selling general and administrative expenses
to increase as a percentage of revenue over the short term as we incur costs
associated with the aligning of our operations to capitalize on our
eBusiness Solutions and IP-based (Internet Protocol) infrastructure areas of
our business and also the growth of our support services organization
required to support expanding field operations.
The $36.9 million increase was primarily a result of:
. the expansion from eight to 32 markets;
. the completion of six acquisitions, including the assets of Tie;
. an increase from 165 employees at December 31, 1997 to 877 at December
31, 1998 (452 of which were hired as a result of the Tie acquisition);
and
. continued growth of the support services organization required for
expanding field operations, which accounted for approximately $20.2
million or 42% of total selling, general and administrative expenses
for 1998.
Depreciation and amortization expense increased approximately $6.0 million
from 1997 to 1998. This increase was a direct result of an increase of $22.7
million in property, network and equipment from 1997 to 1998 and an increase
in goodwill (before 1998 amortization) of $42.6 million and other intangible
assets of $1.7 million as a result of the six acquisitions completed in
1998. As of December 31, 1998 we had $46.5 million in goodwill, net of
amortization, which will be amortized over the next ten years. The increase
in property, network and equipment is largely due to:
. the expansion from eight to 32 markets;
. the development and deployment of our multi-service data and voice
switching platform in three markets;
. continued development of our operational support system;
. the increase in assets managed under Enterprise Managed Services
contracts; and
26
<PAGE>
. office equipment and furniture related to the growth of our support
services organization.
Interest expense increased by approximately $17.3 million as a result of the
April 1998 issuance of our 13% Senior Notes, which consisted of $160 million
in principal amount of promissory notes and warrants to purchase 864,000
shares of common stock. Approximately $1.2 million of this increase relates
to accretion of the debt discount resulting from the value assigned to the
warrants and amortization of debt issuance costs, neither of which are cash
expenses. Interest expense also increased as a result of assumed
indebtedness from acquisitions, as well as increased indebtedness under our
equipment financing facilities with Comdisco and Sun Financial Group, Inc.
due to property, network and equipment purchased for our networks both
inside and outside our customers' premises.
Interest income increased approximately $4.4 million as a result of the
temporary investment of the proceeds of the offering of our 13% Senior
Notes, prior to the use of these proceeds in our business.
Other expense (net) increased by approximately $92,000 and primarily
consisted of losses on disposal of assets and miscellaneous other non-
operating types of expenses.
Liquidity and Capital Resources
Since inception, in addition to borrowings under our credit facilities we
have funded our net losses and capital expenditures through financing
activities as outlined in the following table. In the table below, net
proceeds equals the gross proceeds of the offering less advisors' fees,
underwriting discounts and other expenses associated with the offering.
<TABLE>
<CAPTION>
Gross
Securities Sold Proceeds Net Proceeds
---------------------------------------------------------------------------- ---------------- ----------------
in thousands
<S> <C> <C>
Initial sale of 3,750 shares of common stock to founders
(April through October 1996)............................................. $ 450 $ 450
3,500 shares of common stock and 1,750 warrants
(December 1996 through February 1997).................................... 7,000 6,296
3,410 shares of common stock and 1,705 warrants
(October through November 1997).......................................... 17,050 15,340
13% Senior Notes and 864 warrants (April 1998)............................ 160,000 152,378
Sale of 800 shares of Series A Convertible Preferred Stock and
958 warrants (March 1999)................................................ 20,000 19,300
Initial Public Offering of 8,937 shares of common stock (July 1999)....... 134,051 122,281
---------------- ---------------
Total funds raised....................................................... $ 338,551 $ 316,045
================ ===============
</TABLE>
Our principal uses of cash are to fund working capital requirements, capital
expenditures, business acquisitions, operating losses and interest expenses. We
expect that our expansion will require additional capital expenditures and
direct operating costs and expenses. As a result, we expect to incur net losses
for at least the next 36 months. However, if our customer base grows and we are
successful in offering all of our data services and systems, we believe revenue
will increase in larger proportion than operating expenses.
As of December 31, 1999, we had current assets of $141.4 million, including
cash, cash equivalents and short-term investments of $60.0 million and
restricted cash of $20.8 million, and working capital of $77.0 million. In
addition, we also had $17.7 million in non-current restricted cash. The majority
of our restricted cash, along with the interest we earn on this cash, will be
used to make the interest payments through April 2001 on
27
<PAGE>
our 13% Senior Notes. We invest excess funds in short-term investments until
these funds are needed for debt payments, capital investments, acquisitions and
operations of the business.
28
<PAGE>
Cash Flows From Operating Activities. Operating activities used cash of
approximately $97.4 million during 1999, $28.7 million during 1998 and $6.7
million during 1997. Cash used in operating activities in 1999 was primarily due
to the net loss of $108.3 million, an increase in trade accounts receivable and
other current asset categories of $23.2 million and a decrease in other accrued
liabilities of $3.0 million. These uses of cash were partially offset by $27.3
million in non-cash expenses such as depreciation and amortization and stock
compensation and an increase in trade payables and accrued compensation of $9.7
million. While cash used in operating activities as a percentage of revenue
declined from 66% in 1997 to 47% in 1998, the percentage, as a percentage of
revenue increased in 1999 to 61%. The primary reason for this increase is due to
our vendor credit lines not increasing adequately to support the significant
increase in our purchasing activity. The strengthening of our liquidity position
as a result of the expected proceeds from the sale of our preferred stock and
borrowing under the $50.0 million credit facility (see"Cash Flow From Financing
Activities" and "Future Capital Requirements" below) should allow us to
negogiate better credit terms with our vendors.
The majority of the increase from 1997 to 1998 was due to an increase in
trade accounts receivable of approximately $11.0 million and a $40.9 million
increase in the operating loss, which were partially offset by an increase in
trade accounts payable of approximately $12.4 million, an increase of $5.2
million of accrued interest expense, and non-cash expenses such as depreciation
and amortization and other changes in working capital. Cash used in operating
activities during 1997 was primarily due to our net loss of $9.7 million,
partially offset by non-cash expenses such as depreciation and amortization and
changes in working capital.
Cash Flows From Investing Activities. Investing activities used cash of
$61.1 million during 1999, $94.6 million during 1998 and $11.6 million during
1997. The majority of the cash used in investing activities in 1999 consisted of
short-term investments of $34.3 million, capital expenditures of $20.8 million,
acquisitions of $10.5 million and investment in leases receivable of $8.2
million. An additional $28.3 million of capital expenditures were financed under
our financing facilities, including approximately $9.5 million for our ePOP
deployment and $3.3 million in assets being utilized in Enterprise Managed
Services contracts.
Cash used in investing activities during 1998 consisted primarily of
restricted cash investments in U.S. government securities of $50.9 million in
connection with the sale of our 13% Senior Notes, acquisitions of $42.4 million
($40.0 million of which was used for the Tie acquisition) and capital
expenditures of $6.9 million. These cash uses were partially offset by maturing
short-term investments of $7.4 million. Cash used for investing activities
during 1997 consisted of $7.4 million used for short-term investments, $2.0
million in capital expenditures and $1.5 million for business combinations.
Cash Flows From Financing Activities. Financing activities provided cash of
approximately $158.1 million during 1999, $148.3 million during 1998 and $15.9
million during 1997. Cash provided by financing activities during 1999 consisted
of $122.3 million in net proceeds from our initial public offering, $19.2
million in net proceeds from the sale of our convertible preferred stock, $16.2
million, net of financing costs, in new borrowing under the senior secured
credit facility ($9.5 million) and discounting of long-term receivables with
lendors ($6.7 million). We received an additional $13.3 million in new proceeds
from the exercise of options and warrants. Cash provided was partially offset by
approximately $12.8 million in payments on long-term borrowings.
Cash provided by financing activities during 1998 consisted of approximately
$152.4 million in net proceeds from the sale of our 13% Senior Notes and
warrants, which was partially offset by approximately $4.3 million in payments
on long-term borrowings. In 1997 cash flows from financing activities consisted
of $17.3 million in net proceeds from the sale of shares of our common stock and
warrants, which was partially offset by approximately $1.4 million in debt
repayments.
The following is a description of the significant financing activities that have
funded our operations to date:
In November 1997, we entered into an agreement with Comdisco, Inc. through
which we can receive up to $50 million of equipment lease financing. At December
31, 1999, $30 million was available to us under this facility of which a total
of approximately $24.8 million had been utilized. The remaining $20 million will
become available upon the satisfaction of additional conditions. This facility
will expire on June 30, 2000.
29
<PAGE>
On April 2, 1998 we completed the offering of our 13% Senior Notes, in the
aggregate principal amount of $160.0 million and warrants to purchase 864,000
shares of common stock. At the closing, we deposited $56.8 million of the
proceeds from that offering in a collateral account. The amount in the
collateral account along with the interest earned, will be sufficient to pay the
first six interest payments on the 13% Senior Notes, of which two have been made
as of April 1, 1999. We received approximately $95.6 million after deducting
offering costs of approximately $7.6 million and funding the collateral account.
The 13% Senior Notes contain certain covenants that restrict our ability to
incur additional debt and make certain payments, including dividends.
In March 1999, we sold to affiliates of the Sandler Capital Group 800,000
shares of our convertible preferred stock and warrants to purchase 958,333
shares of our common stock, for total consideration of $20.0 million. The
proceeds from the sale, net of related offering costs, were approximately $19.2
million. These shares of preferred stock were converted to 2,666,667 shares of
our common stock in conjunction with our initial public offering in July 1999.
In June 1999, we entered into a $10.0 million senior secured credit facility
with Goldman Sachs Credit Partners L.P. The proceeds of this facility are being
used for working capital and other general corporate purposes. Interest accrues
at the greater of 13.0% or LIBOR plus 6.0% with interest payments due monthly.
The principal amount outstanding along with any accrued interest is due in June,
2002. We cannot re-borrow amounts repaid under this facility. In connection with
this facility, we also issued to Goldman Sachs Credit Partners L.P. a warrant to
acquire 375,000 shares of common stock at an exercise price of $15.00 per share,
none of which had been exercised as of December 31, 1999. We have obtained
waivers for non-compliance with certain financial covenants of this facility as
of December 31, 1999. We have borrowed the full amount available under this
facility and anticipate repaying it in full during the second quarter of 2000
with a portion of the proceeds from the sale of our preferred stock, discussed
below.
In July 1999, we entered into a six-year $103.5 million credit facility with
Cisco Systems Capital Corporation. This credit facility will provide the
financing for the purchase and installation of our Cisco Systems, Inc. multi-
service data and voice switching platform and for other Cisco equipment. Under
the terms of this agreement, Cisco Systems, Inc. also received a warrant to
purchase 575,000 shares of our common stock, none of which had been exercised as
of December 31, 1999. The warrant has an exercise price of $15.00 per share and
is exercisable for three years from the date of issuance. The facility will be
available in three tranches over a three year period with quarterly payments due
over three years beginning one year from the availability of each tranche. As
of December 31, 1999, we had borrowed $9.5 million under this facility.
We have an agreement with GATX Capital Corporation, that was used to finance
our internal capital needs under which $4.7 million was outstanding on December
31, 1999.
In March 2000, we entered into a commitment letter with Foothill Capital
Corporation for a $50.0 million Senior Secured Revolving Line of Credit
Facility. Under the terms of this $50.0 million credit facility we would be able
to borrow up to 85% of eligible receivables, as defined in the agreement, and
the lessor of $12.0 million or 50% of eligible inventory, as defined in the
agreement. The facility is subject to execution of the definitive agreements,
the completion of the sale of preferred stock discussed below and certain other
requirements.
In March 2000 we entered into a commitment letter in connection with raising
$175 million through the sale of 175,000 shares of our 8% convertible redeemable
preferred stock, 700,000 warrants exercisable at $20 per share and 1.17 million
warrants exercisable at $25 per share. The investment will come from an
investment group led by Texas Pacific Group (TPG) investing $150 million and
affiliates of Sandler Capital Management investing $25 million. The preferred
stock is convertible into shares of our common stock at a conversion price of
$13 per share. Upon closing, TPG will have the right to designate two members to
our board of directors. The transaction is expected to close within 30 days,
subject to the execution of definitive agreements, Hart Scott Rodino approval
other customary closing conditions.
Future Capital Requirements. We have significant debt in relation to our
equity. At December 31, 1999, we had $205.5 million in debt and $36.6 million in
shareholders' equity, which includes paid-in capital of $205.0 million. Our
business plan will continue to require a substantial amount of capital to fund
our expansion of existing markets and acquisitions. Our business plan includes
the following:
30
<PAGE>
. deploying our multi-service data and voice switching platform in all of
our markets and leasing of our IP/ATM network connecting our switches;
. funding the purchase, installation and ownership of the enterprise
networks of our Enterprise Managed Services customers (which includes
providing these customers with all necessary hardware, software,
transmission facilities and management, maintenance and monitoring
services);
. continuing to develop customer care and sales organizations;
. continuing to develop our operational support system; and
. funding operating losses and debt service requirements.
. evaluate acquisitions and investments
We estimate that our existing funds at December 31, 1999, our available
borrowing under our financing and leasing facilities currently in place and
additional funds expected from the sale of our 8% preferred stock and the $50.0
million senior secured credit facility will be sufficient to meet our capital
requirements for the foreseeable future. However, no definitive agreement has
been signed on either the 8% preferred stock sale or the $50.0 million senior
secured credit facility. If we are unable to close on these transactions, our
available funds are only sufficient to sustain our current operating level into
May of 2000 and any such cash shortfall would have a material adverse effect on
our business, financial condition, results of operations and liquidity and on
the price of our common stock.
Even if we complete the sale of the 8% preferred stock and enter into the
$50.0 million senior secured credit facility, we may require additional
capital sooner than anticipated due to material shortfalls in our operating and
financial performance or if we are more aggressive in our expansion than
currently contemplated. We cannot be certain that we would be successful in
raising sufficient debt or equity capital to fund our operations on a timely
basis or on acceptable terms. If needed financing were not available on
acceptable terms, we could be compelled to alter our business strategy, delay or
abandon some of our future plans or expenditures or fail to make interest
payments on our debt. Any of these events would have a material adverse effect
on our business, financial condition, results of operations and liquidity and on
the price of our common stock.
Recent Accounting Standards
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance in applying generally accepted accounting
principles to selected revenue recognition issues. We are currently evaluating
changes to our current revenue recognition policies that may result from the
application of this SAB.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
This item is inapplicable.
31
<PAGE>
Item 8. Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors of Convergent Communications, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Convergent Communications, Inc. at December 31, 1998 and 1999, and the results
of their operations and their cash flows for the years ended December 31, 1997,
1998, and 1999, in conformity with accounting principles generally accepted in
the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses and
negative cash flows that raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with regard to these matters
are also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Denver, Colorado
March 13, 2000, except for Note 1 and Note 7 as to which the date is March 28,
2000
32
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1999
------------------ ------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 25,597 $ 25,215
Short-term investments........................................................... -- 34,742
Restricted cash.................................................................. 20,800 20,800
Trade accounts receivable, net of allowance for doubtful accounts of
$1,909 and $2,512, respectively............................................... 17,661 37,778
Inventory........................................................................ 6,827 13,810
Prepaid expenses, deposits, leases receivable and other.......................... 2,134 9,070
---------------- -----------------
Total current assets.......................................................... 73,019 141,415
Property, network and equipment.................................................... 28,139 77,455
Less accumulated depreciation...................................................... (4,883) (15,292)
---------------- -----------------
Total property, network and equipment......................................... 23,256 62,163
Restricted cash.................................................................... 30,550 17,669
Goodwill, net of amortization of $2,967 and $8,528, respectively................... 46,526 56,037
Other intangible assets, net of amortization of $1,470 and $3,589, respectively.... 10,281 10,967
Leases receivable, net of current portion.......................................... 797 6,150
Investments and other assets....................................................... 1,226 812
---------------- -----------------
Total assets.................................................................. $ 185,655 $ 295,213
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable........................................................... $ 15,061 $ 25,086
Accrued compensation............................................................. 4,583 10,423
Accrued interest................................................................. 5,214 5,308
Other accrued liabilities........................................................ 8,666 5,990
Deferred revenue and customer deposits........................................... 5,212 6,312
Current portion of notes payable................................................. 604 1,788
Current portion of capital leases................................................ 5,179 9,533
---------------- -----------------
Total current liabilities..................................................... 44,519 64,440
Long-term notes payable, less current portion...................................... 153,731 177,995
Long-term capital leases, less current portion..................................... 8,754 16,158
---------------- -----------------
Total liabilities............................................................. 207,004 258,593
---------------- -----------------
Commitments (Note 8)
Shareholders' equity (deficit):
Preferred stock, 1 million shares authorized, none issued........................ -- --
Common stock, no par value, 100 million shares authorized, 13,924 and
28,642 shares issued and outstanding, respectively.............................. 27,487 196,937
Additional paid-in-capital....................................................... 11,719 8,025
Treasury stock................................................................... (502) (919)
Deferred compensation obligation................................................. 502 919
Accumulated other comprehensive income........................................... -- 573
Unearned compensation............................................................ (150) (250)
Accumulated deficit.............................................................. (60,405) (168,665)
---------------- -----------------
Total shareholders' equity (deficit).......................................... (21,349) 36,620
---------------- -----------------
Total liabilities and shareholders' equity (deficit)....................... $ 185,655 $ 295,213
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenue..................................................... $ 10,210 $ 61,600 $ 159,922
---------- ---------- ----------
Cost of sales, excluding depreciation....................... 7,368 43,703 104,045
Selling, general and administrative......................... 10,983 47,862 125,350
Depreciation and amortization............................... 1,453 7,493 17,295
Impairment of long-lived assets............................. -- -- 650
---------- ---------- ----------
Total operating expenses............................... 19,804 99,058 247,340
---------- ---------- ----------
Operating loss.............................................. (9,594) (37,458) (87,418)
Interest expense............................................ (156) (17,502) (25,491)
Interest income............................................. 251 4,632 4,880
Other income (expense)...................................... (156) (248) (231)
---------- ---------- ----------
Net loss............................................... (9,655) (50,576) (108,260)
Other comprehensive income,
unrealized holding gains on investments.................... -- -- 573
---------- ---------- ----------
Comprehensive loss.......................................... $ (9,655) $ (50,576) $ (107,687)
========== ========== ==========
Net loss per share (basic and diluted)...................... $ (0.92) $ (3.68) $ (5.32)
========== ========== ==========
Weighted average shares outstanding (basic and diluted)..... 10,461 13,732 20,356
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Additional Deferred
Common Common Paid-in Treasury Compensation
Shares Stock Capital Stock Obligation
---------- --------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.................... 7,870 $ 8,007 $ 152 $ -- $ --
Sale of stock in private placement........... 4,530 15,846 3,415 -- --
Offering costs............................... -- (2,780) 777 -- --
Stock issued to SONeTech..................... 187 375 -- -- --
Stock issued in acquisitions................. 437 2,112 -- -- --
Exercise of stock options.................... 475 262 -- -- --
Stock purchases.............................. (100) (12) -- -- --
Compensation................................. 30 194 -- -- --
Warrants..................................... -- -- 430 -- --
Other comprehensive income:
Unrealized loss on securities............... -- -- -- -- --
Net loss..................................... -- -- -- -- --
---------- --------- ------------ ---------- --------------
Balance, December 31, 1997.................... 13,429 24,004 4,774 -- --
Common stock issued for:
401(k) match................................ 69 436 -- -- --
Payments to consultants..................... 10 55 -- -- --
Correction of private placement............. 10 -- -- -- --
Business combinations....................... 240 2,267 -- -- --
Exercise of stock options................... 44 17 -- -- --
Exercise of warrants........................ 35 129 (21) -- --
Compensation................................. 87 579 -- -- --
Deferred stock compensation.................. -- -- -- (502) 502
Warrants issued in private placement......... -- -- 6,886 -- --
Warrants issued to consultants............... -- -- 80 -- --
Other comprehensive income:
Reclassification adjustment for loss
included in net loss...................... -- -- -- -- --
Net loss..................................... -- -- -- -- --
---------- --------- ------------ ---------- --------------
Balance, December 31, 1998.................... 13,924 27,487 11,719 (502) 502
Common stock issued for:
Initial Public Offering, net of
offering costs............................ 8,937 122,281 -- -- --
401(k) match................................ 257 2,751 -- -- --
Business combinations....................... 405 4,234 -- -- --
Exercise of stock options................... 79 248 -- -- --
Exercise of warrants........................ 2,285 19,346 (6,325) -- --
Preferred stock conversion................... 2,667 19,206 -- -- --
Compensation................................. 130 1,388 -- -- --
Shares repurchased........................... (38) (4) -- -- --
Distribution of deferred stock............... (4) (50) -- 180 (180)
Deferred stock compensation.................. -- -- -- (597) 597
Warrants issued in connection with
financing................................... -- 50 2,459 -- --
Options issued to employees.................. -- -- 172 -- --
Other comprehensive income:
Unrealized gain on investments.............. -- -- -- -- --
Net loss..................................... -- -- -- -- --
---------- --------- ------------ ---------- --------------
Balance, December 31, 1999.................... 28,642 $ 196,937 $ 8,025 $ (919) $ 919
========== ========= ============ ========== ==============
<CAPTION>
Other
Unearned Comprehensive Accumulated
Compensation Income Deficit Total
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996.................... $ -- $ -- $ (174) $ 7,985
Sale of stock in private placement........... -- -- -- 19,261
Offering costs............................... -- -- -- (2,003)
Stock issued to SONeTech..................... -- -- -- 375
Stock issued in acquisitions................. -- -- -- 2,112
Exercise of stock options.................... (205) -- -- 57
Stock purchases.............................. -- -- -- (12)
Compensation................................. -- -- -- 194
Warrants..................................... -- -- -- 430
Other comprehensive income:
Unrealized loss on securities............... -- (17) -- (17)
Net loss..................................... -- -- (9,655) (9,655)
------------ ------------- ----------- -------------
Balance, December 31, 1997.................... (205) (17) (9,829) 18,727
Common stock issued for:
401(k) match................................ -- -- -- 436
Payments to consultants..................... -- -- -- 55
Correction of private placement............. -- -- -- --
Business combinations....................... -- -- -- 2,267
Exercise of stock options................... -- -- -- 17
Exercise of warrants........................ -- -- -- 108
Compensation................................. 55 -- -- 634
Deferred stock compensation.................. -- -- -- --
Warrants issued in private placement......... -- -- -- 6,886
Warrants issued to consultants............... -- -- -- 80
Other comprehensive income:
Reclassification adjustment for loss
included in net loss...................... -- 17 -- 17
Net loss..................................... -- -- (50,576) (50,576)
------------ ------------- ----------- -------------
Balance, December 31, 1998.................... (150) -- (60,405) (21,349)
Common stock issued for:
Initial Public Offering, net of
offering costs............................ -- -- -- 122,281
401(k) match................................ -- -- -- 2,751
Business combinations....................... -- -- -- 4,234
Exercise of stock options................... -- -- -- 248
Exercise of warrants........................ -- -- -- 13,021
Preferred stock conversion................... -- -- -- 19,206
Compensation................................. (100) -- -- 1,288
Shares repurchased........................... -- -- -- (4)
Distribution of deferred stock............... -- -- -- (50)
Deferred stock compensation.................. -- -- -- --
Warrants issued in connection with financing. -- -- -- 2,509
Options issued to employees.................. -- -- -- 172
Other comprehensive income:
Unrealized gain on investments.............. -- 573 -- 573
Net loss..................................... -- -- (108,260) (108,260)
------------ ------------- ----------- -------------
Balance, December 31, 1999.................... $ (250) $ 573 $ (168,665) $ 36,620
============ ============= =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss........................................................ $ (9,655) $ (50,576) $ (108,260)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................... 1,453 7,493 17,295
Impairment of long-lived assets................................. -- -- 650
Amortization of deferred financing costs and accretion of
debt discount.................................................. -- 1,162 1,984
Provision for uncollectible accounts............................ -- 197 3,153
Stock compensation expense...................................... 195 634 1,460
401k contributions through the issuance of stock................ -- 436 2,751
Warrants issued for the payment of consulting fees.............. -- 80 --
Loss from sale of equipment and investment...................... 91 -- 221
Change in working capital (net of acquisitions):
Trade accounts receivable...................................... (1,527) (10,970) (16,489)
Inventory...................................................... (230) (2,068) (2,527)
Prepaid expenses, deposits and other current assets............ (43) (870) (4,181)
Trade accounts payable......................................... 1,327 12,357 4,194
Accrued compensation........................................... 1,468 2,592 5,459
Accrued interest............................................... -- 5,214 94
Deferred revenue and customer deposits......................... 62 3,300 (194)
Other accrued liabilities...................................... 161 2,321 (2,965)
----------- ----------- -----------
Net cash used in operating activities........................... (6,698) (28,698) (97,355)
Cash flows from investing activities
Additions of property and equipment............................. (2,042) (6,877) (20,820)
Acquisitions, net of cash acquired.............................. (1,542) (42,364) (10,545)
Short-term investments.......................................... (7,388) 7,388 (34,343)
Restricted cash................................................. (406) (50,944) 12,880
Leases receivable............................................... -- (1,174) (8,242)
Proceeds from sale of investment................................ -- -- 155
Intangible and other assets..................................... (270) (675) (228)
----------- ----------- -----------
Net cash used in investing activities........................... (11,648) (94,646) (61,143)
Cash flows from financing activities
Proceeds from initial public offering, net...................... -- -- 122,281
Proceeds from private placements of debt and equity, net........ 17,257 152,378 19,206
Payments on notes payable....................................... (1,450) (1,397) (5,642)
Payments on capital leases...................................... -- (2,941) (7,193)
Proceeds from borrowings, net of costs.......................... -- 109 16,199
Proceeds from exercise of stock options and warrants............ 57 125 13,269
Repurchase of common shares..................................... (12) -- (4)
----------- ----------- -----------
Net cash provided by financing activities....................... 15,852 148,274 158,116
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents............. (2,494) 24,930 (382)
Cash and cash equivalents at beginning of period................. 3,161 667 25,597
----------- ----------- -----------
Cash and cash equivalents at end of period...................... $ 667 $ 25,597 $ 25,215
=========== =========== ===========
Supplemental disclosure of other cash and non-
cash investing and financing activities:
Acquisition of equipment through financing facilities........... $ 1,675 $ 13,039 $ 28,304
Interest paid................................................... $ 145 $ 11,125 $ 23,413
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation:
References in these footnotes to "Convergent Communications," "us," "we,"
and "our" refer to Convergent Communications, Inc. and its subsidiaries.
We are a rapidly growing national provider of e-Sourcing solutions
primarily to businesses with 25 to 500 employees. "e-Sourcing" is the purchase
of managed communications solutions over broadband Internet Protocol based
applications. Inside our customers' premises we own communications networks and
provide professional services, such as the design, installation, management and
monitoring of those networks. Outside our customers' premises, we provide a full
range of data and voice transport services. By operating networks both inside
and outside our customers' premises, and by offering a broad range of Internet,
data and voice systems and services, we enable small and medium sized businesses
to use state-of-the-art communications solutions, including data and voice
networks based on broadband Internet Protocol, electronic commerce, the Internet
and sophisticated communications systems. We intend to become the leading
provider of IP-based Internet, data and voice systems and services to small and
medium sized businesses. We provide the following systems and services:
. eBusiness which includes Web development and hosting;
. Enterprise Services which include integration services, enterprise managed
services and broadband services;
. Enterprise Systems which consists of data and voice systems.
Our ultimate success depends upon, among other factors, establishment of
our nationwide network, funding the development of our enterprise networks,
continuing to develop our customer care and sales organizations, integrating
acquired businesses, attracting and retaining customers, continuing to develop
and integrate our operational support system and other back office systems,
responding to competitive developments, continuing to attract, retain and
motivate qualified personnel, and continuing to upgrade our technologies and
commercialize our services incorporating such technologies. There is no
assurance that we will be successful in addressing these matters and failure to
do so could have a material adverse effect on our business prospects, operating
results and financial condition. Our business plan will continue to require a
substantial amount of capital to fund our expansion of our existing and acquired
markets. As we continue to expand our business, we will seek additional sources
of financing to fund our development. If we are unsuccessful in obtaining such
financing, we would be compelled to alter our business strategy or delay or
abandon some of our future plans.
We have suffered recurring losses and negative cash flows since our
inception. Currently, our existing cash balances and borrowing capabilities are
only sufficient for us to continue to meet our obligations at our current
operating level into May of 2000. These factors raise substantial doubt about
our ability to continue as a going concern. No adjustments have been made in
these financial statements as a result of this uncertainty. However, we have
executed commitment letters with an investment group led by Texas Pacific Group
for $175 million of additional financing through the sale of preferred stock and
an additional commitment from a lending institution for a $50 million line of
credit.
37
<PAGE>
The line of credit commitment is subject to borrowing base restrictions and to
the closing on the sale of the preferred stock.
The sale of the preferred stock will consist of a sale of $175 million of
newly issued 8 percent convertible preferred stock which will be convertible
into common stock at a conversion price of $13 per share. The investors will
also receive 700,000 warrants with an exercise price of $20 per share and 1.17
million warrants
38
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
exercisable at $25 per share. In addition, as part of the sale, we will be
required to repay the loan to Goldman Sachs Credit Partners L.P. in full (see
Note 7). The sale of the preferred stock is subject to the execution of a
definitive agreement, various closing conditions and certain regulatory and
legal approvals.
Upon successful completion of these financings, we believe that we will have
sufficient cash to fund our operations through at least December 31, 2000.
2. Summary of Significant Accounting Policies:
Principles of Consolidation:
The accompanying consolidated financial statements include our accounts and
the accounts of our wholly-owned subsidiaries. All intercompany amounts and
transactions have been eliminated
Use of Estimates:
Our management is required to make estimates and assumptions in order to
prepare the financial statements in conformity with generally accepted
accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and also affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents:
We consider all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Short-term Investments:
Short-term investments are classified as available-for-sale securities at
December 31, 1999. Gains or losses on the sale of short-term investments are
recognized on the specific identification method. Unrealized gains or losses are
treated as a separate component of comprehensive income until the security that
the unrealized gain or loss was recorded on is sold.
Restricted Cash:
Restricted cash primarily represents funds held in collateral accounts for
paying semi-annual interest payments on our 13% Senior Notes through April 1,
2001. The cash is invested in U.S. Government Securities, which mature semi-
annually on October 1 and April 1 through April 1, 2001 (see Note 7). Restricted
cash also represents cash used to collateralize letters of credit, which are
held as collateral for certain of our office leases, capital lease obligations
and performance bonds. The amounts invested are classified as held to maturity
and carried at amortized cost which approximates fair value.
Fair Value of Financial Instruments:
The carrying amounts reported in the balance sheets for cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
short-term borrowings approximate fair value because of the immediate or short-
term maturity of these financial instruments. The carrying amounts reported for
long-term debt other than the 13% Senior Notes approximate fair value based upon
management's best estimates of what interest rates would be available for the
same or similar instruments. The 13% Senior Notes are publicly traded
securities. The quoted fair market value and the carrying amount of the 13%
Senior Notes at December 31, 1998 and 1999 are as follows:
39
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Carrying Fair Market
Amount Value
------------ ------------
1998........................... $160,000,000 $ 76,800,000
1999........................... $160,000,000 $120,000,000
Property, Network and Equipment:
Property, network and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets or the lease term if shorter, which range from two to five years.
Expenditures which significantly increase asset values or extend useful lives
are capitalized. Maintenance and repairs are expensed as incurred. When
property, network and equipment is retired, sold or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts, and
resulting gains and losses are reflected in operations.
Inventory:
Inventory primarily consists of new and refurbished equipment for resale
and is valued at the lower of cost or market using the first-in, first-out
method. We evaluate the need and establish reserves associated with obsolete and
excess inventory.
Intangible Assets:
. Intangible assets consist of the following:
. Goodwill represents the excess purchase price over the net assets
acquired in acquisitions and is being amortized over ten years.
. Customer lists were obtained through business combinations and are being
amortized over five years.
. Debt offering costs represent costs incurred in connection with an
offering of 13% senior notes (see Note 7) and are being amortized over
the term of the notes, ten years.
. Deferred finance costs are costs associated with obtaining certain
financing arrangements and are amortized over the life of the financing
arrangements, two to four years.
. Site location contracts are exclusive rights to operate public
telephones at various locations we acquired through business
combinations. The site location contracts are being amortized over the
average lives of the contracts, primarily three years.
. Software license fees represent proprietary rights to software
associated with our public telephones which are being amortized over
five years, the estimated life of the related equipment.
We periodically evaluate the carrying amount of our intangible assets based
on undiscounted cash flows, or other indicators of fair value, to determine
whether adjustments to these amounts are required.
Long-Lived Assets:
We evaluate the recoverability of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
40
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Disposed Of" ("SFAS 121"). SFAS 121 requires an evaluation of indicators of
impairment and future undiscounted cash flows to be generated by those assets.
Impairment is measured as the amount by which the asset's carrying amounts
exceed the future discounted cash flows estimated to be generated by those
assets. Certain of our long-lived operating assets were written off during 1999
in accordance with SFAS 121.
Investments:
Investments consist of ownership interests of less than 20% in unrelated
entities and are accounted for as available for sale securities. Changes in
market value of the investments are included as a component of other
comprehensive income.
Software:
We capitalize certain internal and external costs of developing software
for internal use in accordance with SOP 98-1. These costs are amortized on a
straight line basis over three years, which is the estimated useful life of the
software.
Revenue Recognition:
Revenue is recognized for product sales when the product is shipped.
Revenue from non-recurring services are recognized when the services are
provided. Revenue for long-term service and maintenance contracts is recognized
over the term of the contract as the services are provided. Revenue from
reselling of long distance service is recognized at the time of performance
based on customer usage. Revenue from sales of equipment under sales type leases
is recognized at the inception of the lease.
Deferred Revenue:
Deferred revenue represents the unearned portion of revenue related to our
long-term service and maintenance contracts, which is recognized over the term
of the contract, generally one year.
Income Taxes:
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to the differences between the financial statement
carrying value of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured by using enacted tax
rates that are applicable to the future years in which deferred tax assets or
liabilities are expected to be realized or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in net earnings
in the period in which the tax rate change is enacted. We establish a valuation
allowance when it is more likely than not that a deferred tax asset will not be
recovered.
Stock-Based Compensation:
We use the intrinsic value method under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," to account for our employee
stock-based compensation plans. We account for options and warrants granted to
non-employees in accordance with Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires that
we recognize an amount based on the fair value of the option or warrant at the
time of grant.
Concentrations of Credit Risk:
41
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
We sell systems and services to small and medium sized businesses on open
account and do not obtain collateral for our receivables. We also offer services
and systems and lease equipment to our customers under long-term contracts,
generally three to five years, in which we maintain ownership in the underlying
equipment. We believe our reserves for potential credit losses are adequate and
we perform on-going credit evaluations.
All of our cash, cash equivalents and investments are maintained at three
financial institutions. The investments consist of high-quality commercial
paper.
Reclassifications:
Certain reclassifications have been made to the prior year data to make it
consistent with the 1999 presentation. These reclassifications had no impact on
net loss.
Recent Accounting Standards:
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance in applying generally accepted accounting
principles to selected revenue recognition issues. We are currently evaluating
changes to our current revenue recognition policies that may result from the
application of this SAB.
3. Acquisitions:
Communication Services of Iowa, Inc. In April 1997, we acquired
Communication Services of Iowa, Inc. (CSI), an Iowa reseller of telephony
keyboard PBX telephone equipment to businesses. We paid $100,000 cash, issued a
$100,000 one-year promissory note at 8% and issued 25,000 shares of our common
stock valued at $50,000 for total consideration of $250,000. The note was paid
in March 1998.
A.T.T.ex Corporation. In September 1997, we acquired A.T.T.ex Corporation
(A.T.T.ex) of Des Moines, Iowa, a telecommunications service company that
provided direct telephony service support to corporate customers. The purchase
price consisted of $450,000 in cash and the issuance of 37,500 shares of our
common stock valued at $187,500 for total consideration of $637,500.
Vital Integration Solutions, Inc. In September 1997, we acquired Vital
Integration Solutions, Inc. (Vital) of Des Moines, Iowa and Omaha, Nebraska, a
full service integration solutions provider which specialized in comprehensive
information management and networking solutions. Vital provided its clients with
the hardware, software and integration services necessary to build information
systems and networks. We paid $500,000 in cash and issued 375,000 shares of our
common stock valued at $1,875,000 for total consideration of $2,375,000.
Telephone Communications Corporation. In February 1998, we acquired the
assets and assumed certain liabilities of Telephone Communications Corporation
(TCC) of Vail, Colorado. TCC was a long distance switchless reseller providing
1+, 0+, 800, and Calling Card services to cities such as Dillon, Frisco and the
Vail Valley. We paid $400,000 in cash, issued a $200,000 one-year note at 8% and
issued 5,000 shares of our common stock which for purchase accounting purposes
were assigned a value of $8.00 per share. We also assumed a note with National
Network Corporation of approximately $287,000, which was paid in April 1998.
Total consideration for the purchase was $927,000. We negotiated an early
discounted payoff of the $200,000 note in the total amount of $180,000
(including accrued interest of $2,250) in May 1998.
Network Computer Solutions, LLC. In February 1998, we acquired the assets
and assumed certain liabilities of Network Computer Solutions (NCS) of Greenwood
Village, Colorado. NCS provided network integration services. We paid $500,000
in cash, issued 50,000 shares of our common stock which for purchase
42
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
accounting purposes were assigned a value of $8.00, assumed liabilities of
$438,372 and paid a finders fee of $150,000 for total consideration of
$1,488,372.
Communication Services of Colorado. In May 1998, we completed a merger
with Communication Services of Colorado (CSC) of Englewood, Colorado. CSC was a
long distance switchless reseller providing 1+, 0+, 800, and Calling Card
services. The purchase price consisted of $475,000 in cash, the issuance of a
$530,000 one-year note at 8% and assumed liabilities of $341,054 for total
consideration of $1,346,054.
HH&H Communications Technologies, Inc. In May 1998, we completed the
acquisition of the assets and certain liabilities of HH&H Communications
Technologies, Inc. (CTI), a voice equipment provider in Texas. We paid $200,000
in cash, issued 15,000 shares of our common stock, which for accounting purposes
were assigned a value of $8.50 per share, and assumed liabilities of $151,383
for total consideration of $478,883.
CMB Holdings, Inc. d/b/a Independent Equipment Company. In June 1998, we
completed the acquisition of substantially all of the assets of CMB Holdings,
Inc. d/b/a Independent Equipment Company (IEC), an equipment remarketer in
Florida. The purchase price consisted of the issuance of 170,000 shares of our
common stock, which for accounting purposes were assigned a value of $10.00 per
share, for total consideration of $1.7 million.
Tie Communications, Inc. Effective August 1, 1998 we completed the
acquisition of substantially all the assets and certain of the liabilities of
Tie Communications, Inc. (Tie). The purchase price consisted of $40.0 million in
cash and the assumption of certain liabilities, which with legal and
professional and other costs resulted in a total purchase price of approximately
$51.4 million. Tie was a telecommunications equipment provider and a nationwide
reseller of long-distance service.
Kansas Communications, Inc. In February 1999, we acquired the assets and
assumed certain liabilities of Kansas Communications, Inc. (KCI). KCI was a
telecommunications equipment provider and integrator. The purchase price
consisted of $1.5 million in cash, $4.5 million in notes payable and 24,925
shares of our common stock, which, for purchase accounting purposes, were
assigned a value of $10.00 per share, and assumed liabilities of $2.4 million
resulting in total consideration of $8.7 million. In April 1999, $1.5 million of
the notes payable were paid with the proceeds from the sale of our Series A
Convertible Preferred Stock. In July 1999 $2.0 million of the notes payable was
repaid and the remaining balance was paid in November 1999.
BSSi Innovations, Inc. In April 1999, we acquired BSSi Innovations, Inc.
(BSSi). BSSi was a data network integration services provider based in Chicago,
Illinois. The purchase price consisted of $455,000 in cash, 37,000 shares of our
common stock, which for purchase accounting purposes were assigned a value of
$10.00 per share, and assumed debt of approximately $525,000, resulting in total
consideration of $1.4 million. An additional 20,000 shares may be issued if
certain financial conditions are met.
Choice Solutions, Inc. In June 1999 we purchased the majority of the
assets and assumed certain liabilities of Choice Solutions, Inc. (CSI). CSI was
a data network integration services provider based in Dallas, Texas. The
purchase price consisted of $1.1 million in cash. Up to $225,000 in additional
shares of our common stock may be issued if certain financial conditions are
met.
Network Technologies Group. In September 1999, we purchased the majority
of the assets and assumed certain liabilities of Network Technologies Group
(NTG). NTG was a data network integration services provider based in Miami,
Florida. The purchase price consisted of $675,000 in cash and $475,000 in shares
of our common stock for a total purchase price of $1.2 million. Up to an
additional $500,000 in shares of our common stock may be issued if certain
financial conditions are met.
Entre Business Technology Group. In October 1999, we acquired Video
Enterprises Corporation, d/b/a Entre Business Technology Group (EBTG). EBTG was
a data network integration services provider based in Atlanta, Georgia. The
purchase price consisted of $2.0 in cash, $2.1 million in shares of our common
stock, and assumed debt of approximately $2.6 million, resulting in total
consideration of $6.7 million. Up to $700,000 in additional shares of our common
stock may be issued if certain financial conditions are met.
43
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Classic Datacom, Inc. In November 1999, we purchased the majority of the
assets and assumed certain liabilities of Classic Datacom, Inc. (CDI). CDI was a
data network integration services provider based in Hartford, Connecticut. The
purchase price consisted of $1.7 million in cash and $1.0 million in common
stock for total consideration of $2.7 million. Up to $600,000 in additional
shares of our common stock may be issued if certain financial conditions are
met.
We accounted for these acquisitions as business combinations, which were
accounted for by the purchase method of accounting. We valued the acquisitions
at the fair market value of the consideration given. With regard to our common
stock and warrants, prior to our initial public offering, we determined the fair
market value based upon a number of factors including a market analysis of
publicly traded companies and a discounted cash flow analysis. An option pricing
model was also used to value our warrants. In connection with the acquisitions,
the excess of consideration given over the fair market value of the net assets
acquired is being amortized on a straight line basis over the estimated life of
the intangible assets acquired which is five to ten years. The accompanying
financial statements include the accounts of the acquired companies from the
effective dates of the acquisitions.
In addition to the business acquisitions previously discussed, we have also
completed purchases of certain assets of other companies as follows:
Big Planet, Inc. In October 1997, we acquired certain assets and assumed
certain liabilities of Big Planet, Inc., of Portland, Oregon. Big Planet is an
Internet service provider (ISP) offering a full range of Internet services,
including Internet access, Web hosting, maintenance, and site design. We paid
$250,000 in cash for the assets and the assumption of certain trade payables.
Sigmacom Corporation. In December 1997, we acquired certain data
integration assets of Cavion Technology, Inc. (formerly Sigmacom Corporation).
Cavion is a systems integrator for corporate audio, video and data
communications, providing state-of-the-art systems that combine
telecommunications and computer network technologies. Cavion is also developing
Internet application software for financial institutions such as credit unions.
We paid $875,000 in cash and issued Sigmacom a warrant to purchase 25,000 shares
of our common stock at an exercise price of $15.00 per share, which expired in
December 1999. We valued the warrants, at an aggregate value of $30,000
utilizing an option pricing model and a number of factors including a market
analysis of publicly traded companies and a discounted cash flow analysis. We
also acquired a minority interest in Cavion's software development business to
which we allocated $350,000 of the purchase price. The value of this minority
interest as of December 31, 1999 was approximately $520,000.
The consideration paid for acquisitions in 1997, 1998 and 1999, and the
allocation of such consideration to the acquired assets and assumed liabilities
is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Cash paid, net of cash acquired...................... $ 1,542 $ 42,364 $ 10,545
Common stock issued to the former owners............. 2,113 2,266 4,234
Notes payable and liability to former owners......... 100 908 4,490
Warrants issued...................................... 55 -- --
-------------- -------------- --------------
Total amount to be allocated....................... $ 3,810 $ 45,538 $ 19,269
============== ============== ==============
Allocation to acquired assets and assumed
liabilities:
Goodwill........................................... $ 3,384 $ 42,544 $ 15,344
Accounts receivable................................ 400 4,813 6,959
Inventory.......................................... 116 4,586 4,300
Equipment.......................................... 356 2,945 1,202
Customer lists..................................... -- 1,684 --
</TABLE>
44
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
<TABLE>
<S> <C> <C> <C>
Prepaid expenses, deposits and other
current assets................................... 4 669 153
Investment......................................... 350 -- --
Accounts payable and accrued liabilities........... (637) (6,804) (6,903)
Deferred revenue, net of costs..................... -- (1,912) (1,602)
Debt............................................... (163) (2,987) (184)
-------------- -------------- --------------
Amounts allocated.................................... $ 3,810 $ 45,538 $ $19,269
============== ============== ==============
</TABLE>
On a pro forma basis, as though the above combinations had taken place at
the beginning of the periods presented, revenue, net loss and net loss per share
would have been as follows (unaudited):
1998 1999
------------ ------------
(in thousands, except per
share amounts)
Revenue.......................... $ 109,667 $ 192,895
Net loss......................... $ (59,462) $ (110,041)
Net loss per share............... $ (2.14) $ (5.33)
Weighted average shares.......... 27,847 20,628
4. Short-Term Investments:
All of our short-term investments as of December 31, 1999 are classified as
available for sale. The investments had an amortized cost basis of $34.3 million
at December 31, 1999 and a fair value of $34.7 million at December 31, 1999. The
unrealized gain at December 31, 1999 related to these investments which matured
in 2000 was $398,881.
5. Leases Receivable:
Our wholly owned subsidiary, Convergent Capital Corporation (CCC), leases
data and telephony equipment to our customers under direct financing and sales
type leases. The receivables, which are due over two to five years, are
collateralized by the equipment being leased. The current portion of leases
receivable is included in other current assets. The components of leases
receivable and the future minimum payments receivable are as follows:
collateralized by the equipment being leased. The current portion of leases
receivable is included in other current assets. The components of leases
receivable and the future minimum payments receivable are as follows:
December 31,
1999
--------------
Receivable: (in thousands)
2000............................................... $ 3,858
2001............................................... 3,446
2002............................................... 2,582
2003............................................... 1,055
2004............................................... 505
Thereafter....................................... 76
--------------
Gross receivables.................................... 11,522
Unearned income...................................... (1,747)
--------------
Lease receivables.................................... 9,775
Less: current portion................................ (3,625)
--------------
Long-term lease receivables.......................... $ 6,150
==============
6. Property, Network and Equipment:
45
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Property, network and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1999
------------ ------------
(in thousands)
<S> <C> <C>
Office furniture and equipment.................... $ 14,057 $ 27,424
Network equipment................................. 8,608 37,843
Enterprise Managed Services network equipment..... 4,297 7,611
Leasehold improvements............................ 939 2,875
Company vehicles.................................. 238 1,702
------------ ------------
28,139 77,455
Less accumulated depreciation..................... (4,883) (15,292)
------------ ------------
Net property, network and equipment............... $ 23,256 $ 62,163
============ ============
</TABLE>
Depreciation expense was $515,317 for the year ended December 31, 1997,
$4.3 million for the year ended December 31, 1998 and $10.6 million for the year
ended December 31, 1999.
46
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
We enter into capital leases for various equipment. Equipment under capital
leases is as follows:
December 31,
------------------------
1998 1999
---------- ----------
(in thousands)
Network equipment........................ $ 11,865 $ 15,189
Furniture and equipment.................. 4,020 16,072
Vehicles................................. -- 1,431
15,885 32,692
Less accumulated depreciation............ (2,906) (7,872)
---------- ----------
$ 12,979 $ 24,820
========== ==========
7. Notes Payable and Capital Leases:
Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
----------- -----------
(in thousands)
<S> <C> <C>
13% Senior Notes payable, (i) below.............................. $ 153,630 $ 154,319
$10.0 Million Senior Facility, (ii) below........................ -- 9,631
$103.5 Million Credit Facility, (iii) below...................... -- 9,537
Notes payable for discounted long-term receivables, (iv) below... -- 6,193
Note payable for acquisition, interest at 8%, principal and
accrued interest due May 1999................................... 530 --
Other............................................................ 175 103
----------- -----------
154,335 179,783
Less current portion............................................. (604) (1,788)
----------- -----------
Long term portion................................................ $ 153,731 $ 177,995
=========== ===========
</TABLE>
_____________
(i) On April 2, 1998 we completed a private offering of $160.0 million of 13%
Senior Notes and 640,000 warrants to purchase 864,000 of our common shares. The
13% Senior Notes mature on April 1, 2008 and interest is payable semi-annually
in arrears on April 1 and October 1 of each year beginning October 1, 1998. At
the same time as the closing of the 13% Notes Offering, we deposited U.S.
Government Securities in a collateral account. The amount deposited in the
collateral account together with the interest earned on those securities, will
be enough to pay the first six interest payments on the 13% Senior Notes. The
first payment was made on October 1, 1998. The 13% Senior Notes contain certain
covenants that restrict our ability to incur additional debt and to make certain
payments, including dividends. Each Warrant entitles the holder to purchase 1.35
shares of our common stock at an exercise price of $.02 per share. The Warrants
are currently exercisable and expire on April 1, 2008. Each Warrant was assigned
a value of $21.52 using an option pricing model, a market analysis of publicly
traded companies and a discounted cash flow analysis. The proceeds that were
attributable to the Warrants were treated as a discount to the 13% Senior Notes
and allocated to shareholders' equity. We received proceeds approximately of
$95.6 million after deducting offering costs of approximately $7.6 million and
making the deposit of $56.8 million into the collateral account. As of December
31, 1999 the amount outstanding, net of the unaccreted discount of $6.4 million
resulting from the allocation of the warrants, was $154.3 million.
47
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(ii) In June 1999, we entered into a $10.0 million senior secured credit
facility with Goldman Sachs Credit Partners L.P. The proceeds of this facility
are being used for working capital and other general corporate purposes.
Interest accrues at the greater of 13.0% or LIBOR plus 6.0% with interest
payments due monthly. The principal amount outstanding along with any accrued
interest is due in June, 2002. We cannot re-borrow amounts repaid under this
facility. In connection with this facility, we also issued to Goldman Sachs
Credit Partners L.P. a warrant to acquire 375,000 shares of common stock at an
exercise price of $15.00 per share, which are exercisable through July 23, 2002.
As of December 31, 1999 none of these warrants had been exercised. We have
obtained waivers for non-compliance with certain financial covenants of this
facility as of December 31, 1999. We have borrowed the full amount available
under this facility.
(iii) In July 1999, we entered into a six-year $103.5 million credit
facility with Cisco Systems Capital Corporation. This credit facility will
provide the financing for the purchase and installation of our Cisco Systems,
Inc. multi-service data and voice switching platform and for other Cisco
equipment. Under the terms of this agreement, Cisco Systems, Inc. also received
a warrant to purchase 575,000 shares of our common stock, none of which had been
exercised as of December 31, 1999. The warrant has an exercise price of $15.00
per share and is exercisable for three years from the date of issuance. The
facility will be available in three tranches over a three year period with
quarterly payments due over three years beginning one year from the availability
of each tranche. As of December 31, 1999, we had borrowed $9.5 million under
this facility.
(iv) We have entered into financing arrangements in which we have assigned,
on a non-recourse basis, certain of our long-term receivables resulting from
equipment leasing and Enterprise Managed Services contracts, to financing
institutions. The indebtedness resulting from these transactions is paid down
over the term of the corresponding receivables which is two to five years.
Interest on this borrowing ranges from 6% to 12% and is collateralized by the
equipment provided under the contract with our customer.
Scheduled maturities on debt outstanding are as follows:
December 31,
1999
----------------
Due in:
2000................................................ $ 1,788
2001................................................ 5,099
2002................................................ 14,939
2003................................................ 3,701
2004................................................ 240
Thereafter.......................................... 160,066
185,833
Less unaccreted discount.............................. (6,050)
----------------
Total debt.......................................... $ 179,783
================
Capital Leases
Some of our equipment and equipment used by our customers is leased under
capital leases. The following is a schedule of the minimum lease payments under
capital leases together with the present value of the minimum lease payments.
December 31,
1999
----------------
(in thousands)
Due in:
2000.............................................. $ 14,816
2001.............................................. 12,824
2002.............................................. 9,458
2003.............................................. 823
48
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2004............................................... 42
----------------
Total minimum lease payments....................... 37,963
Less amount representing interest.................. (12,272)
----------------
Present value of minimum lease payments............ 25,691
Less current portion............................... (9,533)
----------------
Long-term portion.................................. $ 16,158
================
Comdisco Facility. In November 1997 we entered into an agreement with
Comdisco, Inc. (Comdisco) which provides for up to $50 million of equipment
lease financing. At December 31, 1999, $30 million of the $50.0 million was
available for us to use of which $24.8 million was being utilized. The remaining
$20.0 million will be available upon the satisfaction of additional conditions.
This facility will expire on June 30, 2000.
The Comdisco facility is collateralized by the equipment being financed. In
addition, we are required to issue a warrant to acquire shares of our common
stock in an amount equal to ten percent (10%) of the facility, divided by the
exercise price per share. The exercise price per share is equal to the price
paid by investors in recent equity offerings, not less than $6.00 per share. The
warrants will be issued in three installments based upon amounts available under
the facility. We issued a warrant in 1997 for the purchase of 166,666 shares of
our common stock at an exercise price of $6.00 per share for the first $10
million of the facility. We issued a warrant in 1999 for the purchase of 200,000
shares of our common stock at an exercise price of $10.00 per share for the
second $20.0 million of the facility. The warrants were valued utilizing an
option pricing model, and a number of factors including a market analysis of
publicly traded companies and a discounted cash flow analysis. The warrants, all
of which were outstanding as of December 31, 1999, are being amortized into
interest expense over three years.
GATX Financing. In May 1997, we entered into a Master Equipment Lease with
GATX Technology Services Corporation (GATX) to lease equipment, facilities and
related items for our internal expansion as well as equipment to be used for
customer installations. The facility is collateralized by a $100,000 standby
letter of credit. In connection with the establishment of the facility, we
issued a warrant to GATX for the purchase of 40,285 shares of our common stock
at an exercise price of $6.00 per share. We valued the warrant utilizing an
option pricing model and a number of other factors including a market analysis
of publicly traded companies and a discounted cash flow analysis. The warrant is
being amortized into interest expense over three years. We had amounts
outstanding under this facility of $4.4 million as of December 31, 1998 and $4.7
million as of December 31, 1999.
8. Commitments:
We lease a portion of our buildings and equipment under operating leases. Future
minimum payments under operating leases are as follows:
December 31,
1999
-----------------
(in thousands)
Due in:
2000................................................. $ 7,941
2001................................................. 6,762
2002................................................. 6,013
2003................................................. 4,789
2004................................................. 3,517
Thereafter........................................... 3,324
----------------
$ 32,346
================
Rent expense under operating leases was $431,930 for the year ended December 31,
1997, $4.3 million for the year ended December 31, 1998, and $7.0 million for
the year ended December 31, 1999.
49
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9. Shareholders' Equity (Deficit):
We have 1,000,000 shares of preferred stock authorized none of which were
outstanding as of December 31, 1998 and 1999.
On October 31, 1996, we issued 187,500 shares of our common stock in exchange
for a 10% equity interest in Services-oriented open Network Technologies, Inc.
(SONeTech) and an exclusive engineering and consulting agreement. In May, 1999,
we reacquired 37,500 shares of our common stock for $4,500 and sold our equity
interest. A loss of $220,500 was recognized in the transaction.
In February 1997, we completed the second of two tranches of an offering of an
aggregate of 3,500,000 units. Each of the units consisted of one share of common
stock and one-half warrant to purchase a share of common stock (the first
tranche of 2,369,763 units closed in late 1996). The units were sold at a price
of $2.00 each. One warrant entitled the holder to purchase one share of common
stock for a price of $3.00 per share for five years from the date of the
offering. As part of the offering, we issued warrants to purchase 1,750,000 of
our common shares to investors, which were exercisable at $3.00 per share. As of
December 31, 1999, 173,115 of these warrants had been exercised and 872 had been
cancelled. We also issued warrants to purchase 370,625 of our common shares to
the placement agents, which are exercisable at $2.40 per share through November
7, 2001. As of December 31, 1999, all of these warrants remained outstanding.
In October 1997, we completed an offering of 3,410,000 units consisting of one
share of our common stock and one-half warrant to purchase a share of our common
stock. The units were sold at a price of $5.00 each. The proceeds, net of
related offering costs, were approximately $15.2 million. One warrant entitles
the holder to purchase one share of our common stock for a price of $7.50 per
share, beginning in November 1998 through July 14, 1999. As of December 31,
1999, 1,667,250 of these warrants had been exercised and 37,750 were cancelled.
We also issued warrants to purchase 307,930 of our common shares to the
placement agents exercisable at $6.00 per share beginning in May 1998 through
November 14, 2002. As of December 31, 1999 12,053 of these warrants had been
exercised and 1,627 had been cancelled.
In connection with the signing of financing agreements with Comdisco, Inc. and
GATX, we granted Comdisco warrants to purchase 166,666 shares of our common
stock and granted GATX warrants to purchase 40,285 shares of our common stock.
All of these warrants are exercisable at $6.00 per share. The Comdisco warrants
are currently exercisable and expire on July 23, 2004. The GATX warrants are
exercisable beginning in May 1998 and expire in May 2002. As of December 31,
1999, all of these warrants remained outstanding.
In August 1998, we entered into a consulting agreement under which the
consultant recruited senior management personnel on behalf of our wholly-owned
subsidiary, Convergent Capital Corporation. As a result of the services
performed under this agreement, we issued warrants to the consultant to purchase
62,500 shares of our common stock at $10.00 per share. The warrants are
currently exercisable and expire on August 3, 2008. We valued the warrants using
an option pricing model and recognized consulting expense of $79,883. As of
December 31, 1999, all of these warrants remained outstanding.
Certain holders of our common stock and the holders of certain warrants have the
right to demand that we file a registration statement to register their shares
and the shares underlying their warrants.
Stock Option Plans:
We have adopted the 1996 and 1997 Incentive and Non-Statutory Option Plans, the
1998 and 1999 Stock Option Plan and the Stock Incentive Plan (the "Plans") which
authorize us to grant up to 6,450,000 shares of our common stock to employees,
consultants and directors under incentive stock options within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended, and to grant non-
statutory stock options.
50
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Plans require that the exercise price of options we grant must be at least
equal to the fair market value of a share of our common stock on the date of the
grant and must be exercisable over a period of up to ten years. However, if an
employee owns more than 10% of our outstanding common stock, then the exercise
price of an incentive option must be at least 110% of the fair market value of a
share of our common stock on the date of grant and must be exercisable over a
period of five years. All of our options vest over five years.
The Plans are administered by our Board of Directors or a committee of the Board
which determines the terms of the options granted, including the exercise price,
the number of shares of our common stock subject to the option, and the terms
and conditions of exercise. No option granted under the Plan is transferable by
the optionee other than by will or the laws of descent and distribution and each
option is exercisable during the lifetime of the optionee only by such optionee.
In May 1997, we accelerated the vesting provisions related to options of certain
employees to purchase 475,000 shares with an exercise price of $0.12 per share
and all of the options were exercised. The underlying shares are subject to a
repurchase agreement over a five year period whereby we can repurchase a portion
of the shares upon termination of employment. The amount available for
repurchase is reduced by 20% each year of employment. In late 1997, we
repurchased 100,000 shares for $0.12 per share, upon the termination of one of
the exercising employees. The repurchased shares are included in the authorized
but unissued shares of common stock. At December 31, 1999, approximately 105,000
shares were subject to repurchase.
The following table sets forth our stock option activity:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Grant Date
Shares Price Fair Value
-------------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Outstanding at December 31, 1996............................. 905 $ 1.02 $ --
Granted
Above market value...................................... 1,405 3.60 0.52
At market value......................................... 493 3.90 1.12
Exercised ................................................ (475) 0.12 --
Canceled................................................... (6) 2.66 --
------------- ----------- -----------
Outstanding at December 31, 1997............................. 2,322 3.38 --
Granted
Above market value...................................... 1,361 11.26 0.16
At market value......................................... 321 7.48 1.74
Exercised ................................................ (44) 0.38 --
Canceled................................................... (638) 5.26 --
------------- ----------- -----------
Outstanding at December 31, 1998............................. 3,322 6.50 --
Granted
Above market value..................................... 475 14.49 5.65
At market value........................................ 549 10.43 5.87
Below market value..................................... 103 14.28 17.35
Exercised.................................................. (98) 4.76 --
Canceled................................................... (567) 7.13 --
------------- ----------- -----------
Outstanding at December 31, 1999............................. 3,784 $ 8.30 $ --
============= =========== ===========
</TABLE>
The following table indicates the number of shares exercisable and the weighted
average exercise prices at December 31:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- ------------
<S> <C> <C> <C>
Options exercisable.......................................... 172,500 495,050 1,025,200
Weighted average exercise price.............................. $ 2.58 $ 3.32 $ 5.27
</TABLE>
51
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
At December 31, 1999, the range of exercise prices and weighted average
remaining contractual life for options outstanding was as follows:
<TABLE>
<CAPTION>
Weighted Average
Option Price Remaining Contractual
Number of Shares Range Life
- --------------------------------------------- ---------------- ----------------------
<S> <C> <C>
1,265,250.................................... $ 2.00 to $ 5.00 5.6 years
842,700.................................... $ 5.01 to $10.00 6.4 years
1,574,750.................................... $10.01 to $15.00 8.4 years
100,500.................................... $15.01 to $20.00 9.3 years
750.................................... $20.01 to $21.50 9.6 years
</TABLE>
52
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
If the compensation cost for the Plan was determined based on the fair value at
the grant dates for awards using the method prescribed by SFAS 123, our pro
forma net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1997 1998 1999
--------------- ---------------- --------------
Net loss: (in thousands, except per share amounts)
<S> <C> <C> <C>
As reported....................................... $ (9,655) $ (50,576) $ (108,260)
Pro-forma......................................... $ (9,703) $ (50,958) $ (109,073)
Net loss per share:
As reported....................................... $ (0.92) $ (3.68) $ (5.32)
Pro-forma......................................... $ (0.92) $ (3.72) $ (5.36)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method prior to our Initial Public Offering IPO) on July 19,
1999 and the Black Scholes method from July 19, 1999 forward, with the following
assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1997 1998 1999
--------------- -------------- -----------
<S> <C> <C> <C>
Dividend yield -- -- --
Volatility................................................ -- -- 141
Risk-free interest rate................................... 5.65-6.84% 5.38-5.71% 4.60-6.30%
Expected lives............................................ 5 years 5 years 5 years
</TABLE>
Because we expect to make additional option grants, the above pro forma
disclosures are not necessarily representative of pro forma effects on net
income to be reported for future years.
We recognized compensation expense for employee stock grants and stock
options of $194,517 for the year ended December 31, 1997, $633,828 for the year
ended December 31, 1998, and $1.5 million for the year ended December 31, 1999.
53
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
10. Business Segments:
We classify our business into three fundamental areas: eBusiness Solutions,
Enterprise Services and Enterprise Systems. Senior management evaluates and
makes operating decisions about each of these operating segments based on a
number of factors. We do not account for assets by business segment and,
therefore, depreciation and amortization are not factors used in evaluating
operating performance. Two of the most significant factors used in evaluating
the operating performance are: revenue and gross margin before depreciation as
presented below:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
(in thousands)
Revenue:
eBusiness Solutions..................................... $ -- $ -- $ 1,742
Enterprise Services..................................... 2,795 27,922 64,806
Enterprise Systems...................................... 7,415 33,678 93,374
--------------- --------------- ---------------
Total 10,210 61,600 159,922
Gross margin before depreciation:
eBusiness Solutions..................................... -- -- 1,022
Enterprise Services..................................... 1,517 12,335 31,979
Enterprise Systems...................................... 1,325 5,562 22,876
--------------- --------------- ---------------
Total 2,842 17,897 55,877
--------------- --------------- ---------------
Reconciliation to net loss:
Selling, general and administrative..................... (10,983) (47,862) (125,350)
Depreciation and amortization........................... (1,453) (7,493) (17,295)
Impairment of long-lived assets......................... -- -- (650)
--------------- --------------- ---------------
Operating loss (9,594) (37,458) (87,418)
Interest expense (156) (17,502) (25,491)
Interest income......................................... 251 4,632 4,880
Other income (expense) (156) (248) (231)
--------------- --------------- ---------------
Net loss $ (9,655) $ (50,576) $ (108,260)
=============== =============== ===============
</TABLE>
11. Deferred Compensation:
We have a Deferred Compensation plan whereby certain management employees
can elect to defer a portion of their compensation which will be paid in shares
of our common stock at a future date. The plan requires that we issue shares of
common stock into a rabbi trust which will then be distributed to the employee
at a specified date in the future not less than one year from the deferral date.
We have recorded the deferred compensation amount as treasury stock (for
accounting purposes) and as a deferred compensation obligation in the
shareholders' equity (deficit) section of the balance sheet. As of December 31,
1999, 148,171 shares of our common stock are being held in the rabbi trust.
12. Income Taxes:
For federal income tax purposes we had net operating loss carryforwards of
$152.2 million as of December 31, 1999. Section 382 of the Internal Revenue Code
places certain limitations on the annual amount of net operating loss
carryforwards which can be utilized if certain changes in ownership occur. As a
result, our ability to use these net operating loss carryforwards, which will
begin to expire in 2011, may be limited.
54
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1999
--------------- --------------
<S> <C> <C>
Deferred tax assets: (in thousands)
Net operating loss carryforwards.................................. $ 17,058 $ 57,828
Deferred revenue.................................................. 1,924 2,441
Accrued vacation and bonus........................................ 1,342 1,635
Intangibles....................................................... 549 1,031
Allowance for doubtful accounts................................... 528 747
Deferred gain on sales-type leases................................ -- 646
Charitable contributions.......................................... -- 16
Property and equipment............................................ 462 367
Self-insurance and warranty liabilities........................... 449 135
Original issue discount........................................... 384 201
Valuation allowance............................................... (22,696) (65,047)
--------------- --------------
Total net deferred tax assets.................................. $ -- $ --
=============== ==============
</TABLE>
The increase in the valuation allowance of $19.1 million in 1998 and $42.4
million in 1999 are due to increased losses during each year. We have recorded a
full valuation allowance on the net deferred tax assets due to continuing
losses.
Our actual income taxes differed from the expected federal statutory rate as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1998 1999
------------- ----------- -----------
<S> <C> <C> <C>
Statutory tax rate.......................................... 34 % 34 % 35 %
State taxes, net of federal benefit......................... 4 4 3
Valuation allowance......................................... (38) (38) (38)
----------- --------- ---------
Effective tax rate.......................................... -- % -- % --%
=========== ========= =========
</TABLE>
13. Net Loss Per Share:
The net loss available to common shareholders consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C>
Net loss.................................................. $ (9,655) $ (50,576) $ (108,260)
=============== =============== ===============
The weighted average shares consist of the following:
Weighted average common shares used for
basic and fully diluted earnings per share............... 10,461 13,732 20,356
=============== =============== ===============
Anti-dilutive options and warrants not included in
the calculation ......................................... 3,827 6,975 8,868
=============== =============== ===============
</TABLE>
14. Employee Benefit Plans:
We adopted an employee benefit 401(k) plan for all employees effective
March 1, 1997. Under the plan, employees may voluntarily elect to have up to 15%
of their salaries deducted from earnings and placed in the plan. We may elect to
match up to 6% of the employee contributions by contributing our common stock to
the plan. Our contributions are determined on a quarterly basis and the number
of shares to be contributed is based upon the
55
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
estimated fair value of the stock at the end of each quarter. During 1998 we
contributed $182,792 of our common stock for the year ended December 31, 1997
match and contributed $253,102 of our common stock for the first and second
quarters of 1998. During 1999, we contributed $712,596 for the third and fourth
quarters 1998 and contributed $2.0 million for the first, second, and third
quarters of 1999. An additional $932,498 was accrued as of December 31, 1999 for
the fourth quarter of 1999 which was contributed in February, 2000.
15. Related Party Transactions:
In August 1998, we entered into a two year agreement with Strategic
Healthcare Solutions, LLC (SHS) under which SHS was engaged to provide new
customers in the healthcare industry to us. One of our directors is a principal
of Strategic Asset Management which has an ownership interest in SHS. Under the
agreement, we pay SHS a monthly fee and commissions (an aggregate of
approximately $125,000 in 1998 and $227,336 in 1999). In addition, we issued a
warrant to SHS which entitles them to purchase up to a maximum of 131,250 shares
of our common stock at an exercise price of $12.00.
The warrant includes performance objectives which are reviewed
semiannually. If SHS does not meet those performance objectives, all or a
portion of the shares available for each six-month period (32,813 shares) is
reduced. The warrant is not exercisable until August 1, 2000 and expires August
1, 2003. During 1999, 64,331 shares applicable to the warrant were cancelled as
a result of not meeting the performance objectives.
In October 1999, we entered into a long-term Enterprise Managed Services
agreement with Cavion Technologies, Inc. (Cavion). Under this agreement we have
designed a network which we now own, maintain and monitor and support
connectivity, including providing equipment and related services for the
network. In connection with this agreement we purchased $286,000 of equipment
from Cavion. In exchange for the use of our equipment and services provided,
Cavion will pay us a monthly fee over a term of five years. In October 1999,
John Evans was elected as a member of the Board of Directors of Cavion. In
addition, through a business combination we completed in 1997, we own 67,603
shares of Cavion which represents a less than 2% ownership percentage. In
connection with the EMS agreement we recognized revenue of approximately
$135,000 during 1999 of which, approximately $85,000 remained in trade accounts
receivable as of December 31, 1999.
56
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by reference
to our definitive proxy statement for our 2000 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
to our definitive proxy statement for our 2000 Annual Meeting of Stockholders.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
Principal Shareholders
The information required by this item is incorporated herein by reference
to our definitive proxy statement for our 2000 Annual Meeting of Stockholders.
Item 13. Certain Relationships And Related Transactions
The information required by this item is incorporated herein by reference
to our definitive proxy statement for our 2000 Annual Meeting of Stockholders.
57
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a)(1) The following consolidated financial statements of Convergent
Communications, Inc. are included in Item 8 of this Report on Form 10-K:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1999
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999
Notes to Consolidated Financial Statements
(a)(2) The following financial statement schedules of Convergent
Communications for the three years ended December 31, 1999 are included in this
Report on Form 10-K, as required by Item 14(d):
. Report of Independent Accountants on Financial Statement Schedule
. Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted because the information is not
required or is included in the consolidated financial statements.
(a)(3) List of Exhibits (including management contracts or compensatory
plans or arrangements required to be filed)
Exhibit
No. Description
- -------------- ----------------------------------------------------------------
3.1** Amended and Restated Articles of Incorporation of Convergent
Communications, Inc.
3.2* Articles of Amendment to the Amended and Restated Articles of
Incorporation of Convergent Communications, Inc.
3.3+ Articles of Amendment to the Amended and Restated Articles of
Incorporation of Convergent Communications, Inc.
3.4+++ Third Articles of Amendment to Amended and Restated Articles of
Incorporation of Convergent Communications, Inc.
3.5** Bylaws of the Company
4.1** Indenture, dated as of April 2, 1998, by and among the Company
and Norwest Bank Colorado, N.A.
4.2** Warrant Agreement, dated as of April 2, 1998
58
<PAGE>
4.3** Warrant Registration Rights Agreement, dated as of April 2, 1998
4.4** Collateral Account Control Agreement, dated as of April 2, 1998
4.5** Custody and Security Agreement, dated as of April 2, 1998
4.6* Investor Rights Agreement, dated as of March 17, 1999
4.7* Warrant Agreement, dated as of March 17, 1999
4.8++ Warrant Agreement, dated as of June 3, 1999
4.9++++ Warrant to Purchase Common Stock of Convergent Communications,
Inc. dated as of July 16, 1999
10.1 Employment Agreement, dated March 9, 2000, between John R. Evans
and the Company
10.2 Employment Agreement, dated March 9, 2000, between Keith V.
Burge and the Company
10.3 Employment Agreement, dated March 9, 2000, between Philip G
Allen and the Company
10.4 Employment Agreement, dated March 9, 2000, between Martin E.
Freidel and the Company
10.5 Employment Agreement, dated March 9, 2000, between Brian R.
Ervine and the Company
10.6 Employment Agreement, dated March 9, 2000, between Michael
Dozier and the Company
10.7 Employment Agreement, dated March 9, 2000, between D. Randall
Hake and the Company
10.8 Employment Agreement, dated March 9, 2000, between Gregory P.
McGraw and the Company
10.9 Employment Agreement, dated March 9, 2000, between Brian J.
McManus and the Company
10.10** Asset Purchase Agreement, dated June 16, 1998 (as amended) by
and between Convergent Communications Services, Inc. and Tie
Communications, Inc., Debtor-in-Possession
10.11** Master Lease Agreement, dated November 11, 1997, between
Comdisco, Inc. and the Company
10.12** Master Lease Agreement, dated November 17, 1997, between
Convergent Capital Corporation and the Company
10.13** Program Agreement, dated November 19, 1997, among Comdisco,
Inc., Convergent Communications Services, Inc. and the Company
10.14++ Credit and Guaranty Agreement among Convergent Communications,
Inc., Convergent Communications Services, Inc., Convergent
Capital Corporation, various lenders, and Goldman Sachs Credit
Partners L.P., dated as of June 3, 1999
10.15++ Pledge and Security Agreement among Convergent Communications,
Inc., Convergent Communications Services, Inc., Convergent
Capital Corporation and Goldman Sachs Credit Partners L.P.,
dated as of June 3, 1999
59
<PAGE>
10.16++ Purchase and License Agreement by and between Cisco Systems,
Inc. and Convergent Communications Services, Inc. dated July 16,
1999
10.17++++ Credit Agreement dated as of July 16, 1999 between Convergent
Communications Services, Inc. and Cisco Systems Capital
Corporation
10.18++++ Guaranty dated as of July 16, 1999 by Convergent Communications,
Inc. in favor of Cisco Systems Capital Corporation
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney
27.1 Financial Data Schedule
99.1 Audit Committee Charter effective March 9, 2000
* Previously filed and incorporated by reference to the Form 10-K (SEC File
No. 333-53953).
** Previously filed and incorporated by reference to the Registration
Statement on Form S-4 (Reg. No. 333-5393).
+ Previously filed and incorporated by reference to the Registration
Statement on Form S-1 (Reg. No. 333-78483) filed May 14, 1999.
++ Previously filed and incorporated by reference to Amendment No. 1 to
Registration Statement on Form S-1 (Reg. No. 333-78483) filed on June 28,
1999.
+++ Previously filed and incorporated by reference to Amendment No. 2 to
Registration Statement on Form S-1 (Reg. No. 333-78483) filed on July 15,
1999.
++ Previously filed and incorporated by reference to Amendment No. 3 to
Registration Statement on Form S-1 (Reg. No. 333-78483) filed on July 16,
1999
++++ Previously filed and incorporated by reference to Amendment No. 4 to
Registration Statement on Form S-1 (Reg. No. 333-78483) filed on July 19,
1999.
(b) Reports on Form 8-K
Inapplicable
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
The registrant has not sent to security holders any annual report covering the
registrant's last fiscal year or any proxy material relating to a meeting of
security holders. Copies of such annual report and proxy will be furnished to
the Commission when it is sent to security holders.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on March 30, 2000.
Convergent Communications, Inc.
By: /s/ John R. Evans
----------------------------
John R. Evans
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- --------------------------------------------- ----------------
<S> <C> <C>
/s/ John R. Evans Chairman, Chief Executive March 30, 2000
- ---------------------------------------
John R. Evans Officer and Director
(Principal Executive
Officer)
/s/ BRIAN R. ERVINE Chief Financial Officer and March 30, 2000
- ----------------------------------------
Brian R. Ervine Treasurer (Principal
Financial and Principal
Accounting Officer)
/s/ Keith V. Burge President, Chief Operating March 30, 2000
- ----------------------------------------
Keith V. Burge Officer and Director
/s/ Philip G. Allen Executive Vice President, March 30, 2000
- ----------------------------------------
Philip G. Allen Secretary and Director
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Martin E. Freidel, as such person's true
and lawful attorney-in-fact and agent with full power of substitution for such
person and in such person's name, place and stead, in any and all capacities, to
sign and to file with the Securities and Exchange Commission a report of
Convergent Communications, Inc., a Colorado corporation (the "Corporation"), on
Form 10-K, with exhibits thereto and other documents in connection therewith,
granting unto each said attorney-in-fact and agent 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 such person
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or any substitute therefor, may lawfully do or cause
to be done by virtue thereof.
61
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------------------- ------------------------------------------ ------------------
<S> <C> <C>
/s/ Spencer I. Brown Director March 30, 2000
- ----------------------------------------
Spencer I. Brown
/s/ J. Thomas Markley Director March 30, 2000
- ----------------------------------------
J. Thomas Markley
/s/ Michael J. Marocco Director March 30, 2000
- ----------------------------------------
Michael J. Marocco
/s/ Richard G. Tomlinson Director March 30, 2000
- ----------------------------------------
Richard G. Tomlinson
</TABLE>
62
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Convergent Communications, Inc.
Our audits of the consolidated financial statements referred to in our report
dated March 13, 2000 except for Note 1 and Note 7 as to which the date is March
28, 2000, appearing in Item 8 of this Annual Report on Form 10-K also included
an audit of the financial statement schedule listed in the index in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Denver, Colorado
March 13, 2000
63
<PAGE>
SCHEDULE II
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Balance Charged
at to Costs Balance at
Beginning and Deductions/ End of
of Period Expenses Writeoffs Other Period
---------- --------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible trade
receivables:
Year ended December 31, 1997 $ -- $ 21 $ -- $ -- $ 21
----------- ---------- ------------- ------- ------------
Year ended December 31, 1998 $ 21 $ 401 $ (205) $ 1,691 (i) $ 1,908
----------- ---------- ------------- ------- ------------
Year ended December 31, 1999 $ 1,908 $ 3,154 $ (2,550) $ -- $ 2,512
----------- ---------- ------------- ------- ------------
Allowance for obsolete or excess
inventory:
Year ended December 31, 1997 $ -- $ -- $ -- $ -- $ --
----------- ---------- ------------- ------- ------------
Year ended December 31, 1998 $ -- $ 68 $ -- $ -- $ 68
----------- ---------- ------------- ------- ------------
Year ended December 31, 1999 $ 68 $ 1,368 $ (88) $ -- $ 1,348
----------- ---------- ------------- ------- ------------
Valuation allowance for deferred
tax assets:
Year ended December 31, 1997 $ -- $ 3,582 (ii) $ -- $ -- $ 3,582
----------- ---------- ------------- ------- ------------
Year ended December 31, 1998 $ 3,582 $ 19,114 (ii) $ -- $ -- $ 22,696
----------- ---------- ------------- ------- ------------
Year ended December 31, 1999 $ 22,696 $ 42,351 (ii) $ -- $ -- $ 65,047
----------- ---------- ------------- ------- ------------
</TABLE>
(i) Represents amount from acquisition of certain assets of Tie
Communications, Inc.
(ii) Represents a full valuation against the net deferred tax assets.
64
<PAGE>
EXHIBIT 10.1
Convergent Communications(TM) Proprietary Information
- --------------------------------------------------------------------------------
Employment Services Agreement
- --------------------------------------------------------------------------------
Employee Information
- --------------------
John R. Evans 4260 East Plum Court
- --------------------------------- -----------------------------------
(Name) Greenwood Village, Colorado 80121
-----------------------------------
Effective Date: March 9, 2000 (Address)
- ---------------------------------
1. Employment. The Company agrees to employ Employee and Employee hereby
----------
agrees to be employed by the Company and/or such of its subsidiaries and
affiliate corporations as determined by the Company on a full-time basis, for
the period and upon the terms and conditions hereinafter set forth.
2. Capacity and Duties. Employee shall be employed in the following capacity
-------------------
for the Company or any of its affiliates in such capacity of equal or greater
responsibility. During his employment, Employee shall perform the duties and
bear the responsibilities commensurate with his position and shall serve the
Company faithfully and to the best of his ability.
- --------------------------------------------------------------------------------
Title: Chief Executive Officer
- --------------------------------------------------------------------------------
3. Compensation and Benefits.
-------------------------
3.1 The Company shall pay Employee during the Term of this Agreement (or,
if longer, during the term of Employee's employment with the Company or any of
its affiliates) an annual base salary, payable semi-monthly as follows. The
annual base salary shall be adjustable for merit increases.
- --------------------------------------------------------------------------------
Annual Base Salary: Three Hundred Thousand Dollars ($300,000)
- --------------------------------------------------------------------------------
3.2 In addition to his base salary, the Company, during the Term of this
Agreement, shall pay Employee a performance bonus for each fiscal year of the
Company after the end of the fiscal year, in an exact amount to be determined by
the Board of Directors of the Company. The target bonus will be a percentage of
Employee's annual base salary. This bonus may be adjusted based upon performance
and as determined by the Board of Directors of the Company.
- --------------------------------------------------------------------------------
Target Percentage: One Hundred Percent (100%)
- --------------------------------------------------------------------------------
3.3 Throughout the Term of this Agreement, the Company shall provide
Employee a monthly car allowance as shall be determined in accordance with the
Company's policies.
3.4 In addition to salary as provided above, the Company shall provide
Employee during the Term of this Agreement, with the benefits of such insurance
plans, hospitalization plans, stock plans, retirement plans and other employee
fringe benefits (including sick leave and four (4) weeks annual vacation time)
as shall be generally provided to similar positions within the Company and for
which Employee may be eligible under the terms and conditions thereof. The
Company reserves the right to modify, delete or change its benefits at any time.
3.5 Throughout the Term of this Agreement, the Company shall reimburse
Employee for all reasonable out-of-pocket expenses incurred by Employee in
connection with the business of the Company and in performance of his duties
under this Agreement, upon presentation to the Company by Employee of an
itemized accounting of such expenses with reasonable supporting data.
This Employment Services Agreement is further subject to the Employment
Agreement Terms ("Agreement Terms") attached hereto, and, if this box is marked,
[_] Addendum A attached hereto (collectively the "Agreement"). Employee has read
and understands the Agreement Terms and agrees to be bound by those conditions.
Acceptance of this Agreement is contingent upon acceptance by a representative
of the Company duly authorized to execute this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the last date
shown below.
CONVERGENT COMMUNICATIONS, INC. John R. Evans
----------------------------
(Company) (Employee)
By:________________________________ ____________________________
Title:_____________________________
<PAGE>
Employment Agreement Terms
The following Employment Agreement Terms are in addition to the terms
and conditions contained in the Employment Services Agreement cover sheet:
4. Term. The initial term of this Agreement shall commence on the date of this
----
Agreement and shall continue for a period of three (3) years. This Agreement
shall continue thereafter from year to year, unless and until either party
terminates the Agreement pursuant to Section 5 below ("Term"). The applicable
provisions of Sections 6, 7, 8, 9 and 10 shall remain in full force and effect
as provided and for the time periods specified in such Sections notwithstanding
the termination of this Agreement; all other obligations of either party to the
other under this Agreement shall terminate at the end of the Term.
5. Termination.
-----------
5.1 If, during the Term of this Agreement, Employee dies or is prevented
from performing his duties by reason of illness or incapacity for one hundred
forty (140) days in any one hundred eighty (180) day period, the Company may
terminate this Agreement, upon thirty (30) days prior notice thereof to Employee
or his duly appointed legal representative.
5.2 The Company or the Employee may terminate this Agreement upon at least
thirty (30) days prior notice to Employee upon the happening of any of the
following events ("Change of Control Event"):
5.2.1 The sale by the Company of substantially all of its assets to a
single purchaser or associated group of purchasers who are not affiliates of the
Company. For the purposes of this Agreement, the term "affiliate" means a
person, firm or corporation that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
5.2.2 The sale, exchange or other disposition in one transaction of
eighty percent (80%) or more of the outstanding voting stock of the Company to
or with a person, firm or corporation not then an affiliate of the Company.
5.2.3 The merger or consolidation of the Company in a transaction not
involving an affiliate of the Company in which the shareholders of the Company
receive less than fifty percent (50%) of the outstanding voting stock of the new
continuing corporation.
5.2.4 A bona fide decision by the Company to terminate its business
and liquidate its assets (but only if such liquidation is not part of a plan to
carry on the Company's business through its shareholders).
5.2.5 If Employee's employment is terminated prior to the date on
which a Change of Control Event occurs, and such termination was at the request
of a third party who has taken steps to effect a Change of Control Event or was
otherwise caused by the Change of Control Event, then for all purposes of this
Agreement, a Change of Control Event shall be deemed to have occurred prior to
such termination.
5.3 The Company may terminate this Agreement at any time for gross
negligence or willful non-performance by Employee of any duty as an employee of
the Company which continues for a period of thirty (30) days after written
notice specifying such negligence or non-performance.
5.4 The Company may terminate this Agreement immediately upon the
intentional commission of a violation of any federal law, rule or regulation, or
any theft, fraud, embezzlement or similar crime involving the commission of any
felony, or for a material breach of any obligation or covenant created by or
under this Agreement.
5.5 Company or Employee may terminate this Agreement without cause upon at
least thirty (30) days prior notice.
5.6 Termination Fees. In the event that this Agreement is terminated
----------------
pursuant to this Section 5, Company shall pay Employee a Termination Fee as
described below.
5.6.1 If this Agreement is terminated by (a) the Company under
subsections 5.1, 5.2 or 5.5 above, or (b) by the Employee (i) within three (3)
months for any or no reason following a Change of Control Event as described in
subsection 5.2 above, or (ii) for Good Reason (as defined below) within twelve
(12) months following a Change of Control Event as described in subsection 5.2
above, then (1) the Company shall continue to pay Employee's monthly base
salary, as shall be in effect on the termination date, for a period of twenty-
four (24) months following the date of termination; (2) the Company shall
provide Employee with benefits coverage, including, without limitation,
Initials: _________ _________ Date:___________
<PAGE>
coverage under life, medical, dental and vision, but excluding disability plans,
for a period of twenty-four (24) months following the date of termination; (3)
the Company shall pay Employee any incentive bonus earned by Employee pursuant
to Section 3.2, if any, and (4) vesting of Employee's stock options, if any,
shall be accelerated such that all stock options granted to Employee will vest
as of the date of termination.
5.6.2 For purposes of this Agreement, "Good Reason" shall mean,
without the Employee's express written consent, the occurrence within twelve
(12) months after a Change of Control Event of any of the following
circumstances, unless in the case of clauses (i), (v), or (vi), such
circumstances are fully corrected within five (5) days following notice to the
Company:
(i). The assignment to the Employee of any duties usually
performed by an employee or individual of status subordinate to that of the
Employee's position, or a substantial alteration in the nature or status of the
Employee's responsibilities from those in effect immediately prior to a Change
of Control Event;
(ii). A reduction by the Company in the Employee's annual base
salary as then in effect;
(iii). A new Company requirement is instituted which requires the
Employee to change his work location to a location greater than fifty (50) miles
from Employee's work location immediately prior to the institution of the
requirement, but not including a requirement that the Employee travel on the
Company's business to an extent substantially consistent with his present
business travel obligations;
(iv). The failure by the Company, without the Employee's consent,
to pay to the Employee any portion of his compensation, or to pay to the
Employee any portion of an installment of deferred compensation under any
deferred compensation program of the Company within seven (7) days of the date
such compensation is due, unless such failure to pay is reasonably in dispute by
the Company;
(v). The failure by the Company to continue in effect any
compensation plan in which the Employee participates immediately prior to the
Change of Control Event which is material to the Employee's total compensation,
or any substitute plans adopted prior to the Change of Control Event, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan in connection with the Change of Control
Event, or the failure by the Company to continue the Employee's participation
therein;
(vi). The failure by the Company to continue to provide the
Employee with benefits substantially similar to those enjoyed by the Employee
under any of the Company's pension, life insurance, medical, health and
accident, or disability plan in which the Employee was participating at the time
of a Change of Control Event; the taking of any action by the Company which
would directly or indirectly materially reduce any of such benefits or deprive
the Employee of any material fringe benefit enjoyed by the Employee at the time
of the Change of Control Event; or the failure by the Company to provide the
Employee with the number of paid vacation days to which the Employee is entitled
pursuant to the greater of (a) this Agreement or (b) the basis of years of
service with the Company in accordance with the Company's normal vacation policy
in effect at the time of the Change of Control Event.
The Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or mental
illness. The Employee's continued employment shall not constitute consent to, or
a waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
5.6.3 No Termination Fee shall be paid to Employee in the event that
this Agreement is terminated for any other reason, including, without
limitation, pursuant to subsections 5.3 and 5.4 herein.
5.7 In the event that this Agreement is terminated pursuant to subsection
5.2 or by the Company pursuant to subsection 5.5, Employee shall have a period
of twelve (12) months from the date of termination in which to exercise
Employee's vested stock options.
6. Covenant Not to Compete.
-----------------------
6.1 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
later, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not, directly or indirectly, own, manage, operate,
control, be employed by, or participate in the ownership, management, operation
or control of a business that is engaged in the same business as the Company
within any area or at any location constituting,
Initials: _________ _________ Date:___________
<PAGE>
during the term of Employee's employment and/or at the time Employee's
employment is terminated, a Relevant Area. For the purposes of this Section 6,
including all subsections of this Section 6, the business in which the Company
is engaged in is the voice and data communications business, including local and
long distance services, network integration, network monitoring, customer
premise equipment, network equipment leasing, Internet web site design,
ecommerce applications and other Internet related services, and which other
services the Company provides, whether or not the Company is authorized to
provide and actually provides such services during the term of Employee's
employment ("Services"). The "Relevant Area" shall be defined for the purposes
of this Agreement as any area located within, or within fifty (50) miles of, the
legal boundaries or limits of any city within which the Company or any parent,
subsidiary or affiliate thereof is providing Services, has commenced the
acquisition of any authorizations, rights of way or facilities or has commenced
the construction of facilities for the purpose of providing Services, or the
Company has publicly announced or privately disclosed in writing to Employee
that it plans to provide Services.
6.2 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
longer, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not (i) directly or indirectly cause or attempt to
cause any employee of the Company or any of its affiliates to leave the employ
of the Company or any affiliate, (ii) in any way interfere with the relationship
between the Company and any employee or between an affiliate and any employee of
the affiliate, (iii) directly or indirectly hire any employee of the Company or
any affiliate to work for any organization of which Employee is an officer,
director, employee, consultant, independent contractor or owner of an equity or
other financial interest, or (iv) interfere or attempt to interfere with any
transaction in which the Company or any of its affiliates was involved during
the Term of this Agreement or Employee's employment, which ever is longer.
6.3 Employee agrees that, because of the nature and sensitivity of the
information to which he will be privy and because of the nature and national and
international scope of the Company's business, the restrictions in this Section
6 are fair and reasonable.
7. Confidential Information.
------------------------
7.1 The relationship between the Company and Employee is one of confidence
and trust. This relationship and the rights granted and duties imposed by this
Section shall continue until a date two (2) years from the date Employee's
employment is terminated.
7.2 As used in this Agreement (i) "Confidential Information" means
information disclosed to or acquired by Employee about the Company's plans,
products, processes and services including the Services and any Relevant Area,
including information relating to research, development, inventions,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, pricing and tariffed or contractual terms, customer lists and prospect
lists or other market information, with respect to any of the Company's then
current business activities; and (ii) "Inventions" means any inventions,
discoveries, concepts and ideas, whether patentable or not, including, without
limitation, processes, methods, formulas, and techniques (as well as related
improvements and knowledge) that are based on or related to Confidential
Information, that pertain in any manner to the Company's then currently used
technology, expertise or business and that are made or conceived by Employee,
either solely or jointly with others, and while employed by the Company or
within six (6) months thereafter, whether or not made or conceived during
working hours or with the use of the Company's facilities, materials or
personnel.
7.3 Employee agrees that he shall at no time during the term of his
employment or at any time for a period of two (2) years thereafter disclose any
Confidential Information, Inventions or component thereof to any person, firm or
corporation to any extent or for any reason or purpose or use any Confidential
Information or component thereof for any purpose other than the conduct of the
Company's business.
7.4 Any Confidential Information, Invention or component thereof that is
directly or indirectly originated, developed or perfected to any degree by
Employee during the term of his employment by the Company shall be and remain
the sole property of the Company and shall be deemed trade secrets of the
Company.
7.5 Upon termination of Employee's employment pursuant to any of the
provisions herein, Employee or his legal representative shall deliver to the
Company all originals and all duplicates and/or copies of all documents,
records, notebooks, and similar repositories of or containing Confidential
Information or subject matter then in his possession, whether prepared by him or
Initials: _________ _________ Date:___________
<PAGE>
not.
7.6 Employee agrees that the covenants and agreements contained in this
Section 7 are fair and reasonable and that no waiver or modification of this
Section or any covenant or condition set forth herein shall be valid unless set
forth in writing and duly executed by the parties hereto. Employee agrees to
execute such separate and further confidentiality agreements embodying and
enlarging upon the provisions of this Section 7 as the Company may reasonably
request.
8. Injunctive Relief. Upon a breach or threatened breach by Employee of any of
-----------------
the provisions of Sections 6 and 7 of this Agreement, the Company shall be
entitled to an injunction restraining Employee from such breach without a
showing of damage as irreparable harm. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach, including recovery of damages from Employee.
9. No Waiver. A waiver by the Company of a breach of any provision of this
---------
Agreement by Employee shall not operate or be construed as a waiver of any
subsequent or other breach by Employee.
10. Severability. It is the desire and intent of the parties that the
------------
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
11. Notices. All communications, requests, consents and other notices provided
-------
for in this Agreement shall be in writing and shall be deemed given if mailed by
first class mail, postage prepaid, certified or return receipt requested to the
addresses set forth herein, or last known address and received by the intended
party. If the mailing is returned to the sender due to an incorrect address, the
correct address must be obtained in order for the communication to be received
and completed.
12. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Colorado.
13. Assignment. The Company may assign its rights and obligations under this
----------
Agreement to any affiliate of the Company or, subject to the provisions of
Section 5, to any acquirer of substantially all of the business of the Company,
and all covenants and agreements hereunder shall inure to the benefit of and be
enforceable by or against any such assignee. Neither this Agreement nor any
rights or duties hereunder may be assigned or delegated by Employee.
14. Amendments. No provision of this Agreement shall be altered, amended,
----------
revoked or waived except by an instrument in writing, signed by each party to
this Agreement.
15. Binding Effect. Except as otherwise provided herein, this Agreement shall
--------------
be binding upon and shall inure to the benefit of the parties hereto and their
respective legal representatives, heirs, successors and assigns.
16. Execution in Counterparts. This Agreement may be executed in any number of
-------------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Entire Agreement. This Agreement sets forth the entire agreement and
----------------
understanding of the parties and supersedes all prior understandings, agreements
or representations by or between the parties, whether written or oral, which
relate in any way to the subject matter hereof, including, without limitation,
any previously executed employment agreements or amendments thereto.
18. Arbitration. Any dispute arising out of this Agreement, the Employee's
-----------
application for employment, the Employee's relationship with the Company, or the
Employee's employment or separation from employment shall be subject to
arbitration pursuant to the Company's arbitration procedures. The Employee
acknowledges that a copy of the procedures has been delivered to and read by the
Employee prior to the time he/she executed this Agreement. It is understood that
all sections of the Arbitration Procedures apply, except those sections
pertaining to at-will employment, which are superseded by this Employment
Agreement.
Initials: _________ _________ Date:___________
<PAGE>
EXHIBIT 10.2
Convergent Communications(TM) Proprietary Information
- --------------------------------------------------------------------------------
Employment Services Agreement
- --------------------------------------------------------------------------------
Employee Information
--------------------
Keith V. Burge 16 Red Tail Drive
-------------------------------- -----------------------------------
(Name) Highlands Ranch, Colorado 80126
-----------------------------------
Effective Date: March 9, 2000 (Address)
--------------------------------
1. Employment. The Company agrees to employ Employee and Employee hereby
----------
agrees to be employed by the Company and/or such of its subsidiaries and
affiliate corporations as determined by the Company on a full-time basis, for
the period and upon the terms and conditions hereinafter set forth.
2. Capacity and Duties. Employee shall be employed in the following capacity
-------------------
for the Company or any of its affiliates in such capacity of equal or greater
responsibility. During his employment, Employee shall perform the duties and
bear the responsibilities commensurate with his position and shall serve the
Company faithfully and to the best of his ability.
- --------------------------------------------------------------------------------
Title: President and Chief Operating Officer
- --------------------------------------------------------------------------------
3. Compensation and Benefits.
-------------------------
3.1 The Company shall pay Employee during the Term of this Agreement (or,
if longer, during the term of Employee's employment with the Company or any of
its affiliates) an annual base salary, payable semi-monthly as follows. The
annual base salary shall be adjustable for merit increases.
- --------------------------------------------------------------------------------
Annual Base Salary: Two Hundred Seventy-Five Thousand Dollars ($275,000)
- --------------------------------------------------------------------------------
3.2 In addition to his base salary, the Company, during the Term of this
Agreement, shall pay Employee a performance bonus for each fiscal year of the
Company after the end of the fiscal year, in an exact amount to be determined by
the Board of Directors of the Company. The target bonus will be a percentage of
Employee's annual base salary. This bonus may be adjusted based upon performance
and as determined by the Board of Directors of the Company.
- --------------------------------------------------------------------------------
Target Percentage: One Hundred Percent (100%)
- --------------------------------------------------------------------------------
3.3 Throughout the Term of this Agreement, the Company shall provide
Employee a monthly car allowance as shall be determined in accordance with the
Company's policies.
3.4 In addition to salary as provided above, the Company shall provide
Employee during the Term of this Agreement, with the benefits of such insurance
plans, hospitalization plans, stock plans, retirement plans and other employee
fringe benefits (including sick leave and four (4) weeks annual vacation time)
as shall be generally provided to similar positions within the Company and for
which Employee may be eligible under the terms and conditions thereof. The
Company reserves the right to modify, delete or change its benefits at any time.
3.5 Throughout the Term of this Agreement, the Company shall reimburse
Employee for all reasonable out-of-pocket expenses incurred by Employee in
connection with the business of the Company and in performance of his duties
under this Agreement, upon presentation to the Company by Employee of an
itemized accounting of such expenses with reasonable supporting data.
This Employment Services Agreement is further subject to the Employment
Agreement Terms ("Agreement Terms") attached hereto, and, if this box is marked,
[_] Addendum A attached hereto (collectively the "Agreement"). Employee has
read and understands the Agreement Terms and agrees to be bound by those
conditions. Acceptance of this Agreement is contingent upon acceptance by a
representative of the Company duly authorized to execute this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the last date
shown below.
CONVERGENT COMMUNICATIONS, INC. Keith V. Burge
-----------------------------------------
(Company) (Employee)
By:______________________________ _________________________________________
Title:___________________________
<PAGE>
Employment Agreement Terms
The following Employment Agreement Terms are in addition to the terms
and conditions contained in the Employment Services Agreement cover sheet:
4. Term. The initial term of this Agreement shall commence on the date of
----
this Agreement and shall continue for a period of three (3) years. This
Agreement shall continue thereafter from year to year, unless and until either
party terminates the Agreement pursuant to Section 5 below ("Term"). The
applicable provisions of Sections 6, 7, 8, 9 and 10 shall remain in full force
and effect as provided and for the time periods specified in such Sections
notwithstanding the termination of this Agreement; all other obligations of
either party to the other under this Agreement shall terminate at the end of the
Term.
5. Termination.
-----------
5.1 If, during the Term of this Agreement, Employee dies or is prevented
from performing his duties by reason of illness or incapacity for one hundred
forty (140) days in any one hundred eighty (180) day period, the Company may
terminate this Agreement, upon thirty (30) days prior notice thereof to Employee
or his duly appointed legal representative.
5.2 The Company or the Employee may terminate this Agreement upon at least
thirty (30) days prior notice to Employee upon the happening of any of the
following events ("Change of Control Event"):
5.2.1 The sale by the Company of substantially all of its assets to a
single purchaser or associated group of purchasers who are not affiliates of the
Company. For the purposes of this Agreement, the term "affiliate" means a
person, firm or corporation that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
5.2.2 The sale, exchange or other disposition in one transaction of
eighty percent (80%) or more of the outstanding voting stock of the Company to
or with a person, firm or corporation not then an affiliate of the Company.
5.2.3 The merger or consolidation of the Company in a transaction not
involving an affiliate of the Company in which the shareholders of the Company
receive less than fifty percent (50%) of the outstanding voting stock of the new
continuing corporation.
5.2.4 A bona fide decision by the Company to terminate its business
and liquidate its assets (but only if such liquidation is not part of a plan to
carry on the Company's business through its shareholders).
5.2.5 If Employee's employment is terminated prior to the date on
which a Change of Control Event occurs, and such termination was at the request
of a third party who has taken steps to effect a Change of Control Event or was
otherwise caused by the Change of Control Event, then for all purposes of this
Agreement, a Change of Control Event shall be deemed to have occurred prior to
such termination.
5.3 The Company may terminate this Agreement at any time for gross
negligence or willful non-performance by Employee of any duty as an employee of
the Company which continues for a period of thirty (30) days after written
notice specifying such negligence or non-performance.
5.4 The Company may terminate this Agreement immediately upon the
intentional commission of a violation of any federal law, rule or regulation, or
any theft, fraud, embezzlement or similar crime involving the commission of any
felony, or for a material breach of any obligation or covenant created by or
under this Agreement.
5.5 Company or Employee may terminate this Agreement without cause upon at
least thirty (30) days prior notice.
5.6 Termination Fees. In the event that this Agreement is terminated
----------------
pursuant to this Section 5, Company shall pay Employee a Termination Fee as
described below.
5.6.1 If this Agreement is terminated by (a) the Company under
subsections 5.1, 5.2 or 5.5 above, or (b) by the Employee (i) within three (3)
months for any or no reason following a Change of Control Event as described in
subsection 5.2 above, or (ii) for Good Reason (as defined below) within twelve
(12) months following a Change of Control Event as described in subsection 5.2
above, then (1) the Company shall continue to pay Employee's monthly base
salary, as shall be in effect on the termination date, for a period of twenty-
four (24) months following the date of termination; (2) the Company shall
provide Employee with benefits coverage, including, without limitation,
Initials: _________ _________ Date:_____________
<PAGE>
coverage under life, medical, dental and vision, but excluding disability plans,
for a period of twenty-four (24) months following the date of termination; (3)
the Company shall pay Employee any incentive bonus earned by Employee pursuant
to Section 3.2, if any, and (4) vesting of Employee's stock options, if any,
shall be accelerated such that all stock options granted to Employee will vest
as of the date of termination.
5.6.2 For purposes of this Agreement, "Good Reason" shall mean,
without the Employee's express written consent, the occurrence within twelve
(12) months after a Change of Control Event of any of the following
circumstances, unless in the case of clauses (i), (v), or (vi), such
circumstances are fully corrected within five (5) days following notice to the
Company:
(i). The assignment to the Employee of any duties usually performed
by an employee or individual of status subordinate to that of the Employee's
position, or a substantial alteration in the nature or status of the Employee's
responsibilities from those in effect immediately prior to a Change of Control
Event;
(ii). A reduction by the Company in the Employee's annual base salary
as then in effect;
(iii). A new Company requirement is instituted which requires the
Employee to change his work location to a location greater than fifty (50) miles
from Employee's work location immediately prior to the institution of the
requirement, but not including a requirement that the Employee travel on the
Company's business to an extent substantially consistent with his present
business travel obligations;
(iv). The failure by the Company, without the Employee's consent, to
pay to the Employee any portion of his compensation, or to pay to the Employee
any portion of an installment of deferred compensation under any deferred
compensation program of the Company within seven (7) days of the date such
compensation is due, unless such failure to pay is reasonably in dispute by the
Company;
(v). The failure by the Company to continue in effect any
compensation plan in which the Employee participates immediately prior to the
Change of Control Event which is material to the Employee's total compensation,
or any substitute plans adopted prior to the Change of Control Event, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan in connection with the Change of Control
Event, or the failure by the Company to continue the Employee's participation
therein;
(vi). The failure by the Company to continue to provide the Employee
with benefits substantially similar to those enjoyed by the Employee under any
of the Company's pension, life insurance, medical, health and accident, or
disability plan in which the Employee was participating at the time of a Change
of Control Event; the taking of any action by the Company which would directly
or indirectly materially reduce any of such benefits or deprive the Employee of
any material fringe benefit enjoyed by the Employee at the time of the Change of
Control Event; or the failure by the Company to provide the Employee with the
number of paid vacation days to which the Employee is entitled pursuant to the
greater of (a) this Agreement or (b) the basis of years of service with the
Company in accordance with the Company's normal vacation policy in effect at the
time of the Change of Control Event.
The Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or mental
illness. The Employee's continued employment shall not constitute consent to, or
a waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
5.6.3 No Termination Fee shall be paid to Employee in the event that
this Agreement is terminated for any other reason, including, without
limitation, pursuant to subsections 5.3 and 5.4 herein.
5.7 In the event that this Agreement is terminated pursuant to subsection
5.2 or by the Company pursuant to subsection 5.5, Employee shall have a period
of twelve (12) months from the date of termination in which to exercise
Employee's vested stock options.
6. Covenant Not to Compete.
-----------------------
6.1 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
later, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not, directly or indirectly, own, manage, operate,
control, be employed by, or participate in the ownership, management, operation
or control of a business that is engaged in the same business as the Company
within any area or at any location constituting,
Initials: _________ _________ Date:_____________
<PAGE>
during the term of Employee's employment and/or at the time Employee's
employment is terminated, a Relevant Area. For the purposes of this Section 6,
including all subsections of this Section 6, the business in which the Company
is engaged in is the voice and data communications business, including local and
long distance services, network integration, network monitoring, customer
premise equipment, network equipment leasing, Internet web site design,
ecommerce applications and other Internet related services, and which other
services the Company provides, whether or not the Company is authorized to
provide and actually provides such services during the term of Employee's
employment ("Services"). The "Relevant Area" shall be defined for the purposes
of this Agreement as any area located within, or within fifty (50) miles of, the
legal boundaries or limits of any city within which the Company or any parent,
subsidiary or affiliate thereof is providing Services, has commenced the
acquisition of any authorizations, rights of way or facilities or has commenced
the construction of facilities for the purpose of providing Services, or the
Company has publicly announced or privately disclosed in writing to Employee
that it plans to provide Services.
6.2 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
longer, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not (i) directly or indirectly cause or attempt to
cause any employee of the Company or any of its affiliates to leave the employ
of the Company or any affiliate, (ii) in any way interfere with the relationship
between the Company and any employee or between an affiliate and any employee of
the affiliate, (iii) directly or indirectly hire any employee of the Company or
any affiliate to work for any organization of which Employee is an officer,
director, employee, consultant, independent contractor or owner of an equity or
other financial interest, or (iv) interfere or attempt to interfere with any
transaction in which the Company or any of its affiliates was involved during
the Term of this Agreement or Employee's employment, which ever is longer.
6.3 Employee agrees that, because of the nature and sensitivity of the
information to which he will be privy and because of the nature and national and
international scope of the Company's business, the restrictions in this Section
6 are fair and reasonable.
7. Confidential Information.
------------------------
7.1 The relationship between the Company and Employee is one of confidence
and trust. This relationship and the rights granted and duties imposed by this
Section shall continue until a date two (2) years from the date Employee's
employment is terminated.
7.2 As used in this Agreement (i) "Confidential Information" means
information disclosed to or acquired by Employee about the Company's plans,
products, processes and services including the Services and any Relevant Area,
including information relating to research, development, inventions,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, pricing and tariffed or contractual terms, customer lists and prospect
lists or other market information, with respect to any of the Company's then
current business activities; and (ii) "Inventions" means any inventions,
discoveries, concepts and ideas, whether patentable or not, including, without
limitation, processes, methods, formulas, and techniques (as well as related
improvements and knowledge) that are based on or related to Confidential
Information, that pertain in any manner to the Company's then currently used
technology, expertise or business and that are made or conceived by Employee,
either solely or jointly with others, and while employed by the Company or
within six (6) months thereafter, whether or not made or conceived during
working hours or with the use of the Company's facilities, materials or
personnel.
7.3 Employee agrees that he shall at no time during the term of his
employment or at any time for a period of two (2) years thereafter disclose any
Confidential Information, Inventions or component thereof to any person, firm or
corporation to any extent or for any reason or purpose or use any Confidential
Information or component thereof for any purpose other than the conduct of the
Company's business.
7.4 Any Confidential Information, Invention or component thereof that is
directly or indirectly originated, developed or perfected to any degree by
Employee during the term of his employment by the Company shall be and remain
the sole property of the Company and shall be deemed trade secrets of the
Company.
7.5 Upon termination of Employee's employment pursuant to any of the
provisions herein, Employee or his legal representative shall deliver to the
Company all originals and all duplicates and/or copies of all documents,
records, notebooks, and similar repositories of or containing Confidential
Information or subject matter then in his possession, whether prepared by him or
Initials: _________ _________ Date:_____________
<PAGE>
not.
7.6 Employee agrees that the covenants and agreements contained in this
Section 7 are fair and reasonable and that no waiver or modification of this
Section or any covenant or condition set forth herein shall be valid unless set
forth in writing and duly executed by the parties hereto. Employee agrees to
execute such separate and further confidentiality agreements embodying and
enlarging upon the provisions of this Section 7 as the Company may reasonably
request.
8. Injunctive Relief. Upon a breach or threatened breach by Employee of any
-----------------
of the provisions of Sections 6 and 7 of this Agreement, the Company shall be
entitled to an injunction restraining Employee from such breach without a
showing of damage as irreparable harm. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach, including recovery of damages from Employee.
9. No Waiver. A waiver by the Company of a breach of any provision of this
---------
Agreement by Employee shall not operate or be construed as a waiver of any
subsequent or other breach by Employee.
10. Severability. It is the desire and intent of the parties that the
------------
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
11. Notices. All communications, requests, consents and other notices provided
-------
for in this Agreement shall be in writing and shall be deemed given if mailed by
first class mail, postage prepaid, certified or return receipt requested to the
addresses set forth herein, or last known address and received by the intended
party. If the mailing is returned to the sender due to an incorrect address, the
correct address must be obtained in order for the communication to be received
and completed.
12. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Colorado.
13. Assignment. The Company may assign its rights and obligations under this
----------
Agreement to any affiliate of the Company or, subject to the provisions of
Section 5, to any acquirer of substantially all of the business of the Company,
and all covenants and agreements hereunder shall inure to the benefit of and be
enforceable by or against any such assignee. Neither this Agreement nor any
rights or duties hereunder may be assigned or delegated by Employee.
14. Amendments. No provision of this Agreement shall be altered, amended,
----------
revoked or waived except by an instrument in writing, signed by each party to
this Agreement.
15. Binding Effect. Except as otherwise provided herein, this Agreement shall
--------------
be binding upon and shall inure to the benefit of the parties hereto and their
respective legal representatives, heirs, successors and assigns.
16. Execution in Counterparts. This Agreement may be executed in any number of
-------------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Entire Agreement. This Agreement sets forth the entire agreement and
----------------
understanding of the parties and supersedes all prior understandings, agreements
or representations by or between the parties, whether written or oral, which
relate in any way to the subject matter hereof, including, without limitation,
any previously executed employment agreements or amendments thereto.
18. Arbitration. Any dispute arising out of this Agreement, the Employee's
-----------
application for employment, the Employee's relationship with the Company, or the
Employee's employment or separation from employment shall be subject to
arbitration pursuant to the Company's arbitration procedures. The Employee
acknowledges that a copy of the procedures has been delivered to and read by the
Employee prior to the time he/she executed this Agreement. It is understood that
all sections of the Arbitration Procedures apply, except those sections
pertaining to at-will employment, which are superseded by this Employment
Agreement.
Initials: ___________ ____________ Date: _____________
<PAGE>
EXHIBIT 10.3
Convergent Communications(TM) Proprietary Information
- --------------------------------------------------------------------------------
Employment Services Agreement
- --------------------------------------------------------------------------------
Employee Information
- --------------------
Philip G. Allen 3173 Elk View Drive
- ----------------------------------- -----------------------------
(Name) Evergreen, Colorado 80439
----------------------------
Effective Date: March 9, 2000 (Address)
- -----------------------------------
1. Employment. The Company agrees to employ Employee and Employee hereby
----------
agrees to be employed by the Company and/or such of its subsidiaries and
affiliate corporations as determined by the Company on a full-time basis, for
the period and upon the terms and conditions hereinafter set forth.
2. Capacity and Duties. Employee shall be employed in the following capacity
-------------------
for the Company or any of its affiliates in such capacity of equal or greater
responsibility. During his employment, Employee shall perform the duties and
bear the responsibilities commensurate with his position and shall serve the
Company faithfully and to the best of his ability.
- -------------------------------------------------------------------------------
Title: Executive Vice President
- -------------------------------------------------------------------------------
3. Compensation and Benefits.
-------------------------
3.1 The Company shall pay Employee during the Term of this Agreement (or,
if longer, during the term of Employee's employment with the Company or any of
its affiliates) an annual base salary, payable semi-monthly as follows. The
annual base salary shall be adjustable for merit increases.
- -------------------------------------------------------------------------------
Annual Base Salary: One Hundred Sixty-Five Thousand Dollars ($165,000)
- -------------------------------------------------------------------------------
3.2 In addition to his base salary, the Company, during the Term of this
Agreement, shall pay Employee a performance bonus for each fiscal year of the
Company after the end of the fiscal year, in an exact amount to be determined by
the Board of Directors of the Company. The target bonus will be a percentage of
Employee's annual base salary. This bonus may be adjusted based upon performance
and as determined by the Board of Directors of the Company.
- -------------------------------------------------------------------------------
Target Percentage: Seventy-Five Percent (75%)
- -------------------------------------------------------------------------------
3.3 Throughout the Term of this Agreement, the Company shall provide
Employee a monthly car allowance as shall be determined in accordance with the
Company's policies.
3.4 In addition to salary as provided above, the Company shall provide
Employee during the Term of this Agreement, with the benefits of such insurance
plans, hospitalization plans, stock plans, retirement plans and other employee
fringe benefits (including sick leave and four (4) weeks annual vacation time)
as shall be generally provided to similar positions within the Company and for
which Employee may be eligible under the terms and conditions thereof. The
Company reserves the right to modify, delete or change its benefits at any time.
3.5 Throughout the Term of this Agreement, the Company shall reimburse
Employee for all reasonable out-of-pocket expenses incurred by Employee in
connection with the business of the Company and in performance of his duties
under this Agreement, upon presentation to the Company by Employee of an
itemized accounting of such expenses with reasonable supporting data.
This Employment Services Agreement is further subject to the Employment
Agreement Terms ("Agreement Terms") attached hereto, and, if this box is marked,
[_] Addendum A attached hereto (collectively the "Agreement"). Employee has read
and understands the Agreement Terms and agrees to be bound by those conditions.
Acceptance of this Agreement is contingent upon acceptance by a representative
of the Company duly authorized to execute this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the last date
shown below.
CONVERGENT COMMUNICATIONS, INC. Philip G. Allen
------------------------------
(Company) (Employee)
By:______________________________ ______________________________
Title:___________________________
<PAGE>
Employment Agreement Terms
The following Employment Agreement Terms are in addition to the terms and
conditions contained in the Employment Services Agreement cover sheet:
4. Term. The initial term of this Agreement shall commence on the date of this
----
Agreement and shall continue for a period of three (3) years. This Agreement
shall continue thereafter from year to year, unless and until either party
terminates the Agreement pursuant to Section 5 below ("Term"). The applicable
provisions of Sections 6, 7, 8, 9 and 10 shall remain in full force and effect
as provided and for the time periods specified in such Sections notwithstanding
the termination of this Agreement; all other obligations of either party to the
other under this Agreement shall terminate at the end of the Term.
5. Termination.
-----------
5.1 If, during the Term of this Agreement, Employee dies or is prevented
from performing his duties by reason of illness or incapacity for one hundred
forty (140) days in any one hundred eighty (180) day period, the Company may
terminate this Agreement, upon thirty (30) days prior notice thereof to Employee
or his duly appointed legal representative.
5.2 The Company or the Employee may terminate this Agreement upon at least
thirty (30) days prior notice to Employee upon the happening of any of the
following events ("Change of Control Event"):
5.2.1 The sale by the Company of substantially all of its assets to a
single purchaser or associated group of purchasers who are not affiliates of the
Company. For the purposes of this Agreement, the term "affiliate" means a
person, firm or corporation that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
5.2.2 The sale, exchange or other disposition in one transaction of
eighty percent (80%) or more of the outstanding voting stock of the Company to
or with a person, firm or corporation not then an affiliate of the Company.
5.2.3 The merger or consolidation of the Company in a transaction not
involving an affiliate of the Company in which the shareholders of the Company
receive less than fifty percent (50%) of the outstanding voting stock of the new
continuing corporation.
5.2.4 A bona fide decision by the Company to terminate its business
and liquidate its assets (but only if such liquidation is not part of a plan to
carry on the Company's business through its shareholders).
5.2.5 If Employee's employment is terminated prior to the date on
which a Change of Control Event occurs, and such termination was at the request
of a third party who has taken steps to effect a Change of Control Event or was
otherwise caused by the Change of Control Event, then for all purposes of this
Agreement, a Change of Control Event shall be deemed to have occurred prior to
such termination.
5.3 The Company may terminate this Agreement at any time for gross
negligence or willful non-performance by Employee of any duty as an employee of
the Company which continues for a period of thirty (30) days after written
notice specifying such negligence or non-performance.
5.4 The Company may terminate this Agreement immediately upon the
intentional commission of a violation of any federal law, rule or regulation, or
any theft, fraud, embezzlement or similar crime involving the commission of any
felony, or for a material breach of any obligation or covenant created by or
under this Agreement.
5.5 Company or Employee may terminate this Agreement without cause upon at
least thirty (30) days prior notice.
5.6 Termination Fees. In the event that this Agreement is terminated
----------------
pursuant to this Section 5, Company shall pay Employee a Termination Fee as
described below.
5.6.1 If this Agreement is terminated by (a) the Company under
subsections 5.1, 5.2 or 5.5 above, or (b) by the Employee (i) within three (3)
months for any or no reason following a Change of Control Event as described in
subsection 5.2 above, or (ii) for Good Reason (as defined below) within twelve
(12) months following a Change of Control Event as described in subsection 5.2
above, then (1) the Company shall continue to pay Employee's monthly base
salary, as shall be in effect on the termination date, for a period of twenty-
four (24) months following the date of termination; (2) the Company shall
provide Employee with benefits coverage, including, without limitation,
Initials: ___ ___ Date: _______
<PAGE>
coverage under life, medical, dental and vision, but excluding disability plans,
for a period of twenty-four (24) months following the date of termination; (3)
the Company shall pay Employee any incentive bonus earned by Employee pursuant
to Section 3.2, if any, and (4) vesting of Employee's stock options, if any,
shall be accelerated such that all stock options granted to Employee will vest
as of the date of termination.
5.6.2 For purposes of this Agreement, "Good Reason" shall mean,
without the Employee's express written consent, the occurrence within twelve
(12) months after a Change of Control Event of any of the following
circumstances, unless in the case of clauses (i), (v), or (vi), such
circumstances are fully corrected within five (5) days following notice to the
Company:
(i). The assignment to the Employee of any duties usually
performed by an employee or individual of status subordinate to that of the
Employee's position, or a substantial alteration in the nature or status of the
Employee's responsibilities from those in effect immediately prior to a Change
of Control Event;
(ii). A reduction by the Company in the Employee's annual base
salary as then in effect;
(iii). A new Company requirement is instituted which requires the
Employee to change his work location to a location greater than fifty (50) miles
from Employee's work location immediately prior to the institution of the
requirement, but not including a requirement that the Employee travel on the
Company's business to an extent substantially consistent with his present
business travel obligations;
(iv). The failure by the Company, without the Employee's
consent, to pay to the Employee any portion of his compensation, or to pay to
the Employee any portion of an installment of deferred compensation under any
deferred compensation program of the Company within seven (7) days of the date
such compensation is due, unless such failure to pay is reasonably in dispute by
the Company;
(v). The failure by the Company to continue in effect any
compensation plan in which the Employee participates immediately prior to the
Change of Control Event which is material to the Employee's total compensation,
or any substitute plans adopted prior to the Change of Control Event, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan in connection with the Change of Control
Event, or the failure by the Company to continue the Employee's participation
therein;
(vi). The failure by the Company to continue to provide the
Employee with benefits substantially similar to those enjoyed by the Employee
under any of the Company's pension, life insurance, medical, health and
accident, or disability plan in which the Employee was participating at the time
of a Change of Control Event; the taking of any action by the Company which
would directly or indirectly materially reduce any of such benefits or deprive
the Employee of any material fringe benefit enjoyed by the Employee at the time
of the Change of Control Event; or the failure by the Company to provide the
Employee with the number of paid vacation days to which the Employee is entitled
pursuant to the greater of (a) this Agreement or (b) the basis of years of
service with the Company in accordance with the Company's normal vacation policy
in effect at the time of the Change of Control Event.
The Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or mental
illness. The Employee's continued employment shall not constitute consent to, or
a waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
5.6.3 No Termination Fee shall be paid to Employee in the event that
this Agreement is terminated for any other reason, including, without
limitation, pursuant to subsections 5.3 and 5.4 herein.
5.7 In the event that this Agreement is terminated pursuant to subsection
5.2 or by the Company pursuant to subsection 5.5, Employee shall have a period
of twelve (12) months from the date of termination in which to exercise
Employee's vested stock options.
6. Covenant Not to Compete.
-----------------------
6.1 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
later, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not, directly or indirectly, own, manage, operate,
control, be employed by, or participate in the ownership, management, operation
or control of a business that is engaged in the same business as the Company
within any area or at any location constituting,
Initials: ___ ___ Date: _______
<PAGE>
during the term of Employee's employment and/or at the time Employee's
employment is terminated, a Relevant Area. For the purposes of this Section 6,
including all subsections of this Section 6, the business in which the Company
is engaged in is the voice and data communications business, including local and
long distance services, network integration, network monitoring, customer
premise equipment, network equipment leasing, Internet web site design,
ecommerce applications and other Internet related services, and which other
services the Company provides, whether or not the Company is authorized to
provide and actually provides such services during the term of Employee's
employment ("Services"). The "Relevant Area" shall be defined for the purposes
of this Agreement as any area located within, or within fifty (50) miles of, the
legal boundaries or limits of any city within which the Company or any parent,
subsidiary or affiliate thereof is providing Services, has commenced the
acquisition of any authorizations, rights of way or facilities or has commenced
the construction of facilities for the purpose of providing Services, or the
Company has publicly announced or privately disclosed in writing to Employee
that it plans to provide Services.
6.2 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
longer, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not (i) directly or indirectly cause or attempt to
cause any employee of the Company or any of its affiliates to leave the employ
of the Company or any affiliate, (ii) in any way interfere with the relationship
between the Company and any employee or between an affiliate and any employee of
the affiliate, (iii) directly or indirectly hire any employee of the Company or
any affiliate to work for any organization of which Employee is an officer,
director, employee, consultant, independent contractor or owner of an equity or
other financial interest, or (iv) interfere or attempt to interfere with any
transaction in which the Company or any of its affiliates was involved during
the Term of this Agreement or Employee's employment, which ever is longer.
6.3 Employee agrees that, because of the nature and sensitivity of the
information to which he will be privy and because of the nature and national and
international scope of the Company's business, the restrictions in this Section
6 are fair and reasonable.
7. Confidential Information.
------------------------
7.1 The relationship between the Company and Employee is one of confidence
and trust. This relationship and the rights granted and duties imposed by this
Section shall continue until a date two (2) years from the date Employee's
employment is terminated.
7.2 As used in this Agreement (i) "Confidential Information" means
information disclosed to or acquired by Employee about the Company's plans,
products, processes and services including the Services and any Relevant Area,
including information relating to research, development, inventions,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, pricing and tariffed or contractual terms, customer lists and prospect
lists or other market information, with respect to any of the Company's then
current business activities; and (ii) "Inventions" means any inventions,
discoveries, concepts and ideas, whether patentable or not, including, without
limitation, processes, methods, formulas, and techniques (as well as related
improvements and knowledge) that are based on or related to Confidential
Information, that pertain in any manner to the Company's then currently used
technology, expertise or business and that are made or conceived by Employee,
either solely or jointly with others, and while employed by the Company or
within six (6) months thereafter, whether or not made or conceived during
working hours or with the use of the Company's facilities, materials or
personnel.
7.3 Employee agrees that he shall at no time during the term of his
employment or at any time for a period of two (2) years thereafter disclose any
Confidential Information, Inventions or component thereof to any person, firm or
corporation to any extent or for any reason or purpose or use any Confidential
Information or component thereof for any purpose other than the conduct of the
Company's business.
7.4 Any Confidential Information, Invention or component thereof that is
directly or indirectly originated, developed or perfected to any degree by
Employee during the term of his employment by the Company shall be and remain
the sole property of the Company and shall be deemed trade secrets of the
Company.
7.5 Upon termination of Employee's employment pursuant to any of the
provisions herein, Employee or his legal representative shall deliver to the
Company all originals and all duplicates and/or copies of all documents,
records, notebooks, and similar repositories of or containing Confidential
Information or subject matter then in his possession, whether prepared by him or
Initials: ___ ___ Date: _______
<PAGE>
not.
7.6 Employee agrees that the covenants and agreements contained in this
Section 7 are fair and reasonable and that no waiver or modification of this
Section or any covenant or condition set forth herein shall be valid unless set
forth in writing and duly executed by the parties hereto. Employee agrees to
execute such separate and further confidentiality agreements embodying and
enlarging upon the provisions of this Section 7 as the Company may reasonably
request.
8. Injunctive Relief. Upon a breach or threatened breach by Employee of any of
-----------------
the provisions of Sections 6 and 7 of this Agreement, the Company shall be
entitled to an injunction restraining Employee from such breach without a
showing of damage as irreparable harm. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach, including recovery of damages from Employee.
9. No Waiver. A waiver by the Company of a breach of any provision of this
---------
Agreement by Employee shall not operate or be construed as a waiver of any
subsequent or other breach by Employee.
10. Severability. It is the desire and intent of the parties that the
------------
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
11. Notices. All communications, requests, consents and other notices provided
-------
for in this Agreement shall be in writing and shall be deemed given if mailed by
first class mail, postage prepaid, certified or return receipt requested to the
addresses set forth herein, or last known address and received by the intended
party. If the mailing is returned to the sender due to an incorrect address,
the correct address must be obtained in order for the communication to be
received and completed.
12. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Colorado.
13. Assignment. The Company may assign its rights and obligations under this
----------
Agreement to any affiliate of the Company or, subject to the provisions of
Section 5, to any acquirer of substantially all of the business of the Company,
and all covenants and agreements hereunder shall inure to the benefit of and be
enforceable by or against any such assignee. Neither this Agreement nor any
rights or duties hereunder may be assigned or delegated by Employee.
14. Amendments. No provision of this Agreement shall be altered, amended,
----------
revoked or waived except by an instrument in writing, signed by each party to
this Agreement.
15. Binding Effect. Except as otherwise provided herein, this Agreement shall
--------------
be binding upon and shall inure to the benefit of the parties hereto and their
respective legal representatives, heirs, successors and assigns.
16. Execution in Counterparts. This Agreement may be executed in any number of
-------------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Entire Agreement. This Agreement sets forth the entire agreement and
----------------
understanding of the parties and supersedes all prior understandings, agreements
or representations by or between the parties, whether written or oral, which
relate in any way to the subject matter hereof, including, without limitation,
any previously executed employment agreements or amendments thereto.
18. Arbitration. Any dispute arising out of this Agreement, the Employee's
-----------
application for employment, the Employee's relationship with the Company, or the
Employee's employment or separation from employment shall be subject to
arbitration pursuant to the Company's arbitration procedures. The Employee
acknowledges that a copy of the procedures has been delivered to and read by the
Employee prior to the time he/she executed this Agreement. It is understood
that all sections of the Arbitration Procedures apply, except those sections
pertaining to at-will employment, which are superseded by this Employment
Agreement.
Initials: ___ ___ Date: _______
<PAGE>
EXHIBIT 10.4
================================================================================
Convergent Communications(TM) Proprietary Information
- --------------------------------------------------------------------------------
Employment Services Agreement
- --------------------------------------------------------------------------------
Employee Information
--------------------
Martin E. Freidel 3426 Woody Creek
---------------------------------- ------------------------------
(Name) Evergreen, Colorado 80439
------------------------------
Effective Date: March 9, 2000 (Address)
-----------------------------------
1. Employment. The Company agrees to employ Employee and Employee hereby
----------
agrees to be employed by the Company and/or such of its subsidiaries and
affiliate corporations as determined by the Company on a full-time basis, for
the period and upon the terms and conditions hereinafter set forth.
2. Capacity and Duties. Employee shall be employed in the following capacity
-------------------
for the Company or any of its affiliates in such capacity of equal or greater
responsibility. During his employment, Employee shall perform the duties and
bear the responsibilities commensurate with his position and shall serve the
Company faithfully and to the best of his ability.
- --------------------------------------------------------------------------------
Title: Executive Vice President and General Counsel
- --------------------------------------------------------------------------------
3. Compensation and Benefits.
-------------------------
3.1 The Company shall pay Employee during the Term of this Agreement (or,
if longer, during the term of Employee's employment with the Company or any of
its affiliates) an annual base salary, payable semi-monthly as follows. The
annual base salary shall be adjustable for merit increases.
- --------------------------------------------------------------------------------
Annual Base Salary: One Hundred Seventy-Five Thousand ($175,000)
- --------------------------------------------------------------------------------
3.2 In addition to his base salary, the Company, during the Term of this
Agreement, shall pay Employee a performance bonus for each fiscal year of the
Company after the end of the fiscal year, in an exact amount to be determined by
the Board of Directors of the Company. The target bonus will be a percentage of
Employee's annual base salary. This bonus may be adjusted based upon performance
and as determined by the Board of Directors of the Company.
- --------------------------------------------------------------------------------
Target Percentage: Seventy-Five Percent (75%)
- --------------------------------------------------------------------------------
3.3 Throughout the Term of this Agreement, the Company shall provide
Employee a monthly car allowance as shall be determined in accordance with the
Company's policies.
3.4 In addition to salary as provided above, the Company shall provide
Employee during the Term of this Agreement, with the benefits of such insurance
plans, hospitalization plans, stock plans, retirement plans and other employee
fringe benefits (including sick leave and four (4) weeks annual vacation time)
as shall be generally provided to similar positions within the Company and for
which Employee may be eligible under the terms and conditions thereof. The
Company reserves the right to modify, delete or change its benefits at any time.
3.5 Throughout the Term of this Agreement, the Company shall reimburse
Employee for all reasonable out-of-pocket expenses incurred by Employee in
connection with the business of the Company and in performance of his duties
under this Agreement, upon presentation to the Company by Employee of an
itemized accounting of such expenses with reasonable supporting data.
This Employment Services Agreement is further subject to the Employment
Agreement Terms ("Agreement Terms") attached hereto, and, if this box is marked,
[X] Addendum A attached hereto (collectively the "Agreement"). Employee has read
and understands the Agreement Terms and agrees to be bound by those conditions.
Acceptance of this Agreement is contingent upon acceptance by a representative
of the Company duly authorized to execute this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the last date
shown below.
CONVERGENT COMMUNICATIONS, INC. MARTIN E. FREIDEL
----------------------------------
(Company) (Employee)
By:________________________________________ __________________________________
Title:_____________________________________
================================================================================
<PAGE>
Employment Agreement Terms
The following Employment Agreement Terms are in addition to the terms
and conditions contained in the Employment Services Agreement cover sheet:
4. Term. The initial term of this Agreement shall commence on the date of
----
this Agreement and shall continue for a period of three (3) years. This
Agreement shall continue thereafter from year to year, unless and until either
party terminates the Agreement pursuant to Section 5 below ("Term"). The
applicable provisions of Sections 6, 7, 8, 9 and 10 shall remain in full force
and effect as provided and for the time periods specified in such Sections
notwithstanding the termination of this Agreement; all other obligations of
either party to the other under this Agreement shall terminate at the end of the
Term.
5. Termination.
-----------
5.1 If, during the Term of this Agreement, Employee dies or is prevented
from performing his duties by reason of illness or incapacity for one hundred
forty (140) days in any one hundred eighty (180) day period, the Company may
terminate this Agreement, upon thirty (30) days prior notice thereof to Employee
or his duly appointed legal representative.
5.2 The Company or the Employee may terminate this Agreement upon at least
thirty (30) days prior notice to Employee upon the happening of any of the
following events ("Change of Control Event"):
5.2.1 The sale by the Company of substantially all of its assets to a
single purchaser or associated group of purchasers who are not affiliates of the
Company. For the purposes of this Agreement, the term "affiliate" means a
person, firm or corporation that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
5.2.2 The sale, exchange or other disposition in one transaction of
eighty percent (80%) or more of the outstanding voting stock of the Company to
or with a person, firm or corporation not then an affiliate of the Company.
5.2.3 The merger or consolidation of the Company in a transaction not
involving an affiliate of the Company in which the shareholders of the Company
receive less than fifty percent (50%) of the outstanding voting stock of the new
continuing corporation.
5.2.4 A bona fide decision by the Company to terminate its business and
liquidate its assets (but only if such liquidation is not part of a plan to
carry on the Company's business through its shareholders).
5.2.5 If Employee's employment is terminated prior to the date on which
a Change of Control Event occurs, and such termination was at the request of a
third party who has taken steps to effect a Change of Control Event or was
otherwise caused by the Change of Control Event, then for all purposes of this
Agreement, a Change of Control Event shall be deemed to have occurred prior to
such termination.
5.3 The Company may terminate this Agreement at any time for gross
negligence or willful non-performance by Employee of any duty as an employee of
the Company which continues for a period of thirty (30) days after written
notice specifying such negligence or non-performance.
5.4 The Company may terminate this Agreement immediately upon the
intentional commission of a violation of any federal law, rule or regulation, or
any theft, fraud, embezzlement or similar crime involving the commission of any
felony, or for a material breach of any obligation or covenant created by or
under this Agreement.
5.5 Company or Employee may terminate this Agreement without cause upon at
least thirty (30) days prior notice.
5.6 Termination Fees. In the event that this Agreement is terminated
----------------
pursuant to this Section 5, Company shall pay Employee a Termination Fee as
described below.
5.6.1 If this Agreement is terminated by (a) the Company under
subsections 5.1, 5.2 or 5.5 above, or (b) by the Employee for Good Reason (as
defined below) within twelve (12) months following a Change of Control Event as
described in subsection 5.2 above, then (1) the Company shall continue to pay
Employee's monthly base salary, as shall be in effect on the termination date,
for a period of twenty-four (24) months following the date of termination; (2)
the Company shall provide Employee with benefits coverage, including, without
limitation, coverage under life, medical, dental and vision, but excluding
disability plans, for a period of twenty-four (24) months following the date of
termination; (3) the Company shall pay Employee any incentive bonus earned by
Employee pursuant to Section 3.2, if any, and (4) vesting of Employee's stock
options, if any, shall be accelerated such that all stock options granted to
Employee will vest as of the date of termination.
5.6.2 For purposes of this Agreement, "Good
Initials: _______ ______ Date: _______
<PAGE>
Reason" shall mean, without the Employee's express written consent, the
occurrence within twelve (12) months after a Change of Control Event of any of
the following circumstances, unless in the case of clauses (i), (v), or (vi),
such circumstances are fully corrected within five (5) days following notice to
the Company:
(i). The assignment to the Employee of any duties usually performed by
an employee or individual of status subordinate to that of the Employee's
position, or a substantial alteration in the nature or status of the Employee's
responsibilities from those in effect immediately prior to a Change of Control
Event;
(ii). A reduction by the Company in the Employee's annual base salary as
then in effect;
(iii). A new Company requirement is instituted which requires the
Employee to change his work location to a location greater than fifty (50) miles
from Employee's work location immediately prior to the institution of the
requirement, but not including a requirement that the Employee travel on the
Company's business to an extent substantially consistent with his present
business travel obligations;
(iv). The failure by the Company, without the Employee's consent, to pay
to the Employee any portion of his compensation, or to pay to the Employee any
portion of an installment of deferred compensation under any deferred
compensation program of the Company within seven (7) days of the date such
compensation is due, unless such failure to pay is reasonably in dispute by the
Company;
(v). The failure by the Company to continue in effect any compensation
plan in which the Employee participates immediately prior to the Change of
Control Event which is material to the Employee's total compensation, or any
substitute plans adopted prior to the Change of Control Event, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan in connection with the Change of Control
Event, or the failure by the Company to continue the Employee's participation
therein;
(vi). The failure by the Company to continue to provide the Employee
with benefits substantially similar to those enjoyed by the Employee under any
of the Company's pension, life insurance, medical, health and accident, or
disability plan in which the Employee was participating at the time of a Change
of Control Event; the taking of any action by the Company which would directly
or indirectly materially reduce any of such benefits or deprive the Employee of
any material fringe benefit enjoyed by the Employee at the time of the Change of
Control Event; or the failure by the Company to provide the Employee with the
number of paid vacation days to which the Employee is entitled pursuant to the
greater of (a) this Agreement or (b) the basis of years of service with the
Company in accordance with the Company's normal vacation policy in effect at the
time of the Change of Control Event.
The Employee's right to terminate his employment pursuant to this subsection
shall not be affected by his incapacity due to physical or mental illness. The
Employee's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstance constituting Good Reason hereunder.
5.6.3 No Termination Fee shall be paid to Employee in the event that this
Agreement is terminated for any other reason, including, without limitation,
pursuant to subsections 5.3 and 5.4 herein.
5.7 In the event that this Agreement is terminated pursuant to subsection 5.2
or by the Company pursuant to subsection 5.5, Employee shall have a period of
twelve (12) months from the date of termination in which to exercise Employee's
vested stock options.
6. Covenant Not to Compete.
-----------------------
6.1 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
later, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not, directly or indirectly, own, manage, operate,
control, be employed by, or participate in the ownership, management, operation
or control of a business that is engaged in the same business as the Company
within any area or at any location constituting, during the term of Employee's
employment and/or at the time Employee's employment is terminated, a Relevant
Area. For the purposes of this Section 6, including all subsections of this
Section 6, the business in which the Company is engaged in is the voice and data
communications business, including local and long distance services, network
integration, network monitoring, customer premise equipment, network equipment
leasing, Internet web site design, ecommerce applications and other Internet
related services, and which other services the Company provides, whether or not
the Company is authorized to provide and actually provides such services during
the term of Employee's employment ("Services"). The "Relevant Area" shall be
defined for the purposes of this Agreement as any area located within, or within
fifty (50) miles of, the legal
Initials: _______ ______ Date: _______
<PAGE>
boundaries or limits of any city within which the Company or any parent,
subsidiary or affiliate thereof is providing Services, has commenced the
acquisition of any authorizations, rights of way or facilities or has commenced
the construction of facilities for the purpose of providing Services, or the
Company has publicly announced or privately disclosed in writing to Employee
that it plans to provide Services.
6.2 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
longer, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not (i) directly or indirectly cause or attempt to
cause any employee of the Company or any of its affiliates to leave the employ
of the Company or any affiliate, (ii) in any way interfere with the relationship
between the Company and any employee or between an affiliate and any employee of
the affiliate, (iii) directly or indirectly hire any employee of the Company or
any affiliate to work for any organization of which Employee is an officer,
director, employee, consultant, independent contractor or owner of an equity or
other financial interest, or (iv) interfere or attempt to interfere with any
transaction in which the Company or any of its affiliates was involved during
the Term of this Agreement or Employee's employment, which ever is longer.
6.3 Employee agrees that, because of the nature and sensitivity of the
information to which he will be privy and because of the nature and national and
international scope of the Company's business, the restrictions in this Section
6 are fair and reasonable.
7. Confidential Information.
------------------------
7.1 The relationship between the Company and Employee is one of confidence
and trust. This relationship and the rights granted and duties imposed by this
Section shall continue until a date two (2) years from the date Employee's
employment is terminated.
7.2 As used in this Agreement (i) "Confidential Information" means
information disclosed to or acquired by Employee about the Company's plans,
products, processes and services including the Services and any Relevant Area,
including information relating to research, development, inventions,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, pricing and tariffed or contractual terms, customer lists and prospect
lists or other market information, with respect to any of the Company's then
current business activities; and (ii) "Inventions" means any inventions,
discoveries, concepts and ideas, whether patentable or not, including, without
limitation, processes, methods, formulas, and techniques (as well as related
improvements and knowledge) that are based on or related to Confidential
Information, that pertain in any manner to the Company's then currently used
technology, expertise or business and that are made or conceived by Employee,
either solely or jointly with others, and while employed by the Company or
within six (6) months thereafter, whether or not made or conceived during
working hours or with the use of the Company's facilities, materials or
personnel.
7.3 Employee agrees that he shall at no time during the term of his
employment or at any time for a period of two (2) years thereafter disclose any
Confidential Information, Inventions or component thereof to any person, firm or
corporation to any extent or for any reason or purpose or use any Confidential
Information or component thereof for any purpose other than the conduct of the
Company's business.
7.4 Any Confidential Information, Invention or component thereof that is
directly or indirectly originated, developed or perfected to any degree by
Employee during the term of his employment by the Company shall be and remain
the sole property of the Company and shall be deemed trade secrets of the
Company.
7.5 Upon termination of Employee's employment pursuant to any of the
provisions herein, Employee or his legal representative shall deliver to the
Company all originals and all duplicates and/or copies of all documents,
records, notebooks, and similar repositories of or containing Confidential
Information or subject matter then in his possession, whether prepared by him or
not.
7.6 Employee agrees that the covenants and agreements contained in this
Section 7 are fair and reasonable and that no waiver or modification of this
Section or any covenant or condition set forth herein shall be valid unless set
forth in writing and duly executed by the parties hereto. Employee agrees to
execute such separate and further confidentiality agreements embodying and
enlarging upon the provisions of this Section 7 as the Company may reasonably
request.
8. Injunctive Relief. Upon a breach or threatened breach by Employee of any of
-----------------
the provisions of Sections 6 and 7 of this Agreement, the Company shall be
entitled to an injunction restraining Employee from such breach without a
showing of damage as irreparable harm. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach, including recovery of damages from Employee.
Initials: _______ ______ Date: _______
<PAGE>
9. No Waiver. A waiver by the Company of a breach of any provision of this
---------
Agreement by Employee shall not operate or be construed as a waiver of any
subsequent or other breach by Employee.
10. Severability. It is the desire and intent of the parties that the
------------
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
11. Notices. All communications, requests, consents and other notices provided
-------
for in this Agreement shall be in writing and shall be deemed given if mailed by
first class mail, postage prepaid, certified or return receipt requested to the
addresses set forth herein, or last known address and received by the intended
party. If the mailing is returned to the sender due to an incorrect address, the
correct address must be obtained in order for the communication to be received
and completed.
12. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Colorado.
13. Assignment. The Company may assign its rights and obligations under this
----------
Agreement to any affiliate of the Company or, subject to the provisions of
Section 5, to any acquirer of substantially all of the business of the Company,
and all covenants and agreements hereunder shall inure to the benefit of and be
enforceable by or against any such assignee. Neither this Agreement nor any
rights or duties hereunder may be assigned or delegated by Employee.
14. Amendments. No provision of this Agreement shall be altered, amended,
----------
revoked or waived except by an instrument in writing, signed by each party to
this Agreement.
15. Binding Effect. Except as otherwise provided herein, this Agreement shall
--------------
be binding upon and shall inure to the benefit of the parties hereto and their
respective legal representatives, heirs, successors and assigns.
16. Execution in Counterparts. This Agreement may be executed in any number of
-------------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Entire Agreement. This Agreement sets forth the entire agreement and
----------------
understanding of the parties and supersedes all prior understandings, agreements
or representations by or between the parties, whether written or oral, which
relate in any way to the subject matter hereof, including, without limitation,
any previously executed employment agreements or amendments thereto.
18. Arbitration. Any dispute arising out of this Agreement, the Employee's
-----------
application for employment, the Employee's relationship with the Company, or the
Employee's employment or separation from employment shall be subject to
arbitration pursuant to the Company's arbitration procedures. The Employee
acknowledges that a copy of the procedures has been delivered to and read by the
Employee prior to the time he/she executed this Agreement. It is understood that
all sections of the Arbitration Procedures apply, except those sections
pertaining to at-will employment, which are superseded by this Employment
Agreement.
Initials: _______ ______ Date: _______
<PAGE>
Convergent Communications(TM) Proprietary Information
- --------------------------------------------------------------------------------
Addendum A to Employment Services Agreement
- --------------------------------------------------------------------------------
1. Additional Provisions. The Company and Employee agree to the following
---------------------
additions, changes and amendments to the Employment Services Agreement and the
Agreement Terms:
- --------------------------------------------------------------------------------
Section Reference Additions, Changes or Amendments
- ----------------- --------------------------------
- --------------------------------------------------------------------------------
6 Section 6 shall be retitled "Non-Intervention."
(Amendment) Sections 6.1 and 6.3 of this Agreement shall be deleted in
their entirety.
- --------------------------------------------------------------------------------
2. Part of Agreement. This Addendum is a part of the Employment Services
-----------------
Agreement executed on the same date as this Addendum.
3. Other Terms and Conditions. All other terms and conditions of the Agreement
--------------------------
shall remain in full force and effect, as if fully stated herein.
4. Capitalized Terms. Capitalized terms, and other defined terms, shall have
-----------------
the same meaning as that accorded to them in the Agreement, unless the context
requires otherwise.
5. Conflict. If there are any conflicting terms or conditions between the
--------
terms and conditions of this Addendum and the terms and conditions of the
Agreement, the terms and conditions of this Addendum shall control.
Initials: _____ _____ Date: _______
<PAGE>
EXHIBIT 10.5
Convergent Communications(TM) Proprietary Information
- --------------------------------------------------------------------------------
Employment Services Agreement
- --------------------------------------------------------------------------------
Employee Information
- --------------------
Brian R. Ervine
- ------------------------------------- ----------------------------------
----------------------------------
(Name)
Effective Date: March 9, 2000 (Address)
- -------------------------------------
1. Employment. The Company agrees to employ Employee and Employee hereby
----------
agrees to be employed by the Company and/or such of its subsidiaries and
affiliate corporations as determined by the Company on a full-time basis, for
the period and upon the terms and conditions hereinafter set forth.
2. Capacity and Duties. Employee shall be employed in the following capacity
-------------------
for the Company or any of its affiliates in such capacity of equal or greater
responsibility. During his employment, Employee shall perform the duties and
bear the responsibilities commensurate with his position and shall serve the
Company faithfully and to the best of his ability.
- --------------------------------------------------------------------------------
Title: Executive Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
3. Compensation and Benefits.
-------------------------
3.1 The Company shall pay Employee during the Term of this Agreement (or,
if longer, during the term of Employee's employment with the Company or any of
its affiliates) an annual base salary, payable semi-monthly as follows. The
annual base salary shall be adjustable for merit increases.
- --------------------------------------------------------------------------------
Annual Base Salary: Two Hundred Thirty-Five Thousand ($235,000)
- --------------------------------------------------------------------------------
3.2 In addition to his base salary, the Company, during the Term of this
Agreement, shall pay Employee a performance bonus for each fiscal year of the
Company after the end of the fiscal year, in an exact amount to be determined by
the Board of Directors of the Company. The target bonus will be a percentage of
Employee's annual base salary. This bonus may be adjusted based upon performance
and as determined by the Board of Directors of the Company.
- --------------------------------------------------------------------------------
Target Percentage: Seventy-Five Percent (75%)
- --------------------------------------------------------------------------------
3.3 Throughout the Term of this Agreement, the Company shall provide
Employee a monthly car allowance as shall be determined in accordance with the
Company's policies.
3.4 In addition to salary as provided above, the Company shall provide
Employee during the Term of this Agreement, with the benefits of such insurance
plans, hospitalization plans, stock plans, retirement plans and other employee
fringe benefits (including sick leave and four (4) weeks annual vacation time)
as shall be generally provided to similar positions within the Company and for
which Employee may be eligible under the terms and conditions thereof. The
Company reserves the right to modify, delete or change its benefits at any time.
3.5 Throughout the Term of this Agreement, the Company shall reimburse
Employee for all reasonable out-of-pocket expenses incurred by Employee in
connection with the business of the Company and in performance of his duties
under this Agreement, upon presentation to the Company by Employee of an
itemized accounting of such expenses with reasonable supporting data.
This Employment Services Agreement is further subject to the Employment
Agreement Terms ("Agreement Terms") attached hereto, and, if this box is marked,
Addendum A attached hereto (collectively the "Agreement"). Employee has read and
understands the Agreement Terms and agrees to be bound by those conditions.
Acceptance of this Agreement is contingent upon acceptance by a representative
of the Company duly authorized to execute this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the last date
shown below.
CONVERGENT COMMUNICATIONS, INC. BRIAN R. ERVINE
------------------------------
(Company) (Employee)
By:_____________________________ ______________________________
Title:__________________________
<PAGE>
Employment Agreement Terms
The following Employment Agreement Terms are in addition to the terms and
conditions contained in the Employment Services Agreement cover sheet:
4. Term. The initial term of this Agreement shall commence on the date of
----
this Agreement and shall continue for a period of three (3) years. This
Agreement shall continue thereafter from year to year, unless and until either
party terminates the Agreement pursuant to Section 5 below ("Term"). The
applicable provisions of Sections 6, 7, 8, 9 and 10 shall remain in full force
and effect as provided and for the time periods specified in such Sections
notwithstanding the termination of this Agreement; all other obligations of
either party to the other under this Agreement shall terminate at the end of the
Term.
5. Termination.
-----------
5.1 If, during the Term of this Agreement, Employee dies or is prevented
from performing his duties by reason of illness or incapacity for one hundred
forty (140) days in any one hundred eighty (180) day period, the Company may
terminate this Agreement, upon thirty (30) days prior notice thereof to Employee
or his duly appointed legal representative.
5.2 The Company or the Employee may terminate this Agreement upon at least
thirty (30) days prior notice to Employee upon the happening of any of the
following events ("Change of Control Event"):
5.2.1 The sale by the Company of substantially all of its assets to a
single purchaser or associated group of purchasers who are not affiliates of the
Company. For the purposes of this Agreement, the term "affiliate" means a
person, firm or corporation that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
5.2.2 The sale, exchange or other disposition in one transaction of
eighty percent (80%) or more of the outstanding voting stock of the Company to
or with a person, firm or corporation not then an affiliate of the Company.
5.2.3 The merger or consolidation of the Company in a transaction not
involving an affiliate of the Company in which the shareholders of the Company
receive less than fifty percent (50%) of the outstanding voting stock of the new
continuing corporation.
5.2.4 A bona fide decision by the Company to terminate its business
and liquidate its assets (but only if such liquidation is not part of a plan to
carry on the Company's business through its shareholders).
5.2.5 If Employee's employment is terminated prior to the date on
which a Change of Control Event occurs, and such termination was at the request
of a third party who has taken steps to effect a Change of Control Event or was
otherwise caused by the Change of Control Event, then for all purposes of this
Agreement, a Change of Control Event shall be deemed to have occurred prior to
such termination.
5.3 The Company may terminate this Agreement at any time for gross
negligence or willful non-performance by Employee of any duty as an employee of
the Company which continues for a period of thirty (30) days after written
notice specifying such negligence or non-performance.
5.4 The Company may terminate this Agreement immediately upon the
intentional commission of a violation of any federal law, rule or regulation, or
any theft, fraud, embezzlement or similar crime involving the commission of any
felony, or for a material breach of any obligation or covenant created by or
under this Agreement.
5.5 Company or Employee may terminate this Agreement without cause upon at
least thirty (30) days prior notice.
5.6 Termination Fees. In the event that this Agreement is terminated
----------------
pursuant to this Section 5, Company shall pay Employee a Termination Fee as
described below.
5.6.1 If this Agreement is terminated by (a) the Company under
subsections 5.1, 5.2 or 5.5 above, or (b) by the Employee for Good Reason (as
defined below) within twelve (12) months following a Change of Control Event as
described in subsection 5.2 above, then (1) the Company shall continue to pay
Employee's monthly base salary, as shall be in effect on the termination date,
for a period of twenty-four (24) months following the date of termination; (2)
the Company shall provide Employee with benefits coverage, including, without
limitation, coverage under life, medical, dental and vision, but excluding
disability plans, for a period of twenty-four (24) months following the date of
termination; (3) the Company shall pay Employee any incentive bonus earned by
Employee pursuant to Section 3.2, if any, and (4) vesting of Employee's stock
options, if any, shall be accelerated such that all stock options granted to
Employee will vest as of the date of termination.
5.6.2 For purposes of this Agreement, "Good
Initials: _____ _____ Date: ___________________
<PAGE>
Reason" shall mean, without the Employee's express written consent, the
occurrence within twelve (12) months after a Change of Control Event of any of
the following circumstances, unless in the case of clauses (i), (v), or (vi),
such circumstances are fully corrected within five (5) days following notice to
the Company:
(i). The assignment to the Employee of any duties usually performed by
an employee or individual of status subordinate to that of the Employee's
position, or a substantial alteration in the nature or status of the Employee's
responsibilities from those in effect immediately prior to a Change of Control
Event;
(ii). A reduction by the Company in the Employee's annual base salary
as then in effect;
(iii). A new Company requirement is instituted which requires the
Employee to change his work location to a location greater than fifty (50) miles
from Employee's work location immediately prior to the institution of the
requirement, but not including a requirement that the Employee travel on the
Company's business to an extent substantially consistent with his present
business travel obligations;
(iv). The failure by the Company, without the Employee's consent, to
pay to the Employee any portion of his compensation, or to pay to the Employee
any portion of an installment of deferred compensation under any deferred
compensation program of the Company within seven (7) days of the date such
compensation is due, unless such failure to pay is reasonably in dispute by the
Company;
(v). The failure by the Company to continue in effect any compensation
plan in which the Employee participates immediately prior to the Change of
Control Event which is material to the Employee's total compensation, or any
substitute plans adopted prior to the Change of Control Event, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan in connection with the Change of Control
Event, or the failure by the Company to continue the Employee's participation
therein;
(vi). The failure by the Company to continue to provide the Employee
with benefits substantially similar to those enjoyed by the Employee under any
of the Company's pension, life insurance, medical, health and accident, or
disability plan in which the Employee was participating at the time of a Change
of Control Event; the taking of any action by the Company which would directly
or indirectly materially reduce any of such benefits or deprive the Employee of
any material fringe benefit enjoyed by the Employee at the time of the Change of
Control Event; or the failure by the Company to provide the Employee with the
number of paid vacation days to which the Employee is entitled pursuant to the
greater of (a) this Agreement or (b) the basis of years of service with the
Company in accordance with the Company's normal vacation policy in effect at the
time of the Change of Control Event.
The Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or mental
illness. The Employee's continued employment shall not constitute consent to, or
a waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
5.6.3 No Termination Fee shall be paid to Employee in the event
that this Agreement is terminated for any other reason, including, without
limitation, pursuant to subsections 5.3 and 5.4 herein.
5.7 In the event that this Agreement is terminated pursuant to subsection
5.2 or by the Company pursuant to subsection 5.5, Employee shall have a period
of twelve (12) months from the date of termination in which to exercise
Employee's vested stock options.
6. Covenant Not to Compete.
-----------------------
6.1 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
later, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not, directly or indirectly, own, manage, operate,
control, be employed by, or participate in the ownership, management, operation
or control of a business that is engaged in the same business as the Company
within any area or at any location constituting, during the term of Employee's
employment and/or at the time Employee's employment is terminated, a Relevant
Area. For the purposes of this Section 6, including all subsections of this
Section 6, the business in which the Company is engaged in is the voice and data
communications business, including local and long distance services, network
integration, network monitoring, customer premise equipment, network equipment
leasing, Internet web site design, ecommerce applications and other Internet
related services, and which other services the Company provides, whether or not
the Company is authorized to provide and actually provides such services during
the term of Employee's employment ("Services"). The "Relevant Area" shall be
defined for the purposes of this Agreement as any area located within, or within
fifty (50) miles of, the legal
Initials: _____ _____ Date: ___________________
<PAGE>
boundaries or limits of any city within which the Company or any parent,
subsidiary or affiliate thereof is providing Services, has commenced the
acquisition of any authorizations, rights of way or facilities or has commenced
the construction of facilities for the purpose of providing Services, or the
Company has publicly announced or privately disclosed in writing to Employee
that it plans to provide Services.
6.2 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
longer, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not (i) directly or indirectly cause or attempt to
cause any employee of the Company or any of its affiliates to leave the employ
of the Company or any affiliate, (ii) in any way interfere with the relationship
between the Company and any employee or between an affiliate and any employee of
the affiliate, (iii) directly or indirectly hire any employee of the Company or
any affiliate to work for any organization of which Employee is an officer,
director, employee, consultant, independent contractor or owner of an equity or
other financial interest, or (iv) interfere or attempt to interfere with any
transaction in which the Company or any of its affiliates was involved during
the Term of this Agreement or Employee's employment, which ever is longer.
6.3 Employee agrees that, because of the nature and sensitivity of the
information to which he will be privy and because of the nature and national and
international scope of the Company's business, the restrictions in this Section
6 are fair and reasonable.
7. Confidential Information.
------------------------
7.1 The relationship between the Company and Employee is one of confidence
and trust. This relationship and the rights granted and duties imposed by this
Section shall continue until a date two (2) years from the date Employee's
employment is terminated.
7.2 As used in this Agreement (i) "Confidential Information" means
information disclosed to or acquired by Employee about the Company's plans,
products, processes and services including the Services and any Relevant Area,
including information relating to research, development, inventions,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, pricing and tariffed or contractual terms, customer lists and prospect
lists or other market information, with respect to any of the Company's then
current business activities; and (ii) "Inventions" means any inventions,
discoveries, concepts and ideas, whether patentable or not, including, without
limitation, processes, methods, formulas, and techniques (as well as related
improvements and knowledge) that are based on or related to Confidential
Information, that pertain in any manner to the Company's then currently used
technology, expertise or business and that are made or conceived by Employee,
either solely or jointly with others, and while employed by the Company or
within six (6) months thereafter, whether or not made or conceived during
working hours or with the use of the Company's facilities, materials or
personnel.
7.3 Employee agrees that he shall at no time during the term of his
employment or at any time for a period of two (2) years thereafter disclose any
Confidential Information, Inventions or component thereof to any person, firm or
corporation to any extent or for any reason or purpose or use any Confidential
Information or component thereof for any purpose other than the conduct of the
Company's business.
7.4 Any Confidential Information, Invention or component thereof that is
directly or indirectly originated, developed or perfected to any degree by
Employee during the term of his employment by the Company shall be and remain
the sole property of the Company and shall be deemed trade secrets of the
Company.
7.5 Upon termination of Employee's employment pursuant to any of the
provisions herein, Employee or his legal representative shall deliver to the
Company all originals and all duplicates and/or copies of all documents,
records, notebooks, and similar repositories of or containing Confidential
Information or subject matter then in his possession, whether prepared by him or
not.
7.6 Employee agrees that the covenants and agreements contained in this
Section 7 are fair and reasonable and that no waiver or modification of this
Section or any covenant or condition set forth herein shall be valid unless set
forth in writing and duly executed by the parties hereto. Employee agrees to
execute such separate and further confidentiality agreements embodying and
enlarging upon the provisions of this Section 7 as the Company may reasonably
request.
8. Injunctive Relief. Upon a breach or threatened breach by Employee of any of
-----------------
the provisions of Sections 6 and 7 of this Agreement, the Company shall be
entitled to an injunction restraining Employee from such breach without a
showing of damage as irreparable harm. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach, including recovery of damages from Employee.
Initials: _____ _____ Date: ___________________
<PAGE>
9. No Waiver. A waiver by the Company of a breach of any provision of this
---------
Agreement by Employee shall not operate or be construed as a waiver of any
subsequent or other breach by Employee.
10. Severability. It is the desire and intent of the parties that the
------------
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
11. Notices. All communications, requests, consents and other notices provided
-------
for in this Agreement shall be in writing and shall be deemed given if mailed by
first class mail, postage prepaid, certified or return receipt requested to the
addresses set forth herein, or last known address and received by the intended
party. If the mailing is returned to the sender due to an incorrect address,
the correct address must be obtained in order for the communication to be
received and completed.
12. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Colorado.
13. Assignment. The Company may assign its rights and obligations under this
----------
Agreement to any affiliate of the Company or, subject to the provisions of
Section 5, to any acquirer of substantially all of the business of the Company,
and all covenants and agreements hereunder shall inure to the benefit of and be
enforceable by or against any such assignee. Neither this Agreement nor any
rights or duties hereunder may be assigned or delegated by Employee.
14. Amendments. No provision of this Agreement shall be altered, amended,
----------
revoked or waived except by an instrument in writing, signed by each party to
this Agreement.
15. Binding Effect. Except as otherwise provided herein, this Agreement shall
--------------
be binding upon and shall inure to the benefit of the parties hereto and their
respective legal representatives, heirs, successors and assigns.
16. Execution in Counterparts. This Agreement may be executed in any number of
-------------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Entire Agreement. This Agreement sets forth the entire agreement and
----------------
understanding of the parties and supersedes all prior understandings, agreements
or representations by or between the parties, whether written or oral, which
relate in any way to the subject matter hereof, including, without limitation,
any previously executed employment agreements or amendments thereto.
18. Arbitration. Any dispute arising out of this Agreement, the Employee's
-----------
application for employment, the Employee's relationship with the Company, or the
Employee's employment or separation from employment shall be subject to
arbitration pursuant to the Company's arbitration procedures. The Employee
acknowledges that a copy of the procedures has been delivered to and read by the
Employee prior to the time he/she executed this Agreement. It is understood
that all sections of the Arbitration Procedures apply, except those sections
pertaining to at-will employment, which are superseded by this Employment
Agreement.
Initials: _____ _____ Date: ___________________
<PAGE>
Convergent Communications(TM) Proprietary Information
- --------------------------------------------------------------------------------
Addendum A to Employment Services Agreement
- --------------------------------------------------------------------------------
1. Additional Provisions. The Company and Employee agree to the following
---------------------
additions, changes and amendments to the Employment Services Agreement and the
Agreement Terms:
- --------------------------------------------------------------------------------
Section Reference Additions, Changes or Amendments
- ----------------- --------------------------------
- --------------------------------------------------------------------------------
3.6 In addition to any other amounts payable pursuant to this
(new) Agreement and in order to assist Employee with his
relocation from Dallas, Texas to the Denver, Colorado
metropolitan area, the Company shall provide Employee with
temporary housing, including storage of household goods,
pursuant to the Company's relocation policy. In the event
that this Agreement is terminated as a result of a Change in
Control Event, as defined below, occurring within one year
after the date of this Agreement, the Company further agrees
to reimburse Employee for expenses incurred by Employee in
relocating back to the Dallas, Texas metropolitan area
- --------------------------------------------------------------------------------
2. Part of Agreement. This Addendum is a part of the Employment Services
-----------------
Agreement executed on the same date as this Addendum.
3. Other Terms and Conditions. All other terms and conditions of the Agreement
--------------------------
shall remain in full force and effect, as if fully stated herein.
4. Capitalized Terms. Capitalized terms, and other defined terms, shall have
-----------------
the same meaning as that accorded to them in the Agreement, unless the context
requires otherwise.
5. Conflict. If there are any conflicting terms or conditions between the
--------
terms and conditions of this Addendum and the terms and conditions of the
Agreement, the terms and conditions of this Addendum shall control.
Initials:_____ ______ Date: _____
<PAGE>
EXHIBIT 10.6
Convergent Communications(TM) Proprietary Information
- --------------------------------------------------------------------------------
Employment Services Agreement
- --------------------------------------------------------------------------------
Employee Information
--------------------
Michael R. Dozier
-------------------------------- _______________________________
(Name)
_______________________________
Effective Date: March 9, 2000 (Address)
--------------------------------
1. Employment. The Company agrees to employ Employee and Employee hereby
----------
agrees to be employed by the Company and/or such of its subsidiaries and
affiliate corporations as determined by the Company on a full-time basis, for
the period and upon the terms and conditions hereinafter set forth.
2. Capacity and Duties. Employee shall be employed in the following capacity
-------------------
for the Company or any of its affiliates in such capacity of equal or greater
responsibility. During his employment, Employee shall perform the duties and
bear the responsibilities commensurate with his position and shall serve the
Company faithfully and to the best of his ability.
----------------------------------------------------------------------------
Title: Executive Vice President - Market Operations
---------------------------------------------------------------------------
3. Compensation and Benefits.
-------------------------
3.1 The Company shall pay Employee during the Term of this Agreement (or,
if longer, during the term of Employee's employment with the Company or any of
its affiliates) an annual base salary, payable semi-monthly as follows. The
annual base salary shall be adjustable for merit increases.
---------------------------------------------------------------------------
Annual Base Salary: Two Hundred Fifty Thousand Dollars ($250,000)
---------------------------------------------------------------------------
3.2 In addition to his base salary, the Company, during the Term of this
Agreement, shall pay Employee a performance bonus for each fiscal year of the
Company after the end of the fiscal year, in an exact amount to be determined
by the Board of Directors of the Company. The target bonus will be a
percentage of Employee's annual base salary. This bonus may be adjusted based
upon performance and as determined by the Board of Directors of the Company.
---------------------------------------------------------------------------
Target Percentage: One Hundred Percent (100%)
---------------------------------------------------------------------------
3.3 Throughout the Term of this Agreement, the Company shall provide
Employee a monthly car allowance as shall be determined in accordance with the
Company's policies.
3.4 In addition to salary as provided above, the Company shall provide
Employee during the Term of this Agreement, with the benefits of such
insurance plans, hospitalization plans, stock plans, retirement plans and
other employee fringe benefits (including sick leave and four (4) weeks annual
vacation time) as shall be generally provided to similar positions within the
Company and for which Employee may be eligible under the terms and conditions
thereof. The Company reserves the right to modify, delete or change its
benefits at any time.
3.5 Throughout the Term of this Agreement, the Company shall reimburse
Employee for all reasonable out-of-pocket expenses incurred by Employee in
connection with the business of the Company and in performance of his duties
under this Agreement, upon presentation to the Company by Employee of an
itemized accounting of such expenses with reasonable supporting data.
This Employment Services Agreement is further subject to the Employment
Agreement Terms ("Agreement Terms") attached hereto, and, if this box is
marked, [_] Addendum A attached hereto (collectively the "Agreement").
Employee has read and understands the Agreement Terms and agrees to be bound
by those conditions. Acceptance of this Agreement is contingent upon
acceptance by a representative of the Company duly authorized to execute this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the last
date shown below.
CONVERGENT COMMUNICATIONS, INC. MICHAEL R. DOZIER
---------------------------------
(Company) (Employee)
By:_______________________________ _________________________________
Title:____________________________
<PAGE>
Employment Agreement Terms
The following Employment Agreement Terms are in addition to the terms and
conditions contained in the Employment Services Agreement cover sheet:
4. Term. The initial term of this Agreement shall commence on the date of this
----
Agreement and shall continue for a period of three (3) years. This Agreement
shall continue thereafter from year to year, unless and until either party
terminates the Agreement pursuant to Section 5 below ("Term"). The applicable
provisions of Sections 6, 7, 8, 9 and 10 shall remain in full force and effect
as provided and for the time periods specified in such Sections notwithstanding
the termination of this Agreement; all other obligations of either party to the
other under this Agreement shall terminate at the end of the Term.
5. Termination.
-----------
5.1 If, during the Term of this Agreement, Employee dies or is prevented
from performing his duties by reason of illness or incapacity for one hundred
forty (140) days in any one hundred eighty (180) day period, the Company may
terminate this Agreement, upon thirty (30) days prior notice thereof to Employee
or his duly appointed legal representative.
5.2 The Company or the Employee may terminate this Agreement upon at least
thirty (30) days prior notice to Employee upon the happening of any of the
following events ("Change of Control Event"):
5.2.1 The sale by the Company of substantially all of its assets to a
single purchaser or associated group of purchasers who are not affiliates of the
Company. For the purposes of this Agreement, the term "affiliate" means a
person, firm or corporation that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
5.2.2 The sale, exchange or other disposition in one transaction of
eighty percent (80%) or more of the outstanding voting stock of the Company to
or with a person, firm or corporation not then an affiliate of the Company.
5.2.3 The merger or consolidation of the Company in a transaction not
involving an affiliate of the Company in which the shareholders of the Company
receive less than fifty percent (50%) of the outstanding voting stock of the new
continuing corporation.
5.2.4 A bona fide decision by the Company to terminate its business
and liquidate its assets (but only if such liquidation is not part of a plan to
carry on the Company's business through its shareholders).
5.2.5 If Employee's employment is terminated prior to the date on
which a Change of Control Event occurs, and such termination was at the request
of a third party who has taken steps to effect a Change of Control Event or was
otherwise caused by the Change of Control Event, then for all purposes of this
Agreement, a Change of Control Event shall be deemed to have occurred prior to
such termination.
5.3 The Company may terminate this Agreement at any time for gross
negligence or willful non-performance by Employee of any duty as an employee of
the Company which continues for a period of thirty (30) days after written
notice specifying such negligence or non-performance.
5.4 The Company may terminate this Agreement immediately upon the
intentional commission of a violation of any federal law, rule or regulation, or
any theft, fraud, embezzlement or similar crime involving the commission of any
felony, or for a material breach of any obligation or covenant created by or
under this Agreement.
5.5 Company or Employee may terminate this Agreement without cause upon at
least thirty (30) days prior notice.
5.6 Termination Fees. In the event that this Agreement is terminated
----------------
pursuant to this Section 5, Company shall pay Employee a Termination Fee as
described below.
5.6.1 If this Agreement is terminated by the Company under
subsections 5.1 or 5.5 above during the Term, the Company (i) shall continue to
pay Employee's monthly base salary, as shall be in effect on the termination
date, for a period of twelve (12) months following the date of termination, (ii)
shall provide Employee with benefits coverage, including, without limitation,
coverage under medical, dental and vision, but excluding disability plans, for a
period of twelve (12) months following the date of termination and (iii) shall
accelerate Employee's stock options, if any, such that one additional twenty
percent (20%) vesting period shall occur.
5.6.2 If this Agreement is terminated within twelve (12) months
following a Change of Control Event as described in subsection 5.2 above either
(i) by the Company or (ii) by the Employee for Good Reason (as defined below),
(a) the Company shall continue to pay Employee's monthly base salary, as shall
be in effect on the termination date, for a period of twenty-four (24) months
following the date of termination; (b) the Company shall provide Employee with
benefits coverage, including, without limitation, coverage
Initials: ___ ___ Date: _______
<PAGE>
under medical, dental and vision, but excluding disability plans, for a period
of twenty-four (24) months following the date of termination; and (c) vesting of
Employee's stock options, if any, shall be accelerated such that all stock
options granted to Employee will vest as of the date of termination.
5.6.3 For purposes of this Agreement, "Good Reason" shall mean,
without the Employee's express written consent, the occurrence within twelve
(12) months after a Change of Control Event of any of the following
circumstances, unless in the case of clauses (i), (v), or (vi), such
circumstances are fully corrected within five (5) days following notice to the
Company:
(i). The assignment to the Employee of any duties usually
performed by an employee or individual of status subordinate to that of the
Employee's position, or a substantial alteration in the nature or status of the
Employee's responsibilities from those in effect immediately prior to a Change
of Control Event;
(ii). A reduction by the Company in the Employee's annual base
salary as then in effect;
(iii). A new company requirement is instituted which requires
the Employee to change his work location to a location greater than fifty (50)
miles from Employee's work location immediately prior to the institution of the
requirement, but not including a requirement that the Employee travel on the
Company's business to an extent substantially consistent with his present
business travel obligations;
(iv). The failure by the Company, without the Employee's
consent, to pay to the Employee any portion of his compensation, or to pay to
the Employee any portion of an installment of deferred compensation under any
deferred compensation program of the Company within seven (7) days of the date
such compensation is due, unless such failure to pay is reasonably in dispute by
the Company;
(v). The failure by the Company to continue in effect any
compensation plan in which the Employee participates immediately prior to the
Change of Control Event which is material to the Employee's total compensation,
or any substitute plans adopted prior to the Change of Control Event, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan in connection with the Change of Control
Event, or the failure by the Company to continue the Employee's participation
therein;
(vi). The failure by the Company to continue to provide the
Employee with benefits substantially similar to those enjoyed by the Employee
under any of the Company's pension, life insurance, medical, health and
accident, or disability plan in which the Employee was participating at the time
of a Change of Control Event; the taking of any action by the Company which
would directly or indirectly materially reduce any of such benefits or deprive
the Employee of any material fringe benefit enjoyed by the Employee at the time
of the Change of Control Event; or the failure by the Company to provide the
Employee with the number of paid vacation days to which the Employee is entitled
on the basis of years of service with the Company in accordance with the
Company's normal vacation policy in effect at the time of the Change of Control
Event.
The Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or mental
illness. The Employee's continued employment shall not constitute consent to, or
a waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
5.6.4 No Termination Fee shall be paid to Employee in the event that
this Agreement is terminated for any other reason, including, without
limitation, pursuant to subsections 5.3 and 5.4 herein.
5.7 In the event that this Agreement is terminated pursuant to subsection
5.2 or by the Company pursuant to subsection 5.5, Employee shall have a period
of twelve (12) months from the date of termination in which to exercise
Employee's vested stock options.
6. Covenant Not to Compete.
-----------------------
6.1 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and (i) in the
event Employee's employment is terminated by the Company or Employee as a result
of a Change of Control Event, then for a period of twenty-four (24) months after
termination of this Agreement (or, if later, termination of Employee's
employment with the Company or any of its affiliates) or (ii) in the event
Employee's employment is terminated for any other reason, then for a period of
twelve (12) months after termination of this Agreement (or, if later,
termination of Employee's employment with the Company or any of its affiliates),
Employee shall not, directly or indirectly, own, manage, operate, control, be
employed by, or participate in the ownership, management, operation or control
of a business that is engaged in the same business as the Company within any
area or at any location constituting, during the term of Employee's employment
and/or at the time Employee's employment is terminated, a Relevant Area. For
the
Initials: ___ ___ Date: _______
<PAGE>
purposes of this Section 6, including all subsections of this Section 6, the
business in which the Company is engaged in is the voice and data communications
business, including local and long distance services, network integration,
network monitoring, customer premise equipment, network equipment leasing,
Internet web site design, ecommerce applications and other Internet related
services, and which other services the Company provides, whether or not the
Company is authorized to provide and actually provides such services during the
term of Employee's employment ("Services"). The "Relevant Area" shall be
defined for the purposes of this Agreement as any area located within, or within
fifty (50) miles of, the legal boundaries or limits of any city within which the
Company or any parent, subsidiary or affiliate thereof is providing Services,
has commenced the acquisition of any authorizations, rights of way or facilities
or has commenced the construction of facilities for the purpose of providing
Services, or the Company has publicly announced or privately disclosed in
writing to Employee that it plans to provide Services.
6.2 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
longer, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not (i) directly or indirectly cause or attempt to
cause any employee of the Company or any of its affiliates to leave the employ
of the Company or any affiliate, (ii) in any way interfere with the relationship
between the Company and any employee or between an affiliate and any employee of
the affiliate, (iii) directly or indirectly hire any employee of the Company or
any affiliate to work for any organization of which Employee is an officer,
director, employee, consultant, independent contractor or owner of an equity or
other financial interest, or (iv) interfere or attempt to interfere with any
transaction in which the Company or any of its affiliates was involved during
the Term of this Agreement or Employee's employment, which ever is longer.
6.3 Employee agrees that, because of the nature and sensitivity of the
information to which he will be privy and because of the nature and national and
international scope of the Company's business, the restrictions in this Section
6 are fair and reasonable.
7. Confidential Information.
------------------------
7.1 The relationship between the Company and Employee is one of confidence
and trust. This relationship and the rights granted and duties imposed by this
Section shall continue until a date two (2) years from the date Employee's
employment is terminated.
7.2 As used in this Agreement (i) "Confidential Information" means
information disclosed to or acquired by Employee about the Company's plans,
products, processes and services including the Services and any Relevant Area,
including information relating to research, development, inventions,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, pricing and tariffed or contractual terms, customer lists and prospect
lists or other market information, with respect to any of the Company's then
current business activities; and (ii) "Inventions" means any inventions,
discoveries, concepts and ideas, whether patentable or not, including, without
limitation, processes, methods, formulas, and techniques (as well as related
improvements and knowledge) that are based on or related to Confidential
Information, that pertain in any manner to the Company's then currently used
technology, expertise or business and that are made or conceived by Employee,
either solely or jointly with others, and while employed by the Company or
within six (6) months thereafter, whether or not made or conceived during
working hours or with the use of the Company's facilities, materials or
personnel.
7.3 Employee agrees that he shall at no time during the term of his
employment or at any time for a period of two (2) years thereafter disclose any
Confidential Information, Inventions or component thereof to any person, firm or
corporation to any extent or for any reason or purpose or use any Confidential
Information or component thereof for any purpose other than the conduct of the
Company's business.
7.4 Any Confidential Information, Invention or component thereof that is
directly or indirectly originated, developed or perfected to any degree by
Employee during the term of his employment by the Company shall be and remain
the sole property of the Company and shall be deemed trade secrets of the
Company.
7.5 Upon termination of Employee's employment pursuant to any of the
provisions herein, Employee or his legal representative shall deliver to the
Company all originals and all duplicates and/or copies of all documents,
records, notebooks, and similar repositories of or containing Confidential
Information or subject matter then in his possession, whether prepared by him or
not.
7.6 Employee agrees that the covenants and agreements contained in this
Section 7 are fair and reasonable and that no waiver or modification of this
Section or any covenant or condition set forth herein shall
Initials: ___ ___ Date: _______
<PAGE>
be valid unless set forth in writing and duly executed by the parties hereto.
Employee agrees to execute such separate and further confidentiality agreements
embodying and enlarging upon the provisions of this Section 7 as the Company may
reasonably request.
8. Injunctive Relief. Upon a breach or threatened breach by Employee of any of
-----------------
the provisions of Sections 6 and 7 of this Agreement, the Company shall be
entitled to an injunction restraining Employee from such breach without a
showing of damage as irreparable harm. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach, including recovery of damages from Employee.
9. No Waiver. A waiver by the Company of a breach of any provision of this
---------
Agreement by Employee shall not operate or be construed as a waiver of any
subsequent or other breach by Employee.
10. Severability. It is the desire and intent of the parties that the
------------
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
11. Notices. All communications, requests, consents and other notices provided
-------
for in this Agreement shall be in writing and shall be deemed given if mailed by
first class mail, postage prepaid, certified or return receipt requested to the
addresses set forth herein, or last known address and received by the intended
party. If the mailing is returned to the sender due to an incorrect address,
the correct address must be obtained in order for the communication to be
received and completed.
12. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Colorado.
13. Assignment. The Company may assign its rights and obligations under this
----------
Agreement to any affiliate of the Company or, subject to the provisions of
Section 5, to any acquirer of substantially all of the business of the Company,
and all covenants and agreements hereunder shall inure to the benefit of and be
enforceable by or against any such assignee. Neither this Agreement nor any
rights or duties hereunder may be assigned or delegated by Employee.
14. Amendments. No provision of this Agreement shall be altered, amended,
----------
revoked or waived except by an instrument in writing, signed by each party to
this Agreement.
15. Binding Effect. Except as otherwise provided herein, this Agreement shall
--------------
be binding upon and shall inure to the benefit of the parties hereto and their
respective legal representatives, heirs, successors and assigns.
16. Execution in Counterparts. This Agreement may be executed in any number of
-------------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Entire Agreement. This Agreement sets forth the entire agreement and
----------------
understanding of the parties and supersedes all prior understandings, agreements
or representations by or between the parties, whether written or oral, which
relate in any way to the subject matter hereof, including, without limitation,
any previously executed employment agreements or amendments thereto.
18. Arbitration. Any dispute arising out of this Agreement, the Employee's
-----------
application for employment, the Employee's relationship with the Company, or the
Employee's employment or separation from employment shall be subject to
arbitration pursuant to the Company's arbitration procedures. The Employee
acknowledges that a copy of the procedures has been delivered to and read by the
Employee prior to the time he/she executed this Agreement. It is understood
that all sections of the Arbitration Procedures apply, except those sections
pertaining to at-will employment, which are superseded by this Employment
Agreement.
Initials: ___ ___ Date: _______
<PAGE>
EXHIBIT 10.7
Convergent Communications(TM) Proprietary Information
- --------------------------------------------------------------------------------
Employment Services Agreement
- --------------------------------------------------------------------------------
Employee Information
- --------------------
D. Randall Hake
- --------------------------------- ___________________________________
(Name)
___________________________________
Effective Date: March 9, 2000 (Address)
- ---------------------------------
1. Employment. The Company agrees to employ Employee and Employee hereby
----------
agrees to be employed by the Company and/or such of its subsidiaries and
affiliate corporations as determined by the Company on a full-time basis, for
the period and upon the terms and conditions hereinafter set forth.
2. Capacity and Duties. Employee shall be employed in the following capacity
-------------------
for the Company or any of its affiliates in such capacity of equal or greater
responsibility. During his employment, Employee shall perform the duties and
bear the responsibilities commensurate with his position and shall serve the
Company faithfully and to the best of his ability.
--------------------------------------------------------------------------
Title: Executive Vice President - Human Resources
--------------------------------------------------------------------------
3. Compensation and Benefits.
-------------------------
3.1 The Company shall pay Employee during the Term of this Agreement (or,
if longer, during the term of Employee's employment with the Company or any of
its affiliates) an annual base salary, payable semi-monthly as follows. The
annual base salary shall be adjustable for merit increases.
--------------------------------------------------------------------------
Annual Base Salary: One Hundred Fifty Thousand Dollars ($150,000)
--------------------------------------------------------------------------
3.2 In addition to his base salary, the Company, during the Term of this
Agreement, shall pay Employee a performance bonus for each fiscal year of the
Company after the end of the fiscal year, in an exact amount to be determined
by the Board of Directors of the Company. The target bonus will be a
percentage of Employee's annual base salary. This bonus may be adjusted based
upon performance and as determined by the Board of Directors of the Company.
--------------------------------------------------------------------------
Target Percentage: Seventy-Five Percent (75%)
--------------------------------------------------------------------------
3.3 Throughout the Term of this Agreement, the Company shall provide
Employee a monthly car allowance as shall be determined in accordance with the
Company's policies.
3.4 In addition to salary as provided above, the Company shall provide
Employee during the Term of this Agreement, with the benefits of such
insurance plans, hospitalization plans, stock plans, retirement plans and
other employee fringe benefits (including sick leave and four (4) weeks annual
vacation time) as shall be generally provided to similar positions within the
Company and for which Employee may be eligible under the terms and conditions
thereof. The Company reserves the right to modify, delete or change its
benefits at any time.
3.5 Throughout the Term of this Agreement, the Company shall reimburse
Employee for all reasonable out-of-pocket expenses incurred by Employee in
connection with the business of the Company and in performance of his duties
under this Agreement, upon presentation to the Company by Employee of an
itemized accounting of such expenses with reasonable supporting data.
This Employment Services Agreement is further subject to the Employment
Agreement Terms ("Agreement Terms") attached hereto, and, if this box is
marked, [_] Addendum A attached hereto (collectively the "Agreement").
Employee has read and understands the Agreement Terms and agrees to be bound
by those conditions. Acceptance of this Agreement is contingent upon
acceptance by a representative of the Company duly authorized to execute this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the last
date shown below.
CONVERGENT COMMUNICATIONS, INC. D. RANDALL HAKE
---------------------------
(Company) (Employee)
By:______________________________ ___________________________
Title:___________________________
<PAGE>
Employment Agreement Terms
The following Employment Agreement Terms are in addition to the terms and
conditions contained in the Employment Services Agreement cover sheet:
4. Term. The initial term of this Agreement shall commence on the date of
----
this Agreement and shall continue for a period of three (3) years. This
Agreement shall continue thereafter from year to year, unless and until either
party terminates the Agreement pursuant to Section 5 below ("Term"). The
applicable provisions of Sections 6, 7, 8, 9 and 10 shall remain in full force
and effect as provided and for the time periods specified in such Sections
notwithstanding the termination of this Agreement; all other obligations of
either party to the other under this Agreement shall terminate at the end of the
Term.
5. Termination.
-----------
5.1 If, during the Term of this Agreement, Employee dies or is prevented
from performing his duties by reason of illness or incapacity for one hundred
forty (140) days in any one hundred eighty (180) day period, the Company may
terminate this Agreement, upon thirty (30) days prior notice thereof to Employee
or his duly appointed legal representative.
5.2 The Company or the Employee may terminate this Agreement upon at least
thirty (30) days prior notice to Employee upon the happening of any of the
following events ("Change of Control Event"):
5.2.1 The sale by the Company of substantially all of its assets to a
single purchaser or associated group of purchasers who are not affiliates of the
Company. For the purposes of this Agreement, the term "affiliate" means a
person, firm or corporation that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
5.2.2 The sale, exchange or other disposition in one transaction of
eighty percent (80%) or more of the outstanding voting stock of the Company to
or with a person, firm or corporation not then an affiliate of the Company.
5.2.3 The merger or consolidation of the Company in a transaction not
involving an affiliate of the Company in which the shareholders of the Company
receive less than fifty percent (50%) of the outstanding voting stock of the new
continuing corporation.
5.2.4 A bona fide decision by the Company to terminate its business
and liquidate its assets (but only if such liquidation is not part of a plan to
carry on the Company's business through its shareholders).
5.2.5 If Employee's employment is terminated prior to the date on
which a Change of Control Event occurs, and such termination was at the request
of a third party who has taken steps to effect a Change of Control Event or was
otherwise caused by the Change of Control Event, then for all purposes of this
Agreement, a Change of Control Event shall be deemed to have occurred prior to
such termination.
5.3 The Company may terminate this Agreement at any time for gross
negligence or willful non-performance by Employee of any duty as an employee of
the Company which continues for a period of thirty (30) days after written
notice specifying such negligence or non-performance.
5.4 The Company may terminate this Agreement immediately upon the
intentional commission of a violation of any federal law, rule or regulation, or
any theft, fraud, embezzlement or similar crime involving the commission of any
felony, or for a material breach of any obligation or covenant created by or
under this Agreement.
5.5 Company or Employee may terminate this Agreement without cause upon at
least thirty (30) days prior notice.
5.6 Termination Fees. In the event that this Agreement is terminated
----------------
pursuant to this Section 5, Company shall pay Employee a Termination Fee as
described below.
5.6.1 If this Agreement is terminated by the Company under
subsections 5.1 or 5.5 above during the Term, the Company (i) shall continue to
pay Employee's monthly base salary, as shall be in effect on the termination
date, for a period of twelve (12) months following the date of termination, (ii)
shall provide Employee with benefits coverage, including, without limitation,
coverage under medical, dental and vision, but excluding disability plans, for a
period of twelve (12) months following the date of termination and (iii) shall
accelerate Employee's stock options, if any, such that one additional twenty
percent (20%) vesting period shall occur.
5.6.2 If this Agreement is terminated within twelve (12) months
following a Change of Control Event as described in subsection 5.2 above either
(i) by the Company or (ii) by the Employee for Good Reason (as defined below),
(a) the Company shall continue to pay Employee's monthly base salary, as shall
be in effect on the termination date, for a period of twenty-four (24) months
following the date of termination; (b) the Company shall provide Employee with
benefits coverage, including, without limitation, coverage
Initials: ___ ___ Date: _____
<PAGE>
under medical, dental and vision, but excluding disability plans, for a period
of twenty-four (24) months following the date of termination; and (c) vesting of
Employee's stock options, if any, shall be accelerated such that all stock
options granted to Employee will vest as of the date of termination.
5.6.3 For purposes of this Agreement, "Good Reason" shall mean,
without the Employee's express written consent, the occurrence within twelve
(12) months after a Change of Control Event of any of the following
circumstances, unless in the case of clauses (i), (v), or (vi), such
circumstances are fully corrected within five (5) days following notice to the
Company:
(i). The assignment to the Employee of any duties usually
performed by an employee or individual of status subordinate to that of the
Employee's position, or a substantial alteration in the nature or status of the
Employee's responsibilities from those in effect immediately prior to a Change
of Control Event;
(ii). A reduction by the Company in the Employee's annual base
salary as then in effect;
(iii). A new company requirement is instituted which requires the
Employee to change his work location to a location greater than fifty (50) miles
from Employee's work location immediately prior to the institution of the
requirement, but not including a requirement that the Employee travel on the
Company's business to an extent substantially consistent with his present
business travel obligations;
(iv). The failure by the Company, without the Employee's
consent, to pay to the Employee any portion of his compensation, or to pay to
the Employee any portion of an installment of deferred compensation under any
deferred compensation program of the Company within seven (7) days of the date
such compensation is due, unless such failure to pay is reasonably in dispute by
the Company;
(v). The failure by the Company to continue in effect any
compensation plan in which the Employee participates immediately prior to the
Change of Control Event which is material to the Employee's total compensation,
or any substitute plans adopted prior to the Change of Control Event, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan in connection with the Change of Control
Event, or the failure by the Company to continue the Employee's participation
therein;
(vi). The failure by the Company to continue to provide the
Employee with benefits substantially similar to those enjoyed by the Employee
under any of the Company's pension, life insurance, medical, health and
accident, or disability plan in which the Employee was participating at the time
of a Change of Control Event; the taking of any action by the Company which
would directly or indirectly materially reduce any of such benefits or deprive
the Employee of any material fringe benefit enjoyed by the Employee at the time
of the Change of Control Event; or the failure by the Company to provide the
Employee with the number of paid vacation days to which the Employee is entitled
on the basis of years of service with the Company in accordance with the
Company's normal vacation policy in effect at the time of the Change of Control
Event.
The Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or mental
illness. The Employee's continued employment shall not constitute consent to, or
a waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
5.6.4 No Termination Fee shall be paid to Employee in the event that
this Agreement is terminated for any other reason, including, without
limitation, pursuant to subsections 5.3 and 5.4 herein.
5.7 In the event that this Agreement is terminated pursuant to subsection
5.2 or by the Company pursuant to subsection 5.5, Employee shall have a period
of twelve (12) months from the date of termination in which to exercise
Employee's vested stock options.
6. Covenant Not to Compete.
-----------------------
6.1 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and (i) in the
event Employee's employment is terminated by the Company or Employee as a result
of a Change of Control Event, then for a period of twenty-four (24) months after
termination of this Agreement (or, if later, termination of Employee's
employment with the Company or any of its affiliates) or (ii) in the event
Employee's employment is terminated for any other reason, then for a period of
twelve (12) months after termination of this Agreement (or, if later,
termination of Employee's employment with the Company or any of its affiliates),
Employee shall not, directly or indirectly, own, manage, operate, control, be
employed by, or participate in the ownership, management, operation or control
of a business that is engaged in the same business as the Company within any
area or at any location constituting, during the term of Employee's employment
and/or at the time Employee's employment is terminated, a Relevant Area. For the
Initials: ___ ___ Date: _____
<PAGE>
purposes of this Section 6, including all subsections of this Section 6, the
business in which the Company is engaged in is the voice and data communications
business, including local and long distance services, network integration,
network monitoring, customer premise equipment, network equipment leasing,
Internet web site design, ecommerce applications and other Internet related
services, and which other services the Company provides, whether or not the
Company is authorized to provide and actually provides such services during the
term of Employee's employment ("Services"). The "Relevant Area" shall be defined
for the purposes of this Agreement as any area located within, or within fifty
(50) miles of, the legal boundaries or limits of any city within which the
Company or any parent, subsidiary or affiliate thereof is providing Services,
has commenced the acquisition of any authorizations, rights of way or facilities
or has commenced the construction of facilities for the purpose of providing
Services, or the Company has publicly announced or privately disclosed in
writing to Employee that it plans to provide Services.
6.2 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
longer, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not (i) directly or indirectly cause or attempt to
cause any employee of the Company or any of its affiliates to leave the employ
of the Company or any affiliate, (ii) in any way interfere with the relationship
between the Company and any employee or between an affiliate and any employee of
the affiliate, (iii) directly or indirectly hire any employee of the Company or
any affiliate to work for any organization of which Employee is an officer,
director, employee, consultant, independent contractor or owner of an equity or
other financial interest, or (iv) interfere or attempt to interfere with any
transaction in which the Company or any of its affiliates was involved during
the Term of this Agreement or Employee's employment, which ever is longer.
6.3 Employee agrees that, because of the nature and sensitivity of the
information to which he will be privy and because of the nature and national and
international scope of the Company's business, the restrictions in this Section
6 are fair and reasonable.
7. Confidential Information.
------------------------
7.1 The relationship between the Company and Employee is one of confidence
and trust. This relationship and the rights granted and duties imposed by this
Section shall continue until a date two (2) years from the date Employee's
employment is terminated.
7.2 As used in this Agreement (i) "Confidential Information" means
information disclosed to or acquired by Employee about the Company's plans,
products, processes and services including the Services and any Relevant Area,
including information relating to research, development, inventions,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, pricing and tariffed or contractual terms, customer lists and prospect
lists or other market information, with respect to any of the Company's then
current business activities; and (ii) "Inventions" means any inventions,
discoveries, concepts and ideas, whether patentable or not, including, without
limitation, processes, methods, formulas, and techniques (as well as related
improvements and knowledge) that are based on or related to Confidential
Information, that pertain in any manner to the Company's then currently used
technology, expertise or business and that are made or conceived by Employee,
either solely or jointly with others, and while employed by the Company or
within six (6) months thereafter, whether or not made or conceived during
working hours or with the use of the Company's facilities, materials or
personnel.
7.3 Employee agrees that he shall at no time during the term of his
employment or at any time for a period of two (2) years thereafter disclose any
Confidential Information, Inventions or component thereof to any person, firm or
corporation to any extent or for any reason or purpose or use any Confidential
Information or component thereof for any purpose other than the conduct of the
Company's business.
7.4 Any Confidential Information, Invention or component thereof that is
directly or indirectly originated, developed or perfected to any degree by
Employee during the term of his employment by the Company shall be and remain
the sole property of the Company and shall be deemed trade secrets of the
Company.
7.5 Upon termination of Employee's employment pursuant to any of the
provisions herein, Employee or his legal representative shall deliver to the
Company all originals and all duplicates and/or copies of all documents,
records, notebooks, and similar repositories of or containing Confidential
Information or subject matter then in his possession, whether prepared by him or
not.
7.6 Employee agrees that the covenants and agreements contained in this
Section 7 are fair and reasonable and that no waiver or modification of this
Section or any covenant or condition set forth herein shall
Initials: ___ ___ Date: _____
<PAGE>
be valid unless set forth in writing and duly executed by the parties hereto.
Employee agrees to execute such separate and further confidentiality agreements
embodying and enlarging upon the provisions of this Section 7 as the Company may
reasonably request.
8. Injunctive Relief. Upon a breach or threatened breach by Employee of any of
-----------------
the provisions of Sections 6 and 7 of this Agreement, the Company shall be
entitled to an injunction restraining Employee from such breach without a
showing of damage as irreparable harm. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach, including recovery of damages from Employee.
9. No Waiver. A waiver by the Company of a breach of any provision of this
---------
Agreement by Employee shall not operate or be construed as a waiver of any
subsequent or other breach by Employee.
10. Severability. It is the desire and intent of the parties that the
------------
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
11. Notices. All communications, requests, consents and other notices provided
-------
for in this Agreement shall be in writing and shall be deemed given if mailed by
first class mail, postage prepaid, certified or return receipt requested to the
addresses set forth herein, or last known address and received by the intended
party. If the mailing is returned to the sender due to an incorrect address,
the correct address must be obtained in order for the communication to be
received and completed.
12. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Colorado.
13. Assignment. The Company may assign its rights and obligations under this
----------
Agreement to any affiliate of the Company or, subject to the provisions of
Section 5, to any acquirer of substantially all of the business of the Company,
and all covenants and agreements hereunder shall inure to the benefit of and be
enforceable by or against any such assignee. Neither this Agreement nor any
rights or duties hereunder may be assigned or delegated by Employee.
14. Amendments. No provision of this Agreement shall be altered, amended,
----------
revoked or waived except by an instrument in writing, signed by each party to
this Agreement.
15. Binding Effect. Except as otherwise provided herein, this Agreement shall
--------------
be binding upon and shall inure to the benefit of the parties hereto and their
respective legal representatives, heirs, successors and assigns.
16. Execution in Counterparts. This Agreement may be executed in any number of
-------------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Entire Agreement. This Agreement sets forth the entire agreement and
----------------
understanding of the parties and supersedes all prior understandings, agreements
or representations by or between the parties, whether written or oral, which
relate in any way to the subject matter hereof, including, without limitation,
any previously executed employment agreements or amendments thereto.
18. Arbitration. Any dispute arising out of this Agreement, the Employee's
-----------
application for employment, the Employee's relationship with the Company, or the
Employee's employment or separation from employment shall be subject to
arbitration pursuant to the Company's arbitration procedures. The Employee
acknowledges that a copy of the procedures has been delivered to and read by the
Employee prior to the time he/she executed this Agreement. It is understood
that all sections of the Arbitration Procedures apply, except those sections
pertaining to at-will employment, which are superseded by this Employment
Agreement.
Initials: ___ ___ Date:______
<PAGE>
EXHIBIT 10.8
================================================================================
Convergent Communications(TM) Proprietary Information
- --------------------------------------------------------------------------------
Employment Services Agreement
- --------------------------------------------------------------------------------
Employee Information
- --------------------
Gregory P. McGraw
- ----------------------------------- ________________________________
(Name)
________________________________
Effective Date: March 9, 2000 (Address)
- -----------------------------------
1. Employment. The Company agrees to employ Employee and Employee hereby
----------
agrees to be employed by the Company and/or such of its subsidiaries and
affiliate corporations as determined by the Company on a full-time basis, for
the period and upon the terms and conditions hereinafter set forth.
2. Capacity and Duties. Employee shall be employed in the following capacity
-------------------
for the Company or any of its affiliates in such capacity of equal or greater
responsibility. During his employment, Employee shall perform the duties and
bear the responsibilities commensurate with his position and shall serve the
Company faithfully and to the best of his ability.
- --------------------------------------------------------------------------------
Title: Executive Vice President - Corporate Development
- --------------------------------------------------------------------------------
3. Compensation and Benefits.
-------------------------
3.1 The Company shall pay Employee during the Term of this Agreement (or,
if longer, during the term of Employee's employment with the Company or any of
its affiliates) an annual base salary, payable semi-monthly as follows. The
annual base salary shall be adjustable for merit increases.
- --------------------------------------------------------------------------------
Annual Base Salary: Two Hundred Thousand Dollars ($200,000)
- --------------------------------------------------------------------------------
3.2 In addition to his base salary, the Company, during the Term of this
Agreement, shall pay Employee a performance bonus for each fiscal year of the
Company after the end of the fiscal year, in an exact amount to be determined by
the Board of Directors of the Company. The target bonus will be a percentage of
Employee's annual base salary. This bonus may be adjusted based upon performance
and as determined by the Board of Directors of the Company.
- --------------------------------------------------------------------------------
Target Percentage: Seventy-Five Percent (75%)
- --------------------------------------------------------------------------------
3.3 Throughout the Term of this Agreement, the Company shall provide
Employee a monthly car allowance as shall be determined in accordance with the
Company's policies.
3.4 In addition to salary as provided above, the Company shall provide
Employee during the Term of this Agreement, with the benefits of such insurance
plans, hospitalization plans, stock plans, retirement plans and other employee
fringe benefits (including sick leave and four (4) weeks annual vacation time)
as shall be generally provided to similar positions within the Company and for
which Employee may be eligible under the terms and conditions thereof. The
Company reserves the right to modify, delete or change its benefits at any time.
3.5 Throughout the Term of this Agreement, the Company shall reimburse
Employee for all reasonable out-of-pocket expenses incurred by Employee in
connection with the business of the Company and in performance of his duties
under this Agreement, upon presentation to the Company by Employee of an
itemized accounting of such expenses with reasonable supporting data.
This Employment Services Agreement is further subject to the Employment
Agreement Terms ("Agreement Terms") attached hereto, and, if this box is marked,
[_] Addendum A attached hereto (collectively the "Agreement"). Employee has read
and understands the Agreement Terms and agrees to be bound by those conditions.
Acceptance of this Agreement is contingent upon acceptance by a representative
of the Company duly authorized to execute this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the last date
shown below.
CONVERGENT COMMUNICATIONS, INC. GREGORY P. MCGRAW
-----------------------------
(Company) (Employee)
By:_______________________________ _____________________________
Title:____________________________
================================================================================
<PAGE>
Employment Agreement Terms
The following Employment Agreement Terms are in addition to the terms and
conditions contained in the Employment Services Agreement cover sheet:
4. Term. The initial term of this Agreement shall commence on the date of
----
this Agreement and shall continue for a period of three (3) years. This
Agreement shall continue thereafter from year to year, unless and until either
party terminates the Agreement pursuant to Section 5 below ("Term"). The
applicable provisions of Sections 6, 7, 8, 9 and 10 shall remain in full force
and effect as provided and for the time periods specified in such Sections
notwithstanding the termination of this Agreement; all other obligations of
either party to the other under this Agreement shall terminate at the end of the
Term.
5. Termination.
-----------
5.1 If, during the Term of this Agreement, Employee dies or is prevented
from performing his duties by reason of illness or incapacity for one hundred
forty (140) days in any one hundred eighty (180) day period, the Company may
terminate this Agreement, upon thirty (30) days prior notice thereof to Employee
or his duly appointed legal representative.
5.2 The Company or the Employee may terminate this Agreement upon at least
thirty (30) days prior notice to Employee upon the happening of any of the
following events ("Change of Control Event"):
5.2.1 The sale by the Company of substantially all of its assets to a
single purchaser or associated group of purchasers who are not affiliates of the
Company. For the purposes of this Agreement, the term "affiliate" means a
person, firm or corporation that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
5.2.2 The sale, exchange or other disposition in one transaction of
eighty percent (80%) or more of the outstanding voting stock of the Company to
or with a person, firm or corporation not then an affiliate of the Company.
5.2.3 The merger or consolidation of the Company in a transaction not
involving an affiliate of the Company in which the shareholders of the Company
receive less than fifty percent (50%) of the outstanding voting stock of the new
continuing corporation.
5.2.4 A bona fide decision by the Company to terminate its business
and liquidate its assets (but only if such liquidation is not part of a plan to
carry on the Company's business through its shareholders).
5.2.5 If Employee's employment is terminated prior to the date on
which a Change of Control Event occurs, and such termination was at the request
of a third party who has taken steps to effect a Change of Control Event or was
otherwise caused by the Change of Control Event, then for all purposes of this
Agreement, a Change of Control Event shall be deemed to have occurred prior to
such termination.
5.3 The Company may terminate this Agreement at any time for gross
negligence or willful non-performance by Employee of any duty as an employee of
the Company which continues for a period of thirty (30) days after written
notice specifying such negligence or non-performance.
5.4 The Company may terminate this Agreement immediately upon the
intentional commission of a violation of any federal law, rule or regulation, or
any theft, fraud, embezzlement or similar crime involving the commission of any
felony, or for a material breach of any obligation or covenant created by or
under this Agreement.
5.5 Company or Employee may terminate this Agreement without cause upon at
least thirty (30) days prior notice.
5.6 Termination Fees. In the event that this Agreement is terminated
----------------
pursuant to this Section 5, Company shall pay Employee a Termination Fee as
described below.
5.6.1 If this Agreement is terminated by the Company under
subsections 5.1 or 5.5 above during the Term, the Company (i) shall continue to
pay Employee's monthly base salary, as shall be in effect on the termination
date, for a period of twelve (12) months following the date of termination, (ii)
shall provide Employee with benefits coverage, including, without limitation,
coverage under medical, dental and vision, but excluding disability plans, for a
period of twelve (12) months following the date of termination and (iii) shall
accelerate Employee's stock options, if any, such that one additional twenty
percent (20%) vesting period shall occur.
5.6.2 If this Agreement is terminated within twelve (12) months
following a Change of Control Event as described in subsection 5.2 above either
(i) by the Company or (ii) by the Employee for Good Reason (as defined below),
(a) the Company shall continue to pay Employee's monthly base salary, as shall
be in effect on the termination date, for a period of twenty-four (24) months
following the date of termination; (b) the Company shall provide Employee with
benefits coverage, including, without limitation, coverage
Initials: ___ ___ Date: ______
<PAGE>
under medical, dental and vision, but excluding disability plans, for a period
of twenty-four (24) months following the date of termination; and (c) vesting of
Employee's stock options, if any, shall be accelerated such that all stock
options granted to Employee will vest as of the date of termination.
5.6.3 For purposes of this Agreement, "Good Reason" shall mean,
without the Employee's express written consent, the occurrence within twelve
(12) months after a Change of Control Event of any of the following
circumstances, unless in the case of clauses (i), (v), or (vi), such
circumstances are fully corrected within five (5) days following notice to the
Company:
(i). The assignment to the Employee of any duties usually
performed by an employee or individual of status subordinate to that of the
Employee's position, or a substantial alteration in the nature or status of the
Employee's responsibilities from those in effect immediately prior to a Change
of Control Event;
(ii). A reduction by the Company in the Employee's annual base
salary as then in effect;
(iii). A new company requirement is instituted which requires the
Employee to change his work location to a location greater than fifty (50) miles
from Employee's work location immediately prior to the institution of the
requirement, but not including a requirement that the Employee travel on the
Company's business to an extent substantially consistent with his present
business travel obligations;
(iv). The failure by the Company, without the Employee's
consent, to pay to the Employee any portion of his compensation, or to pay to
the Employee any portion of an installment of deferred compensation under any
deferred compensation program of the Company within seven (7) days of the date
such compensation is due, unless such failure to pay is reasonably in dispute by
the Company;
(v). The failure by the Company to continue in effect any
compensation plan in which the Employee participates immediately prior to the
Change of Control Event which is material to the Employee's total compensation,
or any substitute plans adopted prior to the Change of Control Event, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan in connection with the Change of Control
Event, or the failure by the Company to continue the Employee's participation
therein;
(vi). The failure by the Company to continue to provide the
Employee with benefits substantially similar to those enjoyed by the Employee
under any of the Company's pension, life insurance, medical, health and
accident, or disability plan in which the Employee was participating at the time
of a Change of Control Event; the taking of any action by the Company which
would directly or indirectly materially reduce any of such benefits or deprive
the Employee of any material fringe benefit enjoyed by the Employee at the time
of the Change of Control Event; or the failure by the Company to provide the
Employee with the number of paid vacation days to which the Employee is entitled
on the basis of years of service with the Company in accordance with the
Company's normal vacation policy in effect at the time of the Change of Control
Event.
The Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or mental
illness. The Employee's continued employment shall not constitute consent to, or
a waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
5.6.4 No Termination Fee shall be paid to Employee in the event that
this Agreement is terminated for any other reason, including, without
limitation, pursuant to subsections 5.3 and 5.4 herein.
5.7 In the event that this Agreement is terminated pursuant to subsection
5.2 or by the Company pursuant to subsection 5.5, Employee shall have a period
of twelve (12) months from the date of termination in which to exercise
Employee's vested stock options.
6. Covenant Not to Compete.
-----------------------
6.1 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and (i) in the
event Employee's employment is terminated by the Company or Employee as a result
of a Change of Control Event, then for a period of twenty-four (24) months after
termination of this Agreement (or, if later, termination of Employee's
employment with the Company or any of its affiliates) or (ii) in the event
Employee's employment is terminated for any other reason, then for a period of
twelve (12) months after termination of this Agreement (or, if later,
termination of Employee's employment with the Company or any of its affiliates),
Employee shall not, directly or indirectly, own, manage, operate, control, be
employed by, or participate in the ownership, management, operation or control
of a business that is engaged in the same business as the Company within any
area or at any location constituting, during the term of Employee's employment
and/or at the time Employee's employment is terminated, a Relevant Area. For
the
Initials: ___ ___ Date: ______
<PAGE>
purposes of this Section 6, including all subsections of this Section 6, the
business in which the Company is engaged in is the voice and data communications
business, including local and long distance services, network integration,
network monitoring, customer premise equipment, network equipment leasing,
Internet web site design, ecommerce applications and other Internet related
services, and which other services the Company provides, whether or not the
Company is authorized to provide and actually provides such services during the
term of Employee's employment ("Services"). The "Relevant Area" shall be
defined for the purposes of this Agreement as any area located within, or within
fifty (50) miles of, the legal boundaries or limits of any city within which the
Company or any parent, subsidiary or affiliate thereof is providing Services,
has commenced the acquisition of any authorizations, rights of way or facilities
or has commenced the construction of facilities for the purpose of providing
Services, or the Company has publicly announced or privately disclosed in
writing to Employee that it plans to provide Services.
6.2 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
longer, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not (i) directly or indirectly cause or attempt to
cause any employee of the Company or any of its affiliates to leave the employ
of the Company or any affiliate, (ii) in any way interfere with the relationship
between the Company and any employee or between an affiliate and any employee of
the affiliate, (iii) directly or indirectly hire any employee of the Company or
any affiliate to work for any organization of which Employee is an officer,
director, employee, consultant, independent contractor or owner of an equity or
other financial interest, or (iv) interfere or attempt to interfere with any
transaction in which the Company or any of its affiliates was involved during
the Term of this Agreement or Employee's employment, which ever is longer.
6.3 Employee agrees that, because of the nature and sensitivity of the
information to which he will be privy and because of the nature and national and
international scope of the Company's business, the restrictions in this Section
6 are fair and reasonable.
7. Confidential Information.
------------------------
7.1 The relationship between the Company and Employee is one of confidence
and trust. This relationship and the rights granted and duties imposed by this
Section shall continue until a date two (2) years from the date Employee's
employment is terminated.
7.2 As used in this Agreement (i) "Confidential Information" means
information disclosed to or acquired by Employee about the Company's plans,
products, processes and services including the Services and any Relevant Area,
including information relating to research, development, inventions,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, pricing and tariffed or contractual terms, customer lists and prospect
lists or other market information, with respect to any of the Company's then
current business activities; and (ii) "Inventions" means any inventions,
discoveries, concepts and ideas, whether patentable or not, including, without
limitation, processes, methods, formulas, and techniques (as well as related
improvements and knowledge) that are based on or related to Confidential
Information, that pertain in any manner to the Company's then currently used
technology, expertise or business and that are made or conceived by Employee,
either solely or jointly with others, and while employed by the Company or
within six (6) months thereafter, whether or not made or conceived during
working hours or with the use of the Company's facilities, materials or
personnel.
7.3 Employee agrees that he shall at no time during the term of his
employment or at any time for a period of two (2) years thereafter disclose any
Confidential Information, Inventions or component thereof to any person, firm or
corporation to any extent or for any reason or purpose or use any Confidential
Information or component thereof for any purpose other than the conduct of the
Company's business.
7.4 Any Confidential Information, Invention or component thereof that is
directly or indirectly originated, developed or perfected to any degree by
Employee during the term of his employment by the Company shall be and remain
the sole property of the Company and shall be deemed trade secrets of the
Company.
7.5 Upon termination of Employee's employment pursuant to any of the
provisions herein, Employee or his legal representative shall deliver to the
Company all originals and all duplicates and/or copies of all documents,
records, notebooks, and similar repositories of or containing Confidential
Information or subject matter then in his possession, whether prepared by him or
not.
7.6 Employee agrees that the covenants and agreements contained in this
Section 7 are fair and reasonable and that no waiver or modification of this
Section or any covenant or condition set forth herein shall
Initials: ___ ___ Date: ______
<PAGE>
be valid unless set forth in writing and duly executed by the parties hereto.
Employee agrees to execute such separate and further confidentiality agreements
embodying and enlarging upon the provisions of this Section 7 as the Company may
reasonably request.
8. Injunctive Relief. Upon a breach or threatened breach by Employee of any of
-----------------
the provisions of Sections 6 and 7 of this Agreement, the Company shall be
entitled to an injunction restraining Employee from such breach without a
showing of damage as irreparable harm. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach, including recovery of damages from Employee.
9. No Waiver. A waiver by the Company of a breach of any provision of this
---------
Agreement by Employee shall not operate or be construed as a waiver of any
subsequent or other breach by Employee.
10. Severability. It is the desire and intent of the parties that the
------------
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
11. Notices. All communications, requests, consents and other notices provided
-------
for in this Agreement shall be in writing and shall be deemed given if mailed by
first class mail, postage prepaid, certified or return receipt requested to the
addresses set forth herein, or last known address and received by the intended
party. If the mailing is returned to the sender due to an incorrect address,
the correct address must be obtained in order for the communication to be
received and completed.
12. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Colorado.
13. Assignment. The Company may assign its rights and obligations under this
----------
Agreement to any affiliate of the Company or, subject to the provisions of
Section 5, to any acquirer of substantially all of the business of the Company,
and all covenants and agreements hereunder shall inure to the benefit of and be
enforceable by or against any such assignee. Neither this Agreement nor any
rights or duties hereunder may be assigned or delegated by Employee.
14. Amendments. No provision of this Agreement shall be altered, amended,
----------
revoked or waived except by an instrument in writing, signed by each party to
this Agreement.
15. Binding Effect. Except as otherwise provided herein, this Agreement shall
--------------
be binding upon and shall inure to the benefit of the parties hereto and their
respective legal representatives, heirs, successors and assigns.
16. Execution in Counterparts. This Agreement may be executed in any number of
-------------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Entire Agreement. This Agreement sets forth the entire agreement and
----------------
understanding of the parties and supersedes all prior understandings, agreements
or representations by or between the parties, whether written or oral, which
relate in any way to the subject matter hereof, including, without limitation,
any previously executed employment agreements or amendments thereto.
18. Arbitration. Any dispute arising out of this Agreement, the Employee's
-----------
application for employment, the Employee's relationship with the Company, or the
Employee's employment or separation from employment shall be subject to
arbitration pursuant to the Company's arbitration procedures. The Employee
acknowledges that a copy of the procedures has been delivered to and read by the
Employee prior to the time he/she executed this Agreement. It is understood
that all sections of the Arbitration Procedures apply, except those sections
pertaining to at-will employment, which are superseded by this Employment
Agreement.
Initials: ___ ___ Date: ______
<PAGE>
EXHIBIT 10.9
Convergent Communications(TM) Proprietary Information
Employment Services Agreement
Employee Information
- --------------------
Brian J. McManus
- ---------------------------------- _____________________________
(Name) _____________________________
Effective Date: March 9, 2000 (Address)
- ----------------------------------
1. Employment. The Company agrees to employ Employee and Employee hereby
----------
agrees to be employed by the Company and/or such of its subsidiaries and
affiliate corporations as determined by the Company on a full-time basis, for
the period and upon the terms and conditions hereinafter set forth.
2. Capacity and Duties. Employee shall be employed in the following capacity
-------------------
for the Company or any of its affiliates in such capacity of equal or greater
responsibility. During his employment, Employee shall perform the duties and
bear the responsibilities commensurate with his position and shall serve the
Company faithfully and to the best of his ability.
- --------------------------------------------------------------------------------
Title: Executive Vice President and Chief Technology Officer
- --------------------------------------------------------------------------------
3. Compensation and Benefits.
-------------------------
3.1 The Company shall pay Employee during the Term of this Agreement (or,
if longer, during the term of Employee's employment with the Company or any of
its affiliates) an annual base salary, payable semi-monthly as follows. The
annual base salary shall be adjustable for merit increases.
- --------------------------------------------------------------------------------
Annual Base Salary: Two Hundred Thousand Dollars ($200,00)
- --------------------------------------------------------------------------------
3.2 In addition to his base salary, the Company, during the Term of this
Agreement, shall pay Employee a performance bonus for each fiscal year of the
Company after the end of the fiscal year, in an exact amount to be determined by
the Board of Directors of the Company. The target bonus will be a percentage of
Employee's annual base salary. This bonus may be adjusted based upon performance
and as determined by the Board of Directors of the Company.
- --------------------------------------------------------------------------------
Target Percentage: Seventy-Five Percent (75%)
- --------------------------------------------------------------------------------
3.3 Throughout the Term of this Agreement, the Company shall provide
Employee a monthly car allowance as shall be determined in accordance with the
Company's policies.
3.4 In addition to salary as provided above, the Company shall provide
Employee during the Term of this Agreement, with the benefits of such insurance
plans, hospitalization plans, stock plans, retirement plans and other employee
fringe benefits (including sick leave and four (4) weeks annual vacation time)
as shall be generally provided to similar positions within the Company and for
which Employee may be eligible under the terms and conditions thereof. The
Company reserves the right to modify, delete or change its benefits at any time.
3.5 Throughout the Term of this Agreement, the Company shall reimburse
Employee for all reasonable out-of-pocket expenses incurred by Employee in
connection with the business of the Company and in performance of his duties
under this Agreement, upon presentation to the Company by Employee of an
itemized accounting of such expenses with reasonable supporting data.
This Employment Services Agreement is further subject to the Employment
Agreement Terms ("Agreement Terms") attached hereto, and, if this box is marked,
[_] Addendum A attached hereto (collectively the "Agreement"). Employee has read
and understands the Agreement Terms and agrees to be bound by those conditions.
Acceptance of this Agreement is contingent upon acceptance by a representative
of the Company duly authorized to execute this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the last date
shown below.
CONVERGENT COMMUNICATIONS, INC. BRIAN J. MCMANUS
-----------------------------
(Company) (Employee)
By:________________________________ _____________________________
Title:_____________________________
<PAGE>
Employment Agreement Terms
The following Employment Agreement Terms are in addition to the terms and
conditions contained in the Employment Services Agreement cover sheet:
4. Term. The initial term of this Agreement shall commence on the date of
----
this Agreement and shall continue for a period of three (3) years. This
Agreement shall continue thereafter from year to year, unless and until either
party terminates the Agreement pursuant to Section 5 below ("Term"). The
applicable provisions of Sections 6, 7, 8, 9 and 10 shall remain in full force
and effect as provided and for the time periods specified in such Sections
notwithstanding the termination of this Agreement; all other obligations of
either party to the other under this Agreement shall terminate at the end of the
Term.
5. Termination.
-----------
5.1 If, during the Term of this Agreement, Employee dies or is prevented
from performing his duties by reason of illness or incapacity for one hundred
forty (140) days in any one hundred eighty (180) day period, the Company may
terminate this Agreement, upon thirty (30) days prior notice thereof to Employee
or his duly appointed legal representative.
5.2 The Company or the Employee may terminate this Agreement upon at least
thirty (30) days prior notice to Employee upon the happening of any of the
following events ("Change of Control Event"):
5.2.1 The sale by the Company of substantially all of its assets to a
single purchaser or associated group of purchasers who are not affiliates of the
Company. For the purposes of this Agreement, the term "affiliate" means a
person, firm or corporation that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
5.2.2 The sale, exchange or other disposition in one transaction of
eighty percent (80%) or more of the outstanding voting stock of the Company to
or with a person, firm or corporation not then an affiliate of the Company.
5.2.3 The merger or consolidation of the Company in a transaction not
involving an affiliate of the Company in which the shareholders of the Company
receive less than fifty percent (50%) of the outstanding voting stock of the new
continuing corporation.
5.2.4 A bona fide decision by the Company to terminate its business
and liquidate its assets (but only if such liquidation is not part of a plan to
carry on the Company's business through its shareholders).
5.2.5 If Employee's employment is terminated prior to the date on
which a Change of Control Event occurs, and such termination was at the request
of a third party who has taken steps to effect a Change of Control Event or was
otherwise caused by the Change of Control Event, then for all purposes of this
Agreement, a Change of Control Event shall be deemed to have occurred prior to
such termination.
5.3 The Company may terminate this Agreement at any time for gross
negligence or willful non-performance by Employee of any duty as an employee of
the Company which continues for a period of thirty (30) days after written
notice specifying such negligence or non-performance.
5.4 The Company may terminate this Agreement immediately upon the
intentional commission of a violation of any federal law, rule or regulation, or
any theft, fraud, embezzlement or similar crime involving the commission of any
felony, or for a material breach of any obligation or covenant created by or
under this Agreement.
5.5 Company or Employee may terminate this Agreement without cause upon at
least thirty (30) days prior notice.
5.6 Termination Fees. In the event that this Agreement is terminated
----------------
pursuant to this Section 5, Company shall pay Employee a Termination Fee as
described below.
5.6.1 If this Agreement is terminated by the Company under
subsections 5.1 or 5.5 above during the Term, the Company (i) shall continue to
pay Employee's monthly base salary, as shall be in effect on the termination
date, for a period of twelve (12) months following the date of termination, (ii)
shall provide Employee with benefits coverage, including, without limitation,
coverage under medical, dental and vision, but excluding disability plans, for a
period of twelve (12) months following the date of termination and (iii) shall
accelerate Employee's stock options, if any, such that one additional twenty
percent (20%) vesting period shall occur.
5.6.2 If this Agreement is terminated within twelve (12) months
following a Change of Control Event as described in subsection 5.2 above either
(i) by the Company or (ii) by the Employee for Good Reason (as defined below),
(a) the Company shall continue to pay Employee's monthly base salary, as shall
be in effect on the termination date, for a period of twenty-four (24) months
following the date of termination; (b) the Company shall provide Employee with
benefits coverage, including, without limitation, coverage
Initials: ___ ___ Date: _____
<PAGE>
under medical, dental and vision, but excluding disability plans, for a period
of twenty-four (24) months following the date of termination; and (c) vesting of
Employee's stock options, if any, shall be accelerated such that all stock
options granted to Employee will vest as of the date of termination.
5.6.3 For purposes of this Agreement, "Good Reason" shall mean,
without the Employee's express written consent, the occurrence within twelve
(12) months after a Change of Control Event of any of the following
circumstances, unless in the case of clauses (i), (v), or (vi), such
circumstances are fully corrected within five (5) days following notice to the
Company:
(i). The assignment to the Employee of any duties usually
performed by an employee or individual of status subordinate to that of the
Employee's position, or a substantial alteration in the nature or status of the
Employee's responsibilities from those in effect immediately prior to a Change
of Control Event;
(ii). A reduction by the Company in the Employee's annual base
salary as then in effect;
(iii). A new company requirement is instituted which requires the
Employee to change his work location to a location greater than fifty (50) miles
from Employee's work location immediately prior to the institution of the
requirement, but not including a requirement that the Employee travel on the
Company's business to an extent substantially consistent with his present
business travel obligations;
(iv). The failure by the Company, without the Employee's
consent, to pay to the Employee any portion of his compensation, or to pay to
the Employee any portion of an installment of deferred compensation under any
deferred compensation program of the Company within seven (7) days of the date
such compensation is due, unless such failure to pay is reasonably in dispute by
the Company;
(v). The failure by the Company to continue in effect any
compensation plan in which the Employee participates immediately prior to the
Change of Control Event which is material to the Employee's total compensation,
or any substitute plans adopted prior to the Change of Control Event, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan in connection with the Change of Control
Event, or the failure by the Company to continue the Employee's participation
therein;
(vi). The failure by the Company to continue to provide the
Employee with benefits substantially similar to those enjoyed by the Employee
under any of the Company's pension, life insurance, medical, health and
accident, or disability plan in which the Employee was participating at the time
of a Change of Control Event; the taking of any action by the Company which
would directly or indirectly materially reduce any of such benefits or deprive
the Employee of any material fringe benefit enjoyed by the Employee at the time
of the Change of Control Event; or the failure by the Company to provide the
Employee with the number of paid vacation days to which the Employee is entitled
on the basis of years of service with the Company in accordance with the
Company's normal vacation policy in effect at the time of the Change of Control
Event.
The Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or mental
illness. The Employee's continued employment shall not constitute consent to, or
a waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
5.6.4 No Termination Fee shall be paid to Employee in the event that
this Agreement is terminated for any other reason, including, without
limitation, pursuant to subsections 5.3 and 5.4 herein.
5.7 In the event that this Agreement is terminated pursuant to subsection
5.2 or by the Company pursuant to subsection 5.5, Employee shall have a period
of twelve (12) months from the date of termination in which to exercise
Employee's vested stock options.
6. Covenant Not to Compete.
-----------------------
6.1 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and (i) in the
event Employee's employment is terminated by the Company or Employee as a result
of a Change of Control Event, then for a period of twenty-four (24) months after
termination of this Agreement (or, if later, termination of Employee's
employment with the Company or any of its affiliates) or (ii) in the event
Employee's employment is terminated for any other reason, then for a period of
twelve (12) months after termination of this Agreement (or, if later,
termination of Employee's employment with the Company or any of its affiliates),
Employee shall not, directly or indirectly, own, manage, operate, control, be
employed by, or participate in the ownership, management, operation or control
of a business that is engaged in the same business as the Company within any
area or at any location constituting, during the term of Employee's employment
and/or at the time Employee's employment is terminated, a Relevant Area. For
the
Initials: ___ ___ Date: _____
<PAGE>
purposes of this Section 6, including all subsections of this Section 6, the
business in which the Company is engaged in is the voice and data communications
business, including local and long distance services, network integration,
network monitoring, customer premise equipment, network equipment leasing,
Internet web site design, ecommerce applications and other Internet related
services, and which other services the Company provides, whether or not the
Company is authorized to provide and actually provides such services during the
term of Employee's employment ("Services"). The "Relevant Area" shall be
defined for the purposes of this Agreement as any area located within, or within
fifty (50) miles of, the legal boundaries or limits of any city within which the
Company or any parent, subsidiary or affiliate thereof is providing Services,
has commenced the acquisition of any authorizations, rights of way or facilities
or has commenced the construction of facilities for the purpose of providing
Services, or the Company has publicly announced or privately disclosed in
writing to Employee that it plans to provide Services.
6.2 During the Term of this Agreement (or, if longer, during the term of
Employee's employment with the Company or any of its affiliates) and for a
period of twenty-four (24) months after termination of this Agreement (or, if
longer, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not (i) directly or indirectly cause or attempt to
cause any employee of the Company or any of its affiliates to leave the employ
of the Company or any affiliate, (ii) in any way interfere with the relationship
between the Company and any employee or between an affiliate and any employee of
the affiliate, (iii) directly or indirectly hire any employee of the Company or
any affiliate to work for any organization of which Employee is an officer,
director, employee, consultant, independent contractor or owner of an equity or
other financial interest, or (iv) interfere or attempt to interfere with any
transaction in which the Company or any of its affiliates was involved during
the Term of this Agreement or Employee's employment, which ever is longer.
6.3 Employee agrees that, because of the nature and sensitivity of the
information to which he will be privy and because of the nature and national and
international scope of the Company's business, the restrictions in this Section
6 are fair and reasonable.
7. Confidential Information.
------------------------
7.1 The relationship between the Company and Employee is one of confidence
and trust. This relationship and the rights granted and duties imposed by this
Section shall continue until a date two (2) years from the date Employee's
employment is terminated.
7.2 As used in this Agreement (i) "Confidential Information" means
information disclosed to or acquired by Employee about the Company's plans,
products, processes and services including the Services and any Relevant Area,
including information relating to research, development, inventions,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, pricing and tariffed or contractual terms, customer lists and prospect
lists or other market information, with respect to any of the Company's then
current business activities; and (ii) "Inventions" means any inventions,
discoveries, concepts and ideas, whether patentable or not, including, without
limitation, processes, methods, formulas, and techniques (as well as related
improvements and knowledge) that are based on or related to Confidential
Information, that pertain in any manner to the Company's then currently used
technology, expertise or business and that are made or conceived by Employee,
either solely or jointly with others, and while employed by the Company or
within six (6) months thereafter, whether or not made or conceived during
working hours or with the use of the Company's facilities, materials or
personnel.
7.3 Employee agrees that he shall at no time during the term of his
employment or at any time for a period of two (2) years thereafter disclose any
Confidential Information, Inventions or component thereof to any person, firm or
corporation to any extent or for any reason or purpose or use any Confidential
Information or component thereof for any purpose other than the conduct of the
Company's business.
7.4 Any Confidential Information, Invention or component thereof that is
directly or indirectly originated, developed or perfected to any degree by
Employee during the term of his employment by the Company shall be and remain
the sole property of the Company and shall be deemed trade secrets of the
Company.
7.5 Upon termination of Employee's employment pursuant to any of the
provisions herein, Employee or his legal representative shall deliver to the
Company all originals and all duplicates and/or copies of all documents,
records, notebooks, and similar repositories of or containing Confidential
Information or subject matter then in his possession, whether prepared by him or
not.
7.6 Employee agrees that the covenants and agreements contained in this
Section 7 are fair and reasonable and that no waiver or modification of this
Section or any covenant or condition set forth herein shall
Initials: ___ ___ Date: _____
<PAGE>
be valid unless set forth in writing and duly executed by the parties hereto.
Employee agrees to execute such separate and further confidentiality agreements
embodying and enlarging upon the provisions of this Section 7 as the Company may
reasonably request.
8. Injunctive Relief. Upon a breach or threatened breach by Employee of any of
-----------------
the provisions of Sections 6 and 7 of this Agreement, the Company shall be
entitled to an injunction restraining Employee from such breach without a
showing of damage as irreparable harm. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach, including recovery of damages from Employee.
9. No Waiver. A waiver by the Company of a breach of any provision of this
---------
Agreement by Employee shall not operate or be construed as a waiver of any
subsequent or other breach by Employee.
10. Severability. It is the desire and intent of the parties that the
------------
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
11. Notices. All communications, requests, consents and other notices provided
-------
for in this Agreement shall be in writing and shall be deemed given if mailed by
first class mail, postage prepaid, certified or return receipt requested to the
addresses set forth herein, or last known address and received by the intended
party. If the mailing is returned to the sender due to an incorrect address,
the correct address must be obtained in order for the communication to be
received and completed.
12. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Colorado.
13. Assignment. The Company may assign its rights and obligations under this
----------
Agreement to any affiliate of the Company or, subject to the provisions of
Section 5, to any acquirer of substantially all of the business of the Company,
and all covenants and agreements hereunder shall inure to the benefit of and be
enforceable by or against any such assignee. Neither this Agreement nor any
rights or duties hereunder may be assigned or delegated by Employee.
14. Amendments. No provision of this Agreement shall be altered, amended,
----------
revoked or waived except by an instrument in writing, signed by each party to
this Agreement.
15. Binding Effect. Except as otherwise provided herein, this Agreement shall
--------------
be binding upon and shall inure to the benefit of the parties hereto and their
respective legal representatives, heirs, successors and assigns.
16. Execution in Counterparts. This Agreement may be executed in any number of
-------------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Entire Agreement. This Agreement sets forth the entire agreement and
----------------
understanding of the parties and supersedes all prior understandings, agreements
or representations by or between the parties, whether written or oral, which
relate in any way to the subject matter hereof, including, without limitation,
any previously executed employment agreements or amendments thereto.
18. Arbitration. Any dispute arising out of this Agreement, the Employee's
-----------
application for employment, the Employee's relationship with the Company, or the
Employee's employment or separation from employment shall be subject to
arbitration pursuant to the Company's arbitration procedures. The Employee
acknowledges that a copy of the procedures has been delivered to and read by the
Employee prior to the time he/she executed this Agreement. It is understood
that all sections of the Arbitration Procedures apply, except those sections
pertaining to at-will employment, which are superseded by this Employment
Agreement.
Initials: ___ ___ Date: _____
<PAGE>
Exhibit 21.1
The following is a list of our subsidiaries:
1. Convergent Communications Services, Inc., a Colorado corporation
a. World Access, Inc., a Colorado corporation (wholly owned subsidiary of
Convergent Communications Services, Inc.)
2. Convergent Capital Corporation, a Colorado corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-95897 and No. 333-96219 of Convergent
Communications, Inc. of our reports dated March 13, 2000, except for Note 1 and
Note 7 as to which the date is March 28, 2000 relating to the consolidated
financial statements and financial statement schedule, which appear in this Form
10-K.
PricewaterhouseCoopers LLP
Denver, Colorado
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<CASH> 0 25,597 25,215
<SECURITIES> 0 0 34,742
<RECEIVABLES> 0 19,570 40,290
<ALLOWANCES> 0 (1,909) (2,512)
<INVENTORY> 0 6,827 13,810
<CURRENT-ASSETS> 0 73,019 141,415
<PP&E> 0 28,139 77,455
<DEPRECIATION> 0 (4,883) (15,292)
<TOTAL-ASSETS> 0 185,655 295,213
<CURRENT-LIABILITIES> 0 44,519 64,440
<BONDS> 0 168,268 205,474
0 0 0
0 0 0
<COMMON> 0 27,487 196,937
<OTHER-SE> 0 (48,836) (160,317)
<TOTAL-LIABILITY-AND-EQUITY> 0 185,655 295,213
<SALES> 7,415 33,678 96,374
<TOTAL-REVENUES> 10,210 61,600 159,922
<CGS> 1,325 22,651 70,498
<TOTAL-COSTS> 7,369 43,703 104,045
<OTHER-EXPENSES> 12,592 55,356 143,295
<LOSS-PROVISION> 21 401 3,154
<INTEREST-EXPENSE> 156 17,502 26,491
<INCOME-PRETAX> (9,655) (50,576) (108,260)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (9,655) (50,576) (108,260)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (9,655) (50,576) (108,260)
<EPS-BASIC> (0.92) (3.68) (5.32)
<EPS-DILUTED> (0.92) (3.68) (5.32)
</TABLE>
<PAGE>
EXHIBIT 99.1
Convergent Communications, Inc.
Audit Committee of the Board of Directors
Charter
Organization
- ------------
There shall be a committee of the board of directors to be known as the audit
committee. The audit committee shall be composed of at least three (3) directors
who are independent of the management of the corporation and are free of any
relationship that, in the opinion of the board of directors (which shall be
guided by any applicable rules of the Securities and Exchange Commission and the
listing requirements of the applicable securities market), would interfere with
their exercise of independent judgment as a committee member.
Statement of Policy
- -------------------
The audit committee shall provide assistance to the corporate directors in
fulfilling their responsibility to the shareholders, potential shareholders, and
investment community relating to corporate accounting, reporting practices of
the corporation, and the quality and integrity of the financial reports of the
corporation. In so doing, it is the responsibility of the audit committee to
maintain free and open means of communication between the directors, the
independent auditors, the internal auditors, and the financial management of the
corporation.
Responsibilities
- ----------------
In carrying out its responsibilities, the audit committee believes its policies
and procedures should remain flexible, in order to best react to changing
conditions and to ensure to the directors and shareholders that the corporate
accounting and reporting practices of the corporation are in accordance with all
requirements and are of the highest quality.
In carrying out these responsibilities, the audit committee will:
1. Review and recommend to the directors the independent auditors to be
selected to audit the financial statements of the corporation and its
divisions and subsidiaries, and, where appropriate, and as a result of the
independent auditors' ultimate accountability to the board of directors and
the audit committee as representatives of the shareholders, replace or
recommend the replacement of the independent auditors.
2. Meet with the independent auditors and financial management of the
corporation to review the scope of the proposed audit for the current year
and the audit procedures to be utilized, and at the conclusion thereof
review such audit, including any comments or recommendations of the
independent auditors.
3. Review with the independent auditors, the company's internal auditor, and
financial and accounting personnel, the adequacy and effectiveness of the
accounting and financial controls of the corporation, and elicit any
recommendations for the improvement of such internal control procedures or
particular areas where new or more detailed controls or
<PAGE>
procedures are desirable. Particular emphasis should be given to the
adequacy of such internal controls to expose any payments, transactions, or
procedures that might be deemed illegal or otherwise improper. Further, the
committee periodically should review company policy statements to determine
their adherence to the code of conduct.
4. Ensure the receipt from the independent auditors of a formal written
statement delineating all relationships between the auditor and the
company, consistent with Independence Standards Board Standard 1; and to
actively engage in a dialogue with the independent auditor with respect to
any disclosed relationships or services that may impact the objectivity and
independence of the auditor, and to take, or recommend that the board take,
appropriate action to ensure the independence of the independent auditor.
5. Review the internal audit function of the corporation including the
independence and authority of its reporting obligations, the proposed audit
plans for the coming year, and the coordination of such plans with the
independent auditors.
6. Receive prior to each meeting, a summary of findings from completed
internal audits and a progress report on the proposed internal audit plan,
with explanations for any deviations from the original plan.
7. Review the financial statements contained in the annual report to
shareholders with management and the independent auditors to determine that
the independent auditors are satisfied with the disclosure and content of
the financial statements to be presented to the shareholders. Any changes
in accounting principles should be reviewed.
8. Review the interim financial statements with management and the independent
auditors to determine that the independent auditors are satisfied with the
disclosure and content of the financial statements.
9. Provide sufficient opportunity for the internal and independent auditors to
meet with the members of the audit committee without members of management
present. Among the items to be discussed in these meetings are the
independent auditors' evaluation of the corporation's financial,
accounting, and auditing personnel, and the cooperation that the
independent auditors received during the course of the audit.
10. Review accounting and financial human resources and succession planning
within the company.
11. Submit the minutes of all meetings of the audit committee to, or discuss
the matters discussed at each committee meeting with, the board of
directors.
12. Investigate any matter brought to its attention within the scope of its
duties, with the power to retain outside counsel for this purpose if, in
its judgment, that is appropriate.
Adopted Effective: March 9, 2000
